KONKA GROUP CO.,LTD — Interim / Quarterly Report 2007

Aug 24, 2007

Konka Group Co., Ltd.

(Incorporated in the People’s Republic of China) Financial statements for the period ended June 30, 2007

1

Konka Group Co., Ltd.

(Incorporated in the People’s Republic of China)

Contents Pages

Consolidated income statement 3 Consolidated balance sheet4 -5 Consolidated statement of changes in equity 6 Consolidated cash flow statement 7 -8 Notes to the financial statements 9 - 33

Konka Group Co., Ltd.

Consolidated income statement for the period ended June 30, 2007

Note Turnover 5 Cost of sales Gross profit Other revenue 6 Distribution costs Administrative costs Operating profit Finance costs Share of 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 - basis	Jan.–Jun. 2007 Jan.– Jun.2006 RMB'000 RMB'000 5,614,106 5,571,631 (4,608,224) (4,586,787)
	1,005,882 984,844 3,690 461 ( 742,726) ( 709,406) (202,649) (227,407)
	64,197 48,492 ( 15,050) ( 5,946) (466) (501)
	48,681 42,045 (7,049) (10,868)
	41,632 31,177
	43,973 31,214 (2,341) (37)
	41,632 31,177
	RMB0.073 RMB0.052

The calculation of the basic earnings per share is based on the current year’s profit of RMB43,973,000 (2006 – RMB31,214,000) attributable to the equity holders of the parent and on the existing number of 601,986,352 shares in issue during the period.

• -[3]

Konka Group Co., Ltd.

Consolidated balance sheet as at June 30, 2007

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 Deferred tax assets 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	Jun. 30, 2007 RMB'000 1,316,475 29,431 4,840 15,505 39,030 16,613 68,741 1,490,635 630 2,737,940 4,172 618,513 247,961 1,966,453 1,033,789 6,609,458 8,100,093	Dec. 31, 2006 RMB'000 1,308,162 26,428 4,840 16,341 46,151 15,290 67,342
		1,484,554
		630 3,551,897 4,172 950,048 276,215 3,144,956 678,240
		8,606,158
		10,090,712

(to be cont’d)

• -[4]

Konka Group Co., Ltd.

Consolidated balance sheet as at June 30, 2007

		(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	Jun. 30, 2007 RMB'000 601,986 2,811,023 3,413,009 234,390 3,647,399 5,996 28,078 34,074 8,040 1,131,227 814,263 2,173,108 291,982 4,418,620 4,452,694 8,100,093	Dec. 31, 2006 RMB'000 601,986 2,771,404 3,373,390 243,713 3,617,103 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 10,090,712

• -[5]

Konka Group Co., Ltd.

Consolidated statement of changes in equity for the period ended June 30, 2007

As at January 1, 2006 Profit for the year of 2006 Appropriation to statutory surplus reserve Proposed final dividend Dividend to minority interests Decrease in minority interests Exchange difference from translation of foreign operations As at December 31, 2006 Profit for the period of 2007 Appropriation to statutory surplus reserve Proposed final dividend Dividend to minority interests Decrease in minority interests Exchange difference from translation of foreign operations As at June 30, 2007			Reserves
	Share capita Capital reserves Surplus reserves Accumulated profit/(loss) RMB'000 RMB'000 RMB'000 RMB'000 601,986 1,820,452 765,196 25,988 - - - 156,664 - - 31,436 ( 31,436 ) - - - ( 60,199 ) - - - - - - - - - - - -	Dividend reserve Exchange reserve RMB'000 RMB'000 - ( 1649 ) - - - - 60199 - - - - - - 4,753	Total reserves Attributable to equity holders of the parent Minority interests Total RMB'000 RMB'000 RMB'000 RMB'000 2,609,987 3,211,973 261,722 3,473,695 156,664 156,664 7,493 164,157 - - - - - - - - - - ( 22823 ) ( 22823 ) - - ( 2679 ) ( 2679 ) 4,753 4,753 - 4,753
	601,986 1,820,452 796,632 91,017 - - - 43,973 - - - - - - - - - - - - - - - - - -	60199 3,104 - - - - - - - - - - - ( 4,354 ) 60,199 （ 1,250 ）	2,771,404 3,373,390 243,713 3,617,103 43,973 43,973 ( 2,341 ) 41,632 - - - - - - - - - - ( 10,323 ) ( 10,323 ) - - 3,341 3,341 ( 4,354 ) ( 4,354 ) - ( 4,354 )
	601,986 1,820,452 796,632 134,990		2,811,023 3,413,009 234,390 3,647,399

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.

