Crypto Flow Technology Limited — Annual Report 2004

Apr 1, 2005

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CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “STOCK EXCHANGE”)

GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM.

The principal means of information dissemination on GEM is publication on the internet website operated by the Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website at www.hkgem.com in order to obtain up-to-date information on GEM-listed issuers.

The Stock Exchange takes no responsibility for the contents of this report, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this report.

As at the date of this report, the executive director of the Company is Mr. Chan Sek Keung, Ringo, the non-executive directors are Ms. Clara Ho, Mr. Alasdair Gordon Nagle and Mr. Kwan Kit Tong and the independent non-executive directors are Mr. Pang Hing Chung, Alfred, Mr. Tsoi Tai Wai, David and Mr. Yu Zhonghou.

This report, for which the directors (the “Directors”) of Wafer Systems Limited (the “Company”) collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the GEM of the Exchange (the “GEM Listing Rules”) for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief: (i) the information contained in this report is accurate and complete in all material respects and not misleading; (ii) there are no other matters the omission of which would make any statement in this report misleading; and (iii) all opinions expressed in this report have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

WAFER SYSTEMS LIMITED

CONTENTS

• 2 CORPORATE INFORMATION

• 4 CHAIRMAN’S STATEMENT

• 7 COMPARISON OF BUSINESS OBJECTIVES WITH ACTUAL BUSINESS PROGRESS

• 9 BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

• 11 MANAGEMENT DISCUSSION AND ANALYSIS

• 13 DIRECTORS’ REPORT

• 25 AUDITORS’ REPORT

• 26 CONSOLIDATED INCOME STATEMENT 27 CONSOLIDATED BALANCE SHEET

• 28 BALANCE SHEET

• 29 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

• 30 CONSOLIDATED CASH FLOW STATEMENT 31 NOTES TO THE FINANCIAL STATEMENTS 52 FINANCIAL SUMMARY 53 NOTICE OF ANNUAL GENERAL MEETING

WAFER SYSTEMS LIMITED

CORPORATE INFORMATION

BOARD OF DIRECTORS

Executive Director

Mr. Chan Sek Keung, Ringo (Chairman & Chief Executive Officer)

REGISTERED OFFICE

4th Floor, Scotia Centre, P.O. Box 2804 George Town Grand Cayman Cayman Islands

Non-Executive Directors

Mr. Alasdair Gordon Nagle Ms. Clara Ho Mr. Kwan Kit Tong

Independent Non-Executive Directors

Mr. Pang Hing Chung, Alfred Mr. Tsoi Tai Wai, David Mr. Yu Zhonghou

COMPANY SECRETARY

Mr. Pang Kin Man, Edmond

QUALIFIED ACCOUNTANT

Mr. Yau Kin Wa

COMPLIANCE OFFICER

Mr. Chan Sek Keung, Ringo

AUDIT COMMITTEE

Mr. Tsoi Tai Wai, David (Chairman) Mr. Pang Hing Chung, Alfred Mr. Yu Zhonghou

REMUNERATION COMMITTEE

Mr. Tsoi Tai Wai, David (Chairman) Mr. Pang Hing Chung, Alfred Ms. Clara Ho

HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS

Units 901-7, 9th Floor MLC Millennia Plaza 663 King’s Road North Point Hong Kong

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

Butterfield Bank (Cayman) Limited Butterfield House 68 Fort Street P.O. Box 705 George Town Grand Cayman Cayman Islands

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

Computershare Hong Kong Investor Services Limited 46th Floor Hopewell Centre 183 Queen’s Road East Wanchai Hong Kong

ADVISORS

Mr. Chen Sau Chung, John Mr. Samuel Lin Jr.

AUTHORIZED REPRESENTATIVES

Mr. Chan Sek Keung, Ringo Mr. Pang Kin Man, Edmond

2 Annual Report 2004

WAFER SYSTEMS LIMITED

CORPORATE INFORMATION

PRINCIPAL BANKERS

The Hongkong & Shanghai Banking Corporation Limited HSBC Main Building 1 Queen’s Road Central Hong Kong

Jian Sing Bank Limited 41st Floor Tower 1 Lippo Centre 89 Queensway Hong Kong

Dah Sing Bank Limited 36th Floor Dah Sing Financial Centre 108 Gloucester Road, Wanchai Hong Kong

LEGAL ADVISORS

Woo, Kwan, Lee & Lo 27th Floor Jardine House 1 Connaught Place Hong Kong

SPONSORS

CSC Asia Limited 3204-07, 32nd Floor Cosco Tower Grand Millennium Plaza 183 Queen’s Road Central Hong Kong

WEBSITE ADDRESS

www.wafersystems.com

STOCK CODE

AUDITORS

8198

Deloitte Touche Tohmatsu Certified Public Accountants 26th Floor Wing On Centre 111 Connaught Road Central Hong Kong

Annual Report 2004 3

WAFER SYSTEMS LIMITED

CHAIRMAN’S STATEMENT

TO OUR SHAREHOLDERS

For and on behalf of the board of Directors (the “Board”), I am pleased to present the annual report of Wafer Systems Limited (the “Company”) and its subsidiaries (collectively, “Wafer Systems” or the “Group”) for the year ended 31 December 2004 (the “Review Period”).

Leveraging our efforts in developing businesses surrounding Next Generation Network (“NGN”) technologies, we made progress in business performance during the 2004 financial year, with improvements in both turnover and profits. During the Review Period, turnover increased to approximately HK$270 million (2003: HK$166 million) while net profits improved to approximately HK$3.02 million (2003: HK$0.86 million).

With customer satisfaction in mind as our prime motivator, we will continue to provide the most suitable network infrastructure, professional services and network software to clients who wish to reap the full benefits of NGN operation.

FINANCIAL PERFORMANCE

Highlights

	2004	2003	% Change
Turnover (HK$’000)	269,688	165,879	+63%
Profit from operations (HK$’000)	6,054	4,349	+39%
Net profit (HK$’000)	3,023	857	+253%
Basic earnings per share (HK$’cents)	1.04	0.30	+247%
Net current assets (HK$’000)	46,248	45,663	+1%
Current ratio	1.57	1.67	-6%
Debt ratio (debts/assets)	59%	56%	+5%

For the year ended 31 December 2004, the Group achieved a turnover of approximately HK$270 million. It represented an increase of approximately 63% compared with last year’s turnover of approximately HK$166 million. Net profit attributable to shareholders reached approximately HK$3.02 million, an increase of approximately 2.5 times compared with the approximately HK$0.86 million recorded in the year ended 31 December 2003.

Mainland China continued to contribute a substantial portion to the Group’s revenue, accounting for approximately 95% of the Group’s total turnover, while the remaining approximately 5% came from Hong Kong.

During 2004, Network Infrastructure business remained as the Group’s main revenue contributor, generating turnover of approximately HK$241 million, accounting for approximately 89% of the Group’s total turnover. (2003: HK$136 million and 82%). The turnover from Professional Services business amounted to approximately HK$25 million (2003: HK$28 million) while turnover from Network Software was approximately HK$4 million (2003: approximately HK$1.9 million).

As at 31 December 2004, the Group had bank balances and cash totaling approximately HK$40.8 million (2003: HK$45.2 million). Total banking facilities was approximately HK$72 million (2003: HK$67 million), of which approximately HK$49 million (2003: HK$43 million) had been utilized.

4 Annual Report 2004

WAFER SYSTEMS LIMITED

CHAIRMAN’S STATEMENT

FINAL DIVIDEND

The Board of Directors does not recommend the payment of any dividend for the year ended 31 December 2004. (2003: Nil).

BUSINESS REVIEW

Network infrastructure provides the foundation for service providers in building their NGN-backed operations. During the Review Period, we won contracts from major telecommunications service providers in China, including China Telecom, Shandong Netcom, Shanghai Netcom and China Unicom. The services and technologies we provided, helped strengthen their competitive edges and facilitated their advancement to NGN-backed operations.

In addition to broadening our customer base in major telecommunication service providers, we continued to serve well our traditionally strong market segment, the multinational corporations (the “MNCs”). New customers in this category included KONE Corporation, Federal Express, Dupont, Amway, the German software group SAP and many joint venture industrial undertakings between foreign and Chinese corporations. The Group was awarded the “2004 Cisco China Best IP Communications Partner Award” during the year.

During the Review Period, Wafer Systems also offered a broad range of professional services that met the evolving needs of MNCs as well as large domestic corporations like Shanghai Port & Telecommunication Equipment Co. Ltd., the Shanghai Media Group, Huawei Technologies, Sichuan Chang Hong Electronics, Xin Xiang CATV, etc.

Like in Mainland China, network optimization and security solutions are also in much demand for corporations in Hong Kong. Schneider Electric (Hong Kong), QAD Asia Limited, Bookham Technology plc., Hong Kong Interbank Clearing Ltd., and the outlets of Sogo department stores were our new customers during the Review Period.

On the software front, the Group continued its research and development of the NextG IP Billing Software. The Group developed a suite of Internet Protocol (“IP”) network management and network optimization solutions for customers in the IP telephony industry. Additional sets of software developed also included business support system (“BSS”), operation support system (“OSS”) and network security solutions.

In alliance with the China Division of Cisco Systems Inc. and their headquarters research and development team, the Group expects to accelerate its development of NGN software and solutions, further consolidating its position as an NGN pioneer in the industry.

Annual Report 2004 5

WAFER SYSTEMS LIMITED

CHAIRMAN’S STATEMENT

PROSPECTS

With our first mover advantage in the development of NGN and extensive experience and expertise in providing network infrastructure, professional services and network solutions, Wafer Systems has a solid base for future growth. In fiscal year 2005, NGN will remain as a dominant IT trend and the demand for NGN applications from MNCs and telecommunication service providers is expected to see persistent growth. We will continue to capitalize on this trend and help customers streamline their operations and deliver to them new business applications.

We draw on years of experience in delivering high quality services and solutions to MNCs, telecommunication service providers, manufacturing and enterprise customers. They will continue to support our growth in the coming years. Most importantly, we will actively identify new clients on top of strengthening our recent entry into the cable TV sector. The Group will provide bundled service and products to a number of cable TV operators in major cities in Mainland China.

