FORM 20-F

For the transition period from                               to

Commission file number 000-22113

EURO TECH HOLDINGS COMPANY LIMITED

(Exact name of Registrant as specified in its charter)

EURO TECH HOLDINGS COMPANY LIMITED

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

18/F Gee Chang Hong Centre, 65 Wong Chuk Hong Road, Hong Kong

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Ordinary Shares, $0.01 par value

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

(Title of Class)

Indicate the number of issued and outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

11,684,250 Ordinary Shares

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

If this is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Indicate by check mark which financial statement item the registrant has elected to follow.

TABLE OF CONTENTS

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INTRODUCTION

In this Form 20-F, reference to “us”, “we”, the “Company” and “Euro Tech” are to Euro Tech Holdings Company Limited and its subsidiaries unless otherwise expressly stated or the context otherwise requires.

Forward Looking Statements

This annual report contains forward looking statements. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission (the “Commission”) or otherwise. Such forward looking statements are within the meaning of that term in Section 21E of the Exchange Act of 1934. Such statements may include, but not be limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward looking statements, which speak only as of the date the statement was made. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. Statements in this Annual Report, including those contained in the sections entitled Part I, Item 3D. “Risk Factors” and Item 5. “Operating and Financial Review and Prospects” and the notes to the Company’s Consolidated Financial Statements, describe factors, among others, that could contribute to or cause such differences.

GLOSSARY

The following glossary of terms may be helpful in understanding the terminology used in this Annual Report.

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PART I

ITEM 3.           KEY INFORMATION

Item 3A.          Selected Financial Data

SELECTED FINANCIAL INFORMATION

(Amounts expressed in thousands, except

share and per share data and unless otherwise stated)

The selected consolidated income statement data for years ended December 31, 2007, 2006 and 2005, and the selected consolidated balance sheet data as of December 31, 2007 and 2006 set forth below are derived from audited consolidated financial statements of the Company included herein and should be read in conjunction with, and are qualified in their entirety by reference to such financial statements, including the notes thereto and Item 5. “Operating and Financial Review and Prospects.” The selected consolidated income statement data for the years ended December 31, 2004 and 2003 and the selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003 set forth below are derived from audited consolidated financial statements of the Company which are not included herein.

(1)   Current assets minus current liabilities.

(2)   Short-term debt includes short-term borrowings and current portion of long-term bank loans.

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The Company maintains its books and records in United States dollars (“US$”). Its subsidiaries, retail shops and affiliates maintain their books and records either in Hong Kong dollars (“HK$”) or in Chinese Renminbi (“RMB”).

The Hong Kong dollar is freely convertible into other currencies (including the US dollar). Since 1983, the Hong Kong dollar has effectively been officially linked to the US dollar at the rate of approximately HK$7.80 = US$1.00.  However, the market exchange rate of the Hong Kong dollar against the US dollar continues to be influenced by the forces of supply and demand in the foreign exchange market. Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the US dollar and the Hong Kong dollar.

Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates. From 1994 through 2004, the official exchange rate for the conversion of Renminbi to U.S. dollars has generally been stable and maintained at the rate of approximately RMB8.30 = US$1.00. However, in 2007, the Renminbi appreciated and at the end of 2007, the exchange rate was approximately RMB 7.3141 = US$1.00.  The value of the Renminbi fluctuates and is subject to changes in PRC political and economic conditions.

The high, low and average exchange rate set forth below:

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Item 3D.          Risk Factors

You should carefully consider all of the information set forth in this annual report and the following risk factors. The risks below are not the only ones we face. Additional risks not currently known by us or that we deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely effected by any of these risks. This annual report also contains forward looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See “Forward Looking Statements.”

Certain Risks Relating To Doing Business In Hong Kong And The People’s Republic Of China (the “PRC” or “China”).

PRC Sovereignty Over Hong Kong Still Developing.

The Company’s executive and principal offices are located in Hong Kong, a Special Administrative Region of China (or “SAR”; Hong Kong is sometimes herein referred to as the “Hong Kong SAR”).

As provided in the Sino-British Joint Declaration on the Question of Hong Kong (the “Joint Declaration”) and the Basic Law of the Hong Kong SAR of China (the “Basic Law”), the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The PRC’s political system and policies are not practiced in Hong Kong. Under this principle of “one country, two systems”, Hong Kong maintains a legal system that is based on common law and is different from that of the PRC.

The Company’s results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. See “ – Economic Stability Uncertain.”

There can be no assurance that these past or any prospective future changes in political, economic or commercial conditions in Hong Kong and the PRC will not result in a material adverse effect upon the Company.

Economic Stability Uncertain; Earthquake.

Most economies in the Far East had suffered from an economic instability. Although the region, including the PRC, appears to have recovered, there can be no assurance that the recovery

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will continue, most especially in light of the recent catastrophic earthquakes that caused many deaths and widespread destruction.  Continued growth in the PRC is dependent upon an adequate supply of energy and the recovery from recent earthquakes.  There is no assurance that adequate supplies of energy can be developed or found to fuel the PRC’s continued economic growth.  The impact, if any, upon the Company of the recent catastrophes in the PRC cannot be predicted at this time.

The PRC’s Economic, Political And Social Conditions.

The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.  While the PRC economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among the various sectors of the economy.  The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources.  Some of these measures benefit the overall PRC economy, but may also have a negative effect on us.  For example, our financial condition and results of operations may be adversely affected by changes in applicable tax regulations.

The PRC economy appears to be moving from a planned economy to a more market-oriented economy.  Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC are still owned by the PRC government.  In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.  The PRC government also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.  These actions, as well as future actions and policies of the PRC government, could materially affect our business and operations.

The success of the Company’s activities in the PRC depends on the Company’s continued ability to overcome circumstances specifically effecting the industrial sector, including the relatively poor infrastructure, road transportation and communications network and an uncertain legal and regulatory environment.

Economic Reforms May Not Continue Or Impact Positively On The Company; Changing Business Environment.

Over the past several years, the PRC’s government has pursued economic reform policies including encouraging private economic activities and decentralization of economic deregulation. The PRC government may not continue to pursue these policies or may significantly alter them to our detriment from time to time without notice. Changes in policies by the PRC government resulting in changes in laws, regulations, or their interpretation, or the imposition of confiscatory taxes, restrictions on currency conversion and imports could materially and adversely effect our

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business and operating results. The nationalization or other expropriations of private enterprises by the PRC government could result in a loss of our investments in actual funds and time and effort, in China.

The Company’s results at times may also be adversely effected by: (1) changes in political, economic and social conditions in the PRC; (2) changes in government policies such as changes in laws and regulations (or their interpretation); (3) the introduction of additional measures to control inflation; (4) changes in the rate or method of taxation; (5) imposition of additional restrictions on currency conversion remittances abroad; (6) reduction in tariff protection and other import restrictions; and (7) a return to the more centrally-planned economy that existed previously.

We Are Subject To International Economic And Political Risks, Over Which We Have Little Or No Control.

Doing business outside the United States subjects us to various risks, including changing economic and political conditions, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and other unforeseeable risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practice in time to avoid the adverse effect of any of these changes.

Uneven Economic Growth.

The PRC’s economy has experienced significant growth in recent years, but that growth has been uneven among various geographic regions and economic sectors. Economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increase of such disparities could adversely effect political or social stability.

PRC Inflation.

In recent years, the PRC has not experienced significant inflation, and thus inflation has not had a significant effect on our business historically.  In response to the increased inflation rate during 2004, the Chinese government announced measures to restrict lending and investment in the PRC in order to reduce inflationary pressure on the PRC’s economy; and the inflation rate was reduced in 2005 and 2006, but escalated in 2007. If the PRC rate of inflation continues to increase, the Chinese government may introduce further measures intended to reduce the inflation rate in the PRC.  Any such measures adopted by the Chinese government may not be successful in reducing or slowing the increase in the PRC’s inflation rate.  Sustained or increased inflation in the PRC may have an adverse impact on the PRC’s economy and may materially and adversely affect our business and financial results.

Uncertain Legal System And Application Of Laws.

The legislative trend in the PRC over the past decade has been to enhance the protection afforded to foreign investment and allow for more active control by foreign parties of foreign

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invested enterprises. There can be no assurance that this will continue. In addition, as the PRC economy, business and commercial framework and legal system all continue to develop, that development may adversely effect the Company’s activities in the PRC or the ability of the Company to enter into Sino-foreign agreements.

PRC Legal System Business Laws Developing.

The PRC does not yet possess a comprehensive body of business law or a consolidated body of laws governing foreign investment enterprises. As a result, the enforcement, interpretation and implementation of existing laws, regulations or agreements may be sporadic, inconsistent and subject to considerable discretion. The PRC’s judiciary has not had sufficient opportunity to gain experience in enforcing laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. As the legal system develops, entities such as the Company may be adversely effected by new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws. Even when adequate law exists in the PRC, it may not be possible to obtain speedy and equitable enforcement of the law.

Government Currency Controls.

The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of its currency, Renminbi (“RMB”) into foreign exchange and through restrictions on foreign imports. The conversion of RMB into Hong Kong and United States Dollars (“U.S. Dollars”) must be based on rates set by the People’s Bank of China (“PBOC”), which rates are set daily based on the previous day’s Chinese interbank foreign exchange market rate with reference to current exchange rates on the world financial markets.

Although the RMB to U.S. dollar exchange rate has generally been stable from 1994 through 2004, in 2007, the RMB appreciated against the U.S. Dollar.  The PRC government has stated its intention to intervene in the future to support the value of the RMB, there can be no assurance that exchange rates will not become volatile. Exchange rate fluctuations may adversely effect the Company because of foreign currency denominated liabilities, and may materially adversely effect the value, translated into U.S. dollars, of the Company’s net fixed assets situated and to be situated in the PRC, earnings and dividends.