• -[6]

Konka Group Co., Ltd.

Consolidated cash flow statement for the period ended June 30, 2007

Note 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 on goodwill Amortization of intangible assets Profit on partial disposal of associates 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 charges 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	Jan.–Jun. 2007 Jan.– Jun.2006 RMB'000 RMB'000 48,681 42,045 ( 3,993) ( 3,851) ( 1,499) ( 1,499) - - 11,056 5,000 55,450 72,368 1,209 614 354 315 - - 2,805 3,485 ( 490) - 466 490 - - 2,102 41,734 - - ( 1,255) 1,994 1,275 629
	116,161 163,324 ( 1,913) ( 510) 813,504 485,538 333,742 ( 61,876) 27,364 ( 4,962) 1,178,503 359,286 ( 86,550) ( 208,963) ( 266,817) 20,637 (1,941,566) (510,791)
	172,428 241,683 ( 11,056) ( 5,000) (8,449) (8,348)
	152,923 228,335

(to be cont’d)

• -[7]

Konka Group Co., Ltd.

Consolidated cash flow statement for the period ended June 30, 2007

(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 Purchase of intangible assets Returns from partial investment in associates Increase of investment in associates 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 the year Cash and cash equivalents as at end of the year	Jan.–Jun. 2007 Jan.– Jun.2006 RMB'000 RMB'000 152,923 228,335
	3,993 3,851 ( 77,114) ( 32,347) 279 1,167 8,640 - ( 1,000) ( 7,714) - - ( 322) -
	( 65,524) ( 35,043)
	276,982 ( 10,000) 583 1,435 ( 7,074) ( 13,883) ( 2,341) ( 37)
	268,150 ( 22,485)
	355,549 170,807 678,240 629,160
	1,033,789 799,967

• 8 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

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 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 June 30, 2007 and on the operating results for the period 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.

• 9 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

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 period 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 end of each period. 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 June 30, 2007, 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.	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

• 10 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended June 30, 2007

(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.(1) 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 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 products 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

• 11 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

3. Basis of consolidation (cont’d)

(a) 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. Shenzhen Konka Electronic Parts Technology Co., Ltd(2) Boluo Precision Science & Technology Co., Ltd.	Place of incorporation/ Registration registration capital ’000 Hong Kong HKD500 Indonesia USD500 India USD1,160 PRC RMB10,000 PRC RMB24,650 PRC RMB30,000 PRC RMB14,500 PRC RMB40,000 PRC RMB65,000 PRC RMB11250	Percentage of interest held Principal Direct Indirect activities % % - 100 Investment holding - 100 Trading - 70 Production of colour TV sets - 63.25 Production of moulds and plastic products - 60 Manufacture and sale of electronic products - 57 Manufacture and sale of automobile and parts - 51 Production of moulds - 51 Manufacture and sale of electronic product 100 Research of Electronic Parts Manufacture 100 electronic product	Principal activities

• 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 increase fund in the affiliated company, Anhui Konka Electric Appliance Co., Ltd., among the devotion there are cash RMB 50 million and fixed assets RMB 18.19 million.

(2) The Company invested RMB 65 million to set up Shenzhen Konka Electronic Parts Technology Co., Ltd.

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.

• 12 -

(cont’d)

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

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 June 30, 2007, the Group held the associates as follows :

Name of the company Huadoushi Longfeng Properties Development Co., Ltd. * Shenzhen Julong Guangdian Co., Ltd. Shenzhen Dekon Electronics Co., Ltd. Shenzhen Konka Energy Technology Co., Ltd. Chongqing Jingkang Plastics Material Co., Ltd. Shenzhen Zhongcailian Technology Co., Ltd.	Percentage of Place of interest held registration Direct Indirect % % Macau 50 - PRC 20 - PRC - 30 PRC - 30 PRC - 25 PRC 10	Principal activities
		Investment holding and property investment LCD display production & distribution Manufacture & sale of Electronic products Manufacture & sale of electronic parts Production of moulds Research of electronic Technology

• This company was jointly invested by the Group and other four companies for developing a property development project, namely “Huadoushi Furong Village”.

