KONKA GROUP CO.,LTD — Audit Report / Information 2006

Apr 19, 2007

Konka Group Co., Ltd.

(Incorporated in the People’s Republic of China)

Report of the auditors and financial statements for the year ended December 31, 2006

Konka Group Co., Ltd.

(Incorporated in the People’s Republic of China)

Contents	Pages
Report of the auditors	1
Consolidated income statement	2
Consolidated balance sheet	3 - 4
Consolidated statement of changes in equity	5
Consolidated cash flow statement	6 - 7
Notes to the financial statements	8 - 32

Report of the auditors to the members of Konka Group Co., Ltd.

(Incorporated in the People’s Republic of China with limited liability by shares)

We have audited the accompanying financial statements of Konka Group Co., Ltd., which comprise the balance sheet as at December 31, 2006, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of Konka Group Co., Ltd. as of December 31, 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

K. C. Oh & Company Certified Public Accountants

Hong Kong : April 17, 2007

• 1 -

Konka Group Co., Ltd.

Consolidated income statement for the year ended December 31, 2006

Note Turnover 5 Cost of sales Gross profit Other revenue 6 Distribution costs Administrative expenses Operating profit Finance costs Share of profit/(loss) from associates Profit before taxation 7 Income tax 8 Profit for the year Attributable to : Equity holders of the parent Share of results of minority interests Profit attributable to equity holders of the parent Profit per share to equity holders of the parent - basic	2006 RMB’000 12,656,151 ( 10,524,703) 2,131,448 34,884 ( 1,528,856 ) ( 504,952) 132,524 ( 13,845 ) 574 119,253 ( 22,394) 96,859 89,366 7,493 96,859 RMB0.148	2005 RMB’000 11,455,892 ( 9,572,425 )
		1,883,467 39,210 ( 1,419,200 ) ( 445,364 )
		58,113 ( 12,353 ) ( 833 )
		44,927 ( 11,514 )
		33,413
		19,552 13,861
		33,413
		RMB0.032

The calculation of the basic earnings per share is based on the current year’s profit of RMB89,366,000 (2005 - RMB19,552,000) attributable to the equity holders of the parent and on the existing number of 601,986,352 shares in issue during the year.

• 2 -

Konka Group Co., Ltd.

Consolidated balance sheet as at December 31, 2006

Note Assets Non-current assets Property, plant and equipment 9 Land use rights – non-current portion 10 Goodwill 11 Intangible assets 12 Interests in associates 13 Other investments 14 Current assets Land use rights – current portion 10 Inventories 15 Properties held for sale 16 Account receivables 17 Prepayments, deposits and other receivables 18 Note receivables 19 Cash and bank balances Total assets	2006 RMB’000 1,308,162 26,428 4,840 16,341 46,151 15,290 1,417,212 630 3,551,897 4,172 950,048 276,215 3,144,956 678,240 8,606,158 10,023,370	2005 RMB’000 1,332,475 27,059 989 19,928 44,284 10,290
		1,435,025
		630 3,385,558 4,172 676,234 231,918 2,759,689 629,160
		7,687,361
		9,122,386

(to be cont’d)

• 3 -

Konka Group Co., Ltd.

Consolidated balance sheet as at December 31, 2006

		(cont’d)
Note Equity and liabilities Capital and reserves Share capital 20 Reserves Equity attributable to equity holders of the parent Minority interests Total equity Non-current liabilities Deferred income Other long-term liabilities Current liabilities Tax payable Account payables Other payables and accrued expenses Note payables Short-term bank loans 21 Total liabilities Total equity and liabilities	2006 RMB’000 601,986 2,704,106 3,306,092 243,669 3,549,761 7,495 27,495 34,990 10,088 1,217,777 1,081,080 4,114,674 15,000 6,438,619 6,473,609 10,023,370	2005 RMB’000 601,986 2,609,987 3,211,973 261,722 3,473,695 10,493 20,179 30,672 4,536 1,430,260 813,038 3,342,185 28,000 5,618,019 5,648,691 9,122,386

The financial statements on pages 2 to 32 were approved and authorized for issued by the board of directors on April 17, 2007 and are signed on its behalf by :

Director Director Director	Director Director Director	Director Director Director

• 4 -

Konka Group Co., Ltd.

