Section 1 Company Profile - eastcompeace.com

2Annual Report 2005

Section 1 Company Profile

1. Chinese Name: �� !"#$%&'()*

English Name: Eastcompeace Smart Card CO.,LTD.

Short Form in Chinese: �� !

Short Form in English: EASTCOMPEACE

II. Legal Representative: Zhou Zhongguo

III. Secretary of the Board, the Securities Affairs Representative and Person in Charge of Management of

Investors Relation

Secretary of the Board Securities Affairs Person in Charge of Management

Representative of Investors Relation

Names Zhang Xiaochuan Chen Zongchao Zhang Xiaochuan

Liaison Address No. 8 Pinggong M. Road, NanPing Technology Industry Park, Zhuhai City,

Guangdong Province

Tel: 0756-8682893

Fax: 0756-8682736

E-mail: [email protected]

IV. Registered Address: No. 8 Pinggong M. Road, NanPing Technology Industry Park, Zhuhai City, Guangdong

Province

Office Address: The same as above

Postal Code: 519060

Internet Web Site: http://www.eastcompeace.com

E-mail: [email protected]

Annual Report 20053

V. The Newspapaers Designated by China Securities Regulatory Commission as Chosen: China Securities

Journal and Securities Times.

Internet Web Site as Designated: http://www.cninfo.com.cn.

Place Where the Annual Report is Prepared and Placed: Secretariat of the Company

VI. Stock Exchange Listed with: Shenzhen Stock Exchange

Short Form in Chinese: Eastcompeace

Stock Code�002017

VII. Date of the first registration: December 4, 2001

Date of the latest registration alteration: November 16, 2004

Registration with: Guangdong Provincial Administration for Industry and Commerce

Legal Entity Business License No.: 4400001009956

Taxation Registration No.: 440402707986731

Certified Public Accountants Engaged by the Company: Zhejiang Pan-China Certified Public

Accountants

Office Address of the Certified Public Accountants Enaged by the Company: 15th to 20th Floors,

Qianjiang Science & Technology Building, No. 388 Wensan Road, Hangzhou City, Zhejiang Province

Company Profile

4Annual Report 2005

Section 2 Financial and Business Highlights

I. Profit Index Summary in the Report Period

(In RMB)

Items Amount

Total profit 13,491,624.38

Net profit 11,583,419.15

Net profit after deduction of non- recurring loss/gain 11,364,518.94

Principal business profit 98,043,574.24

Profit from other business lines -444,974.20

Operating profit 2,737,071.25

Investment income -303,110.98

Subsidy income 11,714,693.67

Net amount of non-operating income and expenses -657,029.56

Net cash flows arising from operating activities 155,043,468.93

Net increase/ decrease of cash and cash equivalents 91,374,294.20

[Note]: Non-recurring gain/loss items deducted.

Non-recurring gain and loss items Amount

Various types of government subsidies 739,424.00

Various non-recurring and non-operating income/expenditure -481,894.34

Amount affecting the income tax 38,629.45

Non-recurring gain and loss - net 218,900.21

II. Accounting Data and Financial Index Summary of the Previous Three Years (in RMB)

(I) Accounting data summary

Items 2005 2004 increase/decrease in 2003

the report year over

the previous year (%)

Principal business income 647,634,721.69 656,080,479.97 -1.29 598,965,329.49

Total profit 13,491,624.38 47,147,904.77 -71.38 43,751,834.97

Net profit 11,583,419.15 37,516,950.97 -69.12 37,294,688.18

Net profit, less non- 11,364,518.94 38,575,742.20 -70.54 37,533,390.99

recurring gains/loss

Items End of 2005 End of 2004 increase/decrease at the End of 2003

end of the year over the

end of the previous year (%)

Total assets 539,652,211.01 606,849,386.28 -11.07 390,838,067.86

Shareholders' equity 398,045,399.84 410,335,494.45 -3.00 146,919,677.62

(excluding minority equity)

Net cash flows arising from 155,043,468.93 345,849.62 44729.74 36,884,332.35

operating activities

Annual Report 20055

(II) Financial Index Summary

Items 2005 2004 increase/decrease in the 2003

report year over the

previous year (%)

Earnings per share 0.1276 0.4132 -69.12% 0.5668

Earnings per share (note) -- 0.4132 -- --

Net assets-income ratio 2.91% 9.14% Reduced by 6.23% 25.38%

Net assets-income ratio after deducting 2.85% 9.40% Reduced by 6.55% 25.60%

the non-recurring gains and loss (%)

Net cash flows per share arising 1.7075 0.0038 44834.21 0.5606

from operating activities

Items End of 2005 End of 2004 increase/decrease at End of 2003

the end of the year over the

end of the previous year (%)

Net assets per share 4.3838 4.5191 -2.99% 2.2328

Net assets per share 4.3811 4.5172 -3.01% 2.2318

after adjustment

III. Attachment to the Profit Statement

In accordance with No. 9 Rules for Information Disclosure and Report Preparation for Companies Having Issued Securities to the Public

- Calculation and Disclosure of the Net Assets-income Ratio and Earnings per Share promulgated by China Securities Regulatory

Commission, the net assets-income ratio and earnings per share are calculated as follows:

Profit of the report period Net assets-income ratio % Earnings per share (RMB/share)

Fully diluted Weighted average Fully diluted Weighted average

Principal business profit 24.63 24.45 1.0798 1.0798

Operating profit 0.69 0.68 0.0301 0.0301

Net profit 2.91 2.89 0.1276 0.1276

Net profit after deduction 2.86 2.83 0.1252 0.1252

of non- recurring loss/gain

IV. Changes in Shareholders' Equity in the Report Period (In RMB)

Items Share capital Capital public Surplus public Statutory public Retained Foreign currency Total

reserve reserve welfare fund earnings conversion balance Shareholders'

of statement Equity

Opening Balance 90,800,000.00 217,348,865.86 28,427,325.74 14,213,662.87 73,759,302.85 410,335,494.45

Increase in the report period 400,000.00 1,131,834.00 1,131,834.00 11,583,419.15 35,486.24 14,282,573.39

Decrease in the report period 1,609,000.00 24,963,668.00 26,572,668.00

Ending Balance 90,800,000.00 216,139,865.86 30,690,993.74 15,345,496.87 60,379,054.00 35,486.24 398,045,399.84

Financial and Business Highlights

6Annual Report 2005

[Note] Notes to the reasons of change in the shareholders' equity in the report period:

1. Change in the Company's capital public reserve in the report period was due to the free supplies from the government and the expenses

in connection with the reform for equity separation.

2. Change in the Company's retained earnings in the report period was due to increase of the profit in the report period and profit

distribution for the year 2004.

3. Change in the conversion balance in the Company's statements in foreign currency in the report period was due to the conversion

balance of statements in foreign currency of Eastcompeace Smart Card�Singapore�Pte. Ltd., the Company's overseas subsidiary.

4. Change in the Company's surplus public reserve in the report period was due to provision of the profit of the year 2005.

5. Change in the Company's statutory public reserve in the report period was due to provision of the profit of the year 2005.

Financial and Business Highlights

Annual Report 20057

I. Table of change in share capital of the Company (Unit: shares)

Before this change Increase/decrease this time (+ , - ) After this change

Quantity Proporti New Bonus Capitalization of Others Subtotal Quantity Proporti

on(%) issue shares capital surplus on (%)

I. Shares subject to sale restriction 65,800,000 72.47 0 0 0 -8,750,000 -8,750,000 57,050,000 62.83

1. State shares

2. State-owned legal person shares 56,147,140 61.84 -7,466,375 -7,466,375 48,680,765 53.61

3. Other domestic investment shares 9,652,860 10.63 -1,283,625 -1,283,625 8,369,235 9.22

Including:

Domestic corporate shares 5,474,560 6.03 -728,000 -728,000 4,746,560 5.23

Domestic natural person shares 4,178,300 4.60 -555,625 -555,625 3,622,675 3.99

4. Foreign investment shares 0 0.00 0 0 0 0.00

Including:

Overseas corporate shares

Overseas natural person shares

II. Shares not subject to sale restriction 25,000,000 27.53 8,750,000 8,750,000 33,750,000 37.17

1. RMB ordinary shares 25,000,000 27.53 8,750,000 8,750,000 33,750,000 37.17

2. Domestically listed foreign investment shares

3. Overseas listed foreign investment shares

4. Others

III. Total number of shares 90,800,000 100 90,800,000 100

[Note]: The other change listed in this table is caused by the Company's implementation of the plan for share holding structure reform.

II. Share issue and listing

(I) After approval by CSRC with Zheng Jian Fa Xing Zi (2004) No. 95 Document, the Company successfully issued 25 million RMB ordinary

shares (A shares) with par value of RMB 1.00 per share at the price of RMB 10.43 per share in the mode of placement to investors in secondary

Shenzhen and Shanghai market at a fixed price on June 24, 2004.

(II) After approval by Shenzhen Stock Exchange with Shen Zheng Shang (2004) No. 58 Document, 25 million A shares of the Company

were listed and traded at Shenzhen Stock Exchange from July 13, 2004.

(III) On October 28, 2005, the Company's shareholders' meeting concerning share holding structure reform voted through the Plan for Share

Holding Structure Reform. On November 2, 2005, Announcement of Implementation of Share Holding Structure Reform was published on

China Securities Journal, Securities Times and www.cninfo.com.cn. The official implementation of the plan for share holding structure

reform was completed on November 9, 2005. According to the plan, the original shareholders holding non-negotiable shares paid 3.5 shares

for every 10 negotiable shares and 8,750,000 shares in total to the original shareholders holding negotiable shares as consideration to obtain

the right of negotiation to the original non-negotiable shares held by them. After the implementation of the Company's plan for share

holding structure reform, i.e., the payment of consideration by the original shareholders holding non-negotiable shares, the total number of

shares of the Company remained unchanged.

Section 3 Particulars about Changes in Share Capital and Shareholders

8Annual Report 2005

(IV) In the report period, there were no capital surplus capitalization, rights issue, new issue on basis of secondary offering,

merger by absorption, conversion of convertible corporate bonds, capital reduction, issue of staff shares or other circumstances

to be disclosed.

III. Particulars about Shareholders

(I) The total number of shareholders of the Company was 12,778 at the end of the report period

(II) The shareholding of the top ten shareholders at the end of the report period

1. Table of shareholding of the top ten shareholders at the end of the report period

Name of shareholder Nature of Increase or decrease Total quantity Shareholding Quantity of shares pledged

shareholder in the report period of shares held ratio held subject to or frozen shares

sale restriction

Putian East Communications State-owned -4,106,375 26,773,565 29.49% 26,773,565 15,430,000

Group Co., Ltd., shareholder

Zhuhai Putian Peace State-owned -3,360,000 21,907,200 24.13% 21,907,200 0

Telecommunications shareholder

Industry Co., Ltd.

Beijing Xinjietong Mobile Other corporate -447,125 2,915,255 3.21% 2,915,255 0

Communication shares

Technology Co., Ltd.

Zhuhai Fuchun Other corporate -280,875 1,831,305 2.02% 1,831,305 0

Communication shares

Equipment Co., Ltd.

Zhou Zhongguo Natural person -107,625 701,715 0.77% 701,715 0

Shi Jixing Natural person -71,750 467,810 0.52% 467,810 0

Zheng Guomin Natural person -71,750 467,810 0.52% 467,810 0

Yang Youwei Natural person -71,750 467,810 0.52% 467,810 0

Zhang Peide Natural person -71,750 467,810 0.52% 467,810 0

Huang Ningzhai Natural person -71,750 467,810 0.52% 467,810 0

2. Table of shareholding of top 10 shareholders holding shares not subject to sale restriction

Name of shareholder Quantity of shares held not Type of share

subject to sale restriction

Ningbo Yongli Stainless Steel Material Co., Ltd. 229,240 RMB ordinary share

Yang Yi 128,454 RMB ordinary share

Wang Zihua 112,600 RMB ordinary share

Wang Zhonghong 107,328 RMB ordinary share

Zhou Kunlin 103,100 RMB ordinary share

Chen Yuanqiu 94,500 RMB ordinary share

Zhao Yibin 93,141 RMB ordinary share

Jiao Lanfang 91,800 RMB ordinary share

Lin Dong 89,235 RMB ordinary share

Zhang Defu 88,320 RMB ordinary share

Particulars about Changes in Share Capital and Shareholders

Annual Report 20059

(Note 1) Notes to the relationship between the said shareholders or their concerted action:

1. At the end of the report period, the companies holding more than 5% equity of the Company are Putian East Communications Group

Co., Ltd.,, the largest shareholder of the Company, and Zhuhai Putian Peace Telecommunication Industry Co., Ltd., the second largest

shareholder of the Company. Meanwhile, Putian East Communications Group Co., Ltd., holds 50% equity of Zhuhai Putian Peace

Telecommunication Industry Co., Ltd., being the controlling shareholder of the Company. Mr. Zheng Guomin concurrently serves as

chairman of the board of directors of Putian East Communications Group Co., Ltd., Mr. Yang Youwei concurrently serves as chairman

of the board of directors of Zhuhai Special Economic Zone Kehui Enterprise Group Co., Ltd. which holds 13.5% equity of Zhuhai Putian

Peace Telecommunications Industry Co., Ltd.It is unknown whether there is relationship between other shareholders of the Company

and whether they are persons taking concerted action defined in the Regulations on the Information Disclosure of the Change of

Shareholding of Shareholders of Listed Companies;

2. It is unknown whether there is relationship between the actual controller of the Company and the top ten shareholders not subject to

sale restriction and whether they are persons taking concerted action defined in the Regulations on the Information Disclosure of the

Change of Shareholding of Shareholders of Listed Companies;

3. It is unknown whether there is relationship between the above shareholders not subject to sale restriction and whether they are persons

taking concerted action defined in the Regulations on the Information Disclosure of the Change of Shareholding of Shareholders of

Listed Companies.

[Note 2] On September 5, 2005, the Company received the notice from the controlling shareholder Putian East Communications Group

Co., Ltd., that Putian East Communications Group Co., Ltd., pledged 15,430,000 shares of the Company (accounting for 16.99% of the

total share capital of the Company) to Minsheng Bank Hangzhou Branch to provide guarantee for loans. The pledge term is from

September 5, 2005 to July 31, 2006. Putian East Communications Group Co., Ltd., settled equity pledge registration procedure with

China Securities Registration and Settlement Co., Ltd. on September 5, 2005. Refer to the Company's announcement published on

Securities Times, China Securities Daily and www.cninfo.com.cn on September 7, 2005 for details.

(III) Introduction to the controlling shareholder of the Company

Name of controlling shareholder: Putian East Communications Group Co., Ltd.,

Legal representative: Zheng Guomin

Person in charge of the Company: Zhang Zexi

Date of establishment: April 18, 1996

Registered capital: RMB 871,885,086.00

Company type�Limited liability company

Place of registration: 398 Wensan Road, West Lake District, Hangzhou

Business license registration number: 3301001600265

Business scope: Technological development, consultation, service, training, manufacturing, processing, wholesale and retail of commu-

nication equipment, electronic computer and peripheral equipment, electronic components, contracting of communication projects,

economic information consultation, export and import business.

In order to further deepen reform, readjust industrial structure, centralize resources for strengthening the development of key business

and enhance its industrial competitiveness, Putian Group solely sponsored and established China Putian Information Industry Co., Ltd.