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%

• 13 -

(cont’d)

Konka Group Co., Ltd.

Notes to the financial statements for the year ended June 30, 2007

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.

• 14 -

Konka Group Co., Ltd.

Notes to the financial statements for the year ended June 30, 2007

(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.

• 15 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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.

• 16 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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.

• 17 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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.

• 18 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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.

• 19 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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.

• 20 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

5. Business and geographical segments

										Jan.-Jun.,2007																Jan.-Jun.,2006
		Colour TV RMB’000				Mobile phone RMB’000				Others RMB’000				Elimination RMB’000	Consolidated RMB’000				Colour TV RMB’000			Mobile phone RMB’000				Others RMB’000			Elimination RMB’000	Consolidated RMB’000
	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
		4,316,612				816,102				481,392					5,614,106				4,387,137			841,454				343,040				5,571,631
			4,316,612				816,102				481,392					5,614,106				4,387,137			841,454				343,040				5,571,631
		51,661				3,897				8,638					64,197				54,305			2,659				(8,472)				48,492
		(466)				-				-				-	(15,050) (466)				(501)			-				-			-	(5,946) (501)
																(7,049)															(10,868)
															2,341															37
															- 21 - 43,973															31,214

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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	Jan.-Jun.,2007 RMB’000 4,564,857 1,049,249 5,614,106	Jan.-Jun.,2006 RMB’000 3,953,964 1,617,667
		5,571,631

6. Other revenue

Income from government grant (*) Profit on partial disposal of associates Other non-operating net incomes	Jan.-Jun.,2007 Jan.-Jun.,2006 RMB’000 RMB’000 1,499 1,499 490 - 1,701 (1,038)
	3,690 461

• 22 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

7.	Profit before taxation
		Jan.-Jun.,2007	Jan.-Jun.,2006
		RMB'000	RMB'000
Profit before taxation has been arrived at :
After charging :
	Auditors’ remuneration	-	-
	Directors’ emoluments
	Depreciation of property, plant and equipment	55,450	67,712
	Amortization of land use rights	354	315
	Loss on disposal of property, plant and equipment	1,209	614
	Impairment loss of goodwill	0	-
	Amortization of intangible assets	2,805	3,485
	Provision for inventory obsolescence	2,102	43,835
	Inventories written off
	Provision for doubtful debts on account receivables	(1,255)	1,796
	Provision for doubtful debts on other receivables	1,275	544
	Interest expenses	11,056	3,851
	Research and development expenditures	66,421	48,448
	Rentals of land and buildings	6,993	6,792
	Staff costs	150,332	135,693
And after crediting :
	Interest income	3,993	5,000
Reversal for impairment loss on property, plant and
equipment		-	-
	Profit on partial disposal of a subsidiary	-	-
	Profit on partial disposal of associates	(490)	-
	Other payables waived	-	-

• 23 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

8. Income tax PRC corporate tax Hong Kong profits tax	Jan.-Jun.,2007 Jan.-Jun.,2006 RMB’000 RMB’000 6,487 8,306 562 2,562
	7,049 10,868

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% (2006 - 15%) on the estimated assessable income for companies established in Shenzhen and 33% (2006 - 33%) for other PRC companies. Hong Kong profits tax is calculated at 17.5% (2006- 17.5%) of the estimated assessable profits for the year.

