Crypto Flow Technology Limited — Interim / Quarterly Report 2005

Aug 12, 2005

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Wafer Systems Limited 威 發 系 統 有 限 公 司[*]

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 8198)

INTERIM RESULTS ANNOUNCEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2005

CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “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 of the Exchange 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. GEM-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 Exchange takes no responsibility for the contents of this announcement, 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 announcement.

As at the date of this announcement, 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 announcement, 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 GEM (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 announcement 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 announcement misleading; and (iii) all opinions expressed in this announcement have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

* For identification purpose only

• 1 -

TO OUR SHAREHOLDERS

The Board of Directors (the “Board”) is pleased to announce the unaudited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the six months ended 30 June 2005 (the “Review Period”) together with the comparative unaudited figures for the corresponding period in 2004.

BUSINESS OVERVIEW AND REVIEW

Financial Highlights

	Q2/2005 HK$’000	Q2/2004 HK$’000	Change	1H/2005 HK$’000	1H/2004 HK$’000	Change
Turnover Operating Profit Profit attributable to shareholders of the Company Basic EPS (HK Cents) Orders on hand	66,882 571 84 0.03	55,917 2,024 1,419 0.49	+20% -72% -94% -94%	218,930 2,211 862 0.30 55,000	96,410 1,369 373 0.13 92,700	+127% +62% +131% +131% -41%

Financial Review

During the Review Period, the Group recorded a turnover of approximately HK$218.9 million (2004: HK$96.4 million), a sharp 127% increase from that recorded in the corresponding period in 2004. Profit attributable to shareholders of the Company for the Review Period increased by 131% to approximately HK$862,000 (2004: HK$373,000).

During the Review Period, mainland China continued to be the Group’s major market. In particular, the Group was awarded a significant contract of approximately HK$98 million for the supply of network infrastructure equipment to a major telecommunications service provider through Beijing Siemens Communications Network Co. Ltd. With this addition, mainland China accounted for 96.8% (2003: 92.1%) of the total turnover with the remaining 3.2% (2004: 7.9%) generated in Hong Kong. Turnover generated from Network Infrastructure business amounted to approximately HK$195.1 million (2004: HK$83.2 million). The turnover of Professional Services business amounted to approximately HK$23.8 million (2004: HK$12.1 million), while no Network Software business was achieved (2004: HK$1.1 million).

Interim Dividend

The Board does not recommend the payment of an interim dividend for the six months ended 30 June 2005 (2004: Nil).

• 2 -

Business Review

During the first half of 2005, the Group maintained its business strategy of matching its professional expertise with the needs of its customers. The Group’s policy of putting customer satisfaction first continued to win customer loyalty and support. During the Review Period, whilst continuing to serve the traditional market segment of multi-national corporations (“MNCs”) where the Group remains strong, the Group also established more co-operation with major telecommunication service providers (“telcos”) in mainland China as well as local industries and enterprises.

During the Review Period, the Group won a HK$98 million network infrastructure contract which was the largest single contract in the Group’s history. Although its margin was lower than typical margins, the project gave the Group exposure and experience in the execution of large scale projects and enhanced the relationship of the Group with the telcos sector.

Professional Services has always been an important part of the Group’s business and provides a useful contribution to the Group’s profitability. During the Review Period, the Group’s professional services revenue amounted to approximately HK$23.8 million, an increase of 96.7% over the corresponding period in 2004. In addition to large local enterprises, customers for the Group’s professional services include IBM Global Services (China) Co. Ltd. and Motorola (China) Electronics Ltd. for the mainland China market and New World PCS Ltd. for Hong Kong. The Group has firmly established its reputation as a reliable partner for professional services.

During the Review Period, the Group continued with the research and development on network software. These sets of software include business support systems (“BSS”), operation support systems (“OSS”) and network security solutions. In addition to continuing its co-operation with the Asia Pacific research and development team of Cisco Systems Inc., the marketing of the Group’s proprietary software outside of China in collaboration with Cisco made good progress.

Prospects

As the Group enters the third quarter of 2005, there is a healthy backlog of orders on hand. As at 30 June 2005, the total value of the backlog orders on hand was approximately HK$55.0 million, compared with approximately HK$35.5 million at 31 March 2005 and HK$92.7 million as at 30 June 2004.