Foreign Currency Risk.

The Company operates in Hong Kong, the PRC and trades with both local and overseas customers, and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to purchases in, Hong Kong dollar, Renminbi and Euro.  Foreign exchange risk arises from committed and unmatched future commercial transactions, such as confirmed import purchase orders and sales orders, recognized assets and liabilities, and net investment in the PRC operations.  The Company uses derivative financial instruments such as foreign exchange contracts to hedge certain foreign currency exposures.  There can be no assurances that the Company’s hedging strategies will be adequate to avoid this foreign exchange risk.

Turbulent Relations With The United States Of America (“United States”).

Differences between the United States and PRC governments on some political issues, as the recent political conflicts over Myanmar, continue occasionally to color the relationship. These occasional controversies could materially and adversely effect our business and operations. Political or trade friction between the two countries could also materially and adversely effect the market price of our Ordinary Shares, whether or not they adversely effect our business.

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Certain Risks Relating To The Company’s Business

We Have Made And May Make Further Acquisitions Without Your Approval.

Although we endeavor to evaluate the risks inherent in any particular acquisition, there can be no assurance that we will properly or accurately ascertain all such risks. We will have virtually unrestricted flexibility in identifying and selecting prospective acquisition candidates and in deciding if they should be acquired for cash, equity or debt, and in what combination of cash, equity and/or debt.

In October of 2005, we completed our acquisition of 51% of the capital stock of two entities, making the two entities our majority owned subsidiaries, and we have taken and are seeking to take equity positions in related businesses.  We will not seek stockholder approval for any additional acquisitions unless required by applicable law and regulations. Our stockholders will not have an opportunity to review financial and other information on acquisition candidates prior to consummation of any acquisitions under almost all circumstances.

Investors will be relying upon our management, upon whose judgment the investor must depend, with only limited information concerning management’s specific intentions.

There can be no assurance that the Company will locate and successfully complete any such additional acquisitions, or any acquisition will perform as anticipated, will not result in significant unexpected liabilities or will ever contribute significant revenues or profits to the Company or that the Company will not lose its entire investment in any acquisition.

Dependence Upon Management.

The Company is dependent upon the services of its executive officers, in particular Mr. T.C. Leung, the Chairman of the Company’s Board of Directors and its Chief Executive Officer. The business of the Company could be adversely effected by the loss of services of, or a material reduction in the amount of time devoted to the Company by its executive officers. The Company does not maintain “Key Man” life insurance on the lives of any of its officers and directors.  See Item 6. “Directors, Senior Management and Employees.”

Adverse Impact Upon The Company Of PRC’s Credit Restrictions.

The Company faces increasing competition from other distributors of substantially similar products and manufacturers themselves, both foreign and Chinese. The Company faces its principal competition from foreign manufacturers and other distributors of their products situated in Hong Kong and the PRC. Competition may cause purchaser demands for price reductions and reduced profit margin.

Competition With Vendors.

As the Company plans to assemble products of the kind that it presently distributes, the Company may directly compete with certain of its vendors. Any such direct competition may

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adversely effect its relationship with its vendors. See Item 4. “Information on the Company.”

Dependence On Vendors; Lack Of Long Term Agreements.

The Company distributes supplies manufactured by a number of vendors, including Hioki E.E. Corp. (“Hioki”), US Filter/Chemical Feed and Disinfection Group (“USF”) and Lachat Instruments, Inc. (“Lachat”), which are the Company’s largest suppliers. The Company has only a letter from Hioki appointing the Company as Hioki’s sales representative in the PRC, Hong Kong and Macau. Although alternative sources of supply exist, there can be no assurance that the termination of the Company’s relationship with any of the above or other vendors would not have a short-term adverse effect on the Company’s operations due to the Company’s dependence on these vendors.  A substantial number of the Company’s suppliers have been selling their products into China directly and through other distributors.

Risks Relating To The Company Itself; Control By T.C. Leung; Potential Conflict Of Interests.

T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer, as a practical matter, is able to nominate and cause the election of all the members of the Company’s Board of Directors, control the appointment of its officers and the day-to-day affairs and management of the Company. As a consequence, Mr. Leung can have the Company managed in a manner that would be in his own interests and not in the interests of the other shareholders of the Company. See Item 7. “Major Shareholders and Related Party Transactions” and Item 6. “Directors, Senior Management and Employees.”

Certain Legal Consequences Of Incorporation In The British Virgin Islands; Rights Of Shareholders Not As Extensive As In U.S. Corporations.

Principles of British Virgin Islands (“BVI”) corporate law relating to such matters as the validity of the Company procedures, the fiduciary duties of management and the rights of the Company’s shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States.

The rights of shareholders under British Virgin Islands law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Under United States law, majority and controlling shareholders generally have certain “fiduciary” responsibilities to the minority shareholders. United States shareholder action must be taken in good faith and actions by controlling shareholders in a United States jurisdiction and executive compensation which are obviously unreasonable may be declared null and void.

The BVI law protecting the interests of the minority shareholders is not as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. The shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Company’s Board of Directors, and may have more limited rights, than they might have as shareholders of a company incorporated in many United States jurisdictions.

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Anti-Takeover Provisions.

The Company has 5,000,000 shares of “blank check preferred stock” authorized. The “blank check preferred stock” is intended to strengthen the Company’s ability to resist an unsolicited takeover bid and may be deemed to have an anti-takeover effect. The Board of Directors has the right to fix the rights, terms and preferences at the time of issue of “blank check preferred stock” without further action by our shareholders.

Uncertainty Of Enforcing United States Judgments.

There is some uncertainty whether BVI courts would enforce judgments of the courts of the United States and of other foreign jurisdictions, or enforce actions brought in the BVI which are based upon the securities laws of the United States. A final monetary judgment obtained in the United States will be treated as a cause of action in itself by the BVI courts so that no retrial of the issues would be necessary, provided that material preconditions are met and the proceedings pursuant to which judgment was obtained were not contrary to the rules of natural justice.

All of the Company’s directors and executive officers reside outside of the United States, service of process upon the Company and such persons may be difficult to effect in the United States upon all such directors and officers.

All of the Company’s assets are and will be located outside of the United States, in Hong Kong and the PRC, and any judgment obtained in the United States may not be enforced in those jurisdictions. Hong Kong courts will not directly enforce against the Company or such persons judgments obtained in the United States. There is also substantial doubt as to the enforceability in the PRC of actions to enforce judgments of the United States’ courts arising out of or based on the ownership of the securities, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws or otherwise. See “– Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders not as Extensive as in U.S. Corporations.”

Being A Foreign Private Issuer Exempts Us From Certain Securities And Exchange Commission (“Commission”) And National Association Of Securities Dealers Automated Quotation System (“NASDAQ”) Requirements.

We are a foreign private issuer within the meaning of rules promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States public companies including: (1) the rules under the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K; (2) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (3) the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; (4) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the

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issuer’s equity securities within less than six months); (5)Because of these exemptions, investors are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.

Our Securities Must Continue To Meet Qualitative And Quantitative Listing Maintenance Criteria For The NASDAQ SmallCap Market.

Our securities are quoted and traded on the NASDAQ SmallCap Market. There can be no assurance that we will continue to meet both the qualitative and quantitative criteria for continued quotation and trading of our securities on the NASDAQ SmallCap Market. That criteria undergoes periodic review.

If we are unable to meet the continued quotation criteria of the NASDAQ SmallCap Market and are suspended from trading on these markets, our securities could possibly be traded in the over-the-counter market and be quoted in the so-called “pink sheets” or, if then available, the OTC Bulletin Board. In such an event, an investor would likely find it more difficult to dispose of, or even obtain accurate quotations of, our securities. See “- We Are Also Required To Meet Certain, But Not All Corporate Governance Criteria” Applicable to NASDAQ Listed Issuers.

We Are Also Required To Meet Certain, But Not All, Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.

Although, in the past, we have been able to satisfy corporate governance criteria applicable to NASDAQ’s SmallCap Market, those criteria are difficult to comply with and include, among other things: (a) a heightened degree of independence of members of the board of directors with independent directors to, among other things: hold regular meetings among themselves only; (b) establishment of a code of conduct addressing compliance with laws; and (c) a limit on payments to independent directors and their family members (other than for services on the board of directors).

These corporate governance requirements and a strict definition of “independent director” make it more difficult to find independent directors for our Board of Directors. There is intense competition for qualified independent directors, including those persons with accounting experience and financial statement acumen to serve on audit committees. We believe that continued compliance with the corporate governance requirements applicable to NASDAQ listed issuers may be difficult and increase our costs and expenses as the costs of finding and compensating independent directors escalate and the costs of administering their new powers and responsibilities is an added financial burden. If we are unable to attract and keep a sufficient number of independent directors willing to take on the responsibilities imposed by such rules on what we believe to be commercially reasonable terms, our securities may be delisted from NASDAQ.  (See “-Being a ‘Controlled Company’ Exempts Us From Certain Other Corporate Governance Criteria Applicable to NASDAQ Listed Issuers.”)

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Being A “Controlled Company” Exempts Us From Certain Other Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.

As a result of T.C. Leung, the Company’s Chairman of the         Board and Chief Executive Officer beneficially owning in excess of the majority voting power of our Ordinary Shares, we are a “controlled company” as that term is defined in rules and regulations applicable to NASDAQ listed issuers. As a “controlled company”, we are not required to comply with certain NASDAQ corporate governance criteria including, among other things, the requirements that the majority of our Board be independent directors, and their having the authority to approve director nominations and executive officer compensation.

We Are Not Subject To Various Corporate Governance Measures, Which May Result In Shareholders Having Limited Protections.