As the Group enters the new fiscal year, we will continue our software research and development to meet the needs of NGN operations, and particularly to meet the needs of customers from the IP Telephony sector, a business area of promising prospects for the Group. The Group will also continue to actively promote its NGN operation support systems, network security systems and business support systems, to enlarge its market share.

Customer satisfaction will continue to be the focus of the Group’s business philosophy. No efforts will be spared, while providing customers with what they need for communications efficiency, to assure our customers of our commitment for their satisfaction. This business philosophy is also a guarantee to the continued success of your Group to build on the satisfactory performance of the Review Period.

CONCLUSION

The accomplishments we made in year 2004 were the direct result of the concerted efforts of our dedicated staff. In addition to the teamwork, for which I am most thankful, the Group’s insistence in observing its vision and mission, and its emphasis on its corporate values were also vital in driving our achievements in the challenging market.

I take the opportunity to also thank our customers, suppliers, bankers, investors, business partners and advisors for their continued trust and support.

I would also like to thank my fellow directors for their wise counsel and contributions during the year.

CHAN Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 29 March 2005

6 Annual Report 2004

WAFER SYSTEMS LIMITED

COMPARISON OF BUSINESS OBJECTIVES WITH ACTUAL BUSINESS PROGRESS

The following is a comparison of actual business progress in 2004 with the business objectives for the same period as set out in the prospectus of the Company dated 10 May 2002 (the “Prospectus”). The Group reviews its business objectives and strategies on an ongoing basis and makes adjustments as necessary.

BUSINESS OBJECTIVES FOR THE REVIEW ACTUAL BUSINESS PROGRESS IN THE PERIOD AS SET OUT IN THE PROSPECTUS REVIEW PERIOD

Business Development

Establish two additional sales and marketing presence in the Asia Pacific region.

The Group decided to defer the addition of marketing presence and consolidated marketing efforts on existing ones which were already producing good results.

Marketing presence in other parts of the region has been maintained in collaboration with partners of the Group.

Product Development and Service Launches

Network Infrastructure

Further enhance the joint research and development with New Eracom of IP Multimedia Collaboration Solutions.

The Group stopped the co-operation with New Eracom at the end of 2003. Instead, the Group has been working with several other partners on IP Multimedia Collaboration Solutions in order to satisfy the broader needs for such solutions on the NGN platform.

Further enhance the research and development and promote the latest version of IP Multimedia Collaboration Solutions.

Enhancement and promotion of the latest version of IP Multimedia Collaboration Solutions continued during the Review Period.

Further increase its market share by promoting Infrastructure Solutions and Network Security Solutions, as well as the Multimedia Solutions by adopting selfdeveloped software and integrating with video conferencing equipment.

This was in progress as planned.

Professional Services

Further increase its market share by promoting Customer Services, Expert Services and Outsourcing Services.

The Group continued to actively promote its Customer Services, Expert Services and Outsourcing Services.

Annual Report 2004 7

WAFER SYSTEMS LIMITED

COMPARISON OF BUSINESS OBJECTIVES WITH ACTUAL BUSINESS PROGRESS

BUSINESS OBJECTIVES FOR THE REVIEW ACTUAL BUSINESS PROGRESS IN THE PERIOD AS SET OUT IN THE PROSPECTUS REVIEW PERIOD

Network Software

Continue the research and development of the NextG IP Billing Software, the Network Management Software and the OSS/BSS Software.

The Group continued the research and development of the NextG IP Billing Software, etc. under the NGN OSS solutions.

Further increase its market share by promoting the NextG IP Billing Software, the Network Management Software and the OSS/BSS Software.

The Group continued to actively promote its NGN OSS solutions.

Sales and Marketing

Promote self-developed software in Asia Pacific Region and further enhance the sales network in the PRC and Southeast Asia.

The Group has been promoting its self-developed software in collaboration with its partners in Asia Pacific Region whilst enhancing its sales network in the PRC.

Increase efforts in brand building of the Group for its three business segments through comprehensive marketing campaigns in the PRC.

Increased efforts have been put into these areas.

8 Annual Report 2004

WAFER SYSTEMS LIMITED

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

EXECUTIVE DIRECTOR

Mr. Chan Sek Keung , Ringo , aged 45, is the founder, the chief executive officer and the executive Director of the Company. Mr. Chan founded the Group in November 1998 and is responsible for the overall management, strategic planning and development of the Group. Mr. Chan has over 20 years of working experience in the data and networking communication industry. Mr. Chan holds a Bachelor’s degree in Electrical Engineering from the University of Hong Kong, and is a Fellow Member of the Hong Kong Institute of Directors.

NON-EXECUTIVE DIRECTORS

Mr. Alasdair Gordon Nagle , aged 42, is a non-executive Director. Mr. Nagle joined the Group in March 1999. He is a director of both HSBC Private Equity (Asia) Limited and its wholly-owned subsidiary of HSBC Private Equity Technology (Asia) Limited, and is a nominee of The Applied Research Council (“ARC”), a substantial shareholder of the Company, on the Board. Mr. Nagle is a member of the Institute of Chartered Accountants in England & Wales and holds a Master of Arts degree in French and Business Studies from Edinburgh University.

Ms. Clara Ho , aged 33, is a non-executive Director. Ms. Ho joined the Group in May 2001. Ms. Ho is an Investment Director of HSBC Private Equity (Asia) Limited and is a nominee of The Applied Research Council (“ARC”), a substantial shareholder of the Company, on the Board. Ms. Ho holds a Bachelor’s degree in Economics and Accounting from the University of Bristol and is a member of the Institute of Chartered Accountants in England & Wales.

Mr. Kwan Kit Tong , aged 46, is a non-executive Director. Mr. Kwan joined the Group in May 2001. He is the financial controller of QPL International Holdings Limited (“QPL”), substantial shareholder of the Company, and the nominee of QPL on the Board. Mr. Kwan holds a Bachelor’s degree in Commerce from the University of Southern Queensland and also a Fellow Member of the Chartered Association of Certified Accountants and the Hong Kong Institute of Certified Public Accountants.

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. Pang Hing Chung, Alfred , aged 43, is an independent non-executive Director. Mr. Pang was appointed as an independent non-executive Director of the Company in March 1999. Mr. Pang is a Managing Director and Vice Chairman of the Investment Banking Division of BOC International. Mr. Pang holds an MBA degree from the Stanford Graduate School of Business and also a Bachelor of Arts degree in Economics from Cornell University.

Mr. Tsoi Tai Wai, David , aged 57, is an independent non-executive Director. Mr. Tsoi was appointed as an independent non-executive Director of the Company in October 2001. Mr. Tsoi is a Certified Public Accountant by profession, and he is currently the sole proprietor of Alliott Tsoi & Co. Mr. Tsoi holds a Master’s degree in Business Administration from the University of East Asia, Macau and also a Fellow Member of the Chartered Association of Certified Accountants, the Hong Kong Institute of Certified Public Accountants and an Associate Member of the Association of Certified General Accountants. He is also a Fellow Member of the Hong Kong Institute of Directors.

Annual Report 2004 9

WAFER SYSTEMS LIMITED

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Mr. YU Zhonghou , aged 53, is an independent non-executive Director. Mr. Yu was appointed as an independent non-executive Director of the Company in September 2004. Mr. Yu is currently the chairman and general manager of Century Science and Technology Investments Co. Ltd. in Shenzhen, China. Mr. Yu holds a Master’s degree in Commercial Economics from the Faculty of Finance and Trade of China Academy of Social Sciences and also a Bachelor’s degree in Equipment Automation Science from Tianjin University.

SENIOR MANAGEMENT

Ms. Wang Fang , aged 36, is the vice president of the Group. Ms. Wang joined the Group in June 2001 and is responsible for the Group’s overall operations, financial performance as well as sales and marketing activities in mainland China. Ms. Wang graduated from the Faculty of Telecommunications Engineering of the Nanjing Post and Telecom University in China and also holds an International MBA degree from Peking University.

Mr. Pang Kin Man , Edmond , aged 57, joined the Group in August 2001, is the company secretary. Mr. Pang has more than 30 years of working experience. Mr. Pang holds an associate membership of the Institute of Chartered Secretaries and Administrators and the Hong Kong Institute of Company Secretaries. He is also a Fellow Member of the Hong Kong Institute of Directors and holder of its Professional Diploma in Corporate Governance.

Mr. Yau Kin Wa , aged 36, is the qualified accountant and finance manager of the Group, Mr. Yau is a Fellow member of the Association of Chartered Certified Accountants and an Associate member of the Hong Kong Institute of Certified Public Accountants. Mr. Yau joined the Group in June 1999.

Mr. Sha Sue Wen, Jack , aged 35, is the head of research and development of the Group. Mr. Sha holds a Bachelor’s degree in Applied Mathematics from Northwest Polytechnic University in Xi’an, China. Mr. Sha joined the Group in June 1999.

1 0 Annual Report 2004

WAFER SYSTEMS LIMITED

MANAGEMENT DISCUSSION AND ANALYSIS

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

During the Review Period, the Group kept its conservative policies in cash and financial management. Surplus funds were placed on interest-bearing deposits with banks. The Group generally financed its operations and serviced its debts with its internal resources, short-term bank loans and convertible bonds.

The Group remained healthy in the financial and liquidity position during the Review Period. As at 31 December 2004, the Group maintained its net current assets steady at approximately HK$46.2 million (2003: HK$45.7 million), a current ratio of 1.57 (2003: 1.67 ). Net current assets included bank balances and cash of approximately HK$40.8 million (2003: HK$45.2 million), total short term bank loans of approximately HK$47.9 million (2003: HK$33.1 million) and convertible bonds maturing within one year of HK$3.0 million (2003: HK$9.3 million).

The Group had no non-current liabilities (2003: HK$2.8 million) as at year end.

As at 31 December 2004, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

ORDER BOOK AND PROSPECTS OF NEW BUSINESS

As at 31 December 2004, the Group had contracts on hand for sales amounting to approximately HK$36.6 million (2003: HK$28.1 million) which would be booked as revenue upon delivery and implementation.

SIGNIFICANT INVESTMENT HELD

The Group had not made any significant investment since floatation or during the Review Period.

SEGMENTAL INFORMATION

The segmental information of the Group is covered in the second paragraph of Financial Performance under the Chairman’s Statement and in note 3 to the financial statements.

CHARGES ON GROUP ASSETS

As at 31 December 2004 and 2003, the Group did not have any significant charges on assets.