(hereinafter referred to as "CPII") with the equity of subsidiaris (including 99.07% equity of Eastcom Group and 56.75% equity of

Ningbo Electronic Information Group Co., Ltd.) held by it as all capital contribution on July 23, 2004. From then on, CPII holds 99.07%

equity of Eastcom Group.

The basic information of CPII is as follows:

Date of establishment: July 23, 2003; Place of registration: 2 Shangdi Er Street, Zhongguanchun Science and Technology Park, Haidian

District, Beijing; Registered capital: RMB 1.9 billion; Legal representative: Xing Wei; Enterprise type: Joint stock limited company.

Business scope: Technological development, production and sales of mobile communication and terminal equipment, data communication,

network communication, computers and software, relevant supporting parts and components and relevant services, technology transfer,

consultation and services, engineering construction contracting, project planning and design and industry investment.


10Annual Report 2005

Members of the board of directors: Xing Wei ( chairman of the board of directors), Xu Mingwen (director), Huang Zhiqin (director),

Bao Kongrong (director), Tao Xiongqiang (director), Zheng Guomin (director), Xu Lihua (director), Sun Guangxiang (independentdirector) and Zheng Qibao (independent director).Members of the management: Xing Wei (general manager), Xu Mingwen (deputy general manager), Huang Zhiqin (deputy general

manager), Bao Kangrong (deputy general manager), Tao Xiongqiang (deputy general manager) and Wu Changlin (financial controller).

(IV) Introduction to the actual controller of the Company

Name of actual controller: China Putian Information Industry Group Company

Legal representative: Xing WeiPerson in charge of the Company: Xing WeiDate of establishment: 1980Registered capital: RMB 3.08694 billionCompany type�Enterprise owned by the whole peoplePlace of registration: 2 Jiangtai Road, Chaoyang District, Beijing

Registration number of business license of incorporated enterprise: 1000001000157Business scope: Development and production of all kinds of communication equipment including large-sized digital program-con-trolled exchanges, base station equipment and handsets of honeycomb mobile communication system, IP serial products, microwavecommunication equipment, optical communication equipment, optical communication cable and electric cable, all kinds of communica-tion power supply, wiring and parting-line equipment, IC card telephone sets, network administration system, multimedia computerterminals, facsimile machines, posting machinery, general contracting of international and domestic communication projects, develop-

ment of joint ventures and cooperation, technology introduction, product import and export and other businesses of technical economy.The chart of property right and control relationship between the Company and its actual controller:

(V) Introduction to the corporate share shareholders holding over 10% (including 10%) of the total shares of the

Company

Company name: Zhuhai Putian Peace Telecommunications Industry Co., Ltd.Legal representative: Ni ShoupingDate of establishment: July 10, 1987Registered capital: RMB 22.50 RMB millionBusiness scope: Design and production of electronic products, communication equipment, instruments and meters, wholesale and retailof hardware and electrical appliances, electronic products and communication equipment, instruments and meters, cultural articles and

daily-use and general merchandise.


China Putian Information Industry Co.,Ltd.

Putian East Communication Group Co.,Ltd.

China Putian Information Industry Group Company

Eastcompeace Smart Card Co.,Ltd.

Zhuhai Putian Peace Telecommunication Industry Co.,Ltd.29.49% equity

50% equity

24.13% equity

99.07% equity

100% equity

Annual Report 200511

IV. The time for listing of shares subject to sale restriction

Time Quantity of additional shares Balance of shares Balance of shares Remarks

that can be listed and traded subject to sale not subject to sale

upon the expiration of sale restriction restriction

restriction period

November 18, 2006 17,449,235 39,600,765 51,199,235 The shares held by BeijingXinjietong Mobile

Communication Technology Co., Ltd., Zhuhai

Fuchun Communication Equipment Co., Ltd. and

8 natural person shareholders including Zhou

Zhongguo can all be listed. The shares held by

Putian East Communications Group Co., Ltd., and

Zhuhai Putian Peace Telecommunications Indus-

try Co., Ltd.that account for 5% of the total share

capital of the Company can be listed.

November 18, 2007 9,080,000 30,520,765 60,279,235 The shares held by Putian East Communications

Group Co., Ltd., and Zhuhai Putian Peace

Telecommunications Industry Co., Ltd.that

account for 5% of the total share capital of the

Company can be listed

November 18, 2008 30,520,765 0 90,800,000 The remaining shares held by Putian East

Communications Group Co., Ltd., and Zhuhai

Putian Peace Telecommunications Industry

Co., Ltd.can be listed.

[Note] Mr. Zhou Zhongguo, Mr. Yang Youwei, Mr. Zheng Guomin, Mr. Zhang Peide, Mr. Zhang Xiaochuan, Mr. Huang Ningzhai and

Mr. Li Haijiang are respectively the current board chairman, vice board chairman, directors and senior executives of the Company. In

addition to the fulfillment of commitment for share holding structure reform, the shares of the Company held by them shall also be

subject to the restriction on the assignment of the shares held by directors, supervisors and senior executives as provided in relevant

national laws, regulations and regulatory documents.

V. The quantity of shares held by the top 10 shareholders subject to sale restriction and conditions of sale

restriction

Name of shareholder Quantity of shares Time when shares Quantity of additional Conditions

subject to sale can be listed shares that can be of sale restriction

restriction(share) and traded listed and traded

Putian East 26,773,565 November 8, 2006 4,540,000 The non-negotiable shares held will not

Communications November 8, 2007 4,540,000 be listed, traded or assigned within 12

Group Co., Ltd., November 8, 2008 17,693,565 months from the date of obtaining the

right of listing and negotiation. Upon the

Zhuhai Putian Peace 21,907,200 November 8, 2006 4,540,000 expiration of the said commitment

Telecommunications November 8, 2007 4,540,000 period, the proportion of the quantity

Industry Co., Ltd. November 8, 2008 12,827,200 of original non-negotiable shares

traded through stock exchange to the

total shares of the Company shall not

exceed 5% within 12 months and 10%

within 24 months.



(Cont`d)

Name of shareholder Quantity ofshares Time when shares Quantity of additional Conditions

subjectto sale can be listed shares that can be of sale restriction

restriction(share) and traded listed and traded

Beijing Xinjietong Mobile . 2,915,255 November 8, 2006 2,915,255 The non-negotiable shares held

Communication will not be listed, traded or

Technology Co., Ltd assigned within 12 months from

the date of implementation of

the reform plan.

Zhuhai Fuchun 1,831,305 November 8, 2006 1,831,305 Ditto

Communication

Equipment Co., Ltd.

Zhou Zhongguo 701,715 November 8, 2006 701,715 Ditto

Shi Jixing 467,810 November 8, 2006 467,810 Ditto

Yang Youwei 467,810 November 8, 2006 467,810 Ditto

Zheng Guomin 467,810 November 8, 2006 467,810 Ditto

Zhang Peide 467,810 November 8, 2006 467,810 Ditto

Huang Ningzhai 467,810 November 8, 2006 467,810 Ditto



I. Directors, supervisors and senior executives

(�) Basic information

Name Sex Age Position Period of office Quantity of shares Increase/decrease Quantity of shares

held at the beginning in current held at the end

of year (shares) period (shares) of year (share)

Zhou Zhongguo Male 38 Chairman of the February 2004 to 809,340 -107,625 701,715

board of directors� the present

President November 2001

to the present

Yang Youwei Male 62 Vice chairman of November 2001 539,560 -71,750 467,810

the board of directors to the present

Zheng Guomin Male 61 Director November 2001 539,560 -71,750 467,810

to the present

Zhang Zexi Male 50 Director September 2004 0 0 0

to the present

Ni Shouping Female 41 Director November 2001 0 0 0

to the present

Jin Weimin Male 43 Director April 2005 to the present 0 0 0

Zhu Wuxiang Male 41 Independent director December 2002 0 0 0

to the present

Fan Lian Female 58 Independent director December 2002 0 0 0

to the present

Dai Xiangbo Male 44 Independent director May 2004 to the present 0 0 0

Shi Wenzhong Male 39 Chairman of the September 2004 to 0 0 0

supervisory committee the present

Li Saixiong Female 58 Supervisor October 2002 to 0 0 0

the present

Huang Jinye Female 39 Supervisor November 2001 0 0 0

to the present

Wang Jianbo Male 46 Supervisor December 2002 0 0 0

to the present

Zhou Yongjian Male 47 Supervisor November 2001 0 0 0

to the present

Zhang Peide Male 46 Vice president November 2001 539,560 -71,750 467,810

to the present

Zhang Xiaochuan Male 35 Vice president and November 2001 335,580 -44.625 290,955

the secretary to the to the present

board of directors

Huang Ningzhai Male 36 Vice president November 2001 539,560 -71,750 467,810

to the present

Li Haijiang Male 35 Financial controller September 2004 335,580 -44,625 290,955

to the present

Total 3,638,740 -367,545 3,154,865

[Note] The shares of the Company held by the aforementioned directors, supervisors and senior executives of the Company are promoter's

natural person shares. Other directors, supervisors and other senior executives do not hold the shares of the Company. The change in the

shares held by the directors, supervisors and senior executives of the Company in the report period is caused by the payment of

consideration by the original shareholders holding non-negotiable shares to the original shareholders holding negotiable shares after the

implementation of the plan for share holding structure reform.

Section 4 Directors, Supervisors, Senior Executives and Employees


(II) The positions held by the directors and supervisors at corporate shareholders

Name Corporate shareholder Position Term of office

Zheng Guomin Putian East Communications Chairman of the board March 2005 to the present

Group Co., Ltd., of directors

Zhuhai Putian Peace Telecommunications Director January 2001 to the present

Industry Co., Ltd.

Zhang Zexi Putian East Communications President March 2005 to the present

Group Co., Ltd.,

Ni Shouping Putian East Communications Vice president and chief April 1999 up to the present

Group Co., Ltd., accountant

Zhuhai Putian Peace Telecommunications Chairman of the March 2005 to the present

Industry Co., Ltd. board of directors

Zhou Zhongguo Zhuhai Putian Peace Telecommunications Director January 2001 to the present

Industry Co., Ltd.

Yang Youwei Zhuhai Putian Peace Telecommunications Vice chairman of the November 2001 to the present

Industry Co., Ltd. board of directors

Jin Weimin Zhuhai Putian Peace Telecommunications Director January 2005 to the present

Industry Co., Ltd.

Shi Wenzhong Putian East Communications General manager August 1999 up to the present

Group Co., Ltd., of Personnel &

Administration Dept.

Li Saixiong Beijing Xinjietong Mobile Communication Deputy general manager January 2002 to the present

Technology Co., Ltd.

Huang Jinye Zhuhai Putian Peace Telecommunications Director November 2001 to the present

Industry Co., Ltd.

(III) The main work experience of current directors, supervisors and senior executives and the posts or concurrent posts

held by them at the units other than corporate shareholders

1. Directors

Zhou Zhongguo: He once served as assistant general manager and User Dept. and branch factory manager of Hangzhou Communica-

tion Equipment Factory. He now serves as chairman of the board of directors and president of the Company and concurrently serves as

member of editorial committee of Gold Card Engineering, member of standing committee of Zhuhai Xiangzhou District, NPC deputy of

Zhuhai and vice chairman of Zhuhai Association of Industry and Commerce.

Yang Youwei: He once served as director of Research Office of No. 20 Research Institute of Ministry of Electronic Industry, deputy

chief of Science and Technology Division, governor assistant and economic commission director of Xiangzhou District, Zhuhai and

general manager of Xiangzhou District Industrial Development Corporation. He now serves as board chairman of Zhuhai Special

Economic Zone Kehui Enterprise Group Co., Ltd. and vice board chairman of the Company.

Zheng Guomin: He once served as deputy director of No. 1 Research Institute, director of Product Research Institute and deputy

manager of Hangzhou Communication Equipment Factory, vice president of Putian East Communications Group Co., Ltd.,, general

manager of Eastcom Network Equipment Company, president of Putian East Communications Group Co., Ltd.,, board chairman of

Peace Communication Co., Ltd. and board chairman of the Company. He now serves as director of the Company.

Zhang Zexi: He once served as deputy director of Production Dept., chief of Production Division and Operation Division and executive

deputy general manager of System Dept. of Hangzhou Communication Equipment Factory, vice president and general manager of

System Marketing Dept. and executive vice president of Peace Communication Co., Ltd. and vice president of Putian Peace Communi-

cation Group Company. He now serves as director of the Company.

Ni Shouping: He once served as director of Finance Dept. of Peace Communication Co., Ltd. and chief accountant of Putian East

Communications Group Co., Ltd., He now serves as director of the Company.

Directors, Supervisors, Senior Executives and Employees


Jin Weimin: He once worked at Zhuhai Radio Factory and Production Section of Xiangzhou District Economic Committee and served

successively as deputy general manager of Zhuhai Special Economic Zone Kehui Group, board chairman, general manager and

secretary of Party branch of Zhuhai Nanli Group Company, secretary of Party committee of Xiangzhou District Invest-

ment Management Company and board chairman and general manager of Xiangzhou Sanye Holding Co., Ltd. He now

serves as board chairman and general manager of Zhuhai Xiangzhou Zhengfang Holding Co., Ltd. and director of the Company.

Zhu Wuxiang: He was once a professor of Corporate Finance and Investment Banking of Economic Management School of

Tsinghua University. He now serves as independent director of Zhongxing Communication, Beijing Sanyuan Food, Zhejiang

Tengda Construction and the Company.

Fan Lian: He once served as deputy chief and factory office director of Technical Inspection Section of Shanghai Far East Filleting

Factory, manager of Comprehensive Dept. of Union Developing Investment Co., Ltd., deputy director of Assets Operation

Dept. of Union Developing Group Co., Ltd. and deputy general manager of Huaye Textile Dyeing Co., Ltd., executive

deputy general manager and general manager of Union Holdings Co., Ltd.. He now serves as deputy chief economic engineer of

Union Developing Group Co., Ltd., vice board chairman of Union Holdings Co., Ltd., vice board chairman and financial controller of

Zhejiang Union Sanxin Petrochemical Co., Ltd. and independent director of the Company.

Dai Xiangbo: He served successively as leading section staff of No. 2 Division of Zhejiang Audit Department, deputy director general

of Zhejiang Xianju County Audit Bureau and deputy chief of Law Division of Zhejiang Audit Department. He now serves as deputy

secretary general of Zhejiang Certified Accountants Association and concurrently serves as director of Zhejiang Accounting

Society, specially engaged professor of Accounting School of Zhejiang Economics and Finance College, independent non-execu-

tive director of Shenzhou International Group Holding Co., Ltd. (stock code at HKSE: 2313) and independent director of the

Company.

2. Supervisors

Shi Wenzhong: He served successively as deputy director of office of Program Control and Manufacturing Dept. of Hangzhou Commu-

nication Equipment Factory, deputy general manager of Human Resource Dept. of Julong Communication Equipment Co., Ltd. and

office director of Eastcom Group Network Equipment Company. He now serves as the chairman of the supervisory committee of the

Company.

Li Saixiong: He once served as accountant of Shandong Juye Post and Telegraph Office and Beijing Telecommunication

Administration and deputy director of Liaison Office of Guangdong Telecommunication Company in Beijing. He now serves as super-

visor of the Company.

Huang Jinye: He once served as teacher of Zhuhai Tangjia Middle School, office director of Xiangzhou District Industry Bureau and

office director of Xiangzhou Zhengfang Holding Co., Ltd. He now serves as deputy general manager of Xiangzhou Zhengfang Holding

Co., Ltd. and supervisor of the Company.

