Crypto Flow Technology Limited — Interim / Quarterly Report 2006

Nov 16, 2006

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

THIRD QUARTERLY REPORT FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2006

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 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 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 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.

* For identification purpose only

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TO OUR SHAREHOLDERS

The board of Directors (the “Board”) is pleased to report the unaudited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the three months and nine months ended 30 September 2006 (the “Review Period”) together with the comparative unaudited figures for the corresponding period in 2005.

BUSINESS OVERVIEW AND REVIEW

Financial Highlights

	Q3/2006 Q3/2005 HK$’000 HK$’000 Change	Q1-Q3/ Q1-Q3/ 2006 2005 HK$’000 HK$’000 Change
Turnover Operating profit Profit attributable to equity holders of the Company Basic EPS (HK Cents) Orders on hand	78,550 73,685 7% 1,363 957 42% 315 317 -1% 0.11 0.11 –	219,498 292,615 -25% 4,186 3,168 32% 1,327 1,179 13% 0.46 0.41 12% 47,951 31,070

Financial Review

During the Review Period, the Group recorded a turnover of approximately HK$219.5 million (2005: HK$292.6 million), a decrease of 25% from that recorded in the corresponding period in 2005.

Profit attributable to shareholders of the Company for the Review Period increased by 13% to approximately HK$1.3 million (2005: HK$1.2 million).

Basic earnings per share during the Review Period were 0.46 HK cents, an increase of 12% as compared with 0.41 HK cents for the same period in 2005.

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Interim Dividend

The Board does not recommend the payment of an interim dividend for the nine months ended 30 September 2006 (2005: Nil).

Business Review

During the Review Period turnover from the Network Infrastructure business decreased by approximately 25% to approximately HK$192 million (2005: HK$257 million), accounting for about 88% of the Group’s total turnover. For Professional Services, turnover decreased by approximately 27% to approximately HK$25 million (2005: HK$35 million). Software sales during the Review Period saw a 460% increase to HK$1.8 million (2005: HK$0.3 million).

Prospects

The Group has started the final quarter of the year with a backlog of orders on hand of approximately HK$48 million, as compared with approximately HK$31 million at the same time last year.

The competition in the China market remains keen. The Group will continue to work hard on enterprise customers, both multinational and local, as well as making sure our established relations with telecommunications service providers continue to strengthen. The Group will also allocate more resources on businesses with higher margins for sales of professional services and software.

Barring unforeseen circumstances, the Group is cautiously optimistic about the completion of orders on hand as well as obtaining new orders for delivery during the balance of the year.

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Financial Information

Unaudited Consolidated Financial Results

Note Turnover 2 Other income Charges in materials and equipment Employee expense Depreciation and amortization Other expenses Finance costs Profit before taxation Taxation 4 Profit for the period Profit attributable to: Equity holders of the parent Minority interest Earnings per share – Basic (cents) 5 – Diluted (cents) 5	For the three months ended 30 September 2006 2005 HK$’000 HK$’000 78,550 73,685 138 17 (64,999) (59,426) (4,637) (5,000) (1,127) (1,125) (6,562) (7,194) (798) (640) 565 317 (250) – 315 317 315 317 – – 315 317 0.11 0.11 N/A N/A	For the nine months ended 30 September 2006 2005 HK$’000 HK$’000 219,498 292,615 647 116 (182,604) (247,551) (14,759) (13,993) (3,451) (3,284) (15,145) (24,735) (2,609) (1,995) 1,577 1,173 (250) – 1,327 1,173 1,327 1,179 – (6) 1,327 1,173 0.46 0.41 N/A N/A
	2006 HK$’000 78,550 138 (64,999) (4,637) (1,127) (6,562) (798) 565 (250) 315 315 – 315 0.11 N/A	2006 HK$’000 219,498 647 (182,604) (14,759) (3,451) (15,145) (2,609) 1,577 (250) 1,327 1,327 – 1,327 0.46 N/A

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL RESULTS

(1) Basis of presentation

The unaudited consolidated financial results have been prepared in accordance with Hong Kong Financial Reporting Standards 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.