GEARING RATIO

As at 31 December 2004, the gearing ratio, i.e. total liabilities over total assets, slightly increased to approximately 0.59 from approximately 0.56 as at 31 December 2003.

FOREIGN EXCHANGE EXPOSURE

During the Review Period, the Group earned revenue and incurred costs and expenses mainly in U.S. dollars, Hong Kong dollars and Renminbi. As the exchange rates of such currencies have been stable, no hedging or other alternatives have been implemented.

Annual Report 2004 11

WAFER SYSTEMS LIMITED

MANAGEMENT DISCUSSION AND ANALYSIS

CONTINGENT LIABILITIES

Except for those commitments and contingent liabilities set out in the note 21 and note 22 to the financial statements, the Group had no significant contingent liabilities as at 31 December 2004.

ACQUISITIONS, DISPOSALS AND SIGNIFICANT INVESTMENT

The Group had not made any significant acquisition, disposal or investment during the Review Period.

FUTURE PLANS FOR INVESTMENTS OR CAPITAL ASSETS AND SOURCES OF FUNDING

With the exception of those plans set out in the Prospectus, there are no plans for any significant investments in capital assets and sources of funding.

EMPLOYEE INFORMATION

As at 31 December 2004, the Group had 142 employees comprising 21 employees based in Hong Kong and 121 employees based in mainland China. Total staff costs, excluding for directors, was approximately HK$17.3 million (2003: HK$15.5 million) during the Review Period. The Group continues to provide remuneration packages to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides employees with other benefits such as a mandatory provident fund, medical insurance scheme, share option schemes and staff training program. There has been no major change on staff remuneration policies during the year.

USE OF PROCEEDS

The net proceeds raised from the new issue of shares by way of placing were approximately HK$19.2 million, and were utilized in the following areas:

	Use of proceeds as stated	Use of proceeds as stated	Use of proceeds as stated	Actual amount
	in the	Prospectus		utilized
		Up	to 31	up to 31
	Total	December	2004	December 2004
	HK$’million	HK$’million		HK$’million
Research and development *	6.0		6.0	8.7
Expansion of geographical establishments **	4.0		4.0	1.1
Establishment of network monitoring centre	3.0		3.0	2.7
Sales and marketing	2.0		2.0	1.4
Working capitals	4.0		4.0	5.3
Total	19.0		19.0	19.2

• The higher than projected spending on R & D has been due to the speeding up of research on NGN.

• ** The lower than projected spending on the expansion of geographical establishments has been the result of savings due to the Group’s concentrating its marketing efforts on existing ones, and only establish marketing presence in other parts of the region in collaboration with partners of the Group.

1 2 Annual Report 2004

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

The directors present their annual report and the audited financial statements for the year ended 31 December 2004.

PRINCIPAL ACTIVITIES

The Company acts as an investment holding company while its subsidiaries are principally engaged in the provision of network infrastructure solutions, including the sales of network equipment and software and the provision of related network infrastructure services, provision of network professional services, and sales of its proprietary network software.

The principal activities of the Company’s principal subsidiaries are set out in note 24 to the financial statements.

RESULTS

The results of the Group for the year ended 31 December 2004 are set out in the consolidated income statement on page 26 of this annual report.

The directors do not recommend the payment of a dividend.

SHARE CAPITAL

Details of share capital of the Company are set out in note 16 to the financial statements.

RESERVES

Movements in the reserves of the Group and the Company during the year are set out on page 29 of this annual report and note 19 to the financial statements respectively.

The Company’s reserves available for distribution represent the share premium less deficit which in aggregate amounted to HK$44.5 million as at 31 December 2004. Under the Companies Law (Revised) Chapter 22 of the Cayman Islands, the share premium of the Company is available for paying distributions or dividends to shareholders subject to the provisions of its Memorandum and Articles of Association and provided that immediately following the distribution or dividend the Company is able to pay its debts as they fall due in the ordinary course of business. In accordance with the Company’s Articles of Association, dividends shall be distributed out of the retained profits or other reserves, including the share premium account, of the Company.

PROPERTY, PLANT AND EQUIPMENT

During the year, the Group spent approximately HK$2.6 million in the acquisition of property, plant and equipment which mainly comprised computer equipment and tools. Details of this and other movements in property, plant and equipment of the Group during the year are set out in note 10 to the financial statements.

Annual Report 2004 13

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

DIRECTORS AND SERVICE CONTRACTS

The directors of the Company during the year and up to the date of this report were as follows:

Executive director:

Chan Sek Keung, Ringo (Chairman and Chief Executive Officer)

Non-executive directors:

Alasdair Gordon Nagle Clara Ho Kwan Kit Tong

Independent non-executive directors:

Pang Hing Chung, Alfred Tsoi Tai Wai, David Yu Zhonghou (appointed on 23 September 2004)

The executive director has entered into a service contract with the Company for an initial term of three years commencing on 1 January 2002 which will continue thereafter until terminated by either party giving to the other not less than six months’ prior written notice.

Each of the non-executive directors and independent non-executive directors, except for Mr. Yu Zhonghou, has been appointed for a term of two years commencing on 1 April 2004, subject to rotation as required by the Articles of Association of the Company.

Mr. Yu Zhonghou, an independent non-executive director, has been appointed for a term of two years commencing on 23 September 2004 subject to rotation as required by the Articles of Association of the Company. In accordance with Article 86(3) of the Company’s Articles of Association, Mr. Yu Zhonghou retires and, being eligible, offers himself for re-election.

In accordance with Article 87 of the Company’s Articles of Association, Ms. Clara Ho retires by rotation and, being eligible, offers herself for re-election.

1 4 Annual Report 2004

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS OR SHORT POSITIONS IN SHARES AND UNDERLYING SHARES

As at 31 December 2004, the interests and short positions of the directors, chief executive and their respective associates in the shares, underlying shares and debenture or short position and share options of the Company and its associated corporations, as recorded in the register maintained by the Company pursuant to Section 352 of the Securities and Futures Ordinance (the “SFO”), or as otherwise notified to the Company and the Stock Exchange pursuant to Rules 5.40 to 5.59 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange (the “GEM Listing Rules”), were as follows:

Long positions:

(a) Long position in ordinary shares of HK$0.01 each of the Company

			Approximate
			percentage
			of the issued
		Number of issued	share capital
Name of director	Capacity	ordinary shares held	of the Company
Chan Sek Keung,	Beneficial owner	5,456,000	1.88%
Ringo	Held by controlled
	corporation*	56,400,000	19.45%
		61,856,000	21.33%

• These shares are held by Woodstock Management Limited (“Woodstock”), a company wholly-owned by Mr. Chan Sek Keung, Ringo who is deemed, by virtue of the SFO, to be interested in these shares.

(b) Long positions in the underlying shares in the Company

			Approximate
			percentage
			of the issued
		Number of	share capital
Name of director	Capacity	share options held	of the Company
Chan Sek Keung, Ringo	Beneficial owner	4,200,000	1.45%
Alasdair Gordon Nagle	Beneficial owner	375,000	0.13%
Clara Ho	Beneficial owner	375,000	0.13%
Kwan Kit Tong	Beneficial owner	375,000	0.13%
Pang Hing Chung, Alfred	Beneficial owner	1,500,000	0.52%
Tsoi Tai Wai, David	Beneficial owner	750,000	0.26%
		7,575,000	2.62%

Other than as disclosed above, none of the directors, chief executive and their respective associates, had any interests or short positions in any shares, underlying shares or debentures of the Company or any of its associated corporations as at 31 December 2004.

Annual Report 2004 15

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

SUBSTANTIAL SHAREHOLDERS

As at 31 December 2004, the following persons or corporations, in addition to the directors stated under the paragraph headed “Directors’ and chief executive’s interests or short positions in shares and underlying shares”, has relevant interests in the issued share capital of the Company which were recorded in the register of interests required to be kept by the Company pursuant to Section 336 of the SFO.

(a) Long position in ordinary shares of HK$0.01 each of the Company

				Approximate
				percentage of the
		Type of	Number	Company’s issued
Name of shareholder	Capacity	interests	of shares	share capital
The Applied Research Council (“ARC”)	Beneficial owner	Corporate	48,460,000	16.71%
(Note i)
HSBC Private Equity Technology	Investment manager	Corporate	48,460,000	16.71%
(Asia) Limited (Note ii)
HSBC Private Equity (Asia) Limited	Interest of a controlled	Corporate	48,460,000	16.71%
(Note ii)	corporation
North 22 Nominees Limited	Beneficial owner	Corporate	36,900,000	12.73%
Mr. Ng Lai Yick (Note iii)	Beneficial owner	Personal	3,134,744	1.08%
	Interest of a controlled	Corporate	36,900,000	12.73%
	corporation
QPL International Holdings Limited	Beneficial owner	Corporate	35,456,745	12.23%
(“QPL”) (Note iv)
Mr. Li Tung Lok (Note iv)	Interest of a controlled	Corporate	35,456,745	12.23%
	corporation
Ms. Su Ching Wah (Note iv)	Interest of spouse	Family	35,456,745	12.23%

1 6 Annual Report 2004

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

SUBSTANTIAL SHAREHOLDERS (Continued)

(a) Long position in ordinary shares of HK$0.01 each of the Company (Continued)

Notes:

• (i) ARC is the beneficial owner of these shares. In addition to these shares, ARC also holds the convertible bond issued by the Company with a face value of HK$3,000,000. If this convertible bond was converted on its maturity date on 1 January 2005, ARC would hold an additional 5,695,842 shares in the Company.

• (ii) HSBC Private Equity Technology (Asia) Limited is deemed, by virtue of the SFO, to be interested in these shares as it is the investment manager of ARC.

HSBC Private Equity (Asia) Limited is deemed, by virtue of the SFO, to be interested in these shares as HSBC Private Equity Technology (Asia) Limited is its wholly-owned subsidiary.

• (iii) Mr. Ng Lai Yick is deemed, by virtue of the SFO, to be interested in the 36,900,000 shares held by North 22 Nominees Limited as the company is wholly-owned by him.

• (iv) Mr. Li Tung Lok is the controlling shareholder of QPL and is deemed, by virtue of the SFO, to be interested in the 35,456,745 shares held by QPL.

