Crypto Flow Technology Limited — Interim / Quarterly Report 2007

May 17, 2007

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

FIRST QUARTERLY REPORT FOR THE 3 MONTHS ENDED 31 MARCH 2007

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 Board consists of one executive director, Mr. Chan Sek Keung, Ringo, one non-executive director, Mr. Kwan Kit Tong and three independent non-executive directors, namely Mr. Pang Hing Chung, Alfred, Mr. David Tsoi and Mr. Chan Tze Ngon.

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”) hereby report the unaudited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the three months ended 31 March 2007 (the “Review Period”) together with the comparative unaudited figures for the corresponding period in 2006.

BUSINESS REVIEW AND PROSPECTS

The Group continued its business principally in the provision of network infrastructure solutions, including the sales of network equipment and software, provision of related network professional services and sales of its proprietary network software.

First quarter of the year is a traditionally slow season for our business. During the Review Period, the Group recorded a turnover of approximately HK$50.6 million (2006: approximately HK$46.4 million), an increase of approximately 9% from that recorded in the corresponding period in 2006. Loss attributable to equity holders of the Company for the Review Period was reduced to HK$958,000 (2006: approximately loss HK$3,890,000). The better results compared with the year before have largely been due to the better performance in the businesses of professional services and proprietary network software during the Review Period.

Geographically, mainland China remained predominantly the biggest business generating area for the Group. During the Review Period, the Group continued to invest in building up its capability in next generation network (“NGN”) software and solutions and management software. Sales of such software during the Review Period have continued its upward trend.

Continual technology up-grading, congenial partnership with technology leaders and high customer satisfaction will continue to be the priorities of the Group to maintain being a leading NGN solution and service provider.

INTERIM DIVIDEND

The Board does not recommend the payment of an interim dividend for the Review Period (2006: Nil).

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FINANCIAL INFORMATION

Unaudited Consolidated Financial Results

Note Turnover 2 Other income Charges in materials and equipment Employee expenses Depreciation and amortisation Other expenses Finance costs Loss before taxation 3 Taxation 4 Loss for the period Attributable to: Equity holders of the Company Loss per share – Basic (cents) 5	For the three months ended 31 March 2007 2006 HK$’000 HK$’000 50,552 46,358 31 483 (36,059) (38,555) (5,566) (4,962) (1,077) (1,210) (7,637) (5,255) (1,202) (749) (958) (3,890) – – (958) (3,890) (958) (3,890) (0.33) (1.34)
	2007 HK$’000 50,552 31 (36,059) (5,566) (1,077) (7,637) (1,202) (958) – (958) (958) (0.33)

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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 GEM Listing Rules.

The accounting policies 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 2006.

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 recognised for the three months ended 31 March 2007 together with the comparative figures for the corresponding period in 2006 are as follows:

Network infrastructure Professional services Network software Total	(Unaudited) For the three months ended 31 March	(Unaudited) For the three months ended 31 March
	2007 HK$’000 38,293 10,328 1,931 50,552	2006 HK$’000 39,454 6,215 689
		46,358

(3) Loss before taxation

Loss before taxation has been arrived at after charging:

Amortisation of software product development costs Depreciation of property, plant and equipment Employee expenses (including directors’ remuneration) and after crediting: Interest income	For the three months ended 31 March
	2007 2006 HK$’000 HK$’000 650 656 427 554 5,566 4,962 31 15

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(4) Taxation

No provision for Hong Kong profits tax has been made, as the Group had no assessable profit for the three months ended 31 March 2007 and its corresponding period in 2006.

PRC income tax has not been provided for the Review Period and its corresponding period in 2006 as the Company’s PRC subsidiaries had either no assessable profit or were within their tax exemption period.

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 years commencing from their first profit-making year of operation and thereafter entitled to a 50% relief from PRC income tax for the immediate following three years. During the Review Period, one of the Company’s PRC subsidiaries was still within its 50% tax relief period; while one of the Company’s PRC subsidiaries was still within its tax exemption period as its first profit-making year of operation has not started yet.

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

(5) Loss per share

The calculation of basic (loss) earnings per share for the three months ended 31 March 2007 is based on the unaudited loss attributable to equity shareholders of the Company of approximately HK$958,000 (2006: loss of approximately HK$3,890,000) and on the weighted average number of approximately 289,945,000 ordinary shares (2006: approximately 289,945,000) in issue during the period.

Diluted loss per share has not been presented for the three months ended 31 March 2007 since the effect is anti-dilutive.

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Total HK$’000 59,426 24 338 (3,890) 55,898 65,213 28 834 (958) 65,117
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			Total	HK$’000	59,426		24		338		(3,890	55,898		65,213		28		834		(958	65,117
Retained	earnings/	Exchange (Accumulated	reserve losses)	HK$’000 HK$’000	566 (2,458)		– –		338 –		– (3,890)	904 (6,348)		1,196 2,643		– –		834 –		– (958)	2,030 1,685
	Staff	welfare	fund	HK$’000	502		–		–		–	502		–		–		–		–	–
	Enterprise	expansion	fund	HK$’000	502		–		–		–	502		502		–		–		–	502
Statutory	surplus	reserve	fund	HK$’000	1,003		–		–		–	1,003		1,505		–		–		–	1,505
	Share-based	payments	reserve	HK$’000	587		24		–		–	611		643		28		–		–	671
		Share	premium	HK$’000	55,824		–		–		–	55,824		55,824		–		–		–	55,824
		Share	capital	HK$’000	2,900		–		–		–	2,900		2,900		–		–		–	2,900
					As at 1 January 2006	Recognition of equity settled	share-based payments	Exchange difference on translation	of foreign operations	Loss for the three months ended	31 March 2006	As at 31 March 2006		As at 1 January 2007	Recognition of equity settled	share-based payments	Exchange difference on translation	of foreign operations	Loss for the three months ended	31 March 2007	As at 31 March 2007