As the second half of the year is typically the busiest period for its business, the Group is cautiously optimistic about obtaining orders in addition to the delivery of the backlog orders.

The Group is also expecting continued success in attracting business from the MNCs, large local enterprise customers as well as from telecommunications service providers.

However, competition in the market continues to be keen resulting in tight profit margins. Strategically, the Group will continue to foster its existing excellent relationships with customers while placing more emphasis on the more niche market of professional services and software products.

• 3 -

MANAGEMENT DISCUSSION & ANALYSIS

Liquidity, Financial Resources and Capital Structure

During the Review Period, the Group continued 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 from its internal resources and short-terms bank loans.

As at 30 June 2005, the Group recorded net current assets of approximately HK$46.7 million as compared with approximately HK$46.2 million as at 31 December 2004. However, the current ratio decreased to approximately 1.4 from 1.57 as at 31 December 2004. The decrease resulted mainly from the recognition of the HK$98 million network infrastructure contract during the Review Period. Net current assets included bank balances and cash of approximately HK$23.2 million (31 December 2004: HK$40.6 million) and total short terms bank loans of approximately HK$52.2 million (31 December 2004: HK$48.0 million). During the Review Period, the Group redeemed the last convertible bond of HK$3 million.

There was no non-current liabilities recorded as at 30 June 2005 and 31 December 2004.

As at 30 June 2005, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisitions, disposals or investments during the Review Period.

Segmental Information

The segmental information of the Group is covered in the Financial Review and in note 2 to the Condensed Financial Information.

Employee Information

As at 30 June 2005, the Group had 162 employees (2004: 130 employees) comprising 24 employees (2004: 22 employees) based in Hong Kong and 137 employees (2004: 108 employees) based in mainland China. The Group continues to provide remuneration packages to employees in accordance with market practices and past performance. In addition to basic remuneration, the Group also provides other benefits such as a mandatory provident fund, medical scheme, share options scheme and staff training program to employees.

• 4 -

Charges on Group Assets

As at 30 June 2005, the Group did not have any significant charges on its assets.

Gearing Ratio

As at 30 June 2005, the gearing ratio, i.e. total liabilities over total assets, increased to approximately 66.7% from approximately 58.7% as at 31 December 2004.

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.

Order Book & Prospects for New Business

As at 30 June 2005, the Group had contracts on hand for sales amounting to approximately HK$55.0 million (30 June 2004: HK$92.7 million) which will be booked as revenue upon delivery and implementation.

Contingent Liabilities

Except for those commitments and contingent liabilities set out in note 11 and note 12 to the Financial Information, the Group had no significant contingent liabilities as at 30 June 2005.

Future plans for Investments or Capital Assets and Sources of Funding

The Group has no plans for any significant investments, acquisitions of capital assets or additional sources of funding.

• 5 -

FINANCIAL INFORMATION

Condensed Consolidated Income Statement (Unaudited)

Note Turnover 2 Other operating income Charges for materials and equipment Staff costs Depreciation and amortization Other operating expenses Profit from operations 3 Finance costs Profit before taxation Taxation 4 Profit for the period Attributable to: Shareholders of the Company Minority interest Earnings per share – Basic (cents) 5 – Diluted (cents) 5	For the three months ended 30 June 2005 2004 HK$’000 HK$’000 (restated) 66,882 55,917 60 36 (53,170) (41,740) (4,743) (4,273) (1,046) (1,290) (7,412) (6,626) 571 2,024 (552) (585) 19 1,439 65 (45) 84 1,394 84 1,419 – (25) 84 1,394 0.03 0.49 N/A 0.49	For the six months ended 30 June 2005 2004 HK$’000 HK$’000 (restated) 218,930 96,410 99 59 (188,125) (72,415) (8,993) (8,251) (2,159) (2,602) (17,541) (11,832) 2,211 1,369 (1,355) (967) 856 402 – (45) 856 357 862 373 (6) (16) 856 357 0.30 0.13 N/A 0.13