• Ms. Su Ching Wah is the spouse of Mr. Li Tung Lok and is deemed, by virtue of the SFO, to be interested in the 35,456,745 shares held by QPL.

(b) Long positions in underlying shares in the Company

		Amount of
		convertible
		bonds of the	Number of
Name of shareholder	Capacity	Company issued	underlying shares
ARC (Note i)	Beneficial owner	HK$3,000,000	5,695,842
HSBC Private Equity Technology	Investment manager	HK$3,000,000	5,695,842
(Asia) Limited (Note ii)
HSBC Private Equity (Asia) Limited	Interest of a controlled	HK$3,000,000	5,695,842
(Note ii)	corporation

Annual Report 2004 17

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

SUBSTANTIAL SHAREHOLDERS (Continued)

(b) Long positions in underlying shares in the Company (Continued)

Notes:

• (i) Pursuant to an agreement dated 26 April 2002 entered into among ARC, the Group and Woodstock, ARC would subscribe for five convertible bonds to be issued by the Company with respective face values of HK$4,188,100, HK$3,400,000, HK$4,800,000, HK$4,660,000 and HK$3,000,000. At the balance sheet date, the Company had redeemed four convertible bonds of face value of HK$4,188,100, HK$3,400,000, HK$4,800,000 and HK$4,660,000 respectively on their maturity dates leading to ARC’s underlying interests in Company’s shares being decreased from 38,063,603 shares to 5,695,842 shares.

• (ii) HSBC Private Equity Technology (Asia) Limited is deemed (by virtue of the SFO) to be interested in 5,695,842 underlying shares held by ARC as the Company is the investment manager of ARC.

HSBC Private Equity (Asia) Limited is deemed (by virtue of the SFO) to be interested in 5,695,842 underlying shares held by ARC as HSBC Private Equity Technology (Asia) Limited is its wholly-owned subsidiary.

Other than as disclosed above, the Company has not been notified of any other relevant interests or short positions in the shares or underlying shares in the Company as at 31 December 2004.

1 8 Annual Report 2004

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

SHARE OPTION SCHEMES

The Company in a general meeting held on 20 April 2002 adopted both a pre-Initial Public Offering (“IPO”) share option scheme (the “Pre-IPO Share Option Scheme”) and a post-IPO share option scheme (the “Post-IPO Share Option Scheme”).

Save as disclosed below, no options granted pursuant to either the Pre-IPO Shares Option Scheme or the PostIPO Share Option Schemes had been exercised during the year.

(a) Pre-IPO Share Option Scheme

A summary of the pre-IPO share options granted on 30 April 2002 which were exercisable from 17 November 2002 to 29 April 2012 is as follows:

Exercise price Types of participants per share	Number of share options
	Outstanding Cancelled Outstanding as at during as at 1.1.2004 the year 31.12.2004
HK$ Directors: Chan Sek Keung, Ringo 0.55 Pang Hing Chung, Alfred 0.55	3,000,000 – 3,000,000 750,000 – 750,000
Adviser 0.55 Employees 0.55	3,750,000 – 3,750,000 750,000 – 750,000 5,473,000 (255,000) 5,218,000
	9,973,000 (255,000) 9,718,000

The $0.55 exercise price per share of the above share options granted under the Pre-IPO Share Option Scheme is the same as the initial public offering price of the Company’s shares. No options granted under this scheme lapsed or were exercised since the date of grant and up to 31 December 2004.

Options granted are exercisable as to (i) a maximum of 25% of the total number of options granted six months after 17 May 2002, (the “Date of Listing”); (ii) a maximum additional 6.25% of the total number of options granted after the expiry of each 3-month period twelve months after the date of Listing; and (iii) the remaining options granted on or after the third anniversary of the Date of Listing until the end of the option period or lapse of an option.

The total number of shares in respect of which options are issuable under this scheme was 9,718,000, representing approximately 3.35% of the issued share capital of the Company as at 31 December 2004.

Annual Report 2004 19

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

SHARE OPTION SCHEMES (Continued)

(b) Post-IPO Share Option Scheme

A summary of the Post-IPO Share Options is as follows:

Exercise Date Exercisable Closing price Type ofparticipants ofgrant period price per share#*	Number of share options
	Outstanding Granted Cancelled Outstanding as at during during as at 1.1.2004 theyear theyear 31.12.2004
HK$ HK$ Directors: Chan Sek Keung, Ringo 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013 Alasdair Gordon Nagle 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013 Clara Ho 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013 Kwan Kit Tong 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013 Pang Hing Chung, Alfred 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013 Tsoi Tai Wai, David 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013	1,200,000 – – 1,200,000 375,000 – – 375,000 375,000 – – 375,000 375,000 – – 375,000 750,000 – – 750,000 750,000 – – 750,000
	3,825,000 – – 3,825,000
Adviser 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013	300,000 – – 300,000
Employees 12.7.2002 12.7.2003 to 0.385 0.384 11.7.2012 20.2.2003 20.2.2004 to 0.138 0.138 19.2.2013 10.10.2003 10.10.2004 to 0.142 0.142 9.10.2013 23.2.2004 23.2.2005 to 0.160 0.165 22.2.2014 11.10.2004 11.10.2005 to 0.124 0.124 10.10.2014	3,419,000 – (438,000) 2,981,000 3,351,000 – (317,000) 3,034,000 385,000 – (95,000) 290,000 – 2,844,000 (440,000) 2,404,000 – 828,000 – 828,000
	7,155,000 3,672,000 (1,290,000) 9,537,000
	11,280,000 3,672,000 (1,290,000) 13,662,000

• The closing price of the Company’s shares immediately before the date of grant.

The exercise price represented the average of the closing prices of the Company’s shares quoted on the Stock Exchange on the five trading days immediately preceding the date of grant of the options.

2 0 Annual Report 2004

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

SHARE OPTION SCHEMES (Continued)

(b) Post-IPO Share Option Scheme (Continued)

No options granted under this scheme lapsed or were exercised since the date of grant up to 31 December 2004.

These grants under the Post-IPO Share Option Scheme are exercisable, starting from the first anniversary of the grant date at stepped annual increments of 25% of the total options granted, for a period not later than 10 years from the date of grant.

The total number of shares in respect of which options are issuable under this scheme shall not in aggregate exceed 10% of the number of issued shares.

No participant shall be granted an option which, if exercised in full, would result in such participant becoming entitled to subscribe for such number of shares, as when aggregated with the total number of shares already issued under all the options previously granted to him or her which have been exercised, and, issuable under all the outstanding options previously granted to him or her which are for the time being subsisting and unexercised, would exceed 1% of the total number of shares in issue in any 12 month period up to the date of grant of the option.

The directors of the Company consider that it is inappropriate to state the value of the options granted during the year under the above share option schemes of the Company adopted on 20 April 2002 (the “Schemes”) due to the following reasons:

• (i) the calculation of the value of the options will be based on a number of undetermined but crucial variable such as the subscription price payable for the shares in the Company, the number of options to be granted under the Schemes during their duration, the exercise period, interest rate, expected volatility and other relevant variables. In particular, the duration of the Schemes of 10 years will make these volatile variables very difficult to ascertain with accuracy;

• (ii) the generally accepted pricing models of options normally value options which are transferable but the options granted to a grantee under the Schemes are personal to the grantee which are non-transferable and non-assignable and hence calculation of the value of the options granted under the Schemes using such pricing models may not be appropriate; and

• (iii) the directors of the Company are of the view that the calculation on speculative assumptions would not be meaningful and would be misleading to shareholders of the Company.

Annual Report 2004 21

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

DIRECTORS’ INTERESTS IN CONTRACTS

No contracts of significance to which the Company or any of its subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

MAJOR CUSTOMERS AND SUPPLIERS

During the year, the aggregate sales attributable to the Group’s five largest customers comprised approximately 49% of the Group’s total sales while the sales attributable to the Group’s largest customer was approximately 25% of the Group’s total sales.

The aggregate purchases during the year attributable to the Group’s five largest suppliers comprised approximately 82% of the Group’s total purchases while the purchases attributable to the Group’s largest supplier was approximately 64% of the Group’s total purchases.

None of the directors, their associates or any shareholder, which to the knowledge of the directors owned more than 5% of the Company’s issued share capital, had any interest in the share capital of any of the five largest customers or suppliers of the Group.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

During the year, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.

PRE-EMPTIVE RIGHTS

There is no provision for pre-emptive rights under the Company’s Articles of Association or the laws of Cayman Islands, which would oblige the Company to offer new shares on a pro-rata basis to existing shareholders.

DISCLOSURE OF TRADE RECEIVABLES ARISING FROM THE ORDINARY COURSE OF BUSINESS OF THE GROUP

The following disclosure is made pursuant to Rules 17.15 and 17.22 of the GEM Listing Rules.

As at 31 December 2004, there were 289,944,745 shares of the Company in issue. Based on the average closing price of the Company’s shares of HK$0.1266 as stated in the Stock Exchange’s daily quotation sheets for the trading days from 23 December 2004 to 30 December 2004 (both days inclusive), being the five business days immediately preceding 31 December 2004, the total market capitalization of the Company was approximately HK$36,707,004 (the “Total Market Capitalization”) as at 31 December 2004.

2 2 Annual Report 2004

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

DISCLOSURE OF TRADE RECEIVABLES ARISING FROM THE ORDINARY COURSE OF BUSINESS OF THE GROUP (Continued)

As at 31 December 2004, the following trade receivables of the Group exceeded 8% of the Total Market Capitalization.

	Amount due to	% of
	the Group as at	Total market
Customer name	31 December 2004	capitalization
	(HK$’000)
The China Unicom Group	8,147	22%
Maintek Computer (Suzhou) Co., Ltd.	7,060	19%
Guangdong Telecom Appliance Corp.	6,717	18%
Motorola (China) Electronics Ltd.	4,930	13%
中國電信集團公司山西省電信公司	3,726	10%

These receivables, which resulted from sales of network equipment and provision of services by the Group in its ordinary course of business and on normal commercial terms, are unsecured, interest-free and payable under normal payment terms of the Group.

The above customers and their ultimate beneficial owners are independent third parties not connected with any of the directors, chief executive, management shareholders or substantial shareholders of the Company or any of its subsidiaries or any of their respective associates (as defined in the GEM Listing Rules).