Recent Federal legislation, including the Sarbanes-Oxley Act of 2002 (“SOX”), has resulted in the adoption of various corporate governance measures by securities exchanges and NASDAQ designed to promote the integrity of the corporate management and the securities markets.  Being a “controlled company,” we are exempt from many, but not all, of those requirements.  Furthermore, the absence of such practices with respect to our Company may leave our shareholders without protections against interested director transactions, conflicts of interest and similar matters.

We May Be Exposed To Potential Risks Relating To Our Internal Controls Over Financial Reporting And Having Those Controls Attested To By Our Independent Auditors.

Pursuant to Section 404 of SOX, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 20-F.  In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of a company’s internal controls over financial reporting as well as the operating effectiveness of a company’s internal controls.  We were not subject to these requirements for the fiscal year ended December 31, 2007 as a result of temporary rules adopted by the SEC.  We are evaluating our internal control systems in order to allow our management to report on, and our independent auditors attest to, our internal controls, as a required part of our Annual Report on Form 20-F beginning with that report required when the temporary rules cease being effective.

While we expect to expend significant resources in developing the necessary documentation and testing procedures required by SOX, there is a risk that we will not comply with all of these requirements.  At present, there is no precedent available with which to measure compliance adequacy.  Accordingly, there can be no assurance that we will receive a positive attestation from our independent auditors.

In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and

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others may lose confidence in the reliability of our financial statements, our ability to obtain equity or debt financing could suffer and the market price of our shares could decline.

The Market Price Of Our Securities Has Been Fluctuating Widely.

During the past five years, the market price of our Ordinary Shares has fluctuated widely on occasion. Additionally, the Company knows of no reason for these wide fluctuations. See Item 9.C- “Markets.”

There Are Risks In Purchasing Low-Priced Securities.

If our securities were to be suspended or delisted from the NASDAQ SmallCap Market, they could be subject to rules under the Exchange Act which impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and “accredited investors” (for example, individuals with a net worth in excess of US$1,000,000 or an annual income exceeding US$200,000 or US$300,000 together with their spouses). For transactions covered by such rules, a broker-dealer must make a special suitability determination of the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. Consequently, such rules may affect the ability of broker-dealers to sell our securities and the ability to sell any of our securities in any secondary market that may develop for such securities.

In the event our securities are no longer listed on the NASDAQ SmallCap Market or are not otherwise exempt from the provisions of the SEC’s “penny stock” rules, such rules may also affect the ability of broker-dealers and investors to sell our securities.

There Is No Assurance Of A Continued Public Market For Our Securities.

There can be no assurance that a trading market for our Ordinary Shares will continue.

ITEM 4.           INFORMATION ON THE COMPANY

Item 4A.          History and Development of the Company

The Company was organized under the laws of the British Virgin Islands on September 30, 1996 for the purposes of raising capital and for acquiring all the outstanding capital stock of Euro Tech (Far East) Limited, a Hong Kong corporation involved in the distribution of advanced water treatment equipment (“Far East”). In March 1997, the Company acquired all the issued and outstanding capital stock of Far East and it became a wholly-owned subsidiary and was the primary operational entity of the Company.

During Fiscal 2005, we completed our plan to increase our equity position in Yixing Pact Environmental Technology Company Limited (“Yixing”) and Pact Asia Pacific Limited (“Pact”), a company engaged in water and waste-water treatment solution business.  We had previously owned thirty (30%) percent of their capital stock.  With the addition of twenty-one (21%) percent of Pact’s and Yixing’s capital stock in October 2005, they became our majority-owned subsidiaries.

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During Fiscal 2007, we purchased twenty (20%) percent of the equity in a company engaged in the air pollution control business.  In January 2008, we purchased twenty (20%) percent of the equity in another related industry business.         China’s rapid economic growth had led it to become one of the world’s largest emitters of sulfur dioxide.  The damage due to acid rain caused by sulfur dioxide is vast, and is also affecting the neighboring countries as air currents transport sulfur dioxide.  To tackle these environmental and geo-political issues, China has established targets to reduce key pollutants, namely, sulfur dioxide, nitrogen oxides and suspended particulates.  Heavy polluters are being warned to reduce their emissions or face penalties.  We believe that as a result, the demand of desulphurization and dust removal equipment will increase accordingly.

We are in the process of shifting our emphasis from the distribution of instruments and equipment to engineering and manufacturing activities.  Revenues from our “trading” activities have fallen-off as a substantial number of our suppliers have been selling their products into China directly and through other distributors.  Revenues and net income generated from our environmental engineering department and our majority owned subsidiaries, Pact and Yixing (companies engaged in the water and waste water treatment solution business), have more than offset our falling “trading” revenues.

In November of 2006 we established Shanghai Euro Tech Environmental Engineering Company Ltd. (“Shanghai – Environmental”) as a wholly-owned subsidiary under the laws of the People’s Republic of China, to carry on our environmental engineering department with that line of business and its personnel transferred from our subsidiary, Euro Tech (Far East) Ltd.  Shanghai – Environmental is focusing on our water and waste-water treatment engineering business and is planned to be the home of our planned expansion into the air pollution control business.

Item 4B.          Business Overview

The Company is engaged in three different major activities:

(1)           Equipment and Instrument Distribution.

The Company had been primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers). The Company acts as an exclusive and non-exclusive distributor for well-known manufacturers of such equipment, primarily to commercial customers and governmental agencies or instrumentalities in Hong Kong and the PRC. During its fiscal year ended December 31, 2007 (“Fiscal 2007”) the Company distributed products to in excess of 1,000 customers, including the Hong Kong Environmental Protection Department, Hong Kong Water Supplies Department, Government Laboratory, Drainage Services Department China’s National Environmental Protection Agency, Harbin Water, Harbin Environmental Monitoring Center, Guangzhou Water, Guiyang Environmental Monitoring Centre and to subdistributors located in Hong Kong, the PRC and Macau. These products are manufactured by a substantial number of major American, European

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and Japanese corporations, including Hioki, USF and Lachat, which are the Company’s largest suppliers, with purchases from them accounting for approximately 36%, 9% and 8%, respectively, of the Company’s sales during Fiscal 2006 and approximately 32%, 10%, and 5%, respectively of the Company’s sales during Fiscal 2007.

The Company distributes products through its Hong Kong headquarters, its retail shops and representative offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xi´An, Shenyang, Wuhan, Fuzhou, Chengdu and Urumqi and through non-exclusive arrangements with independent sub-distributors located in Hong Kong, the PRC and Macau.

(2)                                  Manufacturing.

The Company believes that by assembling the products it distributes, it may realize increased gross profit margins and greater revenues and net income than if it remains only a distributor of such products with sales of the Company first product offering, an Infrared Photometric Oil Analyzer, commencing in 2003. Similarly, the Company believes that by using its existing regional sales efforts in the PRC, it may be better able to compete with increased competition from our own suppliers and other distributors.

(3)           Environmental Services.

In January 2002, we acquired a 30% equity interest in Pact and Yixing.  Pact and Yixing were privately owned engineering firms situated in Shanghai specializing in the design, manufacture and operation of water and waste-water treatment plant in several industries situated in China, Pact and Yixing, through associates and business alliances, also conduct similar operations in the Middle East.  In October 2005, through our subsidiary Euro Tech (Far East) Limited (“Far East”) we purchased approximately 21% of the issued and outstanding shares of Pact and Yixing for approximately US$1,000,000 from Tamworth Industrial Limited (“Tamworth”).

In August 2007, Far East acquired a 20% equity interest in Zhejiang Tianlan Desulfurization and Dust-Removal Co. Ltd. (“BlueSky”), a company in flue gas desulphurization, flue gas de-nitration, dust removal and purification of industrial waste gases, for  approximately US$4,648,000.

Blue Sky, founded in 2000, is a growing concern that we believe provides a comprehensive service for design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted from various boilers and industrial furnaces of power plants, steel works and chemical plants.

We expect that by securing an equity stake in BlueSky’s business, we have a strategic partner to work within China’s environmental protection business.  With BlueSky’s technology and technical support, we believe we are able to provide services and environmental solutions not only for water and waste-water treatment but also for air pollution control for industrial clients in China.

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Expansion Plans.

Acid rain and sulfur dioxide emissions are serious problems in China. We are planning to expand our activities in the air pollution control business by forming joint ventures, investing or acquiring some interest in companies, such as Blue Sky, involved in (i) the dust removal and/or (ii) the flue gas desulphurization for power plant industries and other similar industries.

We continuously search for other companies engaged in manufacturing these products and equipment and in engineering companies which design and build pollution control systems.  We anticipate that the costs of any such acquisition would be drawn from our general working capital and, possibly, by private sales of our securities including the potential exercise by officers and directors of their options.  We have no commitments or indications of interest for the private sales of our securities.

In January 2008, we  acquired a 20% equity interest in  Zhejiang Jia Huan Electronic Co. Ltd., (“Jia Huan”) for approximately US$2,500,000. Jia Huan has been in the environmental protection business since 1969 and is based in Jin Hua, Zhejiang.

In June 2006, PACT entered into a letter of intent with Pact Engineering FZC (“PACTFZC”), a Middle Eastern water treatment company based in Dubai, and Ecomacchine S.p.A. (“ECO”), an Italian based company engaged in the manufacture of sludge and dewatering equipment.  In June 2007, the joint venture Pact Environmental Equipment Co. Limited, was registered in the PRC. PACT invested US$300,000 and has a 60% controlling interest of the JV, and ECO and PACTFCZ, (a company majority owned by George Hayek, the Company’s Managing Director),  each invested US$100,000 in consideration for 20% interests.

Revenue and income from distribution activities are declining gradually due to a greater number of our significant suppliers marketing and selling their products into the China market through other distributors as well as the Company.  Many of these other distributors are local Chinese companies and can operate with a lower overhead.