The accounting polices adopted in preparing the unaudited consolidated financial report were in consistent with those applied for the annual financial report for the year ended 31 December 2005.

The unaudited consolidated results have been reviewed by the audit committee of the Company (the “Audit Committee”).

(2) Turnover

An analysis of the Group’s turnover recognized for the three and nine months ended 30 September 2006 together with the comparative figures for the corresponding period in 2005 are as follows:

Network infrastructure Professional services Network software Total	For the three months ended 30 September 2006 2005 HK$’000 HK$’000 65,080 62,268 12,837 11,087 633 330 78,550 73,685	For the nine months ended 30 September	For the nine months ended 30 September
		2006 HK$’000 192,336 25,315 1,847 219,498	2005 HK$’000 257,378 34,907 330
			292,615

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(3) Profit before taxation

Profit before taxation has been arrived at after charging:

Amortization of software product development costs Depreciation of property, plant and equipment Staff costs (including directors’ remuneration) and after crediting: Interest income	For the three months ended 30 September 2006 2005 HK$’000 HK$’000 657 504 470 621 4,637 5,000 157 17	For the nine months ended 30 September
		2006 2005 HK$’000 HK$’000 1,969 1,502 1,482 1,782 14,759 13,993 197 116

(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 for the Company and other Hong Kong subsidiaries either because the accumulated tax losses brought forward exceed the estimated assessable profits for the nine months ended 30 September 2006 and its corresponding period in 2005 or the entities sustained losses for taxation purposes.

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

A deferred tax asset has not been recognized in the financial statement in respect of tax losses available to offset future profits as it is not certain that the tax losses will be utilized in the foreseeable future.

(5) Earnings per share

The calculation of basic earnings per share for the three months and the nine months ended 30 September 2006 is based on the unaudited profit attributable to equity holders of the parent of approximately HK$315,000 (2005: HK$317,000) and approximately HK$1,327,000 (2005: HK$1,179,000) respectively and on the weighted average number of approximately 289,945,000 (2005: 289,945,000) shares in issue during the period.

Diluted earnings per share has not been presented for the three months and nine months ended 30 September 2006 and for the three months ended 30 September 2005 since the effect is anti-dilutive.

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Total HK$’000 57,283 – 57,283 19 546 1,304 115 59,267 59,426 339 1,327 44 61,136
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			Minority	interest	HK$’000		–	–		–		19			–		(6)		–	13			–			–		–		–	–
Attributable	to equity	holders	of the	parent	HK$’000		57,283	–		57,283		–			546		1,310		115	59,254			59,426			339		1,327		44	61,136
			Translation Accumulated	reserve losses	HK$’000 HK$’000		– (3,448)	– (453)		– (3,901)		– –			546 –		– 1,310		– –	546 (2,591)			566 (2,458)			339 –		– 1,327		– –	905 (1,131)
		Staff	welfare	fund	HK$’000		502	–		502		–			–		–		–	502			502			–		–		–	502
		Enterprise	expansion	fund	HK$’000		502	–		502		–			–		–		–	502			502			–		–		–	502
	Statutory	surplus	reserve	fund	HK$’000		1,003	–		1,003		–			–		–		–	1,003			1,003			–		–		–	1,003
	Share-	based	payments	reserve	HK$’000		–	453		453		–			–		–		115	568			587			–		–		44	631
			Share	premium	HK$’000		55,824	–		55,824		–			–		–		–	55,824			55,824			–		–		–	55,824
			Share	capital	HK$’000		2,900	–		2,900		–			–		–		–	2,900			2,900			–		–		–	2,900
						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	Exchange differences on	translation of foreign	operations	Profit for the nine months	ended 30 September 2005	Recognition of share-based	payments	As at 30 September 2005		As at 1 January 2006	(as previously reported)	Exchange differences on	translation of foreign	operations	Profit for the nine months	ended 30 September 2006	Recognition of share-based	payments	As at 30 September 2006

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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 Scheme had been exercised during the Review Period.