CORPORATE GOVERNANCE

The Company has complied throughout the year ended 31 December 2004 with the board practices and procedures as set out in Rules 5.28 to 5.39 of the GEM Listing Rules.

In accordance with the revised GEM Listing Rules, Mr. Chan Sek Keung, Ringo, the Chairman and Chief Executive Officer, resigned from the Audit Committee on 23 September 2004 and the vacancy was taken up on the same day by Mr. Yu Zhonghou, independent non-executive director appointed on the same day.

The audit committee comprises of three independent non-executive directors, namely Mr. Tsoi Tai Wai, David, Mr. Pang Hing Chung, Alfred and Mr. Yu Zhonghou. Mr. Tsoi Tai Wai, David is the Chairman of the audit committee.

During the year, the audit committee held four meetings and the primary duties of the meetings were to review and supervise the financial reporting process and internal control system of the Group.

The Company established the remuneration committee of the Board at its meeting held on 26 February 2004 with written terms of reference. The remuneration committee comprises three members, namely independent nonexecutive directors, Mr. Tsoi Tai Wai, David and Mr. Pang Hing Chung, Alfred and a non-executive director, Ms. Clara Ho. Mr. Tsoi Tai Wai, David is the Chairman of the remuneration committee.

Annual Report 2004 23

WAFER SYSTEMS LIMITED

DIRECTORS’ REPORT

CORPORATE GOVERNANCE (Continued)

The Company has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than the required standard of dealings set out in Rules 5.48 to 5.67 of the GEM Listing Rules. Having made specific enquiry of all directors, all directors confirmed they have complied with the required standard set out in the Model Code/the required standard of dealings, and the code of conduct regarding securities transactions by directors adopted by the Company.

The Company has received, from each of the independent non-executive directors, an annual confirmation of his independence pursuant to Rule 5.09 of the GEM Listing Rules. The Company considers all of the independent non-executive directors are independent.

COMPETING INTEREST

None of the directors or the management shareholders (as defined in the GEM Listing Rules) of the Company or their respective associates had any interest in a business which competes with or may compete with the business of the Group.

SPONSOR’S INTERESTS

None of the Company’s sponsor, CSC Asia Limited, its directors, employees or associates (as referred to in Note 3 to the Rule 6.35 of the GEM Listing Rules) had any interests in any class of securities of the Company or any other company in the Group (including options or rights to subscribe for such securities) as at 31 December 2004.

Pursuant to an agreement dated 10 May 2002, CSC Asia Limited has been retained to act as the Company’s sponsor for the period up to 31 December 2004 in return for a monthly advisory fee.

AUDITORS

The financial statements accompanying this Annual Report were audited by Messrs. Deloitte Touche Tohmatsu. A resolution will be submitted to the annual general meeting of the Company to be held on 29 April 2005 for their re-appointment.

On behalf of the Board of Directors

CHAN Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 29 March 2005

2 4 Annual Report 2004

WAFER SYSTEMS LIMITED

AUDITORS’ REPORT

TO THE SHAREHOLDERS OF WAFER SYSTEMS LIMITED

(incorporated in the Cayman Islands with limited liability)

We have audited the financial statements on pages 26 to 51 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

OPINION

In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2004 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong 29 March 2005

Annual Report 2004 25

WAFER SYSTEMS LIMITED

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

		2004	2003
	Notes	HK$’000	HK$’000
Turnover	3	269,688	165,879
Other operating income		747	510
Charges in materials and equipment		(219,059)	(125,577)
Staff costs		(16,650)	(14,461)
Depreciation and amortisation		(5,297)	(5,134)
Other operating expenses		(23,375)	(16,868)
Profit from operations	4	6,054	4,349
Finance costs	7	(2,593)	(3,207)
Profit before taxation		3,461	1,142
Taxation	8	(473)	(285)
Profit before minority interest		2,988	857
Minority interest		35	–
Net profit attributable to shareholders		3,023	857
Earnings per share
– Basic	9	1.04 cents	0.30 cents
– Diluted	9	1.04 cents	0.29 cents

2 6 Annual Report 2004

WAFER SYSTEMS LIMITED

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004

		2004	2003
	Notes	HK$’000	HK$’000
Non-current assets
Property, plant and equipment	10	3,779	4,606
Software product development costs	11	7,256	6,795
		11,035	11,401
Current assets
Inventories		11,895	10,623
Trade and other receivables	13	75,072	56,490
Pledged bank deposits		9	1,042
Bank balances and cash		40,752	45,167
		127,728	113,322
Current liabilities
Trade and other payables	14	29,635	24,842
Taxation		866	481
Convertible bonds maturing within one year	15	3,000	9,280
Short-term bank loans		18,411	14,953
Trust receipts and import loans – unsecured		29,568	18,103
		81,480	67,659
Net current assets		46,248	45,663
Total assets less current liabilities		57,283	57,064
Non-current liabilities
Convertible bonds maturing after one year	15	–	2,804
Net assets		57,283	54,260
Capital and reserves
Share capital	16	2,900	2,900
Reserves		54,383	51,360
Shareholders’ funds		57,283	54,260

The financial statements on pages 26 to 51 were approved and authorised for issue by the Board of Directors on 29 March 2005 and are signed on its behalf by:

CHAN Sek Keung, Ringo

TSOI Tai Wai, David

Chairman and Chief Executive Officer

Director

Annual Report 2004 27

WAFER SYSTEMS LIMITED

BALANCE SHEET AT 31 DECEMBER 2004

		2004	2003
	Notes	HK$’000	HK$’000
Non-current asset
Investment in a subsidiary	12	10	10
Current assets
Prepayment		100	–
Amount due from a subsidiary		56,607	55,788
		56,707	55,788
Current liabilities
Accounts payables		36	46
Amounts due to subsidiaries		6,303	1,103
Convertible bonds maturing within one year	15	3,000	9,280
		9,339	10,429
Net current assets		47,368	45,359
Total assets less current liabilities		47,378	45,369
Non-current liabilities
Convertible bonds maturing after oneyear	15	–	2,804
Net assets		47,378	42,565
Capital and reserves
Share capital	16	2,900	2,900
Reserves	19	44,478	39,665
Shareholders’ funds		47,378	42,565

CHAN Sek Keung, Ringo

Chairman and Chief Executive Officer

TSOI Tai Wai, David

Director

2 8 Annual Report 2004

WAFER SYSTEMS LIMITED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2004

			Statutory
			surplus	Enterprise	Staff
	Share	Share	reserve	expansion	welfare
	capital	premium	fund	fund	fund	Deficit	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
At 1 January 2003	2,823	55,824	1,003	502	502	(7,328)	53,326
Exercise of warrants	77	–	–	–	–	–	77
Net profit attributable to
Shareholders	–	–	–	–	–	857	857
At 31 December 2003	2,900	55,824	1,003	502	502	(6,471)	54,260
Net profit attributable to
shareholders	–	–	–	–	–	3,023	3,023
At 31 December 2004	2,900	55,824	1,003	502	502	(3,448)	57,283

As stipulated by the relevant laws and regulations for foreign investment enterprises in the Mainland China (the “PRC”), the PRC subsidiaries of the Company are required to maintain three statutory reserves, being a statutory surplus reserve fund, an enterprise expansion fund and a staff welfare fund which are non-distributable. Appropriations to such reserves are made out of net profit after taxation of the statutory financial statements of the PRC subsidiaries and the amount and allocation basis are decided by its board of directors annually. The statutory surplus reserve fund can be used to make up prior year losses of the PRC subsidiaries, if any, and can be applied in conversion into capital by means of capitalisation issue. The enterprise expansion fund is used for expanding the capital base of the PRC subsidiaries by means of capitalisation issue. The staff welfare fund, which is to be used for the welfare of the staff and workers of the Company, is of a capital nature.

Annual Report 2004 29

WAFER SYSTEMS LIMITED

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

	2004	2003
	HK$’000	HK$’000
Operating activities
Profit before taxation	3,461	1,142
Adjustments for:
Interest income	(261)	(222)
Interest expenses	2,217	2,192
Amortisation of discount on convertible bonds	376	1,015
Depreciation and amortisation	5,297	5,134
Loss on disposal of property, plant and equipment	9	122
Loss on disposal of investment in securities	–	362
Allowance for bad and doubtful debts	2,435	45
Operating cash flows before movements in working capital	13,534	9,790
(Increase) decrease in inventories	(1,272)	12,117
(Increase) decrease in trade and other receivables	(21,017)	40,626
Increase (decrease) in trade and otherpayables	4,793	(27,689)
Cash (used in) from operations	(3,962)	34,844
PRC income taxpaid	(88)	–
Net cash (used in) from operatingactivities	(4,050)	34,844
Investing activities
Interest received	261	222
Purchase of property, plant and equipment	(2,570)	(2,820)
Proceeds from disposal of property, plant and equipment	80	270
Software product development costs paid	(2,450)	(3,005)
Proceeds from disposal of investments in securities	–	38
Decrease inpledged bank deposits	1,033	18,906
Net cash (used in) from investingactivities	(3,646)	13,611
Financing activities
Interest paid	(2,217)	(2,192)
Proceeds from issue of shares	–	77
Proceeds from issue of shares to minority shareholders of a subsidiary	35	–
Redemption of convertible bonds	(9,460)	(7,588)
Borrowings raised from short-term bank loans	3,458	14,953
Borrowing raised (repayment of) from trust receipts and
import loans	11,465	(22,594)
Net cash from (used in) financingactivities	3,281	(17,344)
Net (decrease) increase in cash and cash equivalents	(4,415)	31,111
Cash and cash equivalents at 1st January	45,167	14,056
Cash and cash equivalents at 31st December	40,752	45,167
Analysis of the balances of cash and cash equivalents
Bank balances	40,752	45,167

3 0 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

1. GENERAL

The Company was incorporated in the Cayman Islands as an exempted company with limited liability. The shares of the Company are listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The Company acts as an investment holding company while its subsidiaries (collectively refer as to the “Group”) are principally engaged in the provision of network infrastructure solutions, including the sales of network equipment and software and the provision of related network infrastructure services, provision of network professional services, and sales of its proprietary network software.

2. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong.

Potential impact arising from the recently issued accounting standards

In 2004, the Hong Kong Institute of Certified Public Accountants issued a number of new or revised Hong Kong Accounting Standards and Hong Kong Financial Reporting Standards (herein collectively referred to as “new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31 December 2004.