Our plans for the near term also include:  (a) continued use of our retail shops to sell “low-tech” products and our own products.  We believe that these shops are operating with a lower overhead than the rest of the Company; and (b) we believe that the continued “low-tech” product sales through our retail shops coupled with our “on-line” product sales will allow us to continue to offer products at lower prices than our competitors.

Having “low-tech” products offered through our retail shops and the availability of “on-line” product offering are anticipated to allow our sales force to focus on “high-tech” and other products requiring personal or telephone contact directly with customers and potential customers.

Manufacturing

Sales of the Infrared Photometric Oil Analyzer commenced in 2003.  During 2004, we began selling turbidity instruments and spectrometers that we developed and manufactured

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ourselves and began assembling and selling the Total Organic Analyzer of O.I. Corporation.  In November 2006, we began actively marketing our Total Organic Carbon (TOC) analytical instrument that measures the degree of the pollution level of drinking water, ground water and waste water. Our TOC analyzer has been two and a half years in research, development and field testing of prototypes sold to our customers. A number of target customers showed their interest in this product during our trade shows and seminars. We had made some modifications to this product to improve the quality and obtained updated Chinese Metrology Certification, a certificate issued by Bureau of Quality and Technical Supervision in November 2007. We have also upgraded other existing instruments and developed a quick response Chemical Oxygen Demand (“COD”) test instrument in 2007, for use on surface water, underground water and domestic and industrial wastewater.

In 2005, the Company also began offering two new company manufactured turbidimeters.  One of the new turbidimeters is directed at water treatment plants, environmental monitoring status, hydrological stations and the second is directed at beer and other beverage processing facilities and it analyzes the particles contained in the beverage.  See “- Product Assembly Operations”. During the next twelve months, we intend to assemble and/or manufacture additional products in the future and seek opportunities with our suppliers to assemble their products, secure manufacturing and/or assembly facilities and seek another manufacturer of analytical instruments to acquire.

Environmental Services

To allow the Company to bid on larger water, waste-water and power generation projects, we acquired Pact and Yixing  (“Pact-Yixing”) and continue our search for other engineering companies and/or a system integrator (a company that provides hardware, software and solutions in the field of engineering) or enter into a joint venture with a third party to work in connection with our process control and engineering department.

Pact-Yixing have completed a substantial number of industrial water and waste-water treatment projects in the PRC.  The majority of these projects are for large multinational manufacturing facilities for clients from the USA, Europe and Japan.  Process design as well as mechanical and electrical engineering are completed in-house and manufacturing contracted to approved fabricators of components.  Fabrication drawings are also done in-house for submittal to said fabricators under the supervision of Pact-Yixing’s quality control engineers.

Pact-Yixing clients cover a varied spectrum of industries covering semiconductor, pharmaceutical, petrochemicals, auto and auto parts, steel, food and beverage and beauty products.

The water and waste-water treatment processes applied at Pact-Yixing cover chemical, physical, biological and membrane separation.  A combination of those processes are normally used to treat a specific industrial process feed or effluent.  With respect to the water treatment side of Pact-Yixing’s business, they design and build filtration equipment, ion-exchange softeners and demineralizers, reverse osmosis, electro-deionization, chemical treatment systems and package type mobile water treatment plants.  As for waste-water treatment, Pact-Yixing design and build biological treatment systems, oil coalescers, dissolved air flotation, lamella clarifiers, chemical reactor tanks, ultrafiltration, microfilitration, dewatering systems and package

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type mobile sewage treatment plants.  Biological treatment plants cover both aerobic and anaerobic processes.  State-of-the-art aerobic processes of SBR (sequential batch reactors) and MBR (membrane biological reactors) are technologies also covered by Pact-Yixing.  See “Glossary.”

In 2006, Pact-Yixing commenced selling water and waste-water treatment equipment.  The equipment are components of systems traditionally marketed by Pact-Yixing.  The equipment are partially manufactured to Pact-Yixing’s in-house design and partially procured from approved Chinese suppliers.  It is contemplated that Pact-Yixing’s trading operation will mainly sell equipment to clients from outside China, starting with the Middle East, Africa and European and American companies operating in the Middle East and Africa.

The Company believes that the Pact-Yixing business is complementary to the Company’s business as the Company continues to sell and market products of others. The Company expects that with this acquisition it may be able to gain a competitive advantage by offering customers and potential customers not only hardware but solutions to engineering problems as well. Also, the Company believes that its equity stake in Pact-Yixing enhances its position as a supplier to Pact. The Company continues to seek to make a similar acquisition of an engineering company specializing in air pollution control or other complementary environmental protection fields or in the power generation field.

A purpose of this acquisition was to reconfirm our direction to place a greater emphasis on developing an engineering solution business, instead of relying on its then current activities.

During Fiscal 2007 and Fiscal 2006, our share of Pact-Yixing’s revenue represented 25% and 15%, respectively, of our revenue.

Equipment and Instrument Distribution

Environmental Protection Equipment.

Laboratory instruments, analyzers and test kits are used to analyze the chemical content and ascertain the level of impurities or other contaminants in water. The Company distributes analytical re-agents and chemicals to support testing systems of laboratory and portable instruments, process analyzers and portable test kits and assist in the analysis process. The Company offers a wide variety of test kits to test water quality. The Company believes that these portable test kits are easy to use and preadapted for rugged field use. These test kits are used to monitor drinking water distribution systems.

Laboratory and portable instruments generally consist of analytical instruments including, but not limited to the following: spectrophotometers, colorimeters, turbidimeters, ion-selective electrodes, chemical oxygen demand apparati, digestion apparati, and precision re-agent dispensing devices which are used to test and monitor impurities and contaminants in water systems. See “Glossary.”

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The Company also distributes continuous-reading process analyzers, process turbidimeters, pH controllers and analyzer accessories. These products are generally used to monitor and control drinking water quality to ensure that water treatment procedures comply with regulatory standards. See “Glossary.”

Scientific Instruments. The Company distributes analytical instruments, environmental monitoring instruments and general purpose laboratory instruments. Analytical instruments include, but are not limited to, chromatographs, mass spectrometers, flow injector analyzers and atomic spectrometers. Environmental monitoring instruments include both air and water quality monitoring instruments. Air quality monitoring instruments are generally divided into those which monitor ambient (i.e., atmospheric) air, and those which monitor pollution sources. Additionally, the Company offers general purpose laboratory instruments including a variety of water quality monitoring and analysis equipment, such as continuous reading process analyzers, process turbidimeters, pH controllers, and test kits for monitoring chemical content in water (i.e., chlorine, fluorides, etc.). See “Glossary.”

Customers for the analytical instruments include government agencies, academic and research institutions and major laboratories. The Company also distributes products to beverage producers and restaurants, including water quality test kits to more than twelve bottling plants of a well known United States soft drink producer, which are located in the PRC; water quality monitoring instruments to well known United States fast food franchisor’s restaurants located in Hong Kong and the PRC, and to well known United States and European beer producers bottling plants located in Wuhan, PRC. Each such soda producer, restaurant and beer bottler does not account for a significant portion of our sales.

Customers for air and water quality monitoring instruments also include government agencies such as the Hong Kong Environmental Protection Department, which uses a Company distributed water quality monitoring system to monitor the water quality of Hong Kong’s Victoria Harbor, more than ten water treatment plants located in the PRC (including sites at Beijing, Tianjin, Guangzhou and Wuhan), China’s National Environmental Protection Agency, Harbin Water, Harbin Environmental Monitoring Centre, Beijing Huai Rou, Shunyi District CDC and Liaoning Jinzhou Waste-water Treatment Plant and the Beijing Environmental Monitoring Centre.

The Company derived approximately 38.7%, 33.2% and 34.8% of its revenues from the sale of Scientific Instruments during Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

Energy Conservation And Related Products. The Company distributes general testing and measuring equipment including multi-channel digital and analogue recorders, signal amplifiers and calibration equipment for energy conservation, renewable energy equipment and power quality analyzers to industries including power plants, railway and aero-space industries, utilities, educational institutions and telecommunications companies.

The Company derived approximately 36.9%, 45.7% and 34.2% of its revenues from the sale of these Energy Conservation and Related Products during Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

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Process Control and Engineering Products. The Company provides process control systems specifically designed for the industrial needs of clients including sensors, temperature gauges, pressure gauges, flow meters, valves, temperature and pressure transmitters and control devices, temperature and pressure calibrators, moisture, power, energy and harmonic analyzers. Chlorination disinfection systems are also distributed by Far East in conjunction with water treatment, sewage discharge and swimming pool water treatment. Customers for the foregoing distributed products include government water supply agencies, water treatment facilities, power and electric companies, petrochemical plants and instrument manufacturers. For example, the Company distributes chlorination disinfection systems to Hong Kong’s Chek Lap Kok airport and its environs.

The Company derived approximately 18.9%, 13.1% and 19.5% of its revenues from the sale of Process Control and Engineering Products during Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively.

Special Projects And Engineering Department. In conjunction with the distribution of products such as programmable logic controllers, telemetry units and SCADA systems and software, the Company also provides systems engineering to government agencies, waste-water treatment and power generation plants and beverage producers.

The Company derived approximately 4.1%, 6.9% and 10.2% of its revenue from its Special Project Operation during Fiscal 2007, Fiscal 2006 and Fiscal 2005. This revenue was derived primarily from sales of products and supply systems.  The Company is placing a greater emphasis on developing an engineering solution to business as one of our key suppliers Eurotherm has been directly marketing and selling their process automation product directly into the PRC and we have received fewer projects situated in Hong Kong.