Zhou Yongjian: He once served as quality inspector of Quality Inspection Dept. and business manager of Human Resource Dept. of

Putian East Communications Group Co., Ltd., He now serves as general manager of Human Resource Dept. and employee supervisor of

the Company.

Wang Jianbo: He once served as technician of No. 132 Regiment of No. 8 Agricultural Division of Xinjiang Production and Construc-

tion Corps, chief of Personnel Section of Xinjiang Shihezi Tonglian Industrial Company and office director of Zhuhai Xiyada Commu-

nication Equipment Co., Ltd. He now serves as general manager of Comprehensive Management Dept. and employee supervisor of the

Company.

3. Senior executives

Zhang Peide: He once served as office director of No. 20 Research Institute of Ministry of Electronic Industry, general manager of Xi'an

Tengqiang Electronic Co., Ltd., deputy general manager of Zhuhai Special Economic Zone Kehui Enterprise Group Co., Ltd., general

manager of Zhuhai Xiyada Communication Equipment Co., Ltd. and director of the Company. He now serves as vice president of the

Company.



Zhang Xiaochuan: He once served as president secretary, director if Enterprise Management Dept. and deputy general manager of

investment management company of Putian East Communications Group Co., Ltd., and director of the Company. He now serves as vice

president and board secretary of the Company.

Huang Ningzhai: He once served as chief of Process Section of Hangzhou Communication Co., Ltd., business manager of Putian East

Communications Group Co., Ltd., and chief engineer of the Company. He now serves as vice president of the Company.

Li Haijiang: He once served as accountant and business manager of Planning & Finance Dept. and general manager of Finance Dept. of

Putian East Communications Group Co., Ltd., and the chairman of the supervisory committee of the Company. He now serves as

financial controller of the Company.

(IV) Annual remuneration of directors, supervisors and senior executives

1. The remuneration of directors, supervisors and senior executives who receive remuneration from the Company is determined accord-

ing to the Proposal Concerning Remuneration of Directors and Supervisors passed by the shareholders' general meeting. Except that indepen-

dent directors receive allowance for independent directors according to Guiding Opinions on Independent Directors and Independent Director's

Work System of the Company, all other directors and supervisors of the Company do not receive remuneration from the Company.

2. The Company provides allowance to independent directors according to the Proposal Concerning Remuneration of Independent

Directors passed at the 4th meeting of the fourth board of directors.

3. The remuneration obtained by directors, supervisors and senior executives from the Company in the report period (Unit: RMB)

Name Position Total amount Whether receiving remuneration

of remuneration or allowance from corporate

shareholders or other related units

Zhou Zhongguo Board chairman and president 515,795.00 No

Yang Youwei Vice board chairman -- Yes

Zheng Guomin Director -- Yes

Zhang Zexi Director -- Yes

Ni Shouping Director -- Yes

Jin Weimin Director -- Yes

Zhu Wuxiang Independent director 36,000.00 No

Fan Lian Independent director 36,000.00 No

Dai Xiangbo Independent director 36,000.00 No

Shi Wenzhong Chairman of the supervisory -- Yes

committee

Li Saixiong Supervisor -- Yes

Huang Jinye Supervisor -- Yes

Wang Jianbo Supervisor and manager 96,855.00 No

of Comprehensive Management Dept.

Zhou Yongjian Supervisor and manager 93,645.00 No

of Human Resource Dept.

Zhang Peide Vice president 339,495.00 No

Zhang Xiaochuan Vice president and board secretary 288,855.30 No

Huang Ningzhai Vice president 319,545.00 No

Li Haijiang Financial controller 194,905.00 No

Total 1,957,095.30



[Note 1] The said remuneration is before-tax remuneration.

[Note 2] Board chairman Zhou Zhongguo did not receive remuneration for board chairman. Employee supervisors Zhou Yongjian and

Wang Jianbo did not receive remuneration for supervisors.

4. The directors and supervisors who did not receive remuneration or allowance from the Company include Zheng Guomin, Yang

Youwei, Ni Shouping, Zhang Zexi, Jin Weimin, Shi Wenzhong, Huang Jinye and Li Saixiong. The above personnel received remunera-

tion or allowance from corporate shareholders or related units. Refer to the following table for details:

Name Name of corporate shareholder or related unit for receiving remuneration

Zheng Guomin Putian East Communications Group Co., Ltd.,

Yang Youwei Zhuhai Special Economic Zone Kehui Enterprise Group Co., Ltd.

Zhang Zexi Putian East Communications Group Co., Ltd.,

Ni Shouping Putian East Communications Group Co., Ltd.,

Jin Weimin Zhuhai Xiangzhou Zhengfang Holding Co., Ltd.

Shi Wenzhong Putian East Communications Group Co., Ltd.,

Li Saixiong Beijing Xinjietong Mobile Communication Technology Co., Ltd.

Huang Jinye Zhuhai Xiangzhou Zhengfang Holding Co., Ltd.

(V) Notes to the change in directors, supervisors and senior executives of the Company in the report period

In April 2005, Mr. Zheng Guoliang, a director of the Company, resigned from directorship due to work transfer. Upon nomination by the

4th meeting of the second board of directors of the Company and election at 2004 annual shareholders' general meeting of the Company,

Mr. Jin Weimin was officially elected as a director of the second board of directors of the Company in April 2005.

In the report period, no supervisor was elected or left his post. Nor was any senior executive appointed or dismissed.

II. The employees of the Company

1) The total number of on-roll employees of the Company was 1284 at the end of the report period.

2) The structure of the Company's employees is shown in the following table:

Speciality division Production Sales Technical Financial Administrative

personnel personnel personnel personnel personnel

Number of persons 886 51 244 13 90

Proportion (%) 69% 4% 19% 1% 7%

Education status Master and Regular university Junior college Senior high

above graduate graduate school graduate

Number of persons 22 169 273 820

Proportion (%) 2% 13% 21% 64%

3) The Company has no retired staff and workers.



I. Status quo of corporate governance

The Company has strictly implemented the Company Law, the Securities Law, Guidelines for Governance of Listed Companies and

Stock Listing Rules of Shenzhen Stock Exchange, constantly improved its corporate governance structure and facilitated its standard-

ized operation. In the report period, the Company amended relevant articles of the Articles of Association of the Company, revised the

Rules of Procedure of Shareholders' General Meeting, Rules of Procedure of the Board of Directors and Rules for Decision on Related

Transactions, formulated and improved rules and regulations on corporate governance and further strengthened information disclosure

and investor relationship management in the light of its actual conditions. The status of corporate governance structure of the Company

basically meets the requirements of Guidelines for Governance of Listed Companies:

(I) Shareholders and shareholders' general meeting: The Company regulates the convening, holding voting procedures of shareholders'

general meetings strictly according to the Opinions on Standards for Shareholders' General Meetings and Rules of Procedure of Share-

holders' General Meeting, treats all shareholders equally, guarantees shareholders' right to know and participate in important matters of

the Company and ensures shareholders, especially middle and small shareholders, can fully exercise their rights.

(II) Relationship between the controlling shareholder and the Company: The controlling shareholder of the Company acts in a standard-

ized way and exercises its rights and assumes corresponding obligations according to law. It has neither directly or indirectly interfered

with the Company's decision making and operating activities nor harmed the lawful rights and interests of the Company or other

shareholders. The Company has the ability of independent operation. The board of directors, the supervisory committee and relevant

internal organs are able to operate independently and free from the controlling shareholder's intervention.

(III) Directors and the board of directors: The Company elects directors strictly according to the director selection and appointment

procedure specified in the Company Law and the Articles of Association of the Company. In director election, cumulative voting system

is adopted to guarantee fair, impartial and open election. The board of directors convenes and organizes meetings according to the

Company Law and Rules of Procedure of the Board of Directors, exercises powers and functions according to law and enables directors

of the Company to exercise powers effectively, honestly and diligently.

(IV) Supervisors and the supervisory committee: The supervisory committee of the Company elects supervisors strictly according to the

supervisor selection and election procedure specified in the Articles of Association of the Company and Rules of Procedure of the

Supervisory Committee. The composition of members of the supervisory committee meets statutory requirements. The supervisors and

employee supervisors of the Company have duly performed their duties, supervised the financial position of the Company and the legal

compliance of the duty performance of directors, managers and other senior executives and duly performed the responsibilities of the

supervisory committee.

(V) Performance appraisal and stimulation and restriction mechanism: The Company is gradually improving performance evaluation

system for directors, supervisors and senior executives. The appointment of managerial personnel of the Company is open and transpar-

ent and meets the requirements of relevant laws and regulations.

(VI) Information disclosure and transparency: The Company has strictly implemented Regulations on Management of Information

Disclosure, designated the secretary to the board of directors to be responsible for information disclosure, opened special telephone and

email for investors and created a special page about relationship with investors on its website to enhance the transparency of its

operation. The Company held online annual report briefing and the meeting of online communication between investors in respect of

share holding structure reform respectively on March 10, 2005 and September 30, 2005 so as to help shareholders holding negotiable

shares know more about the Company. In 2005, the Company truly, accurately, completely and timely disclosed relevant information

strictly according to relevant regulations to ensure all shareholders could obtain information with equal opportunities.

Section 5 Corporate Governance Structure


(VII) Interested parties: The Company is able to fully respect and safeguard the lawful rights and interests of interested parties, actively

cooperates with interested parties, strengthen the communication and exchange between all parties, realize the balance of interests of all

interested parties including shareholders, employees and the society and seek joint promotion of its sustained and healthy development.

To sum up, the actual condition of corporate governance basically meets the requirements of regulatory documents on governance of

listed companies issued by CSRC. According to the requirements of Guidelines for Governance of Listed Companies and Stock Listing

Rules (revised in 2005), the Company will continue to unceasingly perfect and improve internal rules and regulations on corporate

governance, strengthen standardized operation and promote its continuous and steady development.

II. Particulars about duty performance of the independent directors of the Company

In accordance with Guiding Opinions on the Establishment of Independent Director System at Listed Companies, the independent

directors of the Company, i.e., Mr. Zhu Wuxiang, Ms Fan Lian and Mr. Dai Xiangbo, earnestly and diligently performed the duties

specified in Independent Director's Work System of the Company, timely attended board meetings held in the report period, seriously

examined all proposals, made independent, objective and fair judgment based on their own expertise and ability, kept full independence

in work and effectively safeguarded the interests of the Company and middle and small shareholders. In the report period, they expressed

objective and fair opinions on the matters requiring their opinions including the external guarantee on accumulative basis and in current

period, status of fund occupation by related parties, remuneration of directors, supervisors and other senior executives, share holding

structure reform and revision of the plan for share holding structure reform.

(I) Board meeting attendance by independent directors:

Name The supposed times Attendance in Attendance Absence Remarks

of attendance person (times) through proxy (times)

this year (times)

Zhu Wuxiang 5 5 0 0

Fan Lian 5 4 1 0 Authorized independent director

Mr. Zhu Wuxiang to attend the 4th

meeting of the second board of directors

for work-related reason

Dai Xiangbo 5 4 1 0 Authorized independent director Mr. Zhu

Wuxiang to attend the 4th meeting of

the second board of directors for

work-related reason

(II) Objection made by independent directors to relevant matters of the Company

In the report period�the current 3 independent directors of the Company did not make objection to the proposals of the board of

directors or other issues of the Company.

III. Notes to the separation of the Company from its controlling shareholder in respect of business, personnel,

assets, organs and finance

The Company is completely separated from its controlling shareholder in respect of business, personnel, assets, organs and finance and

has independent and complete assets and business and the ability of being oriented toward market and operating independently.

Corporate Governance Structure


(I) Independent business

At present, the Company is engaged in R&D, production and sales of high-end smart card products including smart card and supporting

application system. The controlling shareholder Eastcom Group is not engaged in production and sales of relevant products. The

Company has completely independent business operation system and its operating profit does not depend on the related transactions

with shareholders and other related parties. Meanwhile, it is not restricted by the shareholders and other related parties of the Company.

(II) Complete assets

The Company owns complete assets, production equipment, auxiliary operating equipment and patents matching the scope of produc-

tion and operation and the title certificate of the said assets. No asset of the Company is mortgaged or pledged and the Company owns

complete ownership to its assets. The Company's assets are independent of the controlling shareholder, other promoters and sharehold-

ers of the Company. Up to the present, the Company has not provided guarantee for liabilities of shareholders with assets or credit. It has

full right of control and disposition of all assets. The occupation of assets and funds of the Company by the controlling shareholder and

the corresponding harm of the interests of the Company do not exist.

(III) Independent personnel

The directors (including independent directors), supervisors and senior executives of the Company are elected or appointed strictly

according to relevant provisions of the Company Law and the Articles of Association of the Company. The Company's personnel and

wage management is strictly separated from that corporate shareholders. The current senior executives and core technical personnel

including general manager, deputy general manager, person in charge of financial affairs and board secretary of the Company work at

the Company on full-time basis and receive remuneration. They do not concurrently hold posts at and receive remuneration from related

enterprises. The appointment and dismissal of the senior executives of the Company is decided by the board of directors of the Company

through legal procedure. The controlling shareholder does not interfere with the decision on personnel appointment and dismissal. The

Company has independent employees and has established sound employment and personnel management system. The Company has

signed labor contract with all employees and paid social insurance premiums according to national laws and regulations. The Company

owns independent right of employment and is free from the controlling shareholder's interference.

(IV) Independent organs

According to the Articles of Association of the Company, the Company has shareholders' general meeting, board of directors, supervi-

sory committee and general manager. Each organ is independent of the controlling shareholder and other shareholders and exercises its

functions and powers according to law. The Company, the controlling shareholder and other shareholders own respective offices and

operation places. The Company has established relatively efficient and sound organizational structure, owns complete purchase, pro-

duction and sales system and supporting facilities. All departments have formed an organic whole. The controlling shareholder and other

shareholders have never interfered with the normal production and business activities of the Company since its establishment.

(V) Independent finance

The Company has set up independent financial and accounting department and opened independent bank accounts. It neither shares

bank accounts with the controlling shareholder Eastcom Group nor deposits funds into the account of the finance company or settlement

center of the controlling shareholder. The Company has established independent accounting system and regulations on financial manage-

ment and is able to make financial decisions independently. The controlling shareholder does not interfere with the Company's financial

decision and fund utilization. The Company independently makes tax declaration and performs tax obligation according to law.

IV. Appraisal of and stimulation mechanism for senior executives in the report period

The board of directors is responsible for appraising the responsibilities, abilities and work performance of the general manager. The

general manager is responsible for appraising other senior executives of the Company mainly according to the indicators of fulfillment

of annual target and by considering the performance of operation management and relevant tasks. According to appraisal, the general

manager and other senior executives of the Company seriously performed their responsibilities and obtained good working results in

2005.

Corporate Governance Structure


Section 6 Brief Introduction of Shareholders' General Meeting

I. Holding of the meeting

In the report period, the Company held two shareholders' general meetings in total, i.e., 2004 annual shareholders' general meeting and

the shareholders' meeting concerning share holding structure reform. Shareholders' general meetings were notified, convened and held

strictly according to the procedure and requirements set forth in the Company Law and the Articles of Association of the Company. Mr.