The Group has commenced considering the potential impact of these new HKFRSs but is not yet in a position to determine whether these HKFRSs would have a significant impact on how its results of operations and financial position are prepared and presented. These HKFRSs may result in changes in the future as to how the results and financial position are prepared and presented.

The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31st December each year.

All significant inter-company transactions and balances within the Group are eliminated on consolidation.

Investments in subsidiaries

Investments in subsidiaries are stated at cost less any identified impairment loss.

Turnover

Turnover represents the aggregate of the net amounts received and receivable from third parties in connection with the provision of network infrastructure solutions, network professional services and network software.

Annual Report 2004 31

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition

Sales of network equipment and software are recognised when the network equipment and software are delivered and title has passed.

Revenue from the provision of network infrastructure services and network professional services are recognised when the services are provided.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable.

Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and any identified impairment loss at the balance sheet date.

The gain or loss arising from the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives, using the straight line method, at the rate of 33[1][/] 3% per annum.

Software product development costs

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated asset arising from software product development expenditure is recognised only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortised on a straight line basis over its estimated useful life of three years. Amortization of these costs communication when the softwares are ready for their intended use.

Where no internally-generated software product can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.

Inventories

Inventories, which represent goods held for sale, are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less all estimated costs necessary to make the sale.

3 2 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Convertible bonds

Convertible bonds are separately disclosed and regarded as liabilities unless conversion actually occurs. The finance cost recognised in the income statement in respect of the convertible bonds, including the amortisation of discount payable upon the final redemption of the convertible bonds, is calculated so as to produce a constant periodic rate of charge on the remaining balance of the convertible bonds for each accounting period.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in a subsidiary, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Annual Report 2004 33

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Taxation (Continued)

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to the income statement.

Foreign currencies

Transactions in foreign currencies are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates ruling on the balance sheet date. Gains and losses arising on translation are dealt with in the income statement.

On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rate prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Translation differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the period of the respective leases.

3 4 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

3. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group’s operations are organised into three operating divisions namely network infrastructure, network professional services and network software. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Network infrastructure	–	the sales of network equipment and software and the
		provision of related network infrastructure services
Network professional services	–	provision of network professional services
Network software	–	the sales of the Group’s proprietary network software

Business segments for the year are as follows:

	Turnover	Turnover	Results	Results
	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000
Network infrastructure	240,694	135,775	5,473	3,088
Network professional services	24,973	28,241	1,728	1,813
Network software	4,021	1,863	(1,437)	(725)
	269,688	165,879	5,764	4,176
Other operating income			747	510
Central administrative expenses			(457)	(337)
Profit from operations			6,054	4,349
Finance costs			(2,593)	(3,207)
Profit before taxation			3,461	1,142
Taxation			(473)	(285)
Profit before minority interest			2,988	857
Minority interest			35	–
Net profit attributable to shareholders			3,023	857

Annual Report 2004 35

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

3. BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)

Business segments (Continued)

	2004	2003
	HK$’000	HK$’000
BALANCE SHEET
Assets
Segment assets
– network infrastructure	68,803	60,459
– network professional services	5,055	4,380
– network software	10,710	9,107
Unallocated corporate assets	54,195	50,777
	138,763	124,723
Liabilities
Segment liabilities
– network infrastructure	29,635	24,842
Unallocated corporate liabilities	51,845	45,621
	81,480	70,463
	2004	2003
	HK$’000	HK$’000
OTHER INFORMATION
Capital additions
– network infrastructure	1,870	1,160
– network professional services	591	682
– network software	2,559	3,983
	5,020	5,825
Depreciation and amortisation
– network infrastructure	2,514	2,125
– network professional services	794	1,248
– network software	1,989	1,761
	5,297	5,134
Allowance for bad and doubtful debts	2,435	45

3 6 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

3. BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)

Geographical segments

The Group’s operations are located in the PRC and Hong Kong. The following table provides an analysis of the Group’s geographical segment information:

	Turnover	Turnover
	2004	2003
	HK$’000	HK$’000
PRC	255,663	146,830
Hong Kong	14,025	19,049
	269,688	165,879

The following is an analysis of the carrying amount of segment assets and capital additions, analysed by the geographical area in which the assets are located:

	Carrying amount	Carrying amount
	of segment assets		Capital	additions
	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000
PRC	128,293	115,342	3,250	5,072
Hong Kong	10,470	9,381	1,770	753
	138,763	124,723	5,020	5,825

Annual Report 2004 37

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

4. PROFIT FROM OPERATIONS

	2004	2003
	HK$’000	HK$’000
Profit from operations has been arrived at after charging:
Directors’ remuneration (note 5)	1,455	1,470
Other staff’s retirement benefits scheme contributions	1,317	714
Other staff costs	15,974	14,747
Less: Staff costs capitalised in software product development costs	(2,096)	(2,230)
	16,650	14,701
Allowance for bad and doubtful debts	2,435	45
Amortisation of software product development costs	1,989	1,762
Auditors’ remuneration
– current year	440	430
– overprovision in prior years	–	(64)
Depreciation of property, plant and equipment	3,308	3,372
Loss on disposal of investments in securities	–	362
Loss on disposal of property, plant and equipment	9	122
Operating lease rentals in respect of land and buildings	2,630	2,314
and after crediting:
Interest income	261	222

3 8 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

5. DIRECTORS’ REMUNERATION

	2004	2003
	HK$’000	HK$’000
Fees for
– executive director	–	–
– independent non-executive directors	260	240
– other non-executive directors	–	–
	260	240
Other emoluments for non-executive directors	–	–
Other emoluments for executive director
– basic salaries and allowances	1,183	1,218
– retirement benefits scheme contributions	12	12
	1,195	1,230
Total directors’ remuneration	1,455	1,470

The emoluments of the directors were within the following bands:

	Number of directors	Number of directors
	2004	2003
Up to HK$1,000,000	6	5
HK$1,000,001 to HK$1,500,000	1	1

For each of the two years ended 31 December 2004, the details of remuneration for the executive director are set out above. The directors’ fees for one independent non-executive director is HK$19,600 (2003: nil) and for each of the two other independent non-executive directors is HK$120,000 (2003: HK$120,000).

During the year, no emoluments were paid by the Group to the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors has waived any emoluments during the year.

Annual Report 2004 39

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

6. EMPLOYEES’ EMOLUMENTS

The aggregate emoluments of the five highest paid individuals included one executive director of the Company, whose emoluments are included in note 5 above. The aggregate emoluments of the remaining four highest paid individuals are as follows:

	2004	2003
	HK$’000	HK$’000
Basic salaries and allowances	1,974	1,812
Retirement benefits scheme contributions	36	48
	2,010	1,860

None of the four highest paid individuals received emoluments in excess of HK$1 million.

7. FINANCE COSTS

	2004	2003
	HK$’000	HK$’000
Interest on bank borrowings wholly repayable within five years	(2,217)	(2,192)
Amortisation of discount on convertible bonds	(376)	(1,015)
	(2,593)	(3,207)

8. TAXATION

The charge represents PRC income tax which is calculated at rates applicable to respective PRC subsidiaries.

No provision for Hong Kong Profits Tax has been made in the financial statements as the Group had no assessable profit for the year.

Pursuant to the relevant laws and regulations in the PRC, the Company’s PRC subsidiaries are entitled to exemption from PRC income tax for two or three years commencing from their first profit-making year of operation and thereafter, these PRC subsidiaries will be entitled to a 50% relief from PRC income tax for the following three years. During the year, two of the Company’s PRC subsidiaries are within their 50% tax relief period, the rest is within its tax exemption period.

4 0 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

8. TAXATION (Continued)

The charge for the year is reconciled to profit per income statement as follows:

	2004	2003
	HK$’000	HK$’000
Profit before taxation	3,461	1,142
Tax at the applicable income tax rate	(606)	(200)
Tax effect of expenses not deductible for tax purposes	(27,210)	(15,619)
Tax effect of income not taxable for tax purposes	27,471	15,232
Tax effect of unrecognised tax losses	(203)	(284)
Utilisation of tax losses previously not recognised	49	–
Effect of tax exemption granted to PRC subsidiaries	(38)	671
Others	64	(85)
Tax effect for the year	(473)	(285)

9. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

	2004	2003
Earnings:
Net profit attributable to shareholders for the
purposes of basic and diluted earnings per share	HK$3,023,000	HK$857,000
Number of shares:
Weighted average number of ordinary shares for the
purposes of basic earnings per share	289,944,745	287,021,272
Effect of dilutive potential ordinary shares
– warrants	–	2,705,303
– options	177,389	–
Weighted average number of ordinary shares for the
purposes of diluted earnings per share	290,122,134	289,726,575

The computation of diluted earnings per share does not assume the conversion of the Company’s outstanding convertible bonds for both years since their exercise would result in an increase in earnings per share from continuing ordinary operations for both years.

The effect of share options of 2003 was excluded from the calculation of diluted earnings per share because certain exercise price of the Company’s share options was higher than the average market price of ordinary shares.

Annual Report 2004 41

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

10. PROPERTY, PLANT AND EQUIPMENT

		Furniture,
		fixtures
	Computer	and office	Motor
	equipment	equipment	vehicles	Tools	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
THE GROUP
COST
At 1 January 2004	7,891	1,779	438	4,602	14,710
Additions	1,360	145	–	1,065	2,570
Disposals	(40)	(99)	–	(206)	(345)
At 31 December 2004	9,211	1,825	438	5,461	16,935
DEPRECIATION
At 1 January 2004	5,767	1,328	254	2,755	10,104
Provided for the year	1,773	310	101	1,124	3,308
Eliminated on disposals	(35)	(99)	–	(122)	(256)
At 31 December 2004	7,505	1,539	355	3,757	13,156
NET BOOK VALUES
At 31 December 2004	1,706	286	83	1,704	3,779
At 31 December 2003	2,124	451	184	1,847	4,606

4 2 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

11. SOFTWARE PRODUCT DEVELOPMENT COSTS

	HK$’000
THE GROUP
COST
At 1 January 2003	7,700
Additions	3,005
At 31 December 2003	10,705
Additions	2,450
At 31 December 2004	13,155
AMORTISATION
At 1 January 2003	2,148
Amortised for the year	1,762
At 31 December 2003	3,910
Amortised for the year	1,989
At 31 December 2004	5,899
CARRYING VALUES
At 31 December 2004	7,256
At 31 December 2003	6,795

12. INVESTMENT IN A SUBSIDIARY

	THE COMPANY
	2004 & 2003
	HK$’000
Unlisted shares, at cost	10

Details of the Company’s principal subsidiaries at 31 December 2004 are set out in note 24.