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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, at the 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 31 March 2007, options comprising an aggregate of 8,310,000 shares were outstanding, as detailed below:

Number of share options

Types of participants: Directors Advisor Employees	Exercise price per share HK$ 0.55 0.55 0.55	Outstanding as at 1.1.2007 3,750,000 750,000 3,810,000 8,310,000	Lapsed during Review Period – – – –	Outstanding as at 31.3.2007
				3,750,000 750,000 3,810,000
				8,310,000

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 “Listing Date”); (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 Listing Date; and (iii) the remaining options granted on or after the third anniversary of the Listing Date 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 Scheme

There have been a total of 6 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, 828,000 shares on 11 October 2004 and 6,980,000 shares on 12 January 2007.

A summary of the Post-IPO Share Option Scheme movements during the Review Period and as at 31 March 2007 is as follows:

Date of grant 12.7.2002 20.2.2003 10.10.2003 23.2.2004 11.10.2004 12.1.2007	Type of participants Employees Directors Advisors Employees Employees Employees Employees Directors 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 12.1.2008 to 11.1.2017 12.1.2008 to 11.1.2017 Total:	Exercise price per share HK$ 0.384 0.138 0.138 0.138 0.142 0.165 0.124 0.088 0.088		Number of share options	Number of share options
				Outstanding as at 1.1.2007	Granted during Review Period	Lapsed during Review Period	Outstanding as at 31.3.2007
				2,025,000	–	(Note 1) –	2,025,000
				3,825,000 300,000 1,961,000	– – –	– – –	3,825,000 (Note 2) 300,000 1,961,000
				6,086,000	–	–	6,086,000
				135,000	–	–	135,000
				1,458,000	–	–	1,458,000
				315,000	–	–	315,000
				– –	750,000 6,230,000	– –	750,000 6,230,000
				–	6,980,000	–	6,980,000
				10,019,000	6,980,000	–	16,999,000

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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) Out of these 3,825,000 share options outstanding as at 31 March 2007, 375,000 shares were granted to each of Mr. Alasdair Gordon Nagle and Ms. Clara Ho, directors appointed to the Board to represent the interests of The Applied Research Council. Both Mr. Nagle and Ms. Ho exercised the options on 3 April 2007 and shares were allotted to them accordingly.

Post-IPO share options are exercisable starting from the first anniversary of the date of grant 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 above outstanding options may be exercised within such exercise 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 31 March 2007, 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	8,852,000 Beneficial owner	–	56,400,000 Interest (Note) through a controlled corporation	–	65,252,000	22.50%

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. David Tsoi Mr. Alasdair Gordon Nagle (Note 3) Ms. Clara Ho_(Note 3) Mr. Kwan Kit Tong, Kevin _Notes:–	Date of grant 30.4.2002 20.2.2003 30.4.2002 20.2.2003 20.2.2003 12.1.2007 20.2.2003 20.2.2003 20.2.2003	Number of unlisted pre-IPO share option outstanding as at 1.1.2007 3,000,000 – 750,000 – – – – – –	Number of unlisted pre-IPO share option outstanding as at 31.3.2007 3,000,000 – 750,000 – – – – – –	Number of unlisted post-IPO share option outstanding as at 1.1.2007 – 1,200,000 – 750,000 750,000 – 375,000 375,000 375,000	Number of unlisted post-IPO share option outstanding as at 31.3.2007 – 1,200,000 – 750,000 750,000 750,000 375,000 375,000 375,000	Aggregate interests 4,200,000 1,500,000 1,500,000 375,000 375,000 375,000	Approximate percentage of the Company’s issued share capital
							1.45% 0.52% 0.52% 0.13% 0.13% 0.13%

• (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 or her respective long positions in the underlying shares in the Company by virtue of options granted to the directors pursuant to the Pre-IPO Share Option Scheme and the 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) Both Mr. Nagle and Ms. Ho exercised their respective option rights on 3 April 2007. They subsequently resigned from directorship in the Company with effect from 13 April 2007 after The Applied Research Council, whose interests Mr. Nagle and Ms. Ho were on the Board to represent, ceased to be a substantial shareholder of the Company after 12 April 2007.

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• (4) 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.

• (5) 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.

• (6) Options granted on 12 January 2007 were exercisable during the period from 12 January 2008 to 11 January 2017 at the exercise price of $0.088 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 31 March 2007.

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

As at 31 March 2007, 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

Name of shareholder The Applied Research Council (“ARC”) (Note 1,3) HSBC Private Equity Technology (Asia) Limited_(Note 2,3) HSBC Private Equity (Asia) Limited (Note 2,3) North 22 Nominees Limited(Note 4) Mr. Ng Lai Yick(Note 4) QPL International Holdings Limited (“QPL”)(Note 5) Mr. Li Tung Lok(Note 5) Madam Su Ching Wah (Note 5)_	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) By notice to the Company, ARC informed that it had disposed of 44,824,000 shares in the Company between 11 April 2007 and 12 April 2007. ARC, therefore, ceased to be a substantial shareholder of the Company after 12 April 2007.

• (4) 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.

• (5) 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 31 March 2007.

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.

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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. David Tsoi, Chairman, Mr. Pang Hing Chung, Alfred and Mr. Chan Tze Ngon. Mr. Chan Tze Ngon has joined the Board and the Audit Committee since 1 May 2007.

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, 15 May 2007

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