• 6 -

Condensed Consolidated Balance Sheet

Note Non-current assets Property, plant and equipment 6 Software product development costs Current assets Inventories Trade and other receivables 7 Pledged bank deposits Bank balances and cash Current liabilities Trade and other payables 8 Taxation Convertible bonds maturing within one year Short-term bank loans Trust receipt and import loans – unsecured Bank overdrafts – unsecured Net current assets Total assets less current liabilities Capital and Reserves Share Capital 9 Reserves Equity attributable to shareholders of the Company Minority Interest	(Unaudited) As at 30 June 2005 HK$’000 4,080 7,447 11,527 15,976 124,226 – 23,173 163,375 63,917 541 – 14,019 32,636 5,554 116,667 46,708 58,235 2,900 55,322 58,222 13 58,235	31	(Audited) As at December 2004
			HK$’000 (restated) 3,779 7,256
			11,035
			11,895 75,072 9 40,752
			127,728
			29,635 866 3,000 18,411 29,568 –
			81,480
			46,248
			57,283
			2,900 54,383
			57,283 –
			57,283

• 7 -

Condensed Consolidated Statement of Changes in Equity (Unaudited)

As at 1 January 2004 (as previously reported) Effect of adoption of HKFRS 2 As at 1 January 2004, as restated Issue of shares to minority shareholders of a subsidiary Profit for the six months ended 30 June 2004 Share option benefits As at 30 June 2004, as restated As at 1 January 2005 (as previously reported) Effect of adoption of HKFRS 2 As at 1 January 2005, as restated Issue of shares to minority shareholders of a subsidiary Profit for the six months ended 30 June 2005 Share option benefits As at 30 June 2005	Share capital HK$’000 2,900 – 2,900 – – – 2,900 2,900 – 2,900 – – – 2,900	Share premium HK$’000 55,824 – 55,824 – – – 55,824 55,824 – 55,824 – – – 55,824	Statutory surplus Enterprise reserve expansion fund fund HK$’000 HK$’000 1,003 502 – – 1,003 502 – – – – – – 1,003 502 1,003 502 – – 1,003 502 – – – – – – 1,003 502	Staff welfare fund HK$’000 502 – 502 – – – 502 502 – 502 – – – 502	Share options reserve HK$’000 – 166 166 – – 141 307 – 453 453 – – 77 530	Attributable to shareholders of the Deficit Company HK$’000 HK$’000 (6,471) 54,260 (166) – (6,637) 54,260 – – 373 373 – 141 (6,264) 54,774 (3,448) 57,283 (453) – (3,901) 57,283 – – 862 862 – 77 (3,039) 58,222	Minority Interest HK$’000 – – – 35 (16) – 19 – – – 19 (6) – 13	Total HK$’000 54,260 –
								54,260 35 357 141
								54,793
								57,283 –
								57,283 19 856 77
								58,235

• 8 -

Condensed Consolidated Cash Flow Statement (Unaudited)

Net cash used in operating activities Net cash used in investing activities Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at the end of period Analysis of the balances of cash and cash equivalents Bank balances and cash Bank overdrafts	Six months Six months ended ended 30 June 2005 30 June 2004 HK$’000 HK$’000 (16,168) (9,694) (2,641) (1,580) (4,324) (7,171) (23,133) (18,445) 40,752 45,167 17,619 26,722 23,173 27,834 (5,554) (1,112) 17,619 26,722

• 9 -

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(1) Basis of presentation

The condensed financial statements have been prepared in accordance with Hong Kong Accounting Standard No. 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the applicable disclosure requirements of the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited.

During the Review Period, the Group has adopted all of the new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) issued by the HKICPA which are effective for accounting periods beginning on or after 1 January 2005. The impact of adoption of these new HKFRSs is set out below:

Share-based Payments (HKFRS 2)

HKFRS 2 requires the recognition of equity-settled share-based payments at fair value at the date of grant. The Group granted share options to certain directors, an advisor and employees. Prior to adoption of HKFRS 2, the Group did not recognise the financial effect of share options.

The adoption of HKFRS 2 has resulted in a change in accounting policy for share options. The fair value of share options is determined at the grant date and expensed on a straight-line basis over the vesting period. In accordance with the transitional provisions, HKFRS 2 has been applied retrospectively to all share options granted after 7 November 2002 that were unvested on or after 1 January 2005.

The effect of adoption of HKFRS 2 in the current and prior periods is summarized below:

Increase in staff costs Decrease in profit for the period Decrease in basic earnings per share (cents) Decrease in diluted earnings per share (cents) Increase in deficit Increase in share options reserve	For the six months ended 30 June 2005 2004 HK$’000 HK$’000 (77) (141) (77) (141) (0.02) (0.05) N/A (0.05) As at 30 June 31 December 2005 2004 HK$’000 HK$’000 (530) (453) 530 453

Except for the above, the adoption of these new HKFRSs did not result in material changes to the Group’s principal accounting policies and basis of preparation adopted in its annual financial statements for the year ended 31 December 2004.