Lu Chonghua, a lawyer of Zhejiang Tiance Law Office attended and witnessed the shareholders' general meetings and issued legal

opinion. The particulars are as follows:

1. Annual shareholders' general meeting

2004 annual shareholders' general meeting was held in Qianxi Palace meeting room, 3/F, 2000 Hotel, 121 Renmin Road East, Xiangzhou,

Zhuhai on April 7, 2005. 13 shareholders and shareholders' authorized representatives attended this meeting. This meeting was con-

vened by the board of directors and presided over by vice board chairman Mr. Yang Youwei. Directors, supervisors, senior executives,

sponsoring representative and the witnessing lawyer engaged by the Company attended the meeting. The meeting voted through Work

Report of the Board of Directors for 2004, Work Report of the Supervisory Committee for 2004, Final Accounting Report for 2004,

Annual Report 2004 and Its Summary, Profit Distribution Preplan for 2004, the Proposal for Amending the Articles of Association of the

Company, the Proposal for Revising Rules of Procedure of the Board of Directors, the Proposal for Revising the Proposal Concerning

Rules on Rules of Decision on Related Transactions, the Proposal for Replacing Directors and the Proposal Concerning Remuneration

and Engagement Renewal of Certified Public Accountants.

The resolutions of this meeting was published on Securities Times, China Securities Journal and www.cninfo.com.cn on April 8, 2005.

II. The shareholders' meeting in 2005 concerning share holding structure reform

On October 28, 2005, the Company held a shareholders' meeting concerning its A shares to examine the Plan for Share Holding

Structure Reform of Eastcompeace Smart Card Co., Ltd. The meeting was held in the mode combining on-the-spot voting, online voting

and entrusting the board of directors to vote. The on-the-spot meeting was held in the afternoon of October 28, 2005. The time for online

voting: October 26, 2005 to October 28, 2005. The venue of the on-the-spot meeting: Qianxi Palace meeting room, 3/F, 2000 Hotel, 121

Renmin Road East, Xiangzhou, Zhuhai. The convener of the meeting is the board of directors of the Company. The on-the-spot meeting

was presided over by board chairman Mr. Zhou Zhongguo. 1286 shareholders attended the on-the-spot meeting and participated in

online voting in person or through proxies, representing 73,978,841 shares in total which account for 81.47% of the total share capital of

the Company (90.80 million shares). The number of shareholders holding negotiable shares is 1277. They represented 8,178,841 shares,

which account for 32.72% of total number of negotiable shares of the Company (25 million shares) and 9.01% of the total share capital

of the Company (90.80 million shares). The holding of this shareholders' meeting complied with the provisions of laws, regulations and

regulatory documents including, the Company Law, Opinions on Standardization of Shareholders' General Meeting of Listed Companies,

Stock Listing Rules of Shenzhen Stock Exchange and the Articles of Association of the Company. The meeting examined and adopted

the Plan for Share Holding Structure Reform of Eastcompeace Smart Card Co., Ltd.

The announcement of the voting result of this meeting was published on Securities Times, China Securities Journal and www.cninfo.

com.cn on October 31, 2005.


I. Review of the operating status of the Company in the report period

(I) Overall operating status of the Company in the report period

Due to constant intensification of competition in domestic market of smart card for mobile communication in the report period, the

selling price of the key products of the Company fell to different extent. The decline of product sales cost lagged behind. As a result, the

gross profit rate of the leading products of the Company, i.e., SIM card, stored value card and rechargeable card, dropped by 5.2%, 3.8%

and 0.9% respectively over the previous report period. The comprehensive gross profit rate of products for the year dropped by 3.2%

over the previous report period. The decrease of income and profit from smart card products for domestic mobile communication

seriously affected the Company's overall profitability so that the total profit, net profit and earnings per share of the Company decreased

by over 50% year on year. Facing difficulties, the Company unceasingly strengthened technical renovation for production, marketing,

product R&D and internal management, further increased its market share, constantly enhanced its position in the industry and enlarged

its influence so as to have great competitive advantage in respect of technical service, product quality and selling price. In the report

period, product sales volume increased by 180 million sheets and 40.85% year on year. However, due to the fall of selling price of

products and gross profit rate, income from main operation was RMB 647.63 million, a decrease of 1.29% year on year. Profit from main

operation and total profit were RMB 98.04 million and RMB 13.49 million respectively, a respective year-on-year decrease of 20.35%

and 71.38%.

Based on continuing to focus on the key business, the Company increased investment in technology and market of trans-field products

with high added value including bank card, social insurance card and second generation ID card, strived to shorten the cycle of R&D,

production and marketing of new products and created new channels for profit growth in the report period. Meanwhile, it gave full play

to its advantage in respect of manufacturing and services and quickened the implementation of its internationalization strategy by

actively using its Singapore subsidiary as a sales and service platform for its internationalization strategy.

As for internal management, the Company comprehensively reduced cost by actively taking measures including widening of purchase

channels, tendering and bidding management of suppliers, perfection of internal control system and tapping of internal potential,

vigorously implemented budget inquiry management system and constantly strengthened cost management and control so as to effec-

tively control routine expenses under the circumstance of enlargement of production and operation scale, increase of personnel and year-

by-year growth of investment in new product market development and technology R&D.

In the report period, the Company actively broadened sources of income and reduced expenditure, unceasingly strengthened the inten-

sive management of accounts receivable and inventories, established payment recovery tracing responsibility system, established long-

term strategic cooperation relationship with suppliers, intensified inventory management so as to greatly lower the risks of accounts

receivable and material inventory. Meanwhile, net cash flow from business activities also greatly increased by 447 times year on year

and reached RMB 155 million.

(II) Continuity and stability of the Company's operation and profitability

As of December 31, 2005, the assets-liabilities ratio of the Company (parent company) was 26.3%, being on a reasonable level. Its

current ratio was 2.90. There is no risk of short-term debt service. The investment of raised funds greatly enhanced the quality of the

Company's assets on the whole and optimized its financial position. The operating cash flow of the Company was relatively normal,

stable and abundant. The net amount of the Company's cash flows from operating activities was RMB 155,043,468.93 in 2005. Normal,

stable and abundant operating cash flow can effectively meet the demand of the Company's normal production and operation and

repayment of due debts.

The Company's main operation made smooth progress. Its income from main operation in the recent three years was RMB 598,965,329.49,

RMB 656,080,479.97 and RMB 647,634,721.69 respectively. Income from main operation has kept the trend of continuous and steady

growth. Despite certain decline of gross profit rate of the Company's main operation due to fierce market competition in the recent three

years, the Company has occupied stable market share and owned highly loyal customer base. Its market share will keep steady growth

in quite a long time.

Section 7 Report of Board of Directors


At present, the products of the Company are sold in over 20 countries and regions. With the rapid development of world economy, smart

card and relevant products have made quite great progress. Many favorable factors including the further development of domestic and

international mobile communication market, application of financial IC card and EMV transfer, issue of second generation identity card

in large quantity and the start of third generation mobile communication will guarantee the continuity and stability of the Company's

operation and profitability.

(III) The main advantages of the Company and existing difficulties

1. Main advantages

The Company has focused on smart card since the start of production. It occupies leading position in the industry in respect of technol-

ogy reserve, production scale, production process and product quality. The Company owns a powerful marketing team so as to ensure

the stable growth of market share of products. After successful listing, the Company owns rich funds, which effectively guarantees its

future development.

2. Main difficulties

The gross profit rate of key products fell. Due to the competition in domestic market of smart card for mobile communication was

intensified, the selling price of the key products of the Company declined to different extent while the lowering of sales cost lagged

behind. As a result, the overall profitability of the Company was seriously affected;

The product structure of the Company is relatively single. At present, the key product of the Company is still smart card for mobile

communication. Its ability of resisting and eliminating industrial risks is insufficient. The Company will further increase investment in

finance and identification and optimize product structure based on continuing to enlarge the market share of smart card products.

(IV) Scope of main operation and its operating status

The Company is engaged in smart card industry. The Company's main operation: Production and sales of smart card for mobile

communication, non-contact smart card and supporting application system and other high-end products.

1. Table of the status of main operation in terms of business line and product

In terms of business Income from Cost of main Rate of profit from Increase/decrease Increase/decrease Increase or decrease

line or product main operation operation main operation (%) of income from main of cost of main of rate of profit from

operation over the operation over the main operation over

previous year (%) previous year (%) the previous year (%)

Smart card 647,634,721.69 545,675,768.13 15.74 -1.29 2.61 -3.20

Including�Related transactions 4,751,926.00 2,501,697.45 47.35 25.97 -21.64 31.99

SIM card 430,995,514.77 371,740,284.87 13.75 0.34 7.73 -5.91

Stored value card 50,929,014.24 43,661,387.49 14.27 -40.37 -37.15 -4.40

Rechargeable card 128,343,884.52 106,907,661.09 16.70 2.56 0.37 1.81

Second generation ID card 18,518,784.49 10,451,290.40 43.56 2,845.61 2,523.57 6.92

Other products 18,847,523.67 12,915,144.28 31.48 22.50 24.92 -1.32

Including�Related transactions 4,751,926.00 2,501,697.45 47.35 25.97 -21.64 31.99

2. Main suppliers and customers

Total amount of purchase from RMB 249.5196 million Proportion to total 72.7%

the top five suppliers purchase amount

Total amount of sales to the RMB 282.5157 million Proportion tototal 43.99%

top five customers sales amount

Report of Board of Directors


3. The status of main operation in terms of area

Area Income from main operation Increase/decrease of

income from main operation

over the previous year (%)

Within China 514,011,282.11 -3.82

Outside China 133,623,439.58 9.86

4. Notes to change in main operation or business structure and profitability in the report period

Due to constant intensification of competition in domestic market of smart card for mobile communication in the report period, the

selling price of the key products of the Company fell to different extent. The decline of product sales cost lagged behind. As a result, the

gross profit rate of the leading products of the Company, i.e., SIM card, stored value card and rechargeable card, dropped by 5.2%, 3.8%

and 0.9% respectively over the previous report period. The comprehensive gross profit rate of products for the year dropped by 3.2%

over the previous report period. The decrease of income and profit from smart card products for domestic mobile communication

seriously affected the Company's overall profitability so that the total profit, net profit and earnings per share of the Company decreased

by over 50% year on year.

5. Notes to material year-on-year change of asset composition of the Company in the report period

Indicator End of 2005 End of 2004 Year-on-year Proportion of year-

increase or decrease on-year increase

or decrease (%)

Total assets 539,652,211.01 606,849,386.28 -67,197,175.27 -11.07

Monetary capital 219,717,939.91 128,343,645.71 91,374,294.20 71.2

Subsidy receivable 8,735.40 2,981,309.71 -2,972,574.31 -99.71

Inventories 105,620,721.97 287,746,862.79 -182,126,140.82 -63.29

Long-term equity investment 3,003,554.23 -- 3,003,554.23 --

Intangible assets 5,311,847.23 1,248,496.62 4,063,350.61 325.46

Shareholders' equity 398,045,399.84 410,335,494.45 -12,290,094.61 -3.00

1) Monetary capital increased by RMB 91.37 million and 71.2% year on year mainly because the Company unceasingly strengthened

intensive management of accounts receivable and inventories, established payment recovery tracing responsibility system and actively

and effectively reduced inventories.

2) The export rebate in 2005 was RMB 8.97 million, which increased by RMB 1.77 million over the previous year. Year-end subsidy

receivable decreased by about RMB 3 million year on year mainly because export rebate receivable was recovered at end of year.

3) Inventories decreased by RMB 180 million and 63% over the end of previous year mainly because the Company strengthened

intensive management of inventories, established long-term strategic cooperation relationship with suppliers and conducted localized

purchase and zero inventory management to effectively prevent risks and cutting inventories.

4) Long-term equity investment increased by RMB 3 million over the previous year. According to the resolutions of the 10th meeting of

the first board of directors, the Company increased the capital of Eastcompeace Smart Card (Singapore) Pte. Ltd. by USD 0.4 million

with self-owned cash, which accounts for 80% of its registered capital.

5) Year-end intangible assets increased by RMB 4.06 million year on year due to the Company's purchase of the land use right of phase-

II Zhuhai Science and Technology Innovation Coast covering 34,000 square meters in the report period.



6) Shareholders' equity decreased by RMB 12.29 million over the end of the previous year mainly because the Company paid cash

dividends of RMB 2.5 for every 10 shares, i.e., RMB 22.70 million in total, to all shareholders according to the resolutions of 2004

annual shareholders' general meeting on March 1.

6. Notes to material year-on-year change of main financial data of the Company in the report period

Indicator 2005 2004 Year-on-year Proportion of year-

increase or on-year increase

decrease or decrease (%)

Operating expenses 29,612,901.80 22,914,116.92 6,698,784.88 29.23

Administrative expenses 64,468,094.68 51,000,614.82 13,467,479.86 26.41

Financial expenses 780,532.31 2,657,742.43 -1,877,210.12 -70.63

Subsidy income 11,714,693.67 1,661,289.88 10,053,403.79 605.16

1) Operating expenses increased by RMB 6.7 million year on year mainly due to the following reasons: Product transportation expenses

increased by RMB 4.08 million and 31% year on year due to rapid growth of sales volume. Market development became more difficult

and personnel increased. The expenses of domestic and foreign market development in the year increased by about RMB 3 million over

the previous year.

2) Administrative expenses increased by RMB 13.47 million year on year due to the following two reasons: 1. As the subsidiary in

Singapore was included in consolidation scope, expenses increased by about RMB 6.3 million. 2. In order to consolidate assets and

stabilize operation, the Company made provision of RMB 10.59 million for diminution in value of inventories retained in the past and

those with net realizable value being below cost.

3) Financial expenses decreased by RMB 1.88 million year on year mainly due to the following reason: The Company temporarily

supplemented working capital with partial idle raised funds for two times in total amount of RMB 100million, reduced inventories,

purchase amount and money outflow so that its working capital was abundant. Loan interest decreased by RMB 1.99 million year on year.

4) Subsidy income increased by RMB 10.05 million year on year mainly due to the reduction of material purchase volume, decrease in

received VAT on purchase and increase in VAT paid for software products by RMB 14.20 million in the report year.

7. The main factors causing material year-on-year change in the Company's cash flow composition in the report period and notes to the

reason for material difference between cash flow from operating activities and net profit

Indicator 2005 2004 Year-on-year Proportion of year-

increase or on-year increase

decrease or decrease (%)

Net cash flows from 155,043,468.93 345,849.62 154,697,619.31 44,729.74

operating activities

Net cash flows from -38,662,570.83 -51,078,038.43 12,415,467.60 -24.31

investing activities

Net cash flows from -24,152,211.25 130,129,765.86 -154,281,977.11 -118.56

financing activities

Net increase in cash and 1,374,294.00 78,874,268.15 12,500,025.85 15.85

cash equivalents

1) In the report period, the Company's net cash flow from business activities sharply increased by 447 times year on year and reached

RMB 154.70 million mainly due to the Company's digestion of inventories, reduction of purchase amount and decrease in "cash paid for

goods and services" by RMB 189.25 million and 28.45% year on year.



2) Net cash flows from investing activities increased by RMB 12.42 million year on year mainly due to expenditure of RMB 23.70

million for the construction of phase-II factory building in 2004.

3) Net cash flows from financing activities decreased year on year mainly due to the raise of funds totaling RMB 244.85 million

through new issue in 2004.

4) The difference between net cash flow from business activities and the net profit for the report period is RMB 143.46 million mainly

due to the decrease in inventories by RMB 172.17 million year on year, provision of RMB 10.47 million for impairment of assets,

provision of RMB 26.31 million for depreciation of fixed assets and decrease in operating payables by RMB 61.40 million.

8. Analysis of operating status and results of main controlled subsidiaries and joint ventures

At present, the Company owns a controlled subsidiary with registered capital of Singapore dollar 0.5 million, namely, Eastcompeace

Smart Card (Singapore) Pte. Ltd. The Company holds 80% of its registered capital. Its business scope: Development of over-

seas market of smart card, support to customized solutions and relevant services. From February 2005, the Company included

it into the scope of consolidated statements. As of December 31, 2005, its income from main operation and total profit were

RMB 34,570,830.55 and RMB - 2,820,207.81 respectively.

II. Forecast of the Company's future development

(I) The development trend of the industry is engaged in and the situation of market competition confronted by the Company

2006 is the first year of the Eleventh Five-year Plan of China. Domestic economy will keep rapid growth at a rate of about 9%. The

economic growth will fully promote the development of electronic information industry and create good development opportunities for

smart card industry. Judging from global market, SIM card market will still keep strong growth in telecommunication field. EMV will

increase the issue quantity of bank smart cards in the world. Governmental and medical market has emerged. Technological innovation

will result in the rise in delivery volume of non-contact cards. The rapid development of domestic bank card, telecommunication card,

public security, identity management and traffic card has arrested world attention. Smart card industry will continue to have big

domestic and international market space and smart card purchase will keep steady growth.

In the smart card industry in which the Company is engaged, the market in multi-level and multi-application field is still developing

quickly. With the development of smart card industry, the degree of industrial concentration has been gradually enhanced. The

competition between smart card enterprises will be competition of comprehensive strength including new product R&D ability,

market development ability, product quality, etc.

(II) The Company's development strategy in the future

1. To continue to implement the strategy of leading market share and make all-out efforts to develop and enlarge new markets. To keep

the position of leading supplier in domestic mobile communication market, timely collect and analyze market information and further

strengthen domestic marketing and resource integration. To enlarge the scale of overseas operation, increase overseas operation income

and enhance the proportion of overseas operation income to all sales income. To closely follow the plan of Ministry of Public Security for

issuing second generation ID card, make reasonable and elaborate arrangement, ensure the fulfillment of the placed order of 20 million cards,

strive to make substantial breakthrough in the field of financial card application, actively develop financial card, strengthen demand

analysis of potential markets and open up new channels for profit growth.

2. To increase investment in technological development and quicken the establishment of technological innovation system. On the

one hand, the Company will quicken the tackling of technical problems of key development projects, promote result industrialization and

meet existing market demand. On the other, it will correctly position itself in respect of industry, market and technology, study the

bottleneck problems requiring settlement for enhancing technological innovation ability and overcome relevant weakness.

3. To strengthen strategic research and clarify industry development target. To enhance system integration degree and overall solution

ability, clarify industry development target, fully find potential market demand and create new value in the light of the Company's card

technology and products characterized by multi-industry and multiple application.

4. To always stress basic management and keep creative management abreast of times. To continue to unremittingly practice the concep-

tion of intensive management of each link and improve the efficiency and effect of "implementation". To strengthen the development of

professional and knowledgeable management team, unceasingly improve the development of talents of different levels and estab-

lish and improve stimulation and restriction mechanism fir senior executives and core personnel of the Company.



In addition, the Company will strengthen monitoring, optimize business flow, intensify the control of important links including purchase,

production and sales, financial budget and expense control, effectively lower operation cost and enhance work efficiency.

(III) Demand of funds necessary for realizing future development strategy, plan for fund use and fund sourceThe project of technical renovation of smart card production line and the project of Guangdong smart card engineering technology R&Dcenter under construction will use raised funds. In addition, with the further development of key business, fund demand will increase tocertain extent. In order to realize continuous, stable and healthy development of the Company, the above-mentioned fund demand will

be satisfied by self-owned funds and bank loans in the light of actual conditions.

(IV) Unfavorable factors that will adversely affect realization of the future development strategy and operation objective ofthe Company1. Fall of product priceThe Company comes out top in the industry in terms of both quality and output. However, due to the intensification of competition in

domestic market of smart card for mobile communication, the average selling price of the Company's leading products fell by bigmargin. In the future, the price of the Company's leading products may continue to fall, which will affect its future profitability to acertain extent.To deal with this unfavorable factor, the Company will further improve product quality and performance, enlarge product sales volumeand market share, strengthen management to lower product cost and enhance market competitiveness of existing products. Meanwhile,the Company will continue to increase science and technology input, enhance technological innovation ability, unceasingly develop new

products with high added value and reduce the adverse influence of product price fall on the attainment of the Company's operationobjective in the future.2. Fluctuation of price of main raw materials and concentration of supply channelsThe main raw materials of the Company, i.e., chips and modules, are mainly processed abroad or imported. Besides, the main suppliersof such raw materials are a few transnational companies in France and U.S. In 2005, the total amount of purchase from the top fivesuppliers was RMB 249.5196 million, accounting for 72.7% of total purchase amount. Therefore, the fluctuation of purchase price ofmain raw materials and the change in supply channels will directly affect the product cost of the Company.

To deal with this unfavorable factor, the Company has signed long-term supply contract and service agreement with foreign suppliers ofmain raw materials to ensure the stability of supply volume, price and main technical indicators and try to improve bargaining power onthe one hand. On the other, the Company will actively seek new supply channel to reduce the adverse influence of the manipulation ofraw material price by main suppliers.3. Talent bottleneckThe Company is still in growth stage at present. Enhancing the level of core technology and core competitiveness is still the main factor

that promotes the development of the Company. Therefore, the demand of high-quality talents with high specialized technologicalcapability and management level is still big. However, due to industrial and regional influence, the Company has met certain bottleneckin respect of introduction of talents, especially semi-senior/senior managerial and technical talents. The restriction of talent bottleneckwill affect the Company's long-term operation and future development.To deal with this unfavorable factor, the Company will increase investment in talent, focus on developing good human resource, retainand introduce semi-senior/senior technical and managerial talents, aim to establish expert-typed technical team and management team.

Meanwhile, it will establish and further improve existing stimulation mechanism, combine short-term stimulation and long-term incen-tive through high salary, linkage with performance and equity stimulation, break talent bottleneck, develop good human-orientedcorporate culture and strengthen the training of existing employees in respect of quality, technology and management ability to intensifyits cohesive force and stabilize its talent team.

III. Investment of the Company in the report period

(I) Investment with raised fundsThe status of use of raised funds in 2005: RMB 46.9748 million was directly invested in promised investment projects. As of December31, 2005, the Company had used raised funds of RMB 155.3742 million on accumulative basis. The amount of unused raised funds wasRMB 86.9747 million. The balance of the special account of raised funds of the Company on December 31, 2005 was RMB 60.4952million. The difference between this balance and the balance of unused raised funds was RMB 26.4795 million. The reasons for the

difference are follows:



(1) Temporarily supplementing working capital of RMB 40 million with idle raised funds according to the resolutions of 8th meeting of

the second board of directors of the Company;

(2) The accumulative bank deposit interest income was RMB 0.8846 million;

(3) Self-owned funds of RMB 12.6359 million were invested into some projects in initial stage, which, however, have not been

transferred out from the special account of raised funds.

1. The promised investment projects utilizing raised funds and use status of raised funds are as follows:

Unit: RMB million

Total amount of raised funds 242.3489 Total amount of raised funds 46.9748

used in the report period

Total amount of raised funds used 155.3742

on accumulative basis

Promised project Whether Total amount of Amount invested Amount of Actual investment Profit (gross profit) The completion Whether the Whether the Whether project

project is originally planned in the report accumulative progress in the made in the time or estimated project meets projectes feasibilitymate

changed investment period investment report period (%) report period completion time schedule generate stimated rially changes

of project profit or not

The project of technical No 173.22 25.9720 118.2375 91.00 5.5909 2007 No No No

renovation

of smart card production line

Project of Guangdong Smart Card No 67.50 21.0028 37.1367 54.01 - 2007 No No No

Engineering Technology R&D Center

Project of non-contact IC card No 29.30 - - - 2006 No No No

read-write equipment and

applicationsystem industrialization

Total 270.02 46.9748 155.3742 69.67% 5.5909

Reason for failure to meet planned schedule and make planned profit:

In 2005, there was difference between the planned investment amount and actual investment amount for the project of technical renovationof smart card

production line mainly because the Companymadeappropriate adjustment to the progress of investment of project funds according to the sales status

of products and the implementation progress of the technical renovation project.

In 2005, there was big difference between the planned investment amount and actual investment amount for the construction project of Guangdong

Smart Card Engineering Technology Research and Devel opment Center. The main reasons are as follows: (1) The construction period of the scientific

research building of R&D center planned to be completed in 2005 was extended due to reasons in respect of construction application, tender

invitation and basic construction progress; (2) The Company adjusted and postponed the implementation of someplanned projects at appropriate time

according to the change in smart card market so that the investment of R&D fund was delayed. In 2004 and 2005, the Company actually did not invest in the

project of non-contact IC card read-write equipment and application system industrialization due to the following reason: The total amount of funds

actually raised is lower than the planned total amount of the investment project and relevant products and market condition changed. The risk of implementing

this project increased. As a result, this project was postponed.

Reasons for change in project and The projects utilizing raised funds remained unchanged in

notes to change procedure the report period.

Change in the mode and place of The mode and place of implementation of projects utilizing

implementation of projects utilizing raised funds remained unchanged in the report period.

raised funds

The initial-stage investment in the projects No initial-stage investment was made in the projects utilizing

utilizing raised funds and status of coverage raised funds and there was no need of coverage in the

report period.



(Cont`d)

Temporarily supplementing working capital with partial idle raised funds:

In order to enhance fund utilization efficiency and decrease financial expenses, the 5th meeting of the second board of directors of the Company held

on April 25, 2005 approved the Company to temporarily supplementing working capital with partial idle funds before November 30, 2005. The

accumulative amount of working capital temporarily supplemented with partial idle funds shall not exceed RMB 60 million and the term

of use of each sum of such funds shall not exceed 6 months. Such funds have been recovered on time. The 8th meeting of the second board of directors

of the Company held on November 22, 2005 approved the Company to temporarily supplementing working capital with partial idle funds before May 31,

2006. The accumulative amount of working capital temporarily supplemented with partial idle funds shall not exceed RMB 40 million and the term

of use of each sum of such funds shall not exceed 6 months.

The amount of balance of raised funds Nil

after project implementation and reason therefor

Other use of raised funds Raised funds were not used for other projects in the report period.

2. Implementation status of regulations on deposit of raised funds in special account

According to the Regulations on Management and Use of Raised Funds of the Company examined and revised at the 10th meeting of the

first board of directors and the 2nd meeting of the second board of directors, the Company authorized the sponsoring representative to

check the information about the special account of raised funds at commercial banks and conduct on-the-spot investigation of the status

of management and use of its raised funds at any time.

The Company deposited raised funds into special accounts. As of December 31, 2005, the Company deposited RMB 30.9493 million

into the account opened with Bank of Communications Zhuhai Branch, RMB 29.5399 million into the account opened with Shenzhen

China Merchants Bank OCT Sub-branch and RMB 6000 into the account opened with Construction Bank Zhuhai Xiangzhou Sub-

branch.

The Company signed the Agreement for Management of Special Accounts of Raised Funds with commercial banks and sponsoring

institution Guosen Securities Co., Ltd. As agreed, three parties shall jointly supervise and manage the raised funds in special accounts.

3. Conclusive opinions of the certified public accountants' firm on annual special audit of raised funds

Zhejiang Pan-China Certified Public Accountants Co., Ltd. audited the Special Statement on the Annual Use of Raised Funds examined

and adopted at the 9th meeting of the second board of directors of the Company and issued Zhe Tian Kuai Shen (2006) No. 168 Report

on Annual Special Audit of Raised Funds. In its opinion, the status of use of raised funds disclosed in the Special Statement on the

Annual Use of Raised Funds made by the board of directors of the Company conformed to the actual status of use.

(II) Important investment projects utilizing non-raised funds in the report period

1. On August 18, 2004, the Company signed the agreement for increasing the capital of Singapore ZEP Company with Mr. Anthony Ong

and Mr. Andy Chew. Pursuant to the resolutions of the 10th meeting of the first board of directors of the Company and the Official

Written Reply of Ministry of Commerce to Equity Participation by Zhuhai Eastcompeace Smart Card Co., Ltd. in ZEP Smart Cards

PTE. Ltd. - Shang He Pi (2004) No. 861 Document issued by the Ministry of Commerce of the People's Republic of China, the Company

unilaterally contributed additional capital of USD 0.4 million to Singapore ZEP Company with self-owned cash on January 29, 2005.

After capital increase, the registered capital of Singapore ZEP Company increased from Singapore Dollar 0.1 million to Singapore

Dollar 0.5 million. It was renamed as Eastcompeace Smart Card (Singapore) Pte Ltd. As the Company holds 80% of the registered

capital of this company after capital increase, it owns substantial control over this company. The business scope of Singapore subsidiary:

Development of overseas market of smart card, support to customized solutions and relevant services.



IV. The change in accounting policies and accounting estimates and the correction of significant accounting errors

in the report period and reasons therefor

There were no change in accounting policies and significant accounting errors in the report period. In order to objectively and truly

reflect the use status of equipment, the Company adjusted the depreciation period of special-purpose production equipment from 4-5

years to 8 years from July 1, 2005 by referring to the depreciation period of equipment of the same quality of similar enterprises in the

industry and according to relevant provisions of national financial regulations and the Proposal for Adjusting Depreciation Period of

Special-purpose Equipment for Production adopted by the 6th meeting of the second board of directors. With respect to this change in

accounting estimate, the amount of the Company's profit and consolidated profit for the report year was respectively increased by RMB

11,186,587.93 using future application method according to relevant provisions of Accounting Regulations for Business Enterprises.

V. Routine Work of the Board of Directors

(I) Board meetings and resolutions in the report period

In 2005, the board of directors of the Company held 5 meetings in total according to relevant provisions of the Company Law, the

Securities Law and the Articles of Association of the Company. The number of directors present at the meetings met statutory require-

ments and the convening, holding and voting procedures of board meetings complied with the provisions of the Company Law and the

Articles of Association of the Company. The particulars are as follows:

1. The 4th meeting of the second board of directors of the Company was held in meeting room 901, Main Building, Zhuhai Vacationing

Village Hotel on March 1, 2005. 9 directors were supposed to attend the meeting and 7 of them attended the meeting in person.

Independent directors Mr. Dai Xiangbo and Ms Fan Lian failed to attend this meeting for work-related reason. They authorized indepen-

dent director Mr. Zhu Wuxiang in writing to attend the meeting and exercise voting right on their behalf. The meeting was presided over

by board chairman Mr. Zhou Zhongguo. The meeting examined and adopted Work Report of the General Manager for 2004,Work

Report of the Board of Directors for 2004, Final Accounting Report for 2004, Profit Distribution Preplan for 2004, Annual Report 2004

and Its Summary, Status of Management and Use of Raised Funds in 2004 and Plan for Using Raised Funds in 2005, the Proposal for

Amending the Articles of Association of the Company, the Proposal for Replacing Directors of the Company; the Proposal Concerning

Remuneration and Renewal of Engagement of Certified Public Accountants' Firm, and the Proposal for Holding 2004 Annual Share-

holders' General Meeting.

The announcement of the resolutions of this meeting was published on Securities Times, China Securities Journal and www.cninfo.com.cn

on March 3, 2005.

2. The 5th meeting of the second board of directors of the Company was held by correspondence on April 25, 2005. 9 directors were

supposed to attend the meeting and all of them attended the meeting in person. The meeting examined and adopted the Report for the

First Quarter of 2005 and the Proposal for Supplementing Working Capital with Part of Temporarily Idle Raised Funds.


on April 27, 2005.

3. The 6th meeting of the second board of directors of the Company was held in meeting room 204, Dongxin Building, Hangzhou on July

20, 2005. 9 directors were supposed to attend the meeting and 8 of them attended the meeting in person. Director Ms Ni Shouping failed

to attend this meeting for work-related reason. She authorized director Mr. Zheng Guomin in writing to attend the meeting and exercise

voting right on her behalf. The meeting was presided over by board chairman Mr. Zhou Zhongguo. The meeting examined and adopted2005

Semiannual Work Report of the General Manager, 2005 Semiannual Report and the Proposal for Adjusting Depreciation Period of

Special-purpose Equipment for Production.

The resolutions of this meeting was published on Securities Times, China Securities Journal and www.cninfo.com.cn on July 22, 2005.

4. The 7th meeting of the second board of directors of the Company was held by correspondence on October 27, 2004. 9 directors were

supposed to attend the meeting and all of them attended the meeting in person. The meeting examined and adopted the Report for the

Third Quarter of 2005.



This meeting only examined and adopted the above one proposal. According to relevant regulations of regulatory authority, it is not

required to disclose the resolution of the board meeting by announcement. The Report for the Third Quarter of 2005 was published on

Securities Times, China Securities Journal and www.cninfo.com.cn on October 31, 2005.

5. The 8th meeting of the second board of directors of the Company was held by correspondence on November 22, 2004. 9 directors were

supposed to attend the meeting and all of them attended the meeting in person. The meeting examined and adopted the Proposal for

Supplementing Working Capital with Part of Temporarily Idle Raised Funds.

The announcement of the resolution of this meeting was published on Securities Times, China Securities Journal and www.cninfo.com.

cn on November 24, 2005.

(II) Implementation by the board of directors of the resolutions of the shareholders' general meeting

In the report period, the board of directors of the Company performed duties strictly according to laws and regulations including the

Company Law and relevant provisions of the Articles of Association of the Company and seriously implemented all resolutions passed

at shareholders' general meetings. The particulars are as follows:

1. According to the resolution of 2004 annual shareholders' general meeting held on April 7, 2005, the profit distribution plan of the

Company for 2004 is as follows: The Company is to pay cash dividends of RMB 2.5 (including tax) for every 10 shares to all sharehold-

ers with the total share capital of the Company on December 31, 2004, i.e., 90,800,000 shares, as base. Cash dividends of RMB 22.70

million were distributed in total. The Announcement of Dividend Distribution for 2004 was published on Securities Times, China

Securities Journal and www.cninfo.com.cn on May 25, 2005. Stock right registration date is May 31, 2005. Ex-dividend date is June 1,

2005. Dividend distribution date is June 1, 2005 for Shenzhen market and June 2, 2005 for Shanghai market.

2. According to the resolution of 2004 annual shareholders' general meeting for the Proposal Concerning Remuneration and Renewal of

Engagement of Certified Public Accountants' Firm, the Company engaged Zhejiang pan-China Certified Public Accountants as the

auditing body for its financial affairs.

3. According to the Plan for Share Holding Structure Reform voted through at the shareholders' meeting concerning share holding

structure reform of the Company on October 28, 2005, the original shareholders holding non-negotiable shares obtained the right of

negotiation to the original non-negotiable shares held by them by paying 3.5 shares for every 10 negotiable shares and 8.75 million

shares in total to the original shareholders holding negotiable shares as consideration.

The Company published the Announcement of Implementation of Plan for Share Holding Structure Reform on Securities Times, China

Securities Journal and www.cninfo.com.cn on November 2, 2005. The date of registration of change in shares for the implementation of

share holding structure reform is November 4, 2005. The date of availability of the shares obtained by shareholders holding negotiable

shares as consideration is November 7, 2005 (for Shenzhen market) and November 8, 2005 (for Shanghai market). On November 7,

2005, the nature of non-negotiable shares held by original shareholders holding non-negotiable shares was changed to negotiable shares

subject to sale restriction. On November 8, 2005, the trading of the stocks of the Company was resumed and the shares as consideration

were listed and traded.

VI. The preplan for profit distribution and capitalization of capital surplus for the report year

As confirmed in Zhe Tian Kuai Shen (2006) No. 166 Auditor's Report issued by Zhejiang Pan-China Certified Public Accountants, the

net profit of the Company for 2005 is RMB 11,583,419.15. According to relevant provisions of the Articles of Association of the

Company, 10% of net profit, i.e., RMB 1,158,341.92, is to be allocated respectively for statutory surplus reserve and statutory public

welfare fund. With the undistributed profit at beginning of year, i.e., RMB 73,759,302.85, being added and dividends of RMB 22,700,

000.00 distributed for interim period being deducted, the actual profit available for distribution to shareholders is RMB 60,326,038.

16, which will temporarily not be distributed and will be carried forward to the next year.



The board of directors also made the following proposal: To distribute 3 shares for every 10 shares to all shareholders by means of

capital surplus capitalization with the total share capital of the Company on December 31, 2005, i.e., 90.80 million shares, as the

base. After capital surplus capitalization, the total share capital of the Company will increase from 90.80 million to 118.04 million

shares and capital surplus will decrease from RMB 216,139,865.86 to RMB 188,899,865.86.

The Company distributed cash dividends consecutively in 2003 and 2004. The total amount of dividends distributed is RMB 39,150,000.

In 2006, the Company will invest more in R&D, production and projects utilizing non-raised funds. In order to ensure the fund arrangement

for its key projects and its sustainable development, the Company plans not to distribute cash profit for 2005.

The implementation of this profit distribution preplan is subject to examination and approval at 2005 annual shareholders' general meeting.

VII. In the report period, the newspapers selected by the Company for information disclosure remained China

Securities Journal and Securities Times.

VIII. Particulars of relationship with investors

(I) The Company held 2004 briefing meeting in remote mode through interactive investor relationship platform on March 10, 2005.

Board chairman and general manager of the Company Mr. Zhou Zhongguo, independent director Mr. Zhu Wuxiang, financial controller

Mr. Li Haijiang, board secretary Mr. Zhang Xiaochuan and sponsoring representative Mr. Wu Weigang and Mr. Xie Fenghua attended

this meeting and conducted extensive communication with investors in respect of the operation and future development of the Company.

(II) During its share holding structure reform in September to October 2005, the Company, the Company conducted effective commu-

nication with middle and small investors of the Company through interview, telephone, email and fax. The Company held an online

meeting of communication with investors in respect of share holding structure reform on September 30, 2005. It conducted real-time

communication with investors and answered investors' questions in respect of the Company's plan for share holding structure reform, its

earnings for the first half of 2005 and the prospect of its future development. The above-mentioned investor relationship management

helped investors know more about the Company and laid foundation for the Company's smooth completion of share holding structure

reform.

(III) The Company appointed special personnel to be responsible for investor reception, telephone consultation, email and investor

relationship column on the website of the Company, kept good communication with investors, intermediaries and media and gave

cooperation to the media and research personnel that came to the Company for investigation. In 2005, the Company received 47

investors who paid 15 visits in total.

(IV) In 2005, the Company held two shareholders' general meetings, at which the directors, supervisors and senior executives of the

Company conducted face-to-face communication with the investors present at the meeting in respect of the operation and future devel-

opment of the Company so as to further improve understanding between both parties.

IX. Development of internal audit system

The Company has an audit department with 2 auditors including 1 full-time auditor. According to the Internal Audit System of

Eastcompeace Smart Card Co., Ltd., the Audit Dept. of the Company is responsible for supervising and auditing the implementation

status of financial system and financial position of the Company and the authenticity, legality and result of relevant economic activities

under the leadership of the board of directors. In 2005, Audit Dept. conducted the following internal audit work according to the

requirements of the board of directors:

1. It conducted internal audit of the operating status of the Company, made audit suggestions and proposed corrective actions;

2. It conducted special audit of the internal control system of the Company;

3. It organized and completed the audit of the basic construction of phase-II factory building;



4. It assisted Zhejiang Pan-China Certified Public Accountants in external audit of the financial statements of the Company for 2005.

The internal control level of the Company was enhanced through inspection. The internal control system of the Company was sound and

there were no significant risk factors.

X. Particulars about duty performance of board chairman, independent directors and other directors

In the report period, all directors of the Company kept their words, diligently and independently performed duties, actively attended

relevant meetings of the Company, seriously examined all proposals of the board of directors, acted in the interests of the Company and

its shareholders and protected the lawful rights and interests of middle and small shareholders from infringement according to the

requirements of the Guidelines for Behaviors of Directors of Listed Companies in Small and Medium Enterprise Market.

The chairman of the board of directors of the Company actively promoted the formulation and improvement of internal regulations of

the Company, strengthened the development of the board of directors, convened and presided over board meetings according to law and

thus ensured the normal holding of all board meetings in the report period according to law and actively supervised and urged the

implementation of the resolutions made at board meetings. Meanwhile, he created good working conditions for duty performance of all

directors and fully guaranteed all directors' right to know facts.

With the attitude of being honest to the Company and all shareholders and diligent, independent directors seriously and responsibly

attended the board meetings of the Company in the report period and duly performed their due responsibilities. In the report period,

independent directors made objective and fair judgment of the Company's periodical reports and proposals concerning related transactions,

etc. and played positive role in keeping the Company's continuous, healthy and stable development.

The times of board meeting in the report period 5 times

Name Position Times of Times of Times of Whether fails to

attendance attendance absence attend meeting in

in person through proxy person for two

consecutive times

Zhou Zhongguo Board chairman and president 5 0 0 No

Yang Youwei Vice board chairman 5 0 0 No

Zheng Guomin Director 5 0 0 No

Zhang Zexi Director 5 0 0 No

Ni Shouping Director 4 1 0 No

Jin Weimin Director 5 0 0 No

Zhu Wuxiang Independent director 5 0 0 No

Fan Lian Independent director 4 1 0 No

Dai Xiangbo Independent director 4 1 0 No

XI. Other matters

(I) For the special statement made by certified public accountants on the status of fund occupation by the controlling shareholder and

other related parties of the Company, refer to the special statement on the status of fund occupation by the controlling shareholder and

other related parties of the Company disclosed on Securities Times, China Securities Journal and www.cninfo.com.cn for details.

(II) Special statement and independent opinions of the independent directors of the Company on external guarantee of the Company on

accumulative basis and in current period In accordance with the Circular on Certain Issues Relating to Standardization of Fund Transfer Between

Listed Companies and Their Related Parties and Guarantees Provided by Listed Companies issued by CSRC, we seriously checked the status of fund

occupation by the controlling shareholder and other related parties and the guarantees provided by the Company with practical attitude and hereby

make the following statement on relevant issues: In the report period, the total amount of guarantees provided by the Company was zero. In

2005, the Company was not involved in circumstances including external guarantee, regulation-violating external guarantee and fund

occupation by related parties. Nor did such circumstances occur in previous years and continue in 2005.



I. Work of the Supervisory Committee

In the report period, the supervisory committee of the Company seriously performed their supervision duty to really safeguard the

interests of the Company and middle and small shareholders strictly according to the requirements of relevant laws and regulations

including the Company Law and the Articles of Association of the Company. The supervisors of the Company timely found out the

status of production and operation of the Company, supervised the financial affairs of the Company and the status of fund application,

inspected the status of duty performance of directors and senior executives of the Company, fulfilled their duties and effectively

guaranteed the standardized operation of the Company. In 2005, the supervisory committee of the Company held two meetings in total.

The particulars of the meetings are as follows:

(I) The 2nd meeting of the second supervisory committee of the Company was held in the new meeting room on 1/F of Zhuhai Vacationing

Village Hotel on March 1, 2005. 5 supervisors were supposed to attend the meeting and all of them attended the meeting in person. The

meeting was presided over by the chairman of the supervisory committee Mr. Shi Wenzhong. The meeting examined and voted through

Work Report of the Supervisory Committee for 2004, Final Accounting Report for 2004, Status of Management and Use of Raised

Funds in 2004 and Plan for Using Raised Funds in 2005, and Annual Report 2004 and Its Summary.


on March 3, 2005.

(II) The 3nd meeting of the second supervisory committee of the Company was held in meeting room 203, Eastcom Building, Hangzhou on

July 20, 2005. 5 supervisors were supposed to attend the meeting and 4 of them attended the meeting in person. Supervisor Ms Li Saixiong

failed to attend the meeting for work-related reason and authorized supervisor Mr. Wang Jianbo to attend the meeting and vote on her

behalf. The meeting was presided over by the chairman of the supervisory committee Mr. Shi Wenzhong. The meeting examined and

voted through 2005 Semiannual Report and Its Summary and the Proposal for Adjusting Depreciation Period of Special-purpose

Equipment for Production.


on July 22, 2005.

II. Independent opinions of the supervisory committee on relevant matters of the Company in the report period

(I) The independent opinions of the supervisory committee on the use status of raised funds of the Company

In the report period, the Company strictly managed and used raised funds. The actual investment projects utilizing raised funds were

consistent with the promised projects. The investment projects utilizing raised funds remained unchanged. The Company supplemented

working capital with temporarily idle raised funds to enhance the efficiency of use of raised funds. During actual use, use of raised funds

beyond approved amount limit and approved time limit was not found. In the opinion of the supervisory committee, the above matter

went through necessary decision-making procedure and satisfied the actual conditions of the production and operation of the Company.

(II) The inspection of the financial affairs of the Company

In the report period, the supervisory committee carefully inspected the Company's financial system and financial position conduct

painstaking inspection and held the opinion that the Company's internal control system for finance and accounting was sound, there were

neither material accounting omissions nor false accounting records and annual report 2005 truly reflected the financial position and

operating results of the Company.

Section 8 Report of Supervisory Committee


(III) The independent opinions of the supervisory committee on the related transactions of the Company

In the report period, the price of related transactions in which the Company was involved was fair and reasonable. The related transac-

tions were continuous transactions related to daily operation. No act harming the interests of the Company was found.

(IV) The independent opinions of the supervisory committee on the guarantees provided by the Company and equity and asset swap

In the report period, the Company neither provided guarantees to others nor was involved in debt restructuring, non-monetary transactions,

asset swap and circumstances that harmed the interests of the Company's shareholders or caused th loss of the Company's assets.

(V) The independent opinions of the supervisory committee on the operation of the Company according to law

In the report period, the board of directors of the Company duly performed all resolutions of the shareholders' general meeting according

to its requirements and its decision-making procedure complied with relevant provisions of the Company Law and the Articles of

Association of the Company. The Company has established sound internal control system. When the directors and senior executives of the

Company performed duties and exercised powers and functions, they acted in the interest of the Company, neither violated laws,

regulations and the Articles of Association of the Company nor harmed the interests of the Company.

(VI) The independent opinions of the supervisory committee on the significant investment projects utilizing non-raised funds

The 10th meeting of the first board of directors of the Company examined and adopted the Proposal for Increasing Capital of (Singapore)

ZEP Smart Card PTE. Ltd. The Company increased capital of USD 0.4 million in (Singapore) ZEP Smart Card PTE. Ltd. with self-

owned cash on January 29, 2005. The registered capital of (Singapore) ZEP Smart Card PTE. Ltd. is Singapore Dollar 0.5 million. The

Company holds 80% of its registered capital. Its business scope: Development of overseas market of smart card, support to customized

solutions and relevant services. In the opinion of the supervisory committee, this investment went through legal procedure and con-

formed to the actual operation condition of the Company. Neither insider trading nor circumstances that harmed the rights and interests

of part of shareholders or caused the loss of the Company's assets were found.

Report of Supervisory Committee


I. The Company was not involved in any material lawsuit or arbitration in the report period.

II. The Company neither acquired nor disposed of assets nor was involved in any merger by absorption in the

report period.

III. The Company was not involved in any significant related transaction in the report period.

(I) Related transactions related to daily operation

In the report period, the daily related transactions between the Company and related parties were sales of products and commodities.

There were no purchase of raw materials, fuels and power, provision or acceptance of labor services or sale on commission.

1. Sales of commodities

Based on the main terms of the original agreement being unchanged, the Company signed supplemental agreement for commodity sales

with China Putian Information Industry Group Company, Peace Communication Co., Ltd., Hangzhou Eastcom Industrial Co., Ltd.,

Hangzhou Eastcom Lingtong Electronic Industrial Company, Hangzhou Peace Communication Sale Service Co., Ltd., Beijing Julong

Peace International Information Technology Co., Ltd., Hangzhou Eastcom Optical Communication Technology Co., Ltd., Ningbo Bird

Co., Ltd. and Ningbo Bird Sagem Electronics Co., Ltd. In the report period, the Company performed the agreement and took the bid

quotation of related companies in tendering activities as basis. In case of great change in market price, adjustment shall be made through

consultation between both parties. The related transactions between the Company and its related enterprises followed the principle of

fair pricing based on market price.

The sales of commodities to related parties in the report period were as follows:

1) Amount of sales of commodities to related parties

Item 2005 (RMB) 2004 (RMB)

China Putian Information Industry Group Company 853,418.80 1,631,280.05

East Communication Co., Ltd. 2,459,914.53 2,129,991.45

Hangzhou Eastcom Industrial Co., Ltd. 1,196.58 1,940.17

Hangzhou Eastcom Lingtong Electronic Industrial Co., Ltd. 20,512.82 2,564.10

Hangzhou Peace Communication Sale Service Co., Ltd. - 6,410.26

Beijing Julong Peace International Information Technology Co., Ltd. 455,726.50 -

Hangzhou Eastcom Optical Communication Technology Co., Ltd. 2,666.67 -

Ningbo Bird Co., Ltd. 63,936.75 -

Ningbo Bird Sagem Electronics Co., Ltd. 204,102.56 -

Total 4,061,475.21 3,772,186.03

2) The proportion of the amount of sales to related parties to total amount of income from main operation (%)

Item 2005 2004

China Putian Information Industry Group Company 0.1318 0.2486

East Communication Co., Ltd. 0.3798 0.3247

Hangzhou Eastcom Industrial Co., Ltd. 0.0002 0.0003

Hangzhou Eastcom Lingtong Electronic Industrial Company 0.0032 0.0004

Hangzhou Peace Communication Sale Service Co., Ltd. - 0.0010

Beijing Julong Peace International Information Technology Co., Ltd. 0.0704 -

Hangzhou Eastcom Optical Communication Technology Co., Ltd. 0.0004 -

Ningbo Bird Co., Ltd. 0.0099 -

Ningbo Bird Sagem Electronics Co., Ltd. 0.0315 -

Total 0.6271 0.5750

Section 9 Important Events


3) The content of sales of commodities to related parties, settlement mode and transaction price

Related transaction party Subject of transaction Mode of settlement Transaction

price (RMB)

China Putian Information Industry Group Company SIM card Bank telegraphic transfer 5.68

East Communication Co., Ltd. Paper card Bank telegraphic transfer 0.47

East Communication Co., Ltd. Test card Bank telegraphic transfer 60

Hangzhou Eastcom Industrial Co., Ltd. Test card Bank telegraphic transfer 70

Hangzhou Eastcom Lingtong Electronic Industrial Company Test card Bank telegraphic transfer 12

Beijing Julong Peace International Information Technology Co., Ltd. SIM card Bank telegraphic transfer 5.33

Hangzhou Eastcom Optical Communication Technology Co., Ltd. Paper card Bank telegraphic transfer 0.24

Ningbo Bird Co., Ltd. Test card Bank telegraphic transfer 38.5

Ningbo Bird Sagem Electronics Co., Ltd. Test card Bank telegraphic transfer 38.4

2. Notes to related transactions

The related transactions between the Company and its related enterprises followed the principle of fair pricing based on market price.

The related parties of the Company are enterprises in mobile communication industry. They demand the products of the Company in

respect of many operation links including R&D, production, sales, etc. The above related transactions were in the normal business scope

of the Company. It is expected that the existence of such related transactions will be necessary and they will continue to exist in the

future production and operation of the Company. The Company's related transactions followed the market transaction principle of

"openness, fairness and impartiality", were priced fairly and reasonably and did not harm the interests of the Company. The Company

was independent of its related parties in respect of business, personnel, finance, assets and organs. The related transactions did not affect

the Company's independence. The proportion of the said related transactions to similar transactions was very low. The related transac-

tions were unlikely to cause the Company's dependence on related parties.

(II) There were no related transactions concerning assignment of assets or equity in the report period

(III) In the report period, the Company was not involved in related transactions concerning joint external investment with

related parties.

(IV) The guarantee between the Company and related parties in the report period

On June 20, 2003, Putian East Communications Group Co., Ltd., signed a guarantee contract with Industrial and Commercial Bank of

China Zhuhai Seashore Sub-branch and agreed to provide guarantee for the loan of RMB 30 million borrowed by the Company from the

bank with the term from June 20, 2003 to June 19, 2008. As of December 31, 2005, the balance of loan borrowed by the Company from

this bank was RMB 0. At the end of 2005, the balance of loan was RMB 0.

(V) The related transactions concerning lease between the Company and related parties in the report period

According to the house tenancy contract signed by the Company and Putian East Communications Group Co., Ltd.,, the rental charge

for offices paid by the Company to it in 2005 was RMB 349,322.95. The rental charge paid in the same period of the previous year

was RMB 243,404.49.

Important Events


Balance of accounts receivable from and payable to related parties

Item December 31, 2005 December 31, 2004

Balance Proportion (%) Balance Proportion (%)

Other payables

China Putian Information 54,004.16 0.29

Industry Group Company

Subtotal -- -- 54,004.16 0.29

Accounts receivable

China Putian Information 1,656,147.66 2.73

Industry Group Company

Beijing Julong Peace International 533,200.00 0.85

Information Technology Co., Ltd.

Ningbo Bird Co., Ltd. 17,404.00 0.03

Ningbo Bird Sagem 72,200.00 0.12

Electronics Co., Ltd.

Subtotal 622,804.00 1.00 1,656,147.66 2.73

The above accounts were accounts of small amount generated during the settlement of normal transactions and did not affect the

Company.

II. The Company was not involved in any significant contractual matter in the report period.

(I) The Company did not hold in trust or contract for or lease the material assets of other companies nor did other companies

hold in trust, contract for or lease the material assets of the Company.

(II) In the report period, the Company did not provide any guarantee to others. Nor was there guarantee that was provided

in previous periods but continued to be valid in the report period.

(III) In the report period, the Company did not entrust others to manage its assets. Nor was there asset management that

the Company entrusted others to conduct in previous periods but continued in the report period.

(IV) No other significant contractual matters.

III. Commitments of the Company or shareholders holding over 5% equity of the Company

(I) All promoters of the Company issued the Letter of Commitment of Not Participating in Horizontal Competition. China Putian

Information Industry Group Company, the final actual controller of the Company issued the Letter of Commitment of Avoiding Hori-

zontal Competition with Zhuhai Eastcompeace Smart Card Co., Ltd. In the report period, there was no horizontal competition.

(II) Putian East Communications Group Co., Ltd.,, the controlling shareholder of the Company, made the commitment that it would

neither assign the shares of the Company held by it within 12 months from the date of listing of the Company's shares nor have the

Company repurchase the shares held by it. In the report period, this commitment was not violated.

Important Events


(III) In the report period, the Company smoothly completed share holding structure reform. The commitments for share holding struc-

ture reform: (1) All original shareholders holding non-negotiable shares of the Company promised that the non-negotiable shares held

by them would not be listed, traded or assigned within 12 months from the date of obtaining the right of listing and negotation. (2) The

original shareholders holding non-negotiable shares holding over 5% equity of the Company, i.e., Eastcom Group and Peace Telecom-

munication made the following commitment: The non-negotiable shares of the Company held by them will not be listed, traded or

assigned within 12 months from the date of obtaining the right of listing and negotiation. Upon the expiration of the said commitment

period, the proportion of the quantity of original non-negotiable shares of the Company traded through stock exchange to the total shares

of the Company shall not exceed 5% within 12 months and 10% within 24 months. (3) All original shareholders holding non-negotiable

shares of the Company made the following commitment: They will perform the obligation of information disclosure and bear corre-

sponding legal liabilities strictly according to relevant provisions of the Regulations. When the quantity of shares sold by an original

shareholder holding non-negotiable shares that holds or controls over 5% equity of the Company through stock exchange reaches one

percent of the total number of shares of the Company, the shareholder shall make an announcement within two working days from the

date of the occurrence of such fact. During announcement, the shareholder shall not be required to stop selling shares.

(IV) Putian Peace Communication Group Company, the controlling shareholder of the Company, made the following commitment: If

the shareholders' meeting concerning share holding structure reform passes the Plan of Eastcompeace Smart Card Co., Ltd. for Share

Holding Structure Reform, it will make the proposal for capitalizing capital surplus on basis of no less than 3 shares for every 10 shares

to 2005 annual shareholders' general meeting of the Company and vote for this proposal at this shareholders' general meeting.

In the report period, all shareholders of the Company observed their commitments.

IV. The engagement or dismissal of certified public accountants' firm

In the report period, the Company continued to engage Zhejiang Pan-China Certified Public Accountants as its auditing body. In 2005,

the Company was required to pay audit fee of RMB 0.28 million to Zhejiang Pan-China Certified Public Accountants.

As of the end of the report period, Zhejiang Pan-China Certified Public Accountants has provided audit services to the Company for 7

consecutive years.

V. In the report period, the Company, its board of directors and its directors were not investigated by CSRC,

administratively punished or publicly criticized by CSRC or publicly condemned by stock exchange.

VI. Other important events

(I) Temporarily supplementing working capital with partial idle raised funds

In order to enhance fund utilization efficiency and decrease financial expenses, the 5th meeting of the second board of directors of the

Company held on April 25, 2005 approved the Company to temporarily supplementing working capital with partial idle funds before

November 30, 2005. The accumulative amount of working capital temporarily supplemented with partial idle funds shall not exceed

RMB 60 million and the term of use of each sum of such funds shall not exceed 6 months. The 8th meeting of the second board of

directors of the Company held on November 22, 2005 approved the Company to temporarily supplementing working capital with partial

idle funds before May 31, 2006. The accumulative amount of working capital temporarily supplemented with partial idle funds shall not

exceed RMB 40 million and the term of use of each sum of such funds shall not exceed 6 months.

(II) Refer to "Significant investment projects utilizing non-raised funds in the report period" in Section VII - Report of the Board of

Directors for details of investment made with non-raised funds in the report period.

(III) On October 28, 2005, the Company's shareholders' meeting concerning A share holding structure reform voted through the Plan of

Eastcompeace Smart Card Co., Ltd. for Share Holding Structure Reform. On November 2, 2005, the Announcement of Implementation

of Share Holding Structure Reform was published. According to the plan, the original shareholders holding non-negotiable shares

Important Events


obtained the right of negotiation to the non-negotiable shares held by them by paying 3.5 shares for every 10 negotiable shares and 8,750,000

shares in total as consideration to the shareholders holding negotiable shares registered in books on the stock right registration date for

the implementation of the plan. The implementation of the plan for share holding structure reform was officially completed on

November 9, 2005. After the implementation of the Company's plan for share holding structure reform, i.e., the payment of consideration

by the original shareholders holding non-negotiable shares, the total number of shares of the Company remained unchanged but share

structure changed.

(IV) In the report period, ZEP Smart Card Pte. Ltd., a controlled subsidiary of the Company, was renamed as Eastcompeace Smart Card

(Singapore) Pte. Ltd.

(V) Information Disclosed by the Company

Date of Disclosing Description Media where information is disclosed

Jan 26, 05 2004 Annual Business Achievement Express News Securities Times, China Securities Journal,

http://www.cninfo.com.cn.

Mar 3, 05 Public Notice on Holding the 4th Meeting of the Securities Times, China Securities Journal,

2nd Board of Directors and 2004 Shareholders' http://www.cninfo.com.cn.

General Meeting

Mar 3, 05 Resolutions of the 2nd Meeting of the Second Securities Times, China Securities Journal,

Supervisory Committee Public Notice http://www.cninfo.com.cn.

Mar 3, 05 Independent Opinions of Independent Directors Securities Times, China Securities Journal,

on the Information concerning Accumulative and http://www.cninfo.com.cn.

Current Period External Guarantee and the Fund

Occupied by the Related Parties

Mar 3, 05 2004 Annual Report Summary Securities Times, China Securities Journal,


Mar 3, 05 Independent Opion on Remuneration to Directors, Securities Times, China Securities Journal,

Supervisors and Other Senior Executives http://www.cninfo.com.cn.

for the Year 2004

Mar 3, 05 2004 Annual Report Securities Times, China Securities Journal,


Mar 3, 05 Special-purpose Statement on Application of the Securities Times, China Securities Journal,

Proceeds Raised through Offering of this Year http://www.cninfo.com.cn.

Mar 3, 05 Announcement on Special-purpose Statement on Securities Times, China Securities Journal,

Application of the Proceeds Raised through http://www.cninfo.com.cn.

Offering of this Year

Mar 3, 05 Notice on Special-purpose Auditing on the Funds Securities Times, China Securities Journal,

Occupied by the Related Parties in 2004 http://www.cninfo.com.cn.

Mar 3, 05 Auditor's Report on 2004 Annual Financial Report Securities Times, China Securities Journal,


Mar 8, 05 Notice on Holding On-line Presentation Securities Times, China Securities Journal,

of the Annual Report http://www.cninfo.com.cn.

Mar 16, 05 Additional Public Notice on the Place for Holding Securities Times, China Securities Journal,

2004 Annual Shareholders' General Meeting http://www.cninfo.com.cn.

Important Events


(Cont`d)


Apr 8, 05 Resolutions of 2004 Shareholders' General Securities Times, China Securities Journal,

Meeting - Public Notice http://www.cninfo.com.cn.

Apr 8, 05 2004 Work Report of Independent Directors Securities Times, China Securities Journal,


Apr 8, 05 Rules of Procedures for the Board of Directors Securities Times, China Securities Journal,


Apr 8, 05 Articles of Association Securities Times, China Securities Journal,


Apr 8, 05 Rules of Procedures for Shareholders' Securities Times, China Securities Journal,

General Meeting; http://www.cninfo.com.cn.

Apr 8, 05 Rules for Decision-making on Related Transactions Securities Times, China Securities Journal,


Apr 27, 05 Resolutions of the 5th Meeting of the Second Securities Times, China Securities Journal,

Board of Directors - Public Notice http://www.cninfo.com.cn.

Apr 27, 05 Announcement on Temporary Replenishment of Securities Times, China Securities Journal,

Working Capital with Partial Idle Proceeds http://www.cninfo.com.cn.

from an Offering

Apr 27, 05 2005 1st Quarterly Report Securities Times, China Securities Journal,


May 25, 05 Announcement on Implementation of Securities Times, China Securities Journal,

2004 Dividend Distribution http://www.cninfo.com.cn.

Jul 22, 05 2005 Semi-Annual Report Summary Securities Times, China Securities Journal,


Jul 22, 05 2005 Semi-Annual Report Securities Times, China Securities Journal,


Jul 22, 05 Resolutions of the 6th Meeting of the Second Securities Times, China Securities Journal,


Jul 22, 05 Resolutions of the 3rd Meeting of the Second Securities Times, China Securities Journal,

Supervisory Committee - Public Notice http://www.cninfo.com.cn.

Jul 22, 05 2005 Semi-Annual Financial Report Securities Times, China Securities Journal,


2005-7-26 Announcement on Abnormal Influctuation Securities Times, China Securities Journal,

of stock Exchange http://www.cninfo.com.cn.

Sep 7, 05 Announcement on Pledge of Equity Securities Times, China Securities Journal,


Sep 19, 05 Indicative Announcement on Reform Securities Times, China Securities Journal,

for Equity Separation http://www.cninfo.com.cn.

Sep 26, 05 Sponsor's Opinion on Reform for Equity Separation Securities Times, China Securities Journal,


Important Events


(Cont`d)


Sep 26, 05 Notice on Holding Shareholders' Meeting Securities Times, China Securities Journal,

concerning Reform for Equity Separation http://www.cninfo.com.cn.

Sep 26, 05 Independent Opinion of Independent Securities Times, China Securities Journal,

Directors on Reform for Equity Separation http://www.cninfo.com.cn.

Sep 26, 05 Manual on Reform for Equity Separation (Summary) Securities Times, China Securities Journal,


Sep 26, 05 Letter of the Board of Directors on Recruiting Securities Times, China Securities Journal,

Voting Consignment http://www.cninfo.com.cn.

Sep 26, 05 Legal Opinion on the Issues concerning Reform Securities Times, China Securities Journal,

for Equity Separation http://www.cninfo.com.cn.

Sep 26, 05 Manual on Reform for Equity Separation Securities Times, China Securities Journal,


Sep 28, 05 Announcement on Holding On-line Communications Securities Times, China Securities Journal,

with Investors concerning Reform for Equity Separation http://www.cninfo.com.cn.

Oct 12, 05 Additional Legal Opinion on the Issues concerning Securities Times, China Securities Journal,

Reform for Equity Separation http://www.cninfo.com.cn.

Oct 12, 05 Independent Opinion of Independent Directors on Securities Times, China Securities Journal,

Amendment of the Proposal of Reform for Equity http://www.cninfo.com.cn.

Separation

Oct 12, 05 Sponsor's Additional Opinion on Reform for Securities Times, China Securities Journal,

Equity Separation http://www.cninfo.com.cn.

Oct 12, 05 Manual on Reform for Equity Separation Securities Times, China Securities Journal,

(Revision Draft) http://www.cninfo.com.cn.

Oct 12, 05 Announcement on Communication with Coordinators Securities Times, China Securities Journal,

concerning the Proposal of Reform for Equity http://www.cninfo.com.cn.

Separation and Adjustment of the Proposal of

Reform for Equity Separation

Oct 12, 05 Manual on Reform for Equity Separation Securities Times, China Securities Journal,

(Revision Draft) http://www.cninfo.com.cn.

Oct 19, 05 The First Indicative Announcement on Holding Securities Times, China Securities Journal,

Shareholders' Meeting concerning Reform for Shanghai Securities News,


Oct 25, 05 Announcement on Obtaining the Approval of the Securities Times, China Securities Journal,

State-owned Assets Supervision and Administration http://www.cninfo.com.cn.

Commission of the State Council on the Proposal

of Reform for Equity Separation

Important Events


(Cont`d)


Oct 26, 05 Announcement on Commitments from Shareholders Securities Times, China Securities Journal,


Oct 26, 05 The Second Indicative Announcement on Holding Securities Times, China Securities Journa

Shareholders' Meeting concerning Reform for l, Shanghai Securities News,


Oct 31, 05 2005 3rd Quarterly Report Securities Times, China Securities Journal,


Oct 31, 05 Announcement on the Voting Results of the Shareholders' Securities Times, China Securities Journal,

Meeting on Reform for Equity Separation http://www.cninfo.com.cn.

Oct 31, 05 Legal Opinion on the Shareholders' Meeting Securities Times, China Securities Journal,

concerning Equity Separation http://www.cninfo.com.cn.

Nov 2, 05 Announcement on Implementation of the Securities Times, China Securities Journal,

Proposal of Reform for Equity Separation http://www.cninfo.com.cn.

Nov 2, 05 Announcement on Change of the Short Form of the Stock Securities Times, China Securities Journal,


Nov 8, 05 Announcement on Change of the Share Structure Securities Times, China Securities Journal,


Nov 24, 05 Resolutions of the 8th Meeting of the Second Securities Times, China Securities Journal,


Nov 24, 05 Announcement on Returning the Proceeds from Securities Times, China Securities Journal,

Offering with Self-raised Funds http://www.cninfo.com.cn.

Nov 24, 05 Announcement on Temporary Replenishment Securities Times, China Securities Journal,

of Working Capital with Partial Idle Proceeds http://www.cninfo.com.cn.

from an Offering

Important Events


I. Auditors' Report

Auditors' Report

ZHE TIAN HUI SHEN [2006] No. 166

To the whole shareholders of Eastcompeace Smart Card CO., LTD.,

We have audited the accompanying balance sheet and consolidated balance sheet of Eastcompeace Smart Card CO.,

LTD. (hereinafter referred to as "the Company") as of Dec.31, 2005 and the statement of profit and profit distribution,

consolidated statement of profit and profit distribution, the statement of cash flows and consolidated statement of

cash flows as of the year 2005. These accounting statements are the responsibility of the management of the Company.

Our responsibility is to express an opinion on these accounting statements based on our audits.

We have planned and conducted our audit in accordance with the Chinese Standards on Auditing. Those Standards

require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are

free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the accounting principles used and signifi-

cant estimates made by the management, as well as evaluating the overall financial statement presentation. We

believe that our audit provides a reasonable basis for our opinion.

In our opinion, the hereinafter attached accounting statements comply with the Enterprise Accounting Standards,

fairly present, in all material aspects, the financial position of the Company as of December 31, 2005 and the

operation results and the cash flow for the year 2005.

Zhejiang Pan-China Certified Public Chinese Certified Public Accountants: Wang Yuehao

Accountants Co., Ltd. Chinese Certified Public Accountant: Sun Wenjun

Hangzhou, China Date: March 16, 2006

Section 10 Financial Report


II. Accounting Statements

(I) Balance Sheet

Balance Sheet

Prepared by: Eastcompeace Smart Card CO., LTD. Dec. 31, 2005 In RMB

Items Ending Balance Opening Balance

Consolidated Parent company Consolidated Parent company

Current assets:

Monetary funds 219,717,939.91 217,423,755.16 128,343,645.71 128,343,645.71

Short-term investment

Notes receivable

Dividend receivable

interest receivable

Accounts receivable 58,791,957.94 64,046,801.64 57,286,622.90 57,286,622.90

Other receivables 2,269,118.91 2,140,136.09 1,410,691.15 1,410,691.15

Advance to supplier 2,880,958.08 2,820,176.16 1,971,277.01 1,971,277.01

Subsidies receivable 8,735.40 8,735.40 2,981,309.71 2,981,309.71

Inventories 105,620,721.97 105,578,985.72 287,746,862.79 287,746,862.79

Expenses to be apportioned 240,490.73 240,490.73 170,599.16 170,599.16

Long-term bond investment due within a year

Other current assets

Total current assets 389,529,922.94 392,259,080.90 479,911,008.43 479,911,008.43

Long-term investment:

Long-term equity investment 3,003,554.23 751,322.77

Long term bond investment

Total long-term investments 3,003,554.23 751,322.77

Incl.: Consolidated price difference 3,003,554.23

Fixed assets:

Fixed assets, cost 276,788,493.98 275,966,912.92 244,571,364.31 244,571,364.31

Less: accumulative depreciation 142,825,921.18 142,422,249.29 116,795,966.54 116,795,966.54

Fixed assets, net 133,962,572.80 133,544,663.63 127,775,397.77 127,775,397.77

Less: Provision for devaluation of fixed assets 2,416,297.94 2,416,297.94 2,416,297.94 2,416,297.94

Fixed assets, net 131,546,274.86 131,128,365.69 125,359,099.83 125,359,099.83

Engineering supplies

Construction-in-progress 10,260,611.75 10,260,611.75 330,781.40 330,781.40

Disposal of fixed assets

Total fixed assets 141,806,886.61 141,388,977.44 125,689,881.23 125,689,881.23

Intangible assets and other assets:

Intangible assets 5,311,847.23 5,311,847.23 1,248,496.62 1,248,496.62

Long-term expenses to be apportioned

Other long term assets

Total intangible assets and other assets 5,311,847.23 5,311,847.23 1,248,496.62 1,248,496.62

Deferred taxes:

Deferred taxes and debit

Total assets 539,652,211.01 539,711,228.34 606,849,386.28 606,849,386.28

Financial Report


Financial Report

Balance Sheet




Current liabilities

Short-term Loan

Notes payable 26,499,151.04 26,499,151.04

Accounts payable 90,041,086.54 89,963,196.19 129,295,755.87 129,295,755.87

Advance receipt 153,728.51 153,728.51 149,656.31 149,656.31

Salaries payable 7,642,755.60 7,440,639.46 6,617,192.12 6,617,192.12

Welfares payable 13,508,016.93 13,407,310.11 11,829,471.45 11,829,471.45

Dividends payable

Taxes payable -899,596.35 -899,596.35 -6,507,438.13 -6,507,438.13

Other accounts due 82,264.06 82,264.06

Other payables 24,191,613.74 24,368,851.88 18,730,103.17 18,730,103.17

Expenses allotted in advance

Predicted liabilities

Long-term liabilities due within one year

Total other current liabilities

Total current liabilities 134,719,869.03 134,516,393.86 186,613,891.83 186,613,891.83

Long-term liabilities

Long-term Loan

Bonds payable

Long term accounts payable

Special accounts payable 7,450,000.00 7,450,000.00 9,900,000.00 9,900,000.00

Other long-term liabilities

Total long-term liabilities 7,450,000.00 7,450,000.00 9,900,000.00 9,900,000.00

Deferred taxes:

Deferred taxes and credit items

Total liabilities 142,169,869.03 141,966,393.86 196,513,891.83 196,513,891.83

Minority shareholders' equity: -563,057.86

owners'/shareholders' equity

Paid-up capital (or share capital) 90,800,000.00 90,800,000.00 90,800,000.00 90,800,000.00

Less: Returned investment

Net paid-up capital (or share capital) 90,800,000.00 90,800,000.00 90,800,000.00 90,800,000.00

Capital public reserve 216,139,865.86 216,139,865.86 217,348,865.86 217,348,865.86

Surplus public reserve 30,690,993.74 30,690,993.74 28,427,325.74 28,427,325.74

Incl.: Statutory public welfare fund 15,345,496.87 15,345,496.87 14,213,662.87 14,213,662.87

Retained earnings 60,379,054.00 60,113,974.88 73,759,302.85 73,759,302.85

Including: Cash dividend 22,700,000.00 22,700,000.00

Unidentified investment loss

Foreign currency conversion balance of statement 35,486.24

Total owners'/shareholders' equity 398,045,399.84 397,744,834.48 410,335,494.45 410,335,494.45

Total owners'/shareholders' equity 539,652,211.01 539,711,228.34 606,849,386.28 606,849,386.28

Legal Representative: Zhou Zhongguo Chief Financial Officer: Li Haijiang Person in charge of the accounting department: Ren Bo


Financial Report

(II) Statement of Profit and Profit Distribution

Statement of Profit and Profit Distribution

Prepared by: Eastcompeace Smart Card CO., LTD. January to December, 2005 In RMB

Items Report period Same Period of the Previous Year


I. Income from principal businesses 647,634,721.69 642,228,396.06 656,080,479.97 656,080,479.97

Less� Costs of principal business 545,675,768.13 544,842,209.53 531,786,096.66 531,786,096.66

Taxes and surcharges of principal business 3,915,379.32 3,915,379.32 1,203,798.33 1,203,798.33

II. Profit from principal businesses (loss stated with "-") 98,043,574.24 93,470,807.21 123,090,584.98 123,090,584.98

Plus�Profit from other businesses (loss is stated with "-") -444,974.20 -444,974.20 634,140.82 634,140.82

Less�Operation costs 29,612,901.80 28,794,415.56 22,914,116.92 22,914,116.92

Overheads 64,468,094.68 58,167,065.39 51,000,614.82 51,000,614.82

Financial expenses 780,532.31 772,152.12 2,657,742.43 2,657,742.43

II. Profit from businesses (loss stated with "-") 2,737,071.25 5,292,199.94 47,152,251.63 47,152,251.63

Plus�Investment income (loss stated with "-") -303,110.98 -2,559,277.23

Subsidy income 11,714,693.67 11,714,693.67 1,661,289.88 1,661,289.88

Non-operating income 28,475.36 28,475.36 57,550.10 57,550.10

Less�Non-operating expenses 685,504.92 685,504.92 1,723,186.84 1,723,186.84

IV. Total Profit (loss stated with "-") 13,491,624.38 13,790,586.82 47,147,904.77 47,147,904.77

Less�Income tax 2,472,246.79 2,472,246.79 9,630,953.80 9,630,953.80

Minority shareholders' equity -564,041.56

Add: Amount of unrecognized investment loss incurred in the report period

V. Net Profit (loss stated with "-") 11,583,419.15 11,318,340.03 37,516,950.97 37,516,950.97

Add�Retained earnings at year beginning 73,759,302.85 73,759,302.85 60,195,742.08 60,195,742.08

Other transfer-in

VI. Profit available for distribution 85,342,722.00 85,077,642.88 97,712,693.05 97,712,693.05

Less�Allotting statutory surplus public reserve 1,131,834.00 1,131,834.00 3,751,695.10 3,751,695.10

Allotting statutory public welfare fund 1,131,834.00 1,131,834.00 3,751,695.10 3,751,695.10

Allotting staff's reward and welfare fund

Allotting reserve fund

Allotting enterprise development fund

Investment returned with profit

VII. The profit distributable to the investors 83,079,054.00 82,813,974.88 90,209,302.85 90,209,302.85

Less�Dividends of preferential shares payable

Allotting discretionary surplus public reserve

Dividend payable for common shares 22,700,000.00 22,700,000.00 16,450,000.00 16,450,000.00

Dividends of common shares converted into capital/capital stock

VIII. Retained earnings 60,379,054.00 60,113,974.88 73,759,302.85 73,759,302.85

Additional Information to the Profit Statement

1. Income from sales and disposal of subsidiaries or investees

2. Loss from natural disaster

3. Increase/decrease of the total profit due to change of accounting policy

4. Increase/decrease of the total profit due to change of accounting estimation 11,186,587.93 11,186,587.93

5. Loss from debts reorganization

6. Others



Financial Report

(III) Cash Flow Statement

Cash Flow Statement


Items Report period

Consolidated Parent company

I. Net cash flows arising from operating activities

Cash received from sales of products and supply of labor 731,704,147.80 727,523,975.59

rebated taxes received 18,555,776.70 18,555,776.70

Other business related cash receipts 6,090,558.99 6,006,816.40

Subtotal of cash flow in 756,350,483.49 752,086,568.69

Cash paid for purchase of goods and reception of labor services 475,832,