Consolidated statement of changes in equity for the year ended December 31, 2006

																		Reserves	Reserves
																	Attributable to equity
							Accumulated										holders
	Share capital	Capital reserves	Surplus reserves				profit/(loss)		Dividend reserve	Exchange reserve				Total reserves			of the parent		Minority interests			Total
	RMB’000	RMB’000		RMB’000			RMB’000		RMB’000		RMB’000			RMB’000			RMB’000		RMB’000			RMB’000
As at January 1, 2005	601,986	1,820,452		1,133,044		(	361,412	)	-	(	378	)		2,591,706			3,193,692		247,827			3,441,519
Profit for the year of 2005	-	-		-			19,552		-		-			19,552			19,552		13,861			33,413
Funds from discretionary surplus reserve to
make good the accumulated loss	-	-	(	375,757	)		375,757		-		-			-			-		-			-
Appropriation to statutory surplus reserve	-	-		7,909		(	7,909	)	-		-			-			-		-			-
Increase in minority interests	-	-		-			-		-		-			-			-		34			34
Exchange difference from translation of foreign
operations	-	-		-			-		-	(	1,271	)	(	1,271	)	(	1,271	)	-		(	1,271	)
As at December 31, 2005	601,986	1,820,452		765,196			25,988		-	(	1,649	)		2,609,987			3,211,973		261,722			3,473,695
Profit for the year of 2006	-	-		-			89,366		-		-			89,366			89,366		7,493			96,859
Appropriation to statutory surplus reserve	-	-		27,567		(	27,567	)	-		-			-			-		-			-
Proposed final dividend	-	-		-		(	60,199	)	60,199		-			-			-		-			-
Dividend to minority interests	-	-		-			-		-		-			-			-	(	22,823	)	(	22,823	)
Decrease in minority interests	-	-		-			-		-		-			-			-	(	2,723	)	(	2,723	)
Exchange difference from translation of foreign
operations	-	-		-			-		-		4,753			4,753			4,753		-			4,753
As at December 31, 2006	601,986	1,820,452		792,763			27,588		60,199		3,104			2,704,106			3,306,092		243,669			3,549,761

According to the corporation law and relevant regulations of a joint stock limited company, the Company’s specified profit should be classified as capital reserves, which include share premium, surplus on revaluation of property, plant and equipment and other investments, etc. Capital reserves are normally used for issue of new shares, or for write-off or permanent provision when foreign investments are revalued. Surplus reserves comprise statutory surplus reserve and discretionary surplus reserve.

The Company is required to transfer an amount of not less than 10% of the profit after making up the accumulated loss to statutory surplus reserve until it is up to 50% of the registered share capital. Statutory surplus reserve can be used to cover current year loss or for issue of new shares. The amount of statutory surplus reserve to be utilized for issue of new shares should not exceed an amount such that the balance of the reserve will fall below 25% of the registered share capital after the issue of new shares. Discretionary surplus reserve is applied in accordance with the shareholders’ resolutions passed in the annual general meeting and can be used to make up the accumulated loss or for issue of new shares.

• 5 -

Konka Group Co., Ltd.

Consolidated cash flow statement for the year ended December 31, 2006

Cash flow from operating activities Operating profit before taxation Adjustment items : Interest income Income from government grant Other payables waived Interest expenses Depreciation of property, plant and equipment Loss on disposal of property, plant and equipment Reversal for impairment loss on property, plant and equipment Amortization of land use rights Impairment loss of goodwill Amortization of intangible assets Profit on partial disposal of a subsidiary Share of results from associates Reversal for impairment loss on associates Provision for inventory obsolescence Inventories written off Provision for doubtful debts on account receivables Provision for doubtful debts on other receivables Net operating cash inflow before movements ,in working capital Exchange reserve movement (Increase)/decrease in inventories Increase in account receivables Increase in prepayments, deposits and other receivables (Increase)/decrease in note receivables Increase/(decrease) in account payables Increase/(decrease) in other payables and accrued expenses Increase/(decrease) in note payables Cash generated from/(absorbed in) operations Interest paid Corporate and profits tax paid Net cash inflow/(outflow) from operating activities	2006 RMB’000 119,253 ( 5,000 ) ( 2,998 ) - 4,146 139,300 1,211 - 631 38 6,414 ( 1,378 ) ( 574 ) - 34,835 22,592 14,634 1,712 334,816 4,753 ( 223,766 ) ( 288,448 ) ( 46,009 ) ( 385,267 ) ( 212,483 ) 268,042 772,489 224,127 ( 4,146 ) ( 16,842) 203,139	2005 RMB’000 44,927 ( 7,488 ) ( 2,997 ) ( 1,207 ) 4,456 139,540 1,815 ( 260 ) 630 - 5,550 - 833 ( 8,391 ) 50,053 27,040 18,271 2,148
		274,920 ( 1,271 ) 118,126 ( 123,489 ) ( 34,815 ) 173,963 159,207 ( 7,012 ) ( 635,138 )
		( 75,509 ) ( 4,391 ) ( 9,123 )
		( 89,023 )

(to be cont’d)

• 6 -

Konka Group Co., Ltd.

Consolidated cash flow statement for the year ended December 31, 2006

(cont’d)

Note Net cash inflow/(outflow) from operating activities Investing activities Interest received Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchases of intangible assets Returns from partial investment in associates Increase in investment in an associate Repayments to associates Acquisition of other investments Net cash outflow from investing activities Financing activities Bank loans repaid 22 Other long-term liabilities raised 22 Dividend paid to minority interests 22 Increase/(decrease) in minority interests 22 Net cash outflow from financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents as at beginning of year Cash and cash equivalents as at end of year Analysis of cash and cash equivalents Cash and bank balances	2006 RMB’000 203,139 5,000 ( 136,245 ) 20,047 ( 2,827 ) 6,641 ( 2,000 ) ( 5,934 ) ( 5,000) ( 120,318) ( 13,000 ) 7,316 ( 22,823 ) ( 5,234) ( 33,741) 49,080 629,160 678,240 678,240	2005 RMB’000 ( 89,023 )
		7,488 ( 120,738 ) 6,137 ( 14,464 ) 2,400 - ( 3,967 ) -
		( 123,144 )
		( 20,149 ) 9,680 - 34
		( 10,435 )
		( 222,602 ) 851,762
		629,160
		629,160

• 7 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

1. General information

Konka Group Co., Ltd. (“the Company”), formerly known as Shenzhen Konka Electronic Group Co., Ltd., obtained approval from Shenzhen Municipal People’s Government to reorganize into a limited stock company in August 1991. On the approval of the People’s Bank of China, Shenzhen Branch, the Company issued “A” shares and “B” shares, which have then been listed on the Shenzhen Stock Exchange. On August 29, 1995, the Company changed its name to Konka Group Co., Ltd.