The condensed financial statements are unaudited but have been reviewed by the Audit Committee.

• 10 -

(2) Segment Information

a. Business segment

An analysis of the Group’s turnover and results by business segment is as follows:

Network infrastructure Professional services Network software Other operating income Central administrative expenses Profit from operations Finance costs Profit before taxation Taxation Profit for the period	(Unaudited) For the six months ended 30 June 2005 Turnover Results HK$’000 HK$’000 195,110 3,054 23,820 666 – (1,458) 218,930 2,262 99 (150) 2,211 (1,355) 856 – 856	(Unaudited) For the six months ended 30 June 2004	(Unaudited) For the six months ended 30 June 2004
	Turnover HK$’000 195,110 23,820 – 218,930	Turnover HK$’000 83,154 12,111 1,145 96,410	Results HK$’000 1,517 469 (515)
			1,471 59 (161)
			1,369 (967)
			402 (45)
			357

b. Geographical segment

An analysis of the Group’s turnover by geographical location is as follows:

Hong Kong PRC	(Unaudited) For the six months ended 30 June	(Unaudited) For the six months ended 30 June
	2005 HK$’000 6,987 211,943 218,930	2004 HK$’000 7,659 88,751
		96,410

• 11 -

(3) Profit from operations

Profit from operations has been arrived at after charging:

Amortization of software product development costs Depreciation of property, plant and equipment Staff costs (including Directors’ remuneration) Loss on disposal of property, plant and equipment and after crediting: Interest income	For the three months ended 30 June 2005 2004 HK$’000 HK$’000 460 483 586 807 4,743 4,273 – 10 60 36	For the six months ended 30 June
		2005 2004 HK$’000 HK$’000 998 965 1,161 1,637 8,993 8,251 – 10 99 59

(4) Taxation

The charges represented PRC income tax that were calculated at rates applicable to the respective PRC subsidiaries.

No provision for Hong Kong profits tax has been made as the Group had no assessable profit for the six months ended 30 June 2005 and its corresponding period in 2004.

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 profitmaking 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 Review Period, the Company has one PRC subsidiary within its tax exemption period and one PRC subsidiary within its 50% tax relief period.

No deferred tax asset has been recognized in respect of the unutilized tax losses due to the unpredictability of future profit streams.

(5) Earnings per share

The calculation of basic earnings per share for the three months and the six months ended 30 June 2005 is based on the unaudited profit attributable to shareholders of the Company of approximately HK$84,000 (2004: HK$1,419,000) and approximately HK$862,000 (2004: HK$373,000) respectively and on the weighted average number of approximately 289,945,000 (2004: 289,945,000) shares in issue during the period.

Diluted earnings per share has not been presented for the three months and six months ended 30 June 2005 since the effect is anti-dilutive.

The calculation of the diluted earnings per share for the three months and the six months ended 30 June 2004 is based on the profit attributable to shareholders of the Company of approximately HK$1,419,000 and approximately HK$373,000 and on the weighted average number of approximately 290,029,000 shares and approximately 290,309,000 shares respectively.

• 12 -

(6) Property, plant and equipment

Movements in property, plant and equipment were:

Furniture, fixtures Computer and office equipment equipment HK$’000 HK$’000 Cost At 1 January 2005 9,210 1,825 Additions 231 64 Disposals – – At 30 June 2005 9,441 1,889 Accumulated depreciation At 1 January 2005 7,499 1,545 Additions 470 109 Disposals – – At 30 June 2005 7,969 1,654 Net book value At 30 June 2005 1,472 235 At 31 December 2004 1,711 280	Motor vehicle HK$’000 438 450 – 888 355 40 – 395 493 83	Tools HK$’000 5,462 739 (54) 6,147 3,757 545 (35) 4,267 1,880 1,705	Total HK$’000 16,935 1,484 (54)
			18,365
			13,156 1,164 (35)
			14,285
			4,080
			3,779

(7) Trade and other receivables

Trade receivables Other receivables Prepaid maintenance charges	As at	As at
	30 June 31 December 2005 2004 HK$’000 HK$’000 105,432 61,312 10,698 4,124 8,096 9,636 124,226 75,072
		75,072

There was no change in the Group’s credit policies since 31 December 2004.