• 24 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

9. Property, plant and	9. Property, plant and	equipment
Cost/valuation	Buildings RMB'000	Leasehold improvements RMB'000	Machinery & equipment RMB'000	Electronic equipment RMB'000	Motor vehicles RMB'000	Construction- in-progress RMB'000	Total RMB'000
As at December 31, 2006	903,986	12,392	738,908	648,646	62,924	34,851	2,401,707
Additions	11,940	2,409	35,472	12,879	2,417	28,657	93,774
Disposals	(1,597)		(22,924)	(3,129)	(4,657)		(32,307)
Reclassifications	872					(872)	-
As at June 30, 2007	915,201	14,801	751,456	658,396	60,684	62,636	2,463,174
Accumulated depreciation							-
As at December 31, 2006	(187,456)	(7,195)	(430,049)	(430,161)	(38,684)	-	(1,093,545)
Additions	(12,417)	(1,609)	(34,623)	(15,509)	(3,127)		(67,285)
Disposals	1,944		5,673	2,263	4,251		14,131
As at June 30, 2007	(197,929)	(8,804)	(458,999)	(443,407)	(37,560)	-	(1,146,699)
Net book value
As at June 30, 2007	717,272	5,997	292,457	214,989	23,124	62,636	1,316,475
As at December 31, 2006	716,530	5,197	308,859	218,485	24,240	34,851	1,308,162

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.

• 25 -

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

10. Land use rights

Cost As at beginning of the year Reclassifications As at June 30, 2007 Accumulated amortization As at beginning of the year Charged for the year Reclassifications As at June 30, 2007 Net book value Classified as current portion Classified as non-current portion	Jun.30,2007 Dec.31,2006 RMB’000 RMB’000 42,777 39,420 - -
	42,777 39,420
	(12,362) (11,731) (354) (631) - -
	(12,716) (12,362)
	30,061 27,058 630 630
	29,431 26,428

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.

11. Goodwill

Cost As at beginning of the year Additions As at June 30, 2007 Accumulated amortization/impairment loss As at beginning of the year Impairment loss As at June 30, 2007 Net book value	Jun.30,2007 Dec.31,2006 RMB'000 RMB'000 7,106 3,217 3,889
	7,106 7,106
	(2,266) (2,228) (38)
	(2,266) (2,266)
	4,840 4,840

26

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

12. Intangible assets Cost As at January 1, 2006 Additions As at December 31, 2006 Additions As at June 30, 2007 Accumulated amortization As at January 1, 2006 Charged for the year As at December 31, 2006 Charged for the year As at June 30, 2007 Net book value As at June 30, 2007 As at December 31, 2006 13. Interests in associates Share of net assets Impairment loss provision Amounts due from associates Amounts due to associates	Trademarks Technical know-how Total RMB'000 RMB'000 RMB'000 1,609 38,277 39,886 27 2,800 2,827	Trademarks Technical know-how Total RMB'000 RMB'000 RMB'000 1,609 38,277 39,886 27 2,800 2,827	Trademarks Technical know-how Total RMB'000 RMB'000 RMB'000 1,609 38,277 39,886 27 2,800 2,827
		1,636 41,077 42,713 172 1,797 1,969
		1,808 42,874 44,682
		(1,017) (18,941) (19,958) (191) (6,223) (6,414)
		(1,208) (25,164) (26,372) (76) (2,729) (2,805)
		(1,284) (27,893) (29,177)
		524 14,981 15,505
		428 15,913 16,341
		Jun.30,2007 RMB’000 43,941 ( 2,797 ) 1,230 ( 3,344 ) 39,030	Dec.31,2006 RMB’000 48,075 ( 2,797 ) 1,230 ( 357 ) 46,151

27

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

14. Other investments Unconsolidated subsidiaries, at cost Impairment loss provision Unlisted shares, at cost * Impairment loss provision Listed share, at cost **	Jun.30,2007 RMB’000 136,567 ( 136,567) - 7,885 ( 1,400) 6,485 10,128 16,613	Dec.31,2006 RMB’000 136,567 ( 136,567
		-
		6,885 ( 1,400
		5,485
		9,805
		15,290

• The Company entered into a venture agreement with nine companies to form Shenzhen Zhongcailian Technology Co., Ltd. for a total investment cost of RMB10,000,000 whereby the Company was required to contribute its share of 10%, which was equal to RMB1,000,000.