The principal activities of the Company and its subsidiaries (“the Group”) include the manufacture and sale of colour television, mobile phones, stereo recorders, hi-fi component systems, facsimile machines and telecommunication products, property development and investment holding.

2. Basis of preparation of the financial statements

In the current year, the Group has adopted all of the new and revised International Financial Reporting Standards (“IFRS”), International Accounting Standards (“IAS”) and Interpretations (“Int.”) issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB.

The Group has newly adopted the following new and amended IAS and Int. issued by IFRIC in the financial statements for the current year :

IAS 21 Amendment - The Effects of Changes in Foreign Exchange Rates IAS 39 Amendment - Financial Instruments: Recognition and Measurement IFRIC - Int. 4 Determining whether an Arrangement Contains a Lease

The adoption of the above new IAS and Int. does not have any financial impact on the Group’s financial statements for the years presented.

The consolidated financial statements have been prepared in accordance with the IFRS. These accounting standards differ from those used in the preparation of the PRC statutory financial statements, which are prepared in accordance with the PRC Accounting Standards. To conform to IFRS, adjustments have been made to the PRC statutory financial statements. Details of the impact of such adjustments on the net asset value as at December 31, 2006 and on the operating results for the year then ended are included in note 26 to the financial statements. In addition, the financial statements have been prepared under the historical cost convention except for certain fixed asset items that are recorded at valuation less accumulated depreciation and accumulated impairment losses.

• 8 -

(cont’d)

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

3. Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and the entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

The consolidated financial statements incorporate the financial statements of the Company and of its subsidiaries (the “Group”) made up to December 31 each year. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

(a) Subsidiaries

A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of the equity interest as a long-term investment and/or has the power to cast the majority of votes at meetings of the board of directors/management committee.

As at December 31, 2006, the Company held the following subsidiaries :

Name of the company Dongguan Konka Electronic Co., Ltd. Konka Pacific Pty. Ltd. Konka (U.S.A.) Ltd. Konka America, Inc. Anhui Konka Electronic Co., Ltd. (1)	Place of incorporation/ registration PRC Australia U.S.A. U.S.A. PRC	Registration capital ’000 RMB200,000 AUD1,000 USD3,000 USD1,000 RMB140,000	Percentage of interest held Direct Indirect % % 100 - 100 - 100 - 100 - 78 -	Principal activities
				Production of TV sets, hi-fi, etc. Sale of electronic products Research and development Sale of electronic products Manufacture and sale of TV sets

• 9 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

3. Basis of consolidation (cont’d)

(a) Subsidiaries (cont’d)

Name of the company Mudanjiang Konka Industrial Co., Ltd. Chongqing Konka Electronic Co., Ltd. Shenzhen Konka Visual Information System Engineering Co., Ltd. Hong Kong Konka Limited Shenzhen Konka Electrical Co., Ltd. Shenzhen Konka Telecommunications Technology Co., Ltd. Shenzhen Shushida Electronic Co., Ltd. Shenzhen Konka Communication Network Co., Ltd. Shenzhen Konka Injected Plastic Manufactory Co., Ltd. Anhui Konka Electrical Co., Ltd. (2) Shanxi Konka Electronic Co., Ltd. Chongqing Qingjia Electronic Co., Ltd. ** Dongguan Konka Packaging Co., Ltd. Hong Din International Trade Limited	Place of incorporation/ registration PRC PRC PRC Hong Kong PRC PRC PRC PRC PRC PRC PRC PRC PRC Hong Kong	Registration capital ’000 RMB60,000 RMB45,000 RMB15,000 HKD500 RMB8,300 RMB120,000 RMB42,000 RMB30,000 RMB9,500 RMB10,000 RMB69,500 RMB15,000 RMB10,000 HKD500	Percentage of interest held Direct Indirect % % 60 - 60 - 60 - 99 1 51 - 75 25 75 25 75 25 products 49 51 45 27.3 45 15 30 10 - 100 - 100	Principal activities
				Manufacture and sale of TV sets Manufacture and sale of TV sets Production of mould and sub- contracting Trading of electronic products Manufacture and sale of electronic products Manufacture and sale of mobile phones Manufacture and sale of electronic products Manufacture and sale of digital network Production of plastic products Manufacture and sale of electrical appliances Manufacture and sale of TV sets Manufacture and sale of electronic parts Production of plastic products International trade

• 10 -

(cont’d)

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

3. Basis of consolidation (cont’d)

• (a) Subsidiaries (cont’d)