• 13 -

The aged analysis of trade receivables is as follows:

Age 0 to 90 days 91 to 180 days 181 to 365 days over 365 days Less: allowance for bad and doubtful debts	As at	As at
	30 June 31 December 2005 2004 HK$’000 HK$’000 53,794 38,007 32,791 16,597 15,814 4,349 7,812 5,460 110,211 64,413 (4,779) (3,101) 105,432 61,312
		64,413 (3,101)
		61,312

(8) Trade and other payables

Trade payables Other payables	As at	As at
	30 June 31 December 2005 2004 HK$’000 HK$’000 51,005 18,548 12,912 11,087 63,917 29,635
		29,635

The aged analysis of trade payables is as follows:

Age 0 to 90 days 91 to 180 days over 180 days	As at	As at
	30 June 31 December 2005 2004 HK$’000 HK$’000 32,576 16,692 16,671 691 1,758 1,165 51,005 18,548
		18,548

• 14 -

(9) Share capital

Authorized – ordinary shares of HK$0.01 each Issued and fully paid – at 1 January 2005 and 30 June 2005	Number of shares ’000 500,000 289,945	Nominal value HK$’000 5,000
		2,900

(10) Share-based payments

The Group has two share option schemes for certain directors, an advisor and employees. They are the Pre-IPO Share Option Scheme and Pro-IPO Share Option Scheme and described below:

	Pre-IPO Share Option Scheme	Post-IPO Share Option Scheme
Exercise Price	HK$0.55 per share, which was the same as the placing price per share at the time of IPO.	Average closing price of 5 trading days immediately prior to the date of grant.
Vesting Period	One-half to three years	One to four years
Contractual Life	10 years from date of grant	10 years from date of grant
Cancellation	After 3 months from the departure of grantees from the Group	After 3 months from the departure of grantees from the Group.

Details of the share option outstanding during the Review Period are as follows:

Outstanding at 1 January Granted during the period Cancelled during the period Exercised during the period Outstanding at 30 June Exercisable at 30 June	2005 Weighted Number of average share exercise options price ’000 HK$ 23,380 0.343 – – (2,499) 0.340 – – 20,881 0.343 13,943 0.422	2004
		Weighted Number of average share exercise options price ’000 HK$ 21,253 0.371 2,844 0.165 (530) 0.316 – – 23,567 0.347 8,181 0.442

• 15 -

For the six months ended 30 June 2004, the Group granted approximately 2,844,000 options under the Post-IPO Share Option Scheme. The estimated fair value of each option is approximately HK$0.091. This was calculated by applying the Black Scholes pricing model. The model inputs were the share price of HK$0.165, exercise price of HK$0.165, expected volatility of 63%, no expected dividends, expected life of 5 years, and a risk free rate of 2.65%.

No option was granted for the six months ended 30 June 2005.

(11) Operating lease commitments

As at 30 June 2005, the Group had operating lease commitments of approximately HK$3,399,000 (31 December 2004: HK$2,630,000), out of which approximately HK$2,307,000 was payable within 1 year. (31 December 2004: HK$2,067,000)

(12) Contingent liabilities

As at 30 June 2005, the Company has given corporate guarantees totaling approximately HK$54,000,000 (31 December 2004: HK$54,000,000) to banks to secure the credit facilities granted to its subsidiaries.

• 16 -

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

The following continuing disclosure is made pursuant to Rule 17.22 of the GEM Listing Rules.

As at 30 June 2005, there were 289,944,745 shares in the Company in issue. Based on the average closing price of the Company’s shares of HK$0.1140 as stated in the Stock Exchange’s daily quotation sheets for the trading days from 23 June 2005 to 29 June 2005 (both days inclusive), being the five business days immediately preceding 30 June 2005, the total market capitalisation of the Company was approximately HK$33,053,701 (the “Total Market Capitalisation”) as at 30 June 2005.

As at 31 December 2004, the consolidated total assets value of the Group was approximately HK$138,763,000 (the “Total Assets Value”).