Our special projects and engineering department is believed by the Company to be the main contractor and system integrator of a large number of industrial and municipal waste-water, water treatment and power generation plants in the PRC. Specific services provided by this group include automated control system design, the operation and management of various waste-water, water and power generation projects. We endeavor to introduce, develop, and promote new and advanced technologies, products, and appropriate technical developments from abroad. We have also been cooperating with established technology companies and engage in systems and special projects in Programmable Logic Control, Telemetry unit, SCADA systems, Human Machine Interface Software and Sequential Event Recording.

Technical Support. The Company’s technical support staff provides customers with maintenance, installation assistance, and calibration services, and assists sales personnel in giving technical advice to and performing product demonstrations for customers. Technical Support services derived approximately 1.4%, 1.1% and 1.3% of its revenues from Technical Support Operations during Fiscal 2007, Fiscal 2006, Fiscal 2005, respectively.

Customers. During Fiscal 2007, the Company distributed products to in excess of 1,000 customers, including sub-distributors, located in Hong Kong, the PRC and Macau. No single

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customer accounted for more than 5% of the Company’s revenues during Fiscal 2007. The Company does not believe that any single customer or sub-distributor is material to its operations.

Product Assembly Operations

The Company, through its PRC Corporation, Shanghai Euro Tech Limited established in 1999 in the Pudong Jin Qiao Export Processing Zone of Shanghai, engages in the development, production, sales and servicing of environmental equipment, including the development of modern laboratory analyzers, on-line measuring equipment and other analyzers for chemicals. Our products are “tailor-made” for the diversified needs of equipment users. Main products include Infrared Photometric Oil Analyzer (IPOA), COD analyzers, Total Organic Carbon Analyzer, turbidity meters, total suspended solid analyzers, dissolved oxygen analyzers, various types of spectrophotometers as well as a full spectrum of matching chemical reagents. In late 2005, we began offering two new turbidity meters, manufactured by the Company.  In 2008 we introduced a Flue gas analyzer for use in environmental compliance monitoring. We are in the process of developing an energy meter (a device measuring electric energy consumption and corresponding carbon dioxide emissions) and water toxicity analysis instruments.

The Company believes that by establishing product assembly operations in the PRC will not only increase revenues, expand its customer base, but also its net income since the Company believes it will enjoy higher overall profit margins by assembling certain products which it now distributes rather than by only purchasing the finished product from vendors.

Sources of Supply

The Company distributes products manufactured by a number of vendors, including Hioki, USF and Lachat, which are the Company’s primary suppliers, see “- Business Overview”. The Company has exclusivity agreements for specified geographic areas with many of its suppliers for certain products. Those agreements do not encompass all products distributed by the Company or all of the market areas serviced by the Company. In addition, some of these agreements are memorialized not as formal contracts but rather through other acknowledgements or correspondence which may contain a vague, if any, description of the terms and conditions of such agreement or arrangement, and therefore may be unenforceable.  The Company has only a letter from Hioki appointing the Company as Hioki’s sales representative in the PRC, Hong Kong and Macau.  Hioki has its own PRC distribution company and appointed a Japanese trading company and other distributors to sell its products in China.  The Company continues to be one of Hioki’s non-exclusive distributors.  The Company’s agreement with USF continues in effect for successive renewal terms of one year each, unless either party gives written notice of non-renewal at least 30 days prior to the end of any renewal term.  The Company’s agreement with Lachat continues in effect for successive renewal terms of one year and is terminable on ninety days notice by either party.  The Company’s agreement with Hach is terminable on ninety days notice by either party. Although alternative sources of supply exist, there can be no assurance that the termination of the Company’s relationship with any of the above or other vendors would not have a short-term adverse effect on operations.

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Expansion

The Company continues to seek: development of manufacturing and engineering operations as part of its core business through (a) the development and assembly of more of the Company’s own energy and environment-related equipment (see “ – Product Assembly Operations”), (b) forming joint ventures with some of our suppliers, (c) potential acquisitions of manufacturing plants in the water, air pollution and energy conversation and related businesses, and (d) potential acquisitions of engineering companies to enhance our ability to bid for and take on larger engineering projects.

Regulatory Environment

Concerns about and awareness of pollution problems and environmental issues have grown at all levels of PRC government as the PRC experienced economic growth. Environmental protection laws and strict regulations have been enacted and are buttressed by increased budget allocations for environmental regulation, monitoring and enforcement. The PRC’s primary environmental protection agency is the State Environmental Protection Agency (SEPA), under which there are Environment Protection Bureaus in each city and county. According to oral information received by management from SEPA, under bureau management, there are two environment monitoring systems: one system consists of over 2,200 monitoring stations to collect and analyze the environmental data of each city and county; another system consists of over 2,500 stations to monitor specific industrial districts or factories which have been identified as major pollution sources due to their non-compliance with environmental regulations. The PRC government has established ambitious targets in its 11^th Five-Year Program (2006-2010) to slash emissions of pollutants, including sulfur dioxide emissions, by 10%.  The PRC government passed a law requiring power distributors to combat global warming.  A central government fund, financed by a national tariff increase, will subside the tariff gap between more expensive renewable energy and the national average tariff.  Preferential policies also encourage construction of renewable energy projects, projects in poorer interior regions that are often rich in water, solar and wind resources.  The Company has supplied water and air quality monitoring and analytic instruments to these monitoring stations for several years. There can be no assurance that the agencies will continue to use the Company’s products for these purposes, or that other market competitors will not enter the market with superior products, distribution systems or more competitive prices. See “Competition.”

Competition

The Company faces competition from other distributors of substantially similar products as well as the manufacturers of such products, and in both foreign and Chinese markets.  The Company faces its principal competition from manufacturers and other distributors of its core products located in Hong Kong and the PRC.  Moreover, the Company has implemented plans to assemble products of the kind that it presently distributes (see “-Product Assembly Operations”).  Assembly operations have developed to the stage where some products have already been presented to the market and the Company is in direct and unavoidable competition with certain of its vendors.  There can be no assurance that the existence of this direct competition will not impair the Company’s ability or such competitor’s willingness to continue providing other

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products for continued distribution by the Company and that such a development would not materially adversely effect the Company’s core business.

During Fiscal 2007, Fiscal 2006 and Fiscal 2005, the Company’s gross profit margins were approximately 25.1%, 24.1% and 21%, respectively. The Company believes that it competes with the PRC manufacturers on the basis of quality and technology. The Company believes it offers foreign-manufactured products which are of higher quality and use more advanced technology than products manufactured in the PRC. The Company believes that it competes with foreign manufacturers and other distributors of their products on the basis of the Company’s more extensive distribution network and an established reputation. Pact-Yixing focuses on a market of providing water and waste water treatment services to multinational companies.  The Company competes in this market based upon the quality of its products and having knowledgeable staff.

Website

The Company, through its subsidiary, ChinaH2O.com Limited, a Hong Kong corporation, has a internet platform. The website is located at (http://www.chinah2o.com). The website is directed at environmental businesses in China.  The website provides environmental news, directories of western suppliers, potential clients in China, advertisement space and business opportunities.  The business and other activities generated by ChinaH2O.com Limited have had a synergistic effect with those of the Company indirectly by feeding market information, sales leads and tender information to the Company.

Sales and Marketing

The Company distributes products through its principal office located in Hong Kong and its representative PRC offices located in Beijing, Shanghai, Guangzhou and Fuzhou.  During 2007, the Company closed 1 representative office and consolidated their personnel into our retail shop, as the office did not financially contribute to the Company as anticipated. The Company has a marketing and sales force of 72 people who are paid a salary plus commission based on sales. The Company’s offices also coordinate the sales efforts of approximately fifty other companies located in the PRC which act as sub-distributors. These sub-distributors are engaged on a non-exclusive basis to distribute the products of other distributors. Each of the fifty sub-distributors accounted for less than two percent of the Company’s sales during Fiscal 2007, Fiscal 2006 and Fiscal 2005.

Following the opening of our first retail shop in Shanghai in 2001, (closed in 2007 but absorbed into our own Shanghai Euro Tech Trading (“Shanghai Limited”)) Euro Tech retail outlets are now found in a number of major cities in the PRC, including Beijing and Guangzhou. Our staff at these shops assists customers in selecting the equipment, auxiliary parts and products to suit customer specifications. Equipment that needs to be repaired or provided with routine maintenance can be returned to us via these shops, as our retail shops, except for the Beijing shop, are also maintenance centers. The Company has found the six existing shops to be useful as demonstration locations easily accessed by local customers who can pay in local currency while “off the shelf” sales are made which move its inventory more readily. In addition to the shops, we also have four branches or representative offices of these shops.  All of the foregoing are perceived by the Company to have had a positive impact on its business reputation while reducing the

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Company’s dependency on sub-distributors who may not be loyal to the Company and distribute products of our competitors. As foreign entities are not generally permitted to own these facilities, these shops are owned by non-officer/director, employees of the Company with funds from the Company through non-fixed term loans aggregating approximately US$267,000 bearing a nominal rate of interest. The shops do not have financing from other sources. There can be no assurance that these shops will continue to be economically viable, that the Company will not sustain losses in connection with the loans to the shops; or the shops will result in any significant revenues or profits for the Company. Also, similar shops may be established by our competitors and/or third parties.

Foreign entities are now permitted to own retail shops in some regions of PRC.  The Company has established two wholly-owned retail shops in Chongqing and Xi’An. We plan to establish another  wholly-owned retail shop in Guangzhou and  close the current retail shop in Guangzhou owned by non-officer/director, employees of the Company.  During 2007, we closed the Wuhan representative office, merging personnel into our Wuhan shop.  We will continue to consolidate our operations by combining the retail shops and representative offices in the same cities or close shops and offices that do not appear to be contributing to the Company as expected.