Subsidiaries (cont’d)
Name of the company Hong Din Investment Development Limited Indonesia Konka Trading Limited Konka Electronics (India) Co., Ltd. Dongguan Konka Plastic Mould Co., Ltd. Changshu Konka Electronic Co., Ltd. Chongqing Konka Automobile Co., Ltd. Shenzhen Konka Precision Mould Co., Ltd. (3) Boluo Konka Printed Co., Ltd.	Place of incorporation/ registration Hong Kong Indonesia India PRC PRC PRC PRC PRC	Registration capital ’000 HKD500 USD500 USD1,160 RMB10,000 RMB24,650 RMB30,000 RMB14,500 RMB40,000	Percentage of interest held Direct Indirect % % - 100 - 100 - 70 - 63.25 moulds and plastic products - 60 - 57 - 51 - 51	Principal activities
				Investment holding Trading Production of colour TV sets Production of Manufacture and sale of electronic products Manufacture and sale of automobile and parts Production of moulds Manufacture and sale of electronic products

• The results and the financial position of these companies are not required to be consolidated because they have ceased the business.

• ** The Company has effective control over this company.

• (1) The Company increased an additional equity interest in the subsidiary Anhui Konka Electronic Co., Ltd. by 13% at a consideration of RMB31,781,000, amongst which a sum of RMB3,889,000 was goodwill.

• (2) The Company increased an additional equity interest in the subsidiary Anhui Konka Electrical Co., Ltd. by 45% at a consideration of RMB6,793,000.

• (3) The Company disposed of its 49% equity interest in the subsidiary Shenzhen Konka Precision Mould Co., Ltd. for RMB25,060,000, ending in a disposal profit of RMB1,378,000.

(b) Associates

An associate is a company in which the Company holds, directly or indirectly, not less than 20% and not more than 50% equity interest as a long-term investment and is able to exercise significant influence on this company.

• 11 -

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

Konka Group Co., Ltd.

3. Basis of consolidation (cont’d)

(b) Associates (cont’d)

Investments in associates are accounted for by equity method. Interests in associates are represented by the Group’s share of their net assets, reduced by the impairment loss provision as considered necessary by the directors.

As at December 31, 2006, the Group held the associates as follows :

Name of the company Huadoushi Longfeng Properties Development Co., Ltd. * Shenzhen OCT International Media Co., Ltd. Shenzhen Julong Guangdian Co., Ltd. Shenzhen Dekon Electronics Co., Ltd. Shenzhen Konka Energy Technology Co., Ltd. Chongqing Jingkang Plastics Material Co., Ltd.	Place of registration Macau PRC PRC PRC PRC PRC	Percentage of interest held Direct Indirect % % 50 - 25 - 20 - - 30 - 30 - 25	Principal activities
		% 50 25 20 - - -	Investment holding and property investment TV program production & distribution LCD display production & distribution Manufacture & sale of electronic products Manufacture & sale of electronic parts Production of moulds

• This company was jointly invested by the Group and other four companies for developing a property development project, namely “Huadoushi Furong Village”. During the year, the Group received a return of its partial investment in Huadoushi Longfeng Properties Development Co., Ltd. in the sum of RMB6,641,000.

4. Significant accounting policies

(a) Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost or valuation less accumulated depreciation. Their depreciation is provided using the straight-line method over the estimated useful lives, taking into account the estimated residual value of 10% of the cost or revalued amount, as follows :

Buildings	2.25%
Leasehold improvements	20%
Machinery and equipment	9%
Electronic equipment	18%
Motor vehicles	18%

• 12 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

• (a) Property, plant and equipment and depreciation (cont’d)

Construction-in-progress represents the factory and office buildings under construction and is stated at cost. This includes costs of construction, machinery and furniture as well as interest charges and exchange differences arising from borrowings that are used to finance the construction during the construction period. No depreciation is provided on construction-in-progress prior to its completion. However, for construction-in-progress that are pending for further process and are functionally or technologically obsolete, their carrying amounts are reduced to their recoverable amounts by reference to the impairment loss.

• (b) Land use rights

The cost of land use rights is amortized on a straight-line basis over the lease term.

(c) Goodwill

Goodwill arising on the acquisition of a subsidiary or an associate represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or associate recognized at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary or an associate, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

(d) Intangible assets

The cost of trademarks is amortized on a straight-line basis over its profit-generating period.

Technical know-how is measured initially at cost and is amortized on a straight-line basis over its estimated useful life, which is on average 5 years.

• 13 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

(e) Investments

Investments are recognized and derecognized on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time frame established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.

At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortized cost using the effective interest rate method, less any impairment loss recognized to reflect irrecoverable amounts. An impairment loss is recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortized cost would have been had the impairment not been recognized.

Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognized directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the profit or loss for the period. Impairment losses recognized in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognized in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

Other unlisted long-term investments with no reference to fair value are stated at cost less provision for diminution in value that is other than temporary.

(f) Inventories

Inventories are valued at the lower of cost (using weighted-average method) and net realizable value. Cost comprises direct materials, direct labor cost and an appropriate portion of overheads. Net realizable value is calculated as the estimated selling price less all further costs of production and the related costs of marketing, selling and distribution.

• 14 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

(g) Properties held for sale

Properties held for sale are stated at the lower of cost and net realizable value. Cost is determined by an apportionment of the total land and building costs attributable to unsold properties. Net realizable value is estimated by the directors based on prevailing market prices, on an individual property basis.