As at 30 June 2005, the following trade receivables of the Group exceeded 8% of either the Total Market Capitalisation and/or the Total Assets Value:–

Customer Name	Amount due to the Group as at 30 June 2005 (HK$’000)	Approximate percentage of Total Market Capitalisation	Approximate percentage of Total Assets Value
The China Unicom Group	6,991	21.2%	5.0%
Guangdong Telecom Appliance Corp.	6,655	20.1%	4.8%
Motorola (China) Electronics Ltd.	12,135	36.7%	8.7%
Shanxi Branch of China Telecom Group Corporation	3,691	11.2%	2.7%
Guangzhou Thinker Technology Co., Ltd. * 廣州創想科技股份有限公司	4,049	12.2%	2.9%
Beijing Siemens Communications Network Co. Ltd.	19,560	59.2%	14.1%
IBM Global Services (China) Company Ltd.	4,691	14.2%	3.4%
Joyou Data Technology Ltd., Co.	4,964	15.0%	3.6%
Aostar & Yinhai Information Technologies Co., Ltd.	5,159	15.6%	3.7%

* For identification purpose only

• 17 -

The aforesaid trade receivables of the Group all resulted from the sale of network equipment, the provision of services or the undertaking of system integration projects by the Group in its ordinary course of business. Payment terms with customers are mainly on credit together with deposits where applicable and under normal commercial terms. The receivables are all unsecured, interest-free and invoices are payable from 30 to 90 days of issuance. For some system integration projects with established customers, payment of the balance after deposits is phased into different stages of completion of the project concerned.

To the best of the knowledge, information and belief of the Directors having made all reasonable enquiries, all of the above customers and their respective 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 (all of the aforesaid terms as defined in the GEM Listing Rules).

PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANY

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

SHARE OPTION SCHEMES

The Company, in a general meeting held on 20 April 2002, adopted both a pre-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 Share Option Scheme or the Post-IPO Share Option Schemes had lapsed or had been exercised during the Review Period.

• 18 -

(a) Pre-IPO Share Option Scheme

One single grant of 11,913,000 shares in aggregate was made to various participants on 30 April 2002 under this scheme. As at 30 June 2005, options comprising an aggregate of 8,823,000 shares were outstanding, as detailed below:

		Number of share	Number of share	options
			Cancelled
	Exercise	Outstanding	during	Outstanding
	price	as at	Review	as at
	per share	1.1.2005	Period	30.6.2005
	HK$
Type of Participants:
Directors	0.55	3,750,000	–	3,750,000
Advisor	0.55	750,000	–	750,000
Employees	0.55	5,218,000	895,000	4,323,000
			(Note)
		9,718,000	895,000	8,823,000

• Note: These options were cancelled according to the rules of this scheme due to the employees having left the Group.

Pre-IPO share options 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 on or after the third anniversary of the Date of Listing until the end of the option period or lapse of an option.

The above outstanding options may be exercised, in accordance with the terms of the Pre-IPO Share Option Scheme, before 30 April 2012.

• 19 -

(b) Post-IPO Share Option Schemes

There have been a total of 5 Post-IPO share options grants. The numbers of share options granted were 5,277,000 shares on 12 July 2002, 7,859,000 shares on 20 February 2003, 385,000 shares on 10 October 2003, 2,844,000 shares on 23 February 2004 and 828,000 shares on 11 October 2004. No option was granted during the Review Period.

A summary of the Post-IPO Share Option Scheme movements during the Review Period and as at 30 June 2005 is as follows:

					Number of share options	Number of share options
			Exercise	Outstanding	Granted	Cancelled	Outstanding
	Type of		Price	**as at **	during Review	during	as at
Date of grant	Participants	Exercisable Period	per share	1.1.2005	Period Review Period		30.6.2005
			HK$			(Note 1)
12.7.2002	Employees	12.7.2003 to 11.7.2012	0.384	2,981,000	–	505,000	2,476,000
20.2.2003	Directors	20.2.2004 to 19.2.2013	0.138	3,825,000	–	–	3,825,000
	Advisors	20.2.2004 to 19.2.2013	0.138	300,000	–	–	300,000
	Employees	20.2.2004 to 19.2.2013	0.138	3,034,000	–	473,000	2,561,000
				--------------	--------------	--------------	--------------
				7,159,000	–	473,000	6,686,000
10.10.2003	Employees 10.10.2004 to 9.10.2013		0.142	290,000	–	60,000	230,000
23.2.2004	Employees	23.2.2005 to 22.2.2014	0.165	2,404,000	–	480,000	1,924,000
			(Note 2)
11.10.2004	Employees11.10.2005 to 10.10.2014		0.124	828,000	–	86,000	742,000
				13,662,000	–	1,604,000	12,058,000

Notes:

• (1) These options were cancelled according to the rules of this scheme due to the employees having left the Group.