Annual Report 2004 43

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

13. TRADE AND OTHER RECEIVABLES

	THE	GROUP
	2004	2003
	HK$’000	HK$’000
Trade receivables	61,312	44,132
Other receivables	4,124	8,155
Prepaid maintenance charges	9,636	4,203
	75,072	56,490

Payment terms with customers are mainly on credit together with deposits. Invoices are normally payable from 30 to 90 days of issuance, except for certain well established customers. The following is an aged analysis of trade receivables at the balance sheet date:

	THE	GROUP
	2004	2003
	HK$’000	HK$’000
Age
0 to 30 days	18,254	15,858
31 to 60 days	9,044	10,611
61 to 90 days	10,709	4,241
91 to 180 days	16,597	4,313
181 to 365 days	4,349	9,942
Over 365 days	5,460	227
	64,413	45,192
Less: Allowance for bad and doubtful debts	(3,101)	(1,060)
	61,312	44,132

14. TRADE AND OTHER PAYABLES

	THE	GROUP
	2004	2003
	HK$’000	HK$’000
Trade payables	18,548	14,772
Other payables	11,087	10,070
	29,635	24,842

4 4 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

14. TRADE AND OTHER PAYABLES (Continued)

The following is an aged analysis of trade payables at the balance sheet date:

	THE	GROUP
	2004	2003
	HK$’000	HK$’000
Age
0 to 30 days	14,127	8,862
31 to 90 days	2,565	2,864
91 to 180 days	691	28
181 to 270 days	72	13
271 to 365 days	597	3,002
Over 365 days	496	3
	18,548	14,772

15. CONVERTIBLE BONDS

	THE	GROUP
	AND THE COMPANY
	2004	2003
	HK$’000	HK$’000
Convertible bonds with an aggregate face value of
HK$3,000,000 (2003: HK$12,460,000) discounted
at a rate of 7% per annum	2,449	10,556
Add: Accumulated amortisation of discount upon the
final redemption of the convertible bonds	551	1,528
	3,000	12,084
The convertible bonds mature as follows:
Within one year	3,000	9,280
Between one to two years	–	2,804
	3,000	12,084
Less: Amount matures within one year shown under current liabilities	3,000	9,280
Amount matures after one year	–	2,804

Annual Report 2004 45

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

15. CONVERTIBLE BONDS (Continued)

The convertible bonds were issued by the Company in April 2002 to replace 50% of the convertible note issued by the Company’s subsidiary which amounted to HK$17,437,500. The redemption monies of the convertible notes were used to subscribe for these convertible bonds which represent an aggregate face value of HK$20,048,100 with various maturity dates between 2003 and 2005 discounted at a rate of 7% per annum. The bondholder, the Applied Research Council, which is also a substantial shareholder of the Company, has the right, at any time during the period from 18 May 2003 up to and including the maturity date of the convertible bond, to convert into ordinary shares of the Company at a conversion price of HK$0.5267 per share, subject to adjustments. The Company has the right to redeem the convertible bonds prior to its maturity subject to the prior consent of the bondholder.

During the year, the Company redeemed convertible bonds at face value of HK$9,460,000.

16. SHARE CAPITAL

	Number of shares	Amount
		HK$’000
Authorised:
– at 1 January 2003, 31 December 2003 and 2004	500,000,000	5,000
Issued and fully paid:
– at 1 January 2003	282,268,000	2,823
– exercise of warrants	7,676,745	77
– at 31 December 2003 and 2004	289,944,745	2,900

On 20 May 2003, the warrantholder of subscription rights to subscribe for 7,676,745 shares of HK$0.01 each had exercised its rights at HK$0.01 per share. All the shares issued in 2003 rank pari passu with the then existing shares in all respects.

17. WARRANTS

On 20 May 2003, all the outstanding warrants were exercised to subscribe for 7,676,745 ordinary shares in the Company at a subscription price of HK$0.01 per share.

4 6 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

18. SHARE OPTIONS

(a) Pre-Initial Public Offering (“IPO”) share option scheme

Pursuant to the pre-IPO share option scheme adopted by the Company on 20 April 2002, the Company may grant options to any director, employee, adviser or business consultant of the Company or its subsidiaries, for the primary purpose of providing incentives to them, to subscribe for shares in the Company with the payment of HK$1 per offer.

Details of the movements in the number of share options during the year under the Company’s pre-IPO share option scheme were as follows:

Exercise Type of Exercisable price participants period per share	Number of share options
	Outstanding Cancelled Outstanding Cancelled Outstanding at during at during at 1.1.2003 the year 31.12.2003 the year 31.12.2004
HK$ Directors 17 November 2002 0.55 to 29 April 2012 Others 17 November 2002 0.55 to 29 April 2012	3,750,000 – 3,750,000 – 3,750,000 6,663,000 (440,000) 6,223,000 (255,000) 5,968,000
	10,413,000 (440,000) 9,973,000 (255,000) 9,718,000

(b) Post-IPO share option scheme

Pursuant to the post-IPO share option scheme adopted by the Company on 20 April 2002, the Company may grant options to any director, employee, advisor or business consultant of the Company or its subsidiaries, for the primary purpose of providing incentives to them, to subscribe for shares in the Company with the payment of HK$1 per offer. The exercise price of the share option will be determined at the higher of the average of the closing prices of the Company’s shares quoted on the Stock Exchange on the five trading days immediately preceding the date of grant of the options; the closing price of the shares on the Stock Exchange on the date of grant; and the nominal value of the shares.

These grants under the post-IPO share option scheme are exercisable, starting from the first anniversary of the grant date at stepped annual increments of 25% of the total options granted, for a period not later than 10 years from the date of grant.

The total number of shares in respect of which options are issuable under this scheme shall not in aggregate exceed 10% of the number of issued shares.

Annual Report 2004 47

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

18. SHARE OPTIONS (Continued)

(b) Post-IPO share option scheme (Continued)

Details of the movements in the number of share options during the year under the Company’s post-IPO share option scheme were as follows:

Exercise Type of Exercisable price participants period per share	Number of share options
	Outstanding Granted Cancelled Outstanding Granted Cancelled Outstanding at during during at during during at 1.1.2003 the year the year 31.12.2003 the year the year 31.12.2004
HK$ Directors 20 February 2004 0.138 to 19 February 2013 Others 12 July 2003 0.384 to 11 July 2012 20 February 2004 0.138 to 19 February 2013 10 October 2004 0.142 to 9 October 2013 23 February 2005 0.165 to 22 February 2014 11 October 2005 0.124 to 10 October 2014	– 3,825,000 – 3,825,000 – – 3,825,000 5,007,000 – (1,588,000) 3,419,000 – (438,000) 2,981,000 – 4,034,000 (383,000 ) 3,651,000 – (317,000) 3,334,000 – 385,000 – 385,000 – (95,000) 290,000 – – – – 2,844,000 (440,000) 2,404,000 – – – – 828,000 – 828,000
	5,007,000 8,244,000 (1,971,000) 11,280,000 3,672,000 (1,290,000) 13,662,000

The financial impact of share options granted is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recognised in the income statement in respect of the value of options granted during the year. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which lapsed or are cancelled prior to their exercise date are deleted from the register of outstanding options.

4 8 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

19. RESERVES

Share

	Share
	premium	Deficit	Total
	HK$’000	HK$’000	HK$’000
THE COMPANY
At 1 January 2003	55,824	(24,657)	31,167
Net profit attributable to shareholders	–	8,498	8,498
At 31 December 2003	55,824	(16,159)	39,665
Net profit attributable to shareholders	–	4,813	4,813
At 31 December 2004	55,824	(11,346)	44,478

20. UNRECOGNISED DEFERRED TAXATION

At the balance sheet date, the Group has unutilised tax losses of HK$11,773,000 (2003: HK$10,893,000) available for offset against future profits. No deferred tax asset has been recognised in respect of the unutilised tax losses due to the unpredictability of future profit streams. These tax losses may be carried forward indefinitely.

21. OPERATING LEASE COMMITMENTS

While the Company had no outstanding operating lease commitments at the balance sheet date, its subsidiaries were committed to make the following future minimum lease payments in respect of land and buildings rented under non-cancellable operating leases which fall due as follows:

	THE	GROUP
	2004	2003
	HK$’000	HK$’000
Within one year	2,067	2,540
In the second to fifth year inclusive	563	1,503
	2,630	4,043

22. CONTINGENT LIABILITIES

At the balance sheet date, the Company has given corporate guarantees totalling HK$54,000,000 (2003: HK$52,000,000) to banks to secure the credit facilities granted to its subsidiaries.

Annual Report 2004 49

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

23. RETIREMENT BENEFITS SCHEME

The Group operates a Mandatory Provident Fund Scheme (the “Scheme”) for all qualifying employees in Hong Kong. The assets of the Scheme are held separately from those of the Group in funds under the control of trustee. The Group contributes 5% of relevant payroll costs, subject to a maximum of HK$1,000 for each employee each month, to the Scheme, which contribution is matched by employees.

The employees of the Company’s PRC subsidiaries are members of the state-managed retirement benefits scheme operated by the PRC government. The Company’s PRC subsidiaries are required to contribute a certain percentage of their payroll to the retirement benefits scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefits scheme is to make the required contributions under the scheme.

The total cost charged to income statement of HK$1,317,000 (2003: HK$691,000) represents contributions payable to these schemes by the Group in respect of the current accounting period.