(h) Account receivables

Account receivables are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognized in profit or loss when there is objective evidence that the asset is impaired. The allowance recognized is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

• (i) Account payables

Account payables are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method.

• (j) Cash equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

(k) Bank borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognized over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs.

(l) Research and development expenditures

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

An internally-generated intangible asset arising from the Group’s technical know-how development is recognized only if all of the following conditions are met :

• an asset is created that can be identified;

• it is probable that the asset created will generate future economic benefits; and

• the development cost of the asset can be measured reliably.

• 15 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

• (l) Research and development expenditures (cont’d)

Internally-generated intangible assets are amortized on a straight-line basis over their estimated useful lives. Where no internally-generated intangible asset can be recognized, development expenditure is charged to profit or loss in the period in which it is incurred.

(m) Deferred income

Long-term government grants towards research and technical know-how development are recognized as income on a straight-line basis over the period of the grant.

(n) Revenue recognition

Revenue is recognized when it is probable that the economic benefits associated with the transactions will flow to the Group and the stage of completion of the transactions can be measured reliably :

• i) Revenue from sales of goods is recognized when the risks and rewards of ownership of the goods are substantially transferred to customers.

• ii) For properties held for sale, revenue is recognized on the execution of an unconditional binding sales agreement.

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

• iv) Dividend income from investments is recognized when the shareholders’ right to receive payments has been established.

(o) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

(p) Retirement benefit costs

Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group’s obligations under the plans are equivalent to those arising in a defined contribution retirement benefit plan.

• 16 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

(q) Foreign currency conversion

The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated at the rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences that are attributable to the translation of foreign currency borrowings for the purpose of financing the construction of factory and office buildings, plant and machinery and other major fixed assets for periods prior to their being in a condition to enter into services are included in the cost of the fixed assets concerned. Other exchange differences are dealt with in the consolidated income statement.

On consolidation, the financial statements of overseas subsidiaries denominated in foreign currencies are translated into Renminbi at the rates of exchange prevailing as at the balance sheet date. The resulting translation differences are included in the exchange reserve.

(r) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

i) The Group as lessor

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.

• 17 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

• (r) Leasing (cont’d)

ii) The Group as lessee

Assets held under finance leases are recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’s general policy on borrowing costs.

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

(s) Impairment loss

As 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 any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

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. Any impairment loss arising is recognized as an expense immediately.

A reversal of impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment loss are credited to the income statement in the year in which the reversals are recognized.

(t) Provisions

Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

• 18 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

4. Significant accounting policies (cont’d)

• (u) Income tax

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 income statement items that are never taxable or deductible.

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

Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, 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 as 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. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Tax asset can be offset against tax liability only if the Group has a legally enforceable right to make or receive a single net payment and the Group intends to make or receive such a net payment or to recover the asset and settle the liability simultaneously.

• 19 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

5. Business and geographical segments

Income statement External sales Inter-segment sales Operating profit/(loss) Finance costs Share of profit/(loss) from associates Income tax Minority interests Profit to equity holders of the parent Balance sheet Assets Segment assets Interests in associates Unallocated assets Liabilities Segment liabilities Unallocated liabilities	2006	2005	Consolidated RMB’000 11,455,892 ) -
	Colour TV RMB’000 Mobile phone RMB’000 Others RMB’000 Elimination RMB’000 10,678,277 1,775,893 201,981 - 4,531,770 1,642 588,738 ( 5,122,150	Consolidated RMB’000 Colour TV RMB’000 Mobile phone RMB’000 Others RMB’000 Elimination RMB’000 12,656,151 9,566,275 1,693,656 195,961 - ) - 3,748,258 1,062 219,754 ( 3,969,074
	15,210,047 1,777,535 790,719 ( 5,122,150	) 12,656,151 13,314,533 1,694,718 415,715 ( 3,969,074	) 11,455,892
	164,509 4,292 ( 36,265 ) ( 12	) 132,524 264,154 ( 193,178 ) ( 27,422 ) 14,559 ( 13,845 ) 574 ( 833 ) - - - ( 22,394 ) ( 7,493 ) 89,366 9,957,757 8,038,250 624,487 400,903 - 46,151 44,284 - - - 19,462 10,023,370 6,431,114 4,791,401 640,679 168,432 - 42,495 6,473,609	58,113 ( 12,353 ) ( 833 ) ( 11,514 ) ( 13,861 )
	574 - - - 8,659,864 817,118 480,775 - 46,151 - - - 5,498,870 708,726 223,518 -
			19,552
			9,063,640 44,284 14,462
			9,122,386
			5,600,512 48,179
			5,648,691

• 20 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

5. Business and geographical segments (cont’d)

The Group’s operations are located in and outside the PRC. The following table provides an analysis of the Group’s turnover by geographical market, irrespective of the origin of the goods :

Inside PRC Outside PRC	2006 RMB’000 10,548,249 2,107,902 12,656,151	2005 RMB’000 9,977,030 1,478,862
		11,455,892

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

Inside PRC Outside PRC	Carrying amount of segment assets 2006 RMB’000 2005 RMB’000 9,492,038 8,711,578 531,332 410,808 10,023,370 9,122,386	Capital additions 2006 RMB’000 2005 RMB’000 138,698 135,086 374 116 139,072 135,202	Capital additions 2006 RMB’000 2005 RMB’000 138,698 135,086 374 116 139,072 135,202
			135,202

6. Other revenue

Income from government grant (*) Profit on partial disposal of a subsidiary Impairment loss on associates reversed Income from raw material less cost Income form scrap products less cost Liabilities waived Other non-operating net incomes	2006 RMB’000 2,998 1,378 - 7,413 17,307 - 5,788 34,884	2005 RMB’000 2,997 - 8,391 3,853 10,714 1,207 12,048
		39,210

(*) The Group received government grant for research and technical know-how development that would be recognized as income on a straight-line basis over the period of the grant.