• (2) The closing price of the share of the Company immediately before the date on which the options were granted was HK$0.155.

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Post-IPO share options are exercisable starting from the first anniversary of the grant date at stepped annual increment of 25% of the total options granted, for a period not later than 10 years from the date of grant.

The above outstanding options may be exercised within the exercisable period in accordance with the terms of the Post-IPO Share Option Scheme.

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS OR SHORT POSITION IN SHARES AND UNDERLYING SHARES OF THE COMPANY

As at 30 June 2005, the interests and short positions of the Directors, the chief executive of the Company and their respective associates (as defined in the GEM Listing Rules) in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO or as otherwise notified to the Company and the Exchange pursuant to the required standard of dealings by Directors as referred to in Rule 5.46 of the GEM Listing Rules, were as follows:

(a) Long positions in shares in the Company

==> picture [493 x 182] intentionally omitted <==

----- Start of picture text -----

Number of shares held
Approximate
percentage
of the
Total Company’s
Personal Family Corporate Other interest issued
Name of Director interest Capacity interest interest Capacity interest in shares share capital
Mr. Chan Sek Keung, Ringo 5,816,000 Beneficial – 56,400,000 Interest of a – 62,216,000 21.46%
owner (Note) controlled
corporation
----- End of picture text -----

Note: Such shares in the Company 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.

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(b) Long positions in underlying shares in the Company (Directors’ rights to acquire shares)

		Number	Number	Number of	Number
		of unlisted	of unlisted	unlisted	of unlisted		Approximate
		pre-IPO	pre-IPO	post-IPO	post-IPO		percentage
	**share option **		**share option **	**share option **	share option		of the
	outstanding		outstanding	outstanding	outstanding		Company’s
		as at	as at	as at	as at	Aggregate	issued
Name of Director	Date of grant	1.1.2005	30.6.2005	1.1.2005	30.6.2005	**interests **	share capital
Mr. Chan Sek Keung,	30.4.2002	3,000,000	3,000,000	–	–
Ringo	20.2.2003	–	–	1,200,000	1,200,000	4,200,000	1.45%
Mr. Pang Hing Chung,	30.4.2002	750,000	750,000	–	–
Alfred	20.2.2003	–	–	750,000	750,000	1,500,000	0.52%
Mr. Tsoi Tai Wai, David	20.2.2003	–	–	750,000	750,000	750,000	0.26%
Mr. Alasdair Gordon	20.2.2003	–	–	375,000	375,000	375,000	0.13%
Nagle
Ms. Clara Ho	20.2.2003	–	–	375,000	375,000	375,000	0.13%
Mr. Kwan Kit Tong	20.2.2003	–	–	375,000	375,000	375,000	0.13%

Notes:

• (1) Each of the above Directors is personally the beneficial owner of the share option granted to them.

• (2) Each of the Directors’ interests represent his/her respective long positions in the underlying shares in the Company by virtue of options granted to the Directors pursuant to a pre-IPO share option scheme and a post-IPO share option scheme both adopted by the Company on 20 April 2002 (further details are set out under the section headed “Share Option Schemes”).

• (3) Options granted on 30 April 2002 were exercisable during the period 17 November 2002 to 29 April 2012 at the exercise price of $0.55 per share.

• (4) Options granted on 20 February 2003 were exercisable during the period 20 February 2004 to 19 February 2013 at the exercise price of $0.138 per share.

Other than as disclosed above, none of the Directors, the chief executive of the Company and their respective associates (as defined in the GEM Listing Rules), had any interests or short positions in any shares, underlying shares or debentures of the Company or any of its associated corporations as at 30 June 2005.

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REQUIRED STANDARD OF SECURITIES DEALINGS BY DIRECTORS

During the six months ended 30 June 2005, the Company had adopted a code of conduct for directors’ securities transactions 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 with all the Directors, the Directors of the Company confirmed that they had complied with the required standard of dealings and the code of conducts for directors’ securities transactions during the six months ended 30 June 2005.