These shops (or their representative offices) were opened on the following dates:

Retail Shops

Owned by non-officer/director, employees of the Company:

Owned by the Company:

Representative Offices

Item 4C.          Organizational Structure

The Company presently wholly owns Far East, a Hong Kong corporation, which, in turn, owns the following corporations:

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Wholly-Owned

·      Euro Tech Trading (Shanghai) Limited – a People’s Republic of China corporation

·      Euro Tech (China) Limited – a Hong Kong corporation

·      ChinaH2O.com Limited – a Hong Kong corporation

·      Shanghai Euro Tech Limited – a People’s Republic of China corporation

·      Shanghai Euro Tech Environmental Engineering Company, Ltd. – a People’s Republic of China corporation

·      Chongqing Euro Tech Rizhi Technology Company, Limited – a People’s Republic of China corporation

·      Rizhi Euro Tech Instrument (Shaanxi) Company Limited– a People’s Republic of China corporation

Majority Owned

·      Yixing Pact Environmental Technology Company Limited – a PRC corporation

·      Pact Asia Pacific Limited – a BVI corporation

The Company’s wholly-owned subsidiary and primary operational arm is Far East, which it acquired in March 1997. Far East has engaged in the distribution of various industrial control equipment, which continues to be the core business of the Company, since its inception in 1971.

Item 4D.          Property, Plant and Equipment

The Company maintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupies approximately 12,800 square feet of office and warehouse storage space under a two (2) year lease that expires in May 2009 for monthly rental payments of approximately US$8,140. The warehouse storage space is used to hold products for distribution to our customers via common carriers.

In August 1995, the Company purchased approximately 1,200 square feet of space in a building in Hong Kong. This property is now rented out to a third party.

The Company also maintains representative offices within the PRC in the cities of Beijing, Shanghai, Guangzhou and Fuzhou. The Beijing and Shanghai sales offices are owned by the Company. The remaining sales offices are rented pursuant to short-term leases aggregating approximately US$1,774 per month.

Euro Tech Trading (Shanghai) Ltd. has two offices rented pursuant to short term leases, at an aggregate monthly rental of approximately US$963.  Shanghai Euro Tech Limited’s  premises are also rented pursuant to a short term lease for a monthly rental of approximately US$2,882.

Pact occupies a 700 square meter facility in Shanghai, pursuant to a 3 year lease expiring in January 2009, providing for a monthly rental of approximately US$5,705.

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The Company’s registered office in the British Virgin Islands is located at TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands and its telephone number is (284) 494-5296.

ITEM 5.           OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

The Company is engaged in three different major activities, namely Equipment and Instrument Distribution, Manufacturing, and Environmental Services.

The Company is primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers).

The Company, through its PRC corporation, Shanghai Euro Tech Limited established in 1999 in the Pudong Jin Qiao Export Processing Zone of Shanghai, engages in the development, production, sales and servicing of environmental protection equipment, and energy conservation and related products.

The Company, through its majority owned subsidiaries, Pact and Yixing, its wholly-owned subsidiary, Shanghai – Environmental, and its affiliate, BlueSky, engages in water and waste-water treatment engineering business and air pollution control business.

The Company’s operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. The Company derived approximately 20% and approximately 79% of its revenue from Hong Kong and the PRC, respectively in Fiscal 2007. Net income increased approximately US$61,000, or 17%, in Fiscal 2007 to US$422,000, compared to US$361,000 in Fiscal 2006, primarily due to the contribution from the share of equity in net income of BlueSky of approximately US$247,000, partially offset by the increase in selling and administrative expenses.

The Company continued to consolidate its trading business by combining some of its regional sales efforts in the PRC with the retail shops and using online ordering in the PRC to sell the Company’s products. The Company manufactures and sells its own developed products such as Infrared Photometric Oil Analyzer, turbidity instruments, spectrophotometers and the Total Organic Analyzer. The Company intends to assemble and/or manufacture additional products in the future and seek opportunities with its suppliers to assemble their products, secure manufacturing and/or assembly facilities and seek another manufacturer of analytical instruments to acquire.

The Company continued to accept more engineering projects in water and waste-water industries and also in power generation industries.  The Company intends to continue its search for acquisition candidates of other firms engaged in engineering and/or system integration or

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enter into a joint venture with a third party to work in connection with its process control and engineering department.

Item 5A.          Operating Results

Background - Political and Economic Conditions in Hong Kong and the People’s Republic of China

The Company’s operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. Set forth below are the approximate percentage of the Company’s sales made to customers in the PRC and Hong Kong for the fiscal years indicated:

Sales to customers situated in Macau and elsewhere through Fiscal 2007 were nominal. This makes the Company particularly susceptible to changes in the political and economic climate of either Hong Kong or the PRC.

Hong Kong. Hong Kong has been one of the prime centers for commercial activity and economic development recently in Southeast Asia. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC. As provided in the Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The Basic Law provides that the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years after the transfer of sovereignty. Based on the current political conditions and the Company’s understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had or will have an adverse impact on its financial and operating environment. Although the Chinese government has pledged to maintain the economic and political autonomy of Hong Kong over its internal affairs, there is no assurance that such pledge will continue to be honored if there are changes in the Chinese political or economic climate. See Item 3D. “Key Information – Risk Factors.”

PRC. The PRC has been a socialist state since 1949. For more than forty years, the PRC’s economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various State Plans adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities which may set production and development targets. However, since approximately the early 1980s, the PRC’s national government has undertaken certain reforms to permit greater provincial and local economic autonomy and private economic activities. Any change in political or economic conditions may substantially adversely effect these reform initiatives and, in turn, the Company. See Item 3D. “Key Information – Risk Factors.”

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Results from Operations

The following operating and financial review should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report. All financial data referred to in the following discussion has been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).

The following table presents selected statement of operations data expressed in thousands of US$ and as a percentage of revenue for the Company’s fiscal years indicated below:

Fiscal Year ended December 31, 2007 compared to Fiscal Year Ended December 31, 2006

Revenue; Gross Profit and Cost of Revenue. Revenue increased by approximately US$69,000 or 0.3% to approximately US$27,230,000 in Fiscal 2007 from approximately US$27,161,000 in Fiscal 2006. The increase in revenues was primarily due to increasing revenues of approximately US$2,302,000 from engineering activities as there was an increase in the number of engineering jobs completed in Fiscal 2007, as a result of Pact and Yixing having established operations in the PRC and they have been receiving a greater volume of orders in the recent years, despite declining revenues of approximately US$2,233,000 from trading activities as a greater number of our key or exclusive suppliers have been marketing their products or selling into the China market, either directly or through distributors other than the Company.  After the Company acquired its majority interest in Pact-Yixing in October 2005, Pact-Yixing’s revenues of approximately US$6,981,000 and US$3,953,000 were included in our revenues in Fiscal 2007 and Fiscal 2006, respectively.

Gross profits increased by approximately US$277,000 or 4.2% to approximately US$6,832,000 for Fiscal 2007 as compared to approximately US$6,555,000 for Fiscal 2006.

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During Fiscal 2007, the Company’s cost of revenue was approximately US$20,398,000, or 74.9% of revenue, in comparison to approximately US$20,606,000, or 75.9% for Fiscal 2006.  Cost of revenue expressed as a percentage of revenue decreased by 1.0% in Fiscal 2007 as compared with Fiscal 2006.  The gross profit margin percentage increase was due principally to an increase in revenue from engineering activities which are of higher gross margin percentage than those of trading activities.  Yixing-Pact contributed approximately US$2,126,000 to our gross profit margin in Fiscal 2007.

Selling and Administrative Expenses. Selling and administrative expenses were approximately US$6,585,000 in Fiscal 2007, an increase of approximately US$624,000 or 10.5% from approximately US$5,961,000 in Fiscal 2006. The increase was principally due to the increase of Yixing-Pact expenses of approximately US$512,000 due to expenses of approximately US$211,000 for the manufacturing joint venture and increase in expenses related to increase in revenue. The PRC inflation rate of 4.8% and average appreciation rate of 6% for RMB against the US$ in 2007 also accounted for the increase in selling and administrative expenses.

Equity in Profit of Affiliates. Equity in profit of affiliates of approximately US$247,000 represented the share of net profit after tax of BlueSky after its acquisition in August 2007.

Interest Income. Interest income increased by approximately US$161,000 or 169.5% to approximately US$256,000 in Fiscal 2007 from approximately US$95,000 for Fiscal 2006. The increase was primarily due to the increase in bank deposits during the year.

Other Income. Other income increased by approximately US$15,000 or 10.3% to approximately US$161,000 in Fiscal 2007 from approximately US$146,000 in Fiscal 2006. The increase in other income was principally due to increase in gain of disposal of plant and equipment.

Income Taxes. Taxes decreased by US$12,000 to approximately US$144,000 in Fiscal 2007 from approximately US$156,000 in Fiscal 2006. This decrease was primarily the result of decreased taxable profits and an increase in income which are not subject to income taxes, such as offshore income and interest income.

Net Income. Income from continuing operations increased by approximately US$61,000 or 17% to approximately US$422,000 in Fiscal 2007 from approximately US$361,000 in Fiscal 2006.   The increase was primarily due to the contribution from shares of equity in BlueSky’s net income of approximately US$247,000, partially offset by the increase in selling and administrative expenses.

Fiscal Year ended December 31, 2006 Compared to Fiscal Year Ended December 31, 2005

Revenue; Gross Profit and Cost of Revenue. Revenue decreased by approximately US$4,089,000 or 13.1% to approximately US$27,161,000 in Fiscal 2006 from approximately US$31,250,000 in Fiscal 2005. The decrease in revenues was primarily due to declining revenues

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of approximately US$4,105,000 from trading and manufacturing activities as a greater number of our key or exclusive suppliers have been marketing their products or selling into the China market, either directly or through distributors other than the Company.  After the Company acquired its majority interest in Pact-Yixing in October 2005, Pact-Yixing’s revenues of approximately US$3,953,000 and US$3,662,000 were included in our revenues in Fiscal 2006 and Fiscal 2005, respectively.