• 21 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

7. Profit before taxation Profit before taxation has been arrived at : After charging : Auditors’ remuneration Directors’ emoluments Depreciation of property, plant and equipment Amortization of land use rights Loss on disposal of property, plant and equipment Impairment loss of goodwill Amortization of intangible assets Provision for inventory obsolescence Inventories written off Provision for doubtful debts on account receivables Provision for doubtful debts on other receivables Interest expenses Research and development expenditures Rentals of land and buildings Staff costs And after crediting : Interest income Reversal for impairment loss on property, plant and equipment Profit on partial disposal of a subsidiary Other payables waived

2006 RMB’000 2005 RMB’000 800 800 - - 139,300 139,540 631 630 1,211 1,815 38 - 6,414 5,550 34,835 50,053 22,592 27,040 14,634 18,271 1,712 2,148 4,146 4,456 111,198 98,632 16,691 16,838 260,186 257,038 5,000 7,488 - 260 1,378 - - 1,207

• 22 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

8. Income tax PRC corporate tax Hong Kong profits tax	2006 RMB’000 17,946 4,448 22,394	2005 RMB’000 8,167 3,347
		11,514

PRC corporate tax is determined by reference to the profit reported in the audited financial statements under PRC Accounting Standards, and after adjustments for income and expense items that are not assessable or deductible for income tax purposes. It is provided at the rates of 15% (2005 - 15%) on the estimated assessable income for companies established in Shenzhen and 33% (2005 - 33%) for other PRC companies. Hong Kong profits tax is calculated at 17.5% (2005 - 17.5%) of the estimated assessable profits for the year.

The reconciliation between tax expense and accounting profit at applicable tax rates is as follows :

Profit before taxation Tax at the applicable income tax rate of 15% (2005 - 15%) Tax effect of : - disallowable expenses - non-taxable revenue - different tax rates in different regions - recognized tax losses - tax losses unrecognized Actual tax expense at 18.78% (2005 – 25.63%)	2006 RMB’000 119,253 17,888 1,011 ( 10,581 ) 14,251 ( 10,737 ) 10,562 22,394	2005 RMB’000 44,927
		6,739 266 ( 401 ) ( 2,654 ) ( 9,967 ) 17,531
		11,514

No deferred tax asset is recognized as it is uncertain whether taxable profit will be available against which deductible temporary differences can be utilized in the near future. As at December 31, 2006, the net unprovided deferred tax asset was RMB65,948,000 (2005 – RMB105,954,000).

• 23 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

9. Property, plant and equipment Cost/valuation As at January 1, 2005 Additions Disposals Reclassifications As at December 31, 2005 Additions Disposals Reclassifications As at December 31, 2006 Accumulated depreciation As at January 1, 2005 Additions Disposals Reversal for impairment loss As at December 31, 2005 Additions Disposals As at December 31, 2006 Net book value As at December 31, 2006 As at December 31, 2005	Buildings RMB’000 864,655 12,073 ( 516 ) 19,213 895,425 69 ( 7,549 ) 16,041 903,986 ( 145,208 ) ( 22,256 ) 103 - ( 167,361 ) ( 22,574 ) 2,479 ( 187,456) 716,530 728,064	Leasehold improvements RMB’000 5,788 749 - - 6,537 5,855 - - 12,392 ( 3,296 ) ( 1,794 ) - - ( 5,090 ) ( 2,105 ) - ( 7,195 ) 5,197 1,447	Machinery & equipment RMB’000 638,451 48,369 ( 14,055 ) 20,151 692,916 60,250 ( 14,258 ) - 738,908 ( 327,588 ) ( 49,665 ) 11,892 254 ( 365,107 ) ( 66,860 ) 1,918 ( 430,049 ) 308,859 327,809	Electronic equipment RMB’000 595,061 46,840 ( 16,951 ) - 624,950 39,169 ( 15,473 ) - 648,646 ( 355,486 ) ( 60,738 ) 13,598 - ( 402,626 ) ( 40,280 ) 12,745 ( 430,161 ) 218,485 222,324	Motor vehicles RMB’000 66,011 4,518 ( 11,100 ) - 59,429 12,245 ( 8,750 ) - 62,924 ( 43,952 ) ( 5,087 ) 10,200 6 ( 38,833 ) ( 7,481 ) 7,630 ( 38,684) 24,240 20,596	Construction- in-progress RMB’000 64,533 8,189 ( 1,123 ) ( 39,364 ) 32,235 18,657 - ( 16,041 ) 34,851 - - - - - - - - 34,851 32,235	Total RMB’000 2,234,499 120,738 ( 43,745 ) -
							2,311,492 136,245 ( 46,030 ) -
							2,401,707
							( 875,530 ) ( 139,540 ) 35,793 260
							( 979,017 ) ( 139,300 ) 24,772
							( 1,093,545 )
							1,308,162
							1,332,475

The Group’s certain property, plant and equipment with a net book value of RMB52,120,000 have been pledged to secure general banking facilities granted to the Group.