SUBSTANTIAL SHAREHOLDERS AND OTHER SHAREHOLDERS WHOSE INTERESTS ARE RECORDED UNDER SECTION 336 OF THE SFO

As at 30 June 2005, the following persons or corporations, in addition to the Directors, stated under the section headed “Directors’ and chief executive’s interests or short position in shares and underlying shares of the Company” were interested in shares or underlying shares representing 5% or more in the issued share capital of the Company as recorded in the register of interests required to be kept by the Company pursuant to Section 336 of the SFO.

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Long positions in shares in the Company

				Approximate
				percentage of the
			Number	Company’s issued
Name of shareholder	Capacity	Type of interests	of shares	share capital
The Applied Research	Beneficial owner	Corporate	48,460,000	16.71%
Council (“ARC”)
(Note 1)
HSBC Private Equity	Investment manager	Corporate	48,460,000	16.71%
Technology (Asia)
Limited_(Note 2)_
HSBC Private Equity	Interest of a controlled	Corporate	48,460,000	16.71%
(Asia) Limited	corporation
(Note 2)
North 22 Nominees	Beneficial owner	Corporate	36,900,000	12.73%
Limited
Mr. Ng Lai Yick	Beneficial owner	Personal	3,134,744	1.08%
(Note 3)	Interest of a controlled	Corporate	36,900,000	12.73%
	corporation
QPL International	Beneficial owner	Corporate	35,456,745	12.23%
Holdings Limited
(“QPL”)(Note 4)
Mr. Li Tung Lok	Interest of a controlled	Corporate	35,456,745	12.23%
(Note 4)	corporation
Madam Su Ching Wah	Interest of spouse	Family	35,456,745	12.23%
(Note 4)

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Notes:

• (1) ARC is the beneficial owner of these shares.

• (2) 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.

• (3) 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.

• (4) 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.

Madam 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.

Other than as disclosed above, the Company had not been notified of any other relevant interests or short positions in the shares or underlying shares in the Company as at 30 June 2005.

COMPETITION AND CONFLICT OF INTERESTS

Each of the Directors and the management shareholders of the Company and their respective associates (as defined in the GEM Listing Rules) has confirmed that none of them had any business or interest in companies that competed or might compete with the business of the Group or any other conflict of interests with the interests of the Group.

AUDIT COMMITTEE

The Company established the Audit Committee on 29 October 2001 with written terms of reference in compliance with Rules 5.28 to 5.29 of the GEM Listing Rules and with reference to the guidelines published by the Hong Kong Institute of Certified Public Accountants.

The present Audit Committee consists of three independent non-executive Directors, namely, Mr. Tsoi Tai Wai, David, Mr. Pang Hing Chung, Alfred and Mr. Yu Zhonghou. Mr. Tsoi is the chairman of the Audit Committee. The relevant annual confirmation of independence have been received from Mr. Tsoi and Mr. Pang while the same will be due from Mr. YU in September 2005.

The Audit Committee has reviewed the draft of this announcement and has provided advice and comments thereon.

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BOARD PRACTICES AND PROCEDURES

The Company has complied with the board practices and procedures as set out in Rules 5.34 of the GEM Listing Rules during the Review Period.

CORPORATE GOVERNANCE

At present, the roles of both the chairman and chief executive officer of the Company are carried out by the same individual, Mr. Chan Sek Keung Ringo, the sole executive director of the Company. Steps are being taken to change the board structure by appointing at least a second executive director with the aim of complying with paragraph A.2.1 in the Code on Corporate Governance Practices (“the Code”) as set out in Appendix 15 of the GEM Listing Rules in the future.

Under the present Articles of Association of the Company, the chairman of the Board and/ or the managing director of the Company shall not, whilst holding such office, be subject to retirement by rotation. The Board has resolved that it would propose amendments to the Articles of Association, as special business, at the forthcoming Annual General Meeting with the aim of allowance compliance with paragraph A.4.2 of the Code in the future after the meeting.

Except as disclosed above, the Company was in compliance with the provisions of the Code during the Review Period.

By Order of the Board WAFER SYSTEMS LIMITED CHAN Sek Keung, Ringo Chairman and Chief Executive Officer

Hong Kong, 11 August 2005

This announcement will remain on the “Latest Company Announcements” page of the GEM website at www.hkgem.com for at least 7 days from the date of its publication.

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