Gross profits decreased by approximately US$14,000 or 0.2% to approximately US$6,555,000 for Fiscal 2006 as compared to approximately US$6,569,000 for Fiscal 2005. During Fiscal 2006, the Company’s cost of revenue was approximately US$20,606,000, or 75.9% of revenue, in comparison to approximately US$24,681,000, or 79% for Fiscal 2005.  Cost of revenue expressed as a percentage of revenue decreased by 3.1% in Fiscal 2006 as compared with Fiscal 2005.  The gross profit margin percentage increase was due principally to an increase in gross margin percentage of approximately 4% for trading activities as the Company’s sales of lower gross margin products declined.  Yixing-Pact contributed approximately US$1,417,000 to our gross profit margin in Fiscal 2006.

Selling and Administrative Expenses. Selling and administrative expenses were approximately US$5,961,000 in Fiscal 2006, an increase of approximately US$543,000 or 10.9% from approximately US$5,418,000 in Fiscal 2005. The increase was principally due to the inclusion of our share of Yixing-Pact expenses, approximately $568,000 for a full year, while the Yixing-Pact expenses of approximately US$122,000, included in Fiscal 2005, were for only a partial year, with Yixing-Pact not becoming our majority-owned subsidiaries until October 2005.  The selling and administrative expenses for trading and manufacturing activities decreased slightly as the Company streamlined operations.

Equity in Profit of Affiliates. Equity in profit of affiliates decreased by approximately US $21,000 or 100% to approximately US$Nil in Fiscal 2006 from approximately US $21,000 in Fiscal 2005. The decrease in equity in profit of affiliates was due to the results of Yixing-Pact being consolidated after the Company owned its majority interest in October 2005.

Interest Income. Interest income increased by approximately US$60,000 or 171.4% to approximately US$95,000 in Fiscal 2006 from approximately US$35,000 for Fiscal 2005. The increase was primarily due to the increase in bank deposits.

Other Income. Other income decreased by approximately US$26,000 or 15.1% to approximately US$146,000 in Fiscal 2006 from approximately US$172,000 in Fiscal 2005. The decrease in other income was principally due to decrease in our foreign exchange gains of US$28,000 in Fiscal 2006.

Income Taxes. Taxes decreased by US$172,000 to approximately US$156,000 in Fiscal 2006 from approximately US$328,000 in Fiscal 2005. This decrease was primarily the result of decreased taxable profits and a decrease of effective tax rates from 24.2% in Fiscal 2005 to 18.7% in Fiscal 2006.  The decrease in the effective tax rate was principally due to a tax rate decrease on the net income of Pact-Yixing, as a result of establishing a service company that paid taxes at a lower rate.

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Net Income. Income from continuing operations decreased by approximately US$372,000 or 50.8% to approximately US$361,000 in Fiscal 2006 from approximately US$733,000 in Fiscal 2005. The decrease was primarily due to the decrease in revenues from trading activities, partially offset by higher gross margin and selling and administrative expense percentages resulting from inclusion of Pact-Yixing’s operating results after October 2005.

Item 5B.          Liquidity and Capital Resources

The Company has primarily used its funds to finance accounts receivable, inventories, and capital expenditures including purchases of property, office furniture and equipment, computers and calibration equipment. The Company has historically met its cash requirements from cash flows from operations, short-term borrowings, bank lines of credit, and long-term mortgage bank loans. The Company expects, but can make no assurances that its present cash reserves, cash from operations, existing available bank credit facilities and proceeds from the issuance of our ordinary shares pursuant to stock option exercises would be sufficient to fund its future capital expenditure requirements. Working capital at the end of Fiscal 2007 and Fiscal 2006 were approximately US$10,099,000 and US$10,267,000, respectively.

At the end of Fiscal 2007 and Fiscal 2006, the Company’s accounts receivable were approximately US$4,968,000 and US$4,914,000, respectively.  During Fiscal 2007, the Company generated net cash of approximately US$449,000 from its operating activities from net income, reduction in inventories, and increase in other payables and accrued expenses while funding an increase in accounts receivable, prepayments and other current assets and decrease in accounts payable.

During Fiscal 2007, the Company used approximately US$4,415,000 in investing activities.  In Fiscal 2006, the Company used approximately US$352,000 from investing activities.  The Company used approximately US$250,000 and US$106,000 to purchase facilities and equipment in Fiscal 2007 and Fiscal 2006, respectively.  During Fiscal 2007 and Fiscal 2006, the Company released approximately US$83,000 and used US$111,000, respectively, as restricted cash to issue performance guarantees to its customers through its banks.  During Fiscal 2007, Yixing-Pact paid a dividend of approximately US$140,000 to minority interest shareholders. During Fiscal 2007, the Company used approximately US$4,151,000 to acquire 20% equity interest in Blue Sky. Additionally, a final payment of US$648,000 is to be made by the end of June 30, 2008, based on Blue Sky’s net profits for its fiscal year ended December 31, 2007.

The Company received approximately US$3,720,000 and US$2,607,000, respectively, in Fiscal 2007 and Fiscal 2006 from financing activities resulting from the issuance of its ordinary shares being issued on stock options that were exercised. During Fiscal 2007, the Company received approximately US$200,000 as a return on its interest in the Yixing-Pact’s manufacturing joint venture. The Company had various banking facilities available for overdraft, import and export credits and foreign exchange contracts from

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which the Company can access up to approximately US$4,167,000 at December 31, 2007. The aforementioned available credit facilities were obtained on the conditions that, among other things, the Company not create a charge or lien on its other assets in favor of third parties without such bank’s consent, and the Company maintaining a certain level of net worth.

Cash increased from approximately US$9,160,000 at the end of Fiscal 2006 to approximately US$9,387,000 at the end of Fiscal 2007. The principal reasons for the increase in cash were the increase in other payables by approximately US$896,000 and proceeds of approximately US$3,720,000 from the exercise of stock options by Company management and employees.  However, the Company used cash to fund its decrease in accounts payable by approximately US$1,080,000 and used US$4,151,000 for investment in affiliates.  The Company plans to use cash on hand primarily to acquire a manufacturing plant and/or environmental engineering company in the PRC and to expand its manufacturing plant and environmental engineering business.

The Company’s net accounts receivable slightly increased from approximately US$4,914,000 at the end of Fiscal 2006 to approximately US$4,968,000 at the end of Fiscal 2007.

The Company’s inventory decreased from approximately US$2,028,000 at the end of Fiscal 2006 to approximately US$2,012,000 at the end of Fiscal 2007.

The Company’s capital expenditures were approximately US$106,000 and US$250,000 in Fiscal 2006 and Fiscal 2007, respectively. Capital expenditures during Fiscal 2006 and Fiscal 2007 were incurred primarily in connection with the purchase of office equipment, furniture and fixtures.  The Company continues to seek targets for acquisition and facilities for assembly operations or engineering companies. If such acquisitions are indeed made, the Company may expect to incur significantly larger capital expenditures, for which the Company presently intends, but as to which no assurance can be made, to use existing cash reserves, cash from operations, available bank credit facilities and proceeds from the issuance of our ordinary shares to fund such capital expenditures.

Anticipated Future Resources and Uses of Cash

The Company has historically funded its working capital, capital expenditure, investing and expansions needs from operations, available bank credit facilities and proceeds from the issuances of our ordinary shares and expects to continue funding its Fiscal 2008 these requirements from operations, available bank credit facilities and proceeds from the exercise of options. The Company may use its funds to acquire other businesses, make equity investments in related business, form strategic alliances with third parties, invest in product research and development, or expand its sales offices and retail shops or, with third parties, seek to acquire new products or businesses or form strategic alliances. The Company expects, but can make no assurances that its present cash reserves, cash from operations and existing available bank credit facilities would be sufficient to fund its future cash requirements.

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Inflation

The Company believes generally declining rates of inflation in the PRC have had a positive effect on its results from operations.  As a result of the recent rise in the rate of inflation in the PRC, we anticipate increases in the overhead costs of our PRC affiliates and offices.  The Company believes, although no assurance can be given, that as credit restrictions are gradually lifted, it will be able to increase prices in the market for its products and thus realize increased profit margins.

Critical Accounting Policies

Revenue Recognition

Pursuant to the revenue recognition criteria set forth in Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104: “Revenue Recognition”, the Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been delivered, the sales price is fixed or determinable and collectibility is reasonably assured. For certain products where installation is necessary, revenue is recognized upon completion of installation.  Revenue earned from customer support, which represents a minor percentage of total revenues, it is recognized when such services are provided.

Revenues and profits in long term fixed price contracts are recorded under the percentage of completion method in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”.  This approach relies on estimates of total expected direct costs of completion, which are compared to actual direct costs incurred to date to arrive at an estimate of revenue and profit earned to date.  Recognized revenue and profit are subject to revisions as the contract progresses to completion.  Revisions to profit estimate are reflected in income in the period in which the facts that give rise to the revision become known. For any contract where it is identified that a loss will be incurred, the full loss will be recognized immediately. There were no long-term fixed price contracts during 2007.

Inventory Valuation

The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required.

Deferred Taxes

As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes and tax bases of assets and liabilities in each of the jurisdictions in which it operates. This process involves the Company estimating its current tax exposure together with assessing temporary differences resulting from its differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheet. The Company must then assess

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the likelihood that its deferred tax assets will be recovered from future taxable income, and, to the extent the Company believes that recovery is more unlikely than likely, it must establish a valuation allowance. To the extent the Company establishes a valuation allowance or increases this allowance in a period, it must include an expense within the tax provision in the statement of operations.