In preparation for the reorganization of the Company into a Sino-foreign joint stock limited company, the Company’s property, plant and equipment as at July 31, 1991 were revalued on an open market value basis by Zhonghua (Shenzhen) Certified Public Accountants, a registered valuer in Shenzhen. The surplus of RMB29,203,000 arising from the revaluation was capitalized as share capital.

• 24 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

10. Land use rights 2006 RMB’000 Cost As at beginning of the year 39,420 Reclassifications - As at end of the year 39,420 Accumulated amortization As at beginning of the year ( 11,731 ) Charged for the year ( 631 ) Reclassifications - As at end of the year ( 12,362 ) Net book value 27,058 Classified as current portion ( 630 ) Classified as non-current portion 26,428 The Group’s certain land use rights with a net book value of RMB3,696,000 have secure general banking facilities granted to the Group. 11. Goodwill 2006 RMB’000 Cost As at beginning of the year 3,217 Additions 3,889 As at end of the year 7,106 Accumulated amortization/impairment loss As at beginning of the year ( 2,228 ) Impairment loss ( 38 ) As at end of the year ( 2,266 ) Net book value 4,840	2005 RMB’000 31,326 8,094
	39,420
	( 3,007 ) ( 630 ) ( 8,094 )
	( 11,731 )
	27,689 ( 630 )
	27,059
	been pledged to 2005 RMB’000 3,217 -
	3,217
	( 2,228 ) -
	( 2,228 )
	989

The Group’s certain land use rights with a net book value of RMB3,696,000 have been pledged to secure general banking facilities granted to the Group.

• 25 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

12. Intangible assets Cost As at January 1, 2005 Additions As at December 31, 2005 Additions As at December 31, 2006 Accumulated amortization As at January 1, 2005 Charged for the year As at December 31, 2005 Charged for the year As at December 31, 2006 Net book value As at December 31, 2006 As at December 31, 2005 13. Interests in associates Share of net assets Impairment loss provision Amounts due from associates Amounts due to associates	Trademarks RMB’000 1,562 47 1,609 27 1,636 ( 852 ) ( 165 ) ( 1,017 ) ( 191 ) ( 1,208 ) 428 592	Technical know-how RMB’000 23,860 14,417 38,277 2,800 41,077 ( 13,556 ) ( 5,385) ( 18,941 ) ( 6,223) ( 25,164) 15,913 19,336 2006 RMB’000 48,075 ( 2,797 ) 1,230 ( 357) 46,151	Total RMB’000 25,422 14,464
			39,886 2,827
			42,713
			( 14,408 ) ( 5,550 )
			( 19,958 ) ( 6,414 )
			( 26,372 )
			16,341
			19,928
			2005 RMB’000 52,142 ( 2,797 ) 1,130 ( 6,191 ) 44,284

• 26 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

14. Other investments Unconsolidated subsidiaries, at cost Impairment loss provision Unlisted shares, at cost * Impairment loss provision Listed share, at cost **	2006 RMB’000 136,567 ( 136,567) - 6,885 ( 1,400) 5,485 9,805 15,290	2005 RMB’000 136,567 ( 136,567 )
		-
		1,885 ( 1,400 )
		485
		9,805
		10,290

• The Company entered into a venture agreement with seven companies to form Shanlian Information Technological Engineering Co., Ltd. for a total investment cost of RMB52,000,000 whereby the Company was required to contribute its share of 9.61525%, which was equal to RMB5,000,000.

• ** The market value of these listed shares is not generally available.

15. Inventories Raw materials Work-in-progress Finished goods Provision for inventory obsolescence 16. Properties held for sale King Yuan Building – cost b/f and c/f	2006 RMB’000 1,313,546 71,962 2,427,368 3,812,876 ( 260,979) 3,551,897 2006 RMB’000 4,172	2005 RMB’000 1,416,730 198,685 1,996,287
		3,611,702 ( 226,144 )
		3,385,558
		2005 RMB’000 4,172

• 27 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

17. Account receivables 2006 RMB’000 Amount receivables 1,102,754 Provision for doubtful debts ( 152,706) 950,048 As at December 31, 2006, the aging of amount receivables is analyzed as follows : 2006 RMB’000 Within one year 913,441 Over one year but within two years 14,255 Over two years but within three years 10,145 Over three years 164,913 1,102,754 18. Prepayments, deposits and other receivables 2006 RMB’000 Advance payments 61,839 Prepayments 46,718 Other receivables 175,944 284,501 Provision for doubtful debts ( 8,286) 276,215 19. Note receivables 2006 RMB’000 Bills receivable 86,783 Promissory notes issued by banks 3,021,670 Promissory notes issued by debtors 36,503 3,144,956	2005 RMB’000 814,306 ( 138,072 )
	676,234
	2005 RMB’000 605,465 20,970 7,552 180,319
	814,306
	2005 RMB’000 53,457 76,721 108,314
	238,492 ( 6,574 )
	231,918
	2005 RMB’000 135,862 2,594,001 29,826
	2,759,689