24. PRINCIPAL SUBSIDIARIES

Details of the Company’s principal subsidiaries, all of which are wholly-owned by the Company, at 31 December 2004 are as follows:

	Place of
	incorporation/	Nominal value
	establishment/	of issued/
Name of subsidiary	operations	registered capital	Principal activities
Wafer Systems Holdings Limited*	Hong Kong	HK$10,000	Investment holding
北京威發新世紀信息技術有限公司	PRC for a term	US$1,500,000	Operation of businesses in
(Beijing Wafer New Century	of 15 years		network infrastructure,
Information Technology	commencing		provision of network
Co., Ltd.)	12 January		professional services
	2001#		and sales of proprietary
			network software
上海滬威網絡系統有限公司	PRC for a term	US$210,000	Operation of businesses in
(Wafer Network Systems	of 15 years		network infrastructure,
(Shanghai) Co. Ltd.)	commencing		provision of network
	28 July 1999#		professional services
			and sales of proprietary
			network software

5 0 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

24. PRINCIPAL SUBSIDIARIES (Continued)

	Place of
	incorporation/	Nominal value
	establishment/	of issued/
Name of subsidiary	operations	registered capital	Principal activities
Wafer Systems (China)	Hong Kong	HK$10,000	Operation of businesses in
Limited			network infrastructure,
			provision of network
			professional services
			and sales of proprietary
			network software
Wafer Systems (Hong Kong)	Hong Kong	HK$10,000	Operation of businesses in
Limited			network infrastructure,
			provision of network
			professional services
			and sales of proprietary
			network software
威發(西安)軟件有限公司	PRC for a term	US$100,950	Research and development
(Wafer (Xi’an) Software	of 15 years
Co., Ltd.)	commencing
	26 July 2001#

• Directly held by the Company.

• These are wholly foreign owned enterprises established in the PRC.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affect the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

None of the subsidiaries had any debt securities outstanding at the end of the year, or at any time during the year.

Annual Report 2004 51

WAFER SYSTEMS LIMITED

FINANCIAL SUMMARY

	2000	2001	2002	2003	2004
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
RESULTS
Turnover	85,339	149,579	180,333	165,879	269,688
Profit (loss) before taxation	474	8,198	(6,400)	1,142	3,461
Taxation	403	(191)	551	(285)	(473)
Profit (loss) before minority interest	877	8,007	(5,849)	857	2,988
Minority interest	–	–	–	–	35
Net profit (loss) attributable to shareholders	877	8,007	(5,849)	857	3,023
		As at	31 December
	2000	2001	2002	2003	2004
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
ASSETS AND LIABILITIES
Total assets	70,495	103,280	165,763	124,723	138,763
Total liabilities	(74,591)	(80,915)	(112,437)	(70,463)	(81,480)
(Deficiency) balance of shareholders’ funds	(4,096)	22,365	53,326	54,260	57,283

5 2 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT the annual general meeting of Wafer Systems Limited (the “Company”) will be held at Units 901-7, 9th Floor, MLC Millennia Plaza, 663 King’s Road, North Point, Hong Kong on Friday, 29 April 2005 at 3:30 p.m. for the following purposes:

1. To receive and consider the audited consolidated financial statements and reports of the directors and auditors for the year ended 31 December 2004;

2. To re-elect a director, Ms. Clara Ho, retiring by rotation; (note 5)

3. To re-elect a director, Mr. Yu Zhonghou, retiring under Article 86 (3) of the Company; (note 6)

4. To re-appoint auditors and to authorize the board of directors to fix their remuneration; and

5. As special business, to consider and, if thought fit, pass with or without amendments the following resolutions as ordinary resolutions:

ORDINARY RESOLUTIONS

• (1) “ THAT:

• (a) subject to paragraph (c) of this resolution, and pursuant to the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited, the exercise by the directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant, whether conditionally or unconditionally, offers, agreements and options (including warrants, bonds, debentures, notes and any securities which carry rights to subscribe for or are convertible into shares in the Company) which would or might require the exercise of such powers be and is hereby generally and unconditionally approved;

• (b) the approval in paragraph (a) of this resolution shall authorize the directors of the Company during the Relevant Period to make or grant offers, agreements and options (including warrants, bonds, debentures, notes and any securities which carry rights to subscribe for or are convertible into the shares in the Company) which would or might require the exercise of such powers after the end of the Relevant Period;

Annual Report 2004 53

WAFER SYSTEMS LIMITED

NOTICE OF ANNUAL GENERAL MEETING

(c) the aggregate nominal amount of share capital allotted, issued or dealt with or agreed conditionally or unconditionally to be allotted, issued or dealt with (whether pursuant to options or otherwise) by the directors of the Company pursuant to the approval in paragraph (a) of this resolution, otherwise than pursuant to (i) a Rights Issue (as hereinafter defined); or (ii) the grant or exercise of any option under any share option scheme of the Company or any other option, scheme or similar arrangement for the time being adopted for the grant or issue to officers and/or employees of the Company and/or any of its subsidiaries of shares in the Company or rights to acquire shares in the Company; or (iii) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares in the Company in accordance with the Articles of Association of the Company in force from time to time; or (iv) any issue of shares in the Company upon the exercise of rights of subscription or conversion under the terms of any warrants or convertible bonds issued by the Company or any securities which carry rights to subscribe for or are convertible into shares in the Company, shall not exceed twenty per cent (20%) of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing this resolution and the authority pursuant to paragraph (a) of this resolution shall be limited accordingly; and

• (d) for the purpose of this resolution,

“Relevant Period” means the period from the date of the passing this resolution until whichever is the earliest of:

• (i) the conclusion of the next annual general meeting of the Company;

• (ii) the expiration of the period within which the next annual general meeting of the Company is required by the Articles of Association of the Company or any applicable law of the Cayman Islands to be held; and

• (iii) the passing of an ordinary resolution by the shareholders of the Company in general meeting revoking or varying the authority given to the directors of the Company by this resolution.

“Rights Issue” means an offer of shares in the Company, or offer or issue of warrants, options or other securities giving rights to subscribe for shares open for a period fixed by the directors of the Company to holders of shares in the Company on the register on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as the directors of the Company may deem necessary or expedient in relation to fractional entitlements, or having regard to any restrictions or obligations under the laws of, or the requirements of, or the expense or delay which may be involved in determining the existence or extent of any restrictions or obligations under the laws of, or the requirements of, any jurisdiction applicable to the Company, or any recognized regulatory body or any stock exchange in any territory applicable to the Company.)“

5 4 Annual Report 2004

WAFER SYSTEMS LIMITED

NOTICE OF ANNUAL GENERAL MEETING

• (2) “ THAT:

• (a) subject to paragraph (b) of this resolution, the exercise by the directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares in the capital of the Company on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited or any other stock exchange on which the shares in the Company may be listed and recognized by the Securities and Futures Commission and The Stock Exchange of Hong Kong Limited for such purpose, subject to and in accordance with the rules and regulations of the Securities and Future Commission, The Stock Exchange of Hong Kong Limited, the Companies Law of the Cayman Islands and all other applicable laws in this regard, be and the same is hereby generally and unconditionally approved;

• (b) the aggregate nominal amount of shares in the Company which the Company is authorised to repurchase pursuant to the approval in paragraph (a) of this resolution during the Relevant Period shall not exceed ten per cent (10%) of the aggregate nominal amount of the issued share capital of the Company as at the date of the passing of this resolution and the authority pursuant to paragraph (a) of this resolution shall be limited accordingly;

• (c) for the purpose of this resolution,

  • “Relevant Period” means the period from the date of the passing of this resolution until whichever is the earliest of:

  • (i) the conclusion of the next annual general meeting of the Company;

  • (ii) the expiration of the period within which the next annual general meeting of the Company is required by the Articles of Association of the Company or any other applicable law of the Cayman Islands to be held; and

  • (iii) the passing of an ordinary resolution by the shareholders of the Company in general meeting revoking or varying the authority given to the directors of the Company by this resolution.“

• (3) “ THAT conditional upon resolution nos. (1) and (2) set out in item 5 of the notice convening this meeting being passed, the general mandate granted to the directors of the Company to allot, issue and deal with additional shares in the Company pursuant to the said resolution no. (1) be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of shares in the capital of the Company which are repurchased by the Company under the authority granted to the directors of the Company pursuant to the said resolution no. (2), provided that the amount of shares so repurchased by the Company shall not exceed ten per cent (10%) of the aggregate nominal amount of the issued share capital of the Company on the date of this resolution.“

By Order of the Board Chan Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 29 March 2005

Annual Report 2004 55

WAFER SYSTEMS LIMITED

NOTICE OF ANNUAL GENERAL MEETING

Notes:–

1. A member of the Company entitled to attend and vote at the above meeting is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is holder of two or more shares may appoint more than one proxy to attend and vote instead of him. A proxy need not be a member of the Company.

2. In order to be valid, a form of proxy together with the power of attorney or other authority (if any) under which it is signed, or a certified copy thereof, must be deposited at the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong no later than 48 hours before the time appointed for the meeting (or any adjournment thereof).

3. With regard to ordinary resolution no. (2) set out in item 5 of this notice, an explanatory statement containing information regarding the repurchase by the Company of its own shares will be sent to shareholders of the Company together with the 2004 Annual Report of the Company.

4. Article 66 of the Company’s articles of association sets out the procedures by which shareholders of the Company may demand a poll;

5. A resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

6. (a) By the Chairman of such meeting; or

7. (b) By at least three Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or

8. (c) By a Member of Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all Members having the right to vote at the meeting; or

9. (d) By a Member or Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

A demand by a person as proxy for a Member or in the case of a Member being a corporation by its duly authorised representative shall be deem to be the same as a demand by a Member.

1. The biographical details on Ms. Clara Ho are as contained on page 9 of the Annual Report, Ms. Ho has been reappointed as a non-executive director of the Company for a term of two years commencing on 1 April 2004 without any remuneration. Her interests in the shares of the Company, within the meaning of Part XV of the Securities and Futures Ordinance, are the 375,000 share options in the Company granted to her on 20 February 2003 at the exercise price of HK$0.138 per share and expiring on 19 February 2013. For the past three years, Ms. Ho has not held any directorship position in any other listed public companies.

2. The biographical details on Mr. Yu Zhonghou are as contained on page 10 of the Annual Report, Mr. Yu has been appointed as an independent non-executive director of the Company for a term of two years commencing on 23 September 2004 at a fee of HK$72,000 per annum. Mr. Yu does not have any interests in the shares of the Company within the meaning of Part XV of the Securities and Futures Ordinance. For the past three years, Mr. Yu has not held any directorship position in any other listed public companies.

3. The translation into Chinese language of this notice is for reference only. In case of any inconsistency, the English version shall prevail.

5 6 Annual Report 2004