Recent Accounting Pronouncements

In September 2006, the FASB issued FAS 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 are effective for the fiscal year beginning after November 15, 2007. We are currently evaluating the impact of the provisions of FAS 157.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities:  Including an amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits all entities to elect to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings.  SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted.  The Company does not anticipate that the adoption of this statement will have a material effect on the Company’s financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries. This statement requires the reporting of all noncontrolling interests as a separate component of stockholders’ equity, the reporting of consolidated net income (loss) as the amount attributable to both the parent and the noncontrolling interests and the separate disclosure of net income (loss) attributable to the parent and to the noncontrolling interests. In addition, this statement provides accounting and reporting guidance related to changes in noncontrolling ownership interests. Other than the reporting requirements described above which require retrospective application, the provisions of SFAS No. 160 are to be applied prospectively in the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of FAS No. 160 on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (FAS No. 141(R)), which replaces FASB Statement No. 141. FAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FAS No. 141(R) is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be our year beginning January 1, 2009. We are currently evaluating the potential impact, if any, of the adoption of FAS No. 141(R) on the consolidated financial statements.

The Company does not believe that any other recently issued and adopted, but not yet effective, accounting standards should have a material effect on the accompanying financial

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statements.

Item 5C.          Research and Development, Patents and Licenses

During Fiscal 2007, Fiscal 2006 and Fiscal 2005, the Company expensed approximately US$47,000, US$55,000 and US$48,000, respectively, on the development of its products.  It is anticipated that an additional US$250,000 in research and development costs will be expended on similar projects and potential research and development projects for the development of air and water testing equipment and monitoring equipment during Fiscal 2008.

Item 5D.          Trend Information

There are increasing demands in the PRC for clean water, clean air, greater industrial pollution controls, waste management and electricity.  We also see additional distributors competing with us.  However, given the political situation in the PRC, trends could quickly disappear and we do not know if they will continue in the future.  We note that, as evidenced by our recent acquisition of Pact-Yixing, we are placing greater emphasis on developing our engineering solution business in an effort to capitalize on these increased demands (clean water, pollution controls and waste management).

The Company believes that the expenses incurred in product development may result in increases in revenue but such increases are unlikely to allow for a recovery of the expenses for approximately the next two years.

Item 5E.          Off Balance Sheet Arrangements

None.

Item 5F.          Tabular Disclosure of Contractual Obligations

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ITEM 6.           DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Item 6A.          Directors and Senior Management

Information concerning the Directors and Executive Officers of the Company are as follows:

Set forth below is a brief background of the executive officers and directors based upon the information supplied by them to the Company:

T.C. Leung has been Chief Executive Officer and Chairman of the Board of Directors of both the Company and Far East since their inception. Before establishing Far East, Mr. Leung was an engineer for English Electric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm (Far East) Ltd. (“Eurotherm”) between 1971 and 1992. From 1988 until he retired in February 2005, Mr. Leung had also served as managing director of Eurotherm Hong Kong. Mr. Leung received a Masters degree in Business Administration from the University of East Asia, Macau in 1986 and is a Chartered Engineer, a title bestowed upon a member of the Council of Engineering Institutions in the United Kingdom.

Jerry Wong has served as Director and Chief Financial Officer of Far East since 1994 and has been with Far East since 1987. Mr. Wong has been the Chief Financial Officer and a Director of the Company since its inception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged in the insurance business, as deputy manager of its secretarial, legal and accounting department. From 1981 until 1985, Mr. Wong served as a senior accountant in Price Waterhouse-Hong Kong. He is a Fellow of the Association of Chartered Certified Accountants in the United Kingdom and a Certified Public Accountant in Hong Kong.

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Alex Sham has been a Director of the Company since its inception. Mr. Sham joined Far East in 1988 and has been its Sales Manager since 1993 and became a Director of Far East in 1996. Mr. Sham received a Bachelor of Science in Applied Chemistry from Hong Kong Baptist University in 1990. Prior to joining Far East, Mr. Sham was employed by the Environmental Protection Department of the Hong Kong Government from 1986 until 1988.  Mr. Sham received a Master’s Degree in Business Administration from the University of Adelaide in 2003.

Y.K. Liang has been a Director of the Company since February 1998. Mr. Liang is a director of Wong Liang Consultants Ltd. (“Consultants”) and a member of the certified public accounting firm of Y.K. Liang & Co. (“LCO”). Mr. Liang has been associated with both Consultants and LCO for more than the past five years. Consultants is a general business consulting firm.

Ka Chong Cheang has been a Director of the Company since December 2005. From 1952 until 1977, he had been shipping manager for John Swire & Sons (Hong Kong) Ltd., a firm engaged in the importing and exporting shipping industry.  For more than the past five years, Mr. Chong has been a business consultant.

Xu Hong Wang has been a director of the Company since August 2002. Mr. Wang is the East China sales manager of Euro Tech (Far East) Limited, a wholly-owned subsidiary of the Company, since mid 1994. From mid 1997 until joining Euro Tech, he was employed as a Research Associate and Lecturer at the Analysis and Research Center of Shanghai’s Tongji University. Wang Xu Hong received Bachelor’s and Master’s degrees in Science from Fudan University in 1984 and 1988, respectively.

Li Da Weng, from 1993 until January 2005, was the General Director of the Yangtze Valley Water Resources Protection Bureau (“YVWRPB”).  He was employed by the YVWRPB in various positions, for more than 25 years, before he became the General Director in 1993.  Since 2005, he has been the Secretary General of Yangtze Forum, a group of governments, businesses, universities and research institutes meeting on occasion to discuss issues on protecting and developing the Yangtze River, and since 1994 he has been a member of the Science and Technical Committee of Changjiang Water Resources Commission.  Mr. Li Da Weng graduated from Hengyang Mining and Metallurgy College (now known as Nanhua University) in 1965 with a Bachelor’s Degree in Analytical Chemistry.  From December 1981 to December 1983, he was a visiting scholar at the Canada’s Centre for Inland Waters, National Water Research Institute.

Directors of the Company serve until the next annual meeting of shareholders of the Company and until their successors are elected and duly qualified. Officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors.

None of the Company’s directors, officers or beneficial owners of ten percent or more of its Common Stock are required to file any reports pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”).

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The Company had 2 meetings of its Board of Directors during Fiscal 2007, while its Audit Committee had 3 meetings during Fiscal 2007.

There are no material legal proceedings involving any director, officer or affiliate of the Company, owner of record or beneficially of more than five percent of the Company’s Common Stock or any associate of any of the foregoing.

Two prior directors of the Company, Nancy Wong and C.P. Kwan, were not elected by stockholders of the Company at the last annual meeting of stockholders.

Key Employees

George Hayek, Managing Director.  He is the founder of Pact and Yixing and is a civil engineer (1967) and post-graduate certificate holder in sanitary engineering and environmental management from the American University of Beirut and the University of California at Irvine (in 1971 and 1988, respectively).  Since 1971, he has occupied several key posts in water and waste-water treatment companies in the USA, the UK, Spain, Cyprus, The Middle East, Southeast Asia and the last 14 years in the PRC.  From 1998 to date, he has been the managing director of Pact.  His international experience helped Pact in securing most of the contracts with European and American multinational industries in the PRC.

Yvonne Xia manages Pact and Yixing’s Procurement Department, as well as assisting the managing director in management of the various departments.  She joined Pact-Yixing at the time of their formation in 1998.  Ms. Xia is an environmental engineering graduate from Qing Hua University of Beijing (1989) and an EMBA graduate from the Olin School of Management of the Washington University (2003).  She has several positions of increasing responsibility, including management of engineering, sales, procurement and projects while with Pact-Yixing.

Item 6B.          Compensation

The following table sets forth certain summary information with respect to the compensation paid by the Company and its subsidiaries, for services rendered in all capacities to the Company and its subsidiary during Fiscal 2007, Fiscal 2006 and Fiscal 2005 to the Chairman of the Board and Chief Executive Officer and a key employee of the Company.  No other executive officer or employee received in excess of US$100,000 as cash compensation during those fiscal periods.

Summary Compensation Table

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Mr. Hayek is to continue his employment relationship with Pact and Yixing for a period of three years ending October 2008.

Compensation of Directors. Directors of the Company do not receive compensation for their services as directors; however, the Board of Directors may authorize the payment of compensation to directors for their attendance at regular and annual meetings of the Board and for attendance at meetings of committees of the Board as is customary for similar companies. Directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company.

Pension Plan. Prior to December 1, 2000, the Company had only one defined contribution pension plan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equal to their own contributions plus 50% to 100% of individual fund account balances contributed by the Company, depending on their years of service with the Company. The Company was required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company.

With the introduction of the Mandatory Provident Fund Scheme, a defined contribution scheme managed by an independent trustee on December 1, 2000, each of the Company and its employees who joined the Company subsequently makes monthly contributions to the scheme at 5% of the employee’s cash income as defined under the Mandatory Provident Fund legislation. Contributions of both the Company and its employees are subject to a maximum of HK$1,000 per month and thereafter contributions are voluntary and are not subject to any limitation. The Company and its employees made their first contributions in December 2000.

As stipulated by the rules and regulations in the PRC, the Company contributes to state-sponsored retirement plans for its employees in the PRC. The Company contributes approximately 10% to 22% of the basic salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.

During the years ended December 31, 2007, 2006 and 2005, the aggregate contributions of the Company to the aforementioned pension plans and retirement benefit schemes were approximately US$245,000, US$202.000 and US$191,000, respectively.

Management Option Plan. The Company had authorized the issuance of Options to purchase up to an aggregate of 4,586,400 Ordinary Shares (the “Management Options”) to its officers, directors and employees as the Company’s Chairman of the Board and Chief Executive Officer may direct. The Management Options became exercisable on March 14, 1998 and expired on March 14, 2007.

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The following executive officers and directors of the Company had exercised the Management Options at prices/price ranges as indicated below prior to the end terms of the options.