(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 September 2006, options comprising an aggregate of 8,310,000 shares were outstanding, as detailed below:

Number of share options

Type of Participants: Directors Advisor Employees	Exercise price per share HK$ 0.55 0.55 0.55	Outstanding as at 1.1.2006 3,750,000 750,000 4,255,000 8,755,000	Lapsed during Review Period – – 445,000 (Note) 445,000	Outstanding as at 30.9.2006
				3,750,000 750,000 3,810,000
				8,310,000

Note: These options lapsed 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.

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(b) Post-IPO Share Option Schemes

There have been a total of 5 lots of Post-IPO share options granted. The lots 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 September 2006 is as follows:

Date of grant 12.7.2002 20.2.2003 10.10.2003 23.2.2004 11.10.2004	Type of participants Employees Directors Advisors Employees Employees Employees Employees	Exercisable period 12.7.2003 to 11.7.2012 20.2.2004 to 19.2.2013 20.2.2004 to 19.2.2013 20.2.2004 to 19.2.2013 10.10.2004 to 9.10.2013 23.2.2005 to 22.2.2014 11.10.2005 to 10.10.2014	Exercise price per share HK$ 0.384 0.138 0.138 0.138 0.142 0.165 (Note 2) 0.124		Number of share options	Number of share options
				Outstanding as at 1.1.2006	Granted during Review Period	Lapsed during Review Period	Outstanding as at 30.9.2006
				2,326,000	–	(Note 1) 301,000	2,025,000
				3,825,000 300,000 2,382,000 ----------------- 6,507,000	– – – ----------------- –	– – 421,000 ----------------- 421,000	3,825,000 300,000 1,961,000 ----------------- 6,086,000
				165,000	–	30,000	135,000
				1,624,000	–	166,000	1,458,000
				580,000	–	155,000	425,000
				11,202,000	–	1,073,000	10,129,000

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Notes:

• (1) These options were lapsed 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.

Post-IPO share options are exercisable starting from the first anniversary of the date of grant 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.

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

As at 30 September 2006, 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

Number of shares held	Number of shares held	Number of shares held	Number of shares held	Number of shares held	Number of shares held	Number of shares held
	Personal interest Capacity	Family interest	Corporate interest Capacity	Other interest	Total interest in shares	Approximate percentage of the Company’s issued share capital
Name of Director
Mr. Chan Sek Keung, Ringo	7,676,000 Beneficial owner	–	56,400,000 Interest (Note) through a controlled corporation	–	64,076,000	22.10%

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 have an interest in these shares.

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

Name of Director Mr. Chan Sek Keung, Ringo Mr. Pang Hing Chung, Alfred Mr. Tsoi Tai Wai, David Mr. Alasdair Gordon Nagle Ms. Clara Ho Mr. Kwan Kit Tong, Kevin	Date of grant 30.4.2002 20.2.2003 30.4.2002 20.2.2003 20.2.2003 20.2.2003 20.2.2003 20.2.2003	Number of Number of unlisted unlisted pre-IPO pre-IPO share option share option outstanding outstanding as at 1.1.2006 as at 30.9.2006 3,000,000 3,000,000 – – 750,000 750,000 – – – – – – – – – –	Number of unlisted post-IPO share option outstanding **as at 1.1.2006 **	Number of unlisted post-IPO share option outstanding as at 30.9.2006 – 1,200,000 – 750,000 750,000 375,000 375,000 375,000	Aggregate interests 4,200,000 1,500,000 750,000 375,000 375,000 375,000	Approximate percentage of the Company’s issued share capital
			– 1,200,000 – 750,000 750,000 375,000 375,000 375,000			1.45% 0.52% 0.26% 0.13% 0.13% 0.13%

Notes:

• (1) Each of the above Directors is the personal beneficial owner of the share options granted to him or her.

• (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 from 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 from 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 September 2006.

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

As at 30 September 2006, 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.

Long positions in shares in the Company

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

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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 have an interest in these shares as it is the investment manager of ARC.

HSBC Private Equity (Asia) Limited is deemed, by virtue of the SFO, to have an interest 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 have an interest 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 have an interest 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 have an interest in the 35,456,745 shares held by QPL.

Save 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 September 2006.

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 has been received from all these three Directors.

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

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

Hong Kong, 14 November 2006

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