• 28 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

20. Share capital Registered, issued and paid-up “A” shares of RMB1 each “B” shares of RMB1 each “A” shares, listed and tradable “B” shares, listed and tradable Listed but temporarily not tradable	2006 RMB’000 399,148 202,838 601,986 280,244 202,838 483,082 118,904 601,986	2005 RMB’000 399,148 202,838
		601,986
		224,199 202,838
		427,037 174,949
		601,986

The “A” and “B” shares carry equal rights with respect to the distribution of the Company’s assets and profits, and rank pari passu in all other respects. The “A” shares are held by PRC investors with settlement in Renminbi, whereas “B” shares are held by both PRC investors and foreign investors, and are settled in Hong Kong dollars.

As at the effective date of the share reform, each shareholder of listed and tradable “A” share with name registered in the register of shareholders was entitled 2.5 shares for every 10 shares on hand. As a result, the shareholders of listed but temporarily not tradable shares had compensated to such “A” share shareholders in the total entitlement of 56,045,734 shares.

21.	Short-term bank loans
			2006	2005
		Note	RMB’000	RMB’000
	Bank loans, secured	9, 10	15,000	28,000

• 29 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

22. Analysis of financing

As at beginning of the year Net cash inflow/(outflow) from financing Gain on partial disposal of a subsidiary Decrease in minority interests Dividend paid to minority shareholders Share of results of minority interests As at end of the year	Bank loans RMB’000 28,000 ( 13,000 ) - - - - 15,000	Other long-term liabilities RMB’000 20,179 7,316 - - - - 27,495	Minority interests RMB’000 261,722 - ( 1,378 ) ( 1,345 ) ( 22,823 ) 7,493
			243,669

23. Commitments

As at December 31, 2006, the Group did not have any material commitments under non-cancellable operating leases and capital expenditures.

24. Contingent liabilities

At December 31, 2006, the Group did not have any significant contingent liabilities.

25. Related party transactions

During the year ended December 31, 2006, the Group had certain material transactions with Overseas Chinese Town Holdings Co. (major shareholder of the company) and its subsidiaries with details as follows :

		2006	2005
		RMB’000	RMB’000
Overseas Chinese Town	Operating lease paid	335	335
Holdings Co.
Shenzhen Dekon Electronics	Purchase of merchandises	71,109	52,017
Co., Ltd.
Shanghai Huali Packaging	Purchase of merchandises	54,090	56,144
Co., Ltd.	'
Shenzhen Huali Packaging	Purchase of merchandises	29,049	27,615
Co., Ltd.	'
Mudanjiang Huali Packaging	Purchase of merchandises	11,759	11,891
Co., Ltd.

• 30 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

25.	Related party transactions (cont’d)
				2006		2005
				RMB’000		RMB’000
	Anhui Huali Packaging	Purchase of merchandises		10,105			-
	Co., Ltd.
	Anhui Tin Dai Enterprises	Increase in equity interest	in
	Group Co., Ltd.	subsidiaries		38,574			-
26.	Impact on results attributable to shareholders and net asset value
	as reported by the PRC Certified	Public Accountants
				Profit
				attributable		Net
			**to **	shareholders		asset value
				RMB’000		RMB’000
	As reported by PRC Certified Public Accountants			102,638		3,241,561
	Adjustments to conform to IFRS :
	Prior year adjustment on capital reserves			-	(	6,978	)
	Prior year adjustment on surplus reserves			-		17,909
	Transfer to dividend reserve			-		60,199
	Accumulated losses of subsidiaries		(	16,428 )		-
	Government grant transfer from capital reserves to
	'deferred income			580	(	7,495	)
	Government grant recognized as income			2,998		-
	Transfer of welfare funds recognized as expense		(	997 )		-
	Impairment loss of goodwill reversed			575		896
	As restated in conformity with IFRS			89,366		3,306,092

27. Financial instruments

Financial assets of the Group include cash and bank balances, note receivables, account receivables, prepayments, deposits and other receivables. Financial liabilities include bank loans, note payables, account payables, other payables, accrued expenses, deferred income and other long-term liabilities.

(a) Credit risk

Cash and bank balances : Substantial amounts of the Group’s cash balances are deposited with Bank of China, China Merchants Bank, Shenzhen Development Bank, Industrial and Commercial Bank of China, Construction Bank of China and Agricultural Bank of China.

Account receivables : The Group does not have a significant exposure to any individual customer or counterpart. The major concentrations of credit risk arise from exposures to a substantial number of account receivables that are mainly located in the PRC.

• 31 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended December 31, 2006

(cont’d)

27. Financial instruments (cont’d)

(b) Fair value

The fair value of financial assets and financial liabilities is not materially different from their carrying amount.

The carrying value of short-term bank loans and other long-term liabilities is estimated to approximate its fair value based on the borrowing terms and rates of similar loans.

Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties on matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

28. Language

The translated English version of financial statements is for reference only. Should any disagreement arise, the Chinese version shall prevail.

• 32 -