** 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	Jun.30,2007 RMB’000 1,239,558 115,080 1,644,734 2,999,372 ( 261,432) 2,737,940 Jun.30,2007 RMB’000 4,172	Dec.31,2006 RMB’000 1,313,546 71,962 2,427,368
		3,812,876 ( 260,979 )
		3,551,897
		Dec.31,2006 RMB’000 4,172

28

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(cont’d)

17. Account receivables Amount receivables Provision for doubtful debts	Jun.30,2007 RMB’000 769,817 ( 151,304) 618,513	Dec.31,2006 RMB’000 1,102,754 ( 152,706 )
		950,048

As at June 30, 2007, the aging of amount receivables is analyzed as follows :

Within one year Over one year but within two years Over two years but within three years Over three years 18. Prepayments, deposits and other receivables Advance payments and Prepayments Other receivables Provision for doubtful debts 19. Note receivables Bills receivable Promissory notes issued by banks Promissory notes issued by debtors	Jun.30,2007 RMB’000 560,352 31,911 14,549 163,005 769,817 Jun.30,2007 RMB’000 131,661 125,476 257,137 ( 9,176) 247,961 Jun.30,2007 RMB’000 65,122 1,899,132 2,199 1,966,453	Dec.31,2006 RMB’000 913,441 14,255 10,145 164,913
		1,102,754
		Dec.31,2006 RMB’000 108,557 175,944
		284,501 ( 8,286 )
		276,215
		Dec.31,2006 RMB’000 86,783 3,021,670 36,503
		3,144,956

29

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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	Jun.30,2007 RMB’000 399,148 202,838 601,986 280,244 202,838 483,082 118,904 601,986	Dec.31,2006 RMB’000 399,148 202,838
		601,986
		280,244 202,838
		483,082 118,904
		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.

21. Short-term bank loans

	Note	Jun.30,2007	Dec.31,2006
		**RMB’000 **	RMB’000
Bank loans, secured	9, 10	18,000	15,000
Tradable financial liabilities		273,982
		291,982	15,000

30

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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 June 30, 2007	Bank loans Other long-term liabilities Minority interests RMB'000 RMB'000 RMB'000 15,000 27,495 243,713 276,982 583 - - - - - - 3,341 - - (10,323) - - (2,341)
	291,982 28,078 234,390

23. Commitments

As at June 30, 2007, the Group did not have any material commitments under non-cancellable operating leases and capital expenditures.

24. Contingent liabilities

At June 30, 2007, the Group did not have any significant contingent liabilities.

25. Related party transactions

During the period ended June 30, 2007, the Group had certain material transactions with Overseas Chinese Town Holdings Co. (major shareholder of the company) and its subsidiaries with details as follows :

		Jan.-Jun.,2007 RMB’000	Jan.-Jun.,2006 RMB’000
Shenzhen Dekon Electronics Co., Ltd.	Purchase of merchandise	42,279	29,727
Shanghai Huali Packaging Co., Ltd.	Purchase of merchandise	7,300	24,737
Mudanjiang Huali Packaging Co., Ltd.	Purchase of merchandise	5,106	4,983
Shenzhen Huali Packaging Co., Ltd.	Purchase of merchandise	14,170	17,633
Anhui Huali Packaging Co., Ltd.	Purchase of merchandise	24,031	-

31

Konka Group Co., Ltd.

Notes to the financial statements for the year ended June 30, 2007

(cont’d)

25. Related party transactions	(cont’d)
Shenzhen Overseas Chinese Town Hydro water Company	Water and electricity expenses	4,099	4,318
Overseas Chinese Town Holdings Co.	Equity transfer	2,160	-
Shanghai Overseas Chinese	Equity transfer
Town Investment and		4,320	-
Development Co., Ltd.
Chengdu Tianfu Overseas	Equity transfer
Chinese Town Industrial		4,320	-
Development Company
Anhui Konka Electronic
Co., Ltd	Purchase of merchandise	25	3,818
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	42,474		3,346,979
	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
	Government grant transfer from capital reserves to
	'deferred income	-	(	5,996 )
	Government grant recognized as income	1,499		-
	Transfer of welfare funds recognized as expense	-		-
	Impairment loss of goodwill reversed	-		896
	As restated in conformity with IFRS	43,973		3,413,009
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.

32

Konka Group Co., Ltd.

Notes to the financial statements for the period ended June 30, 2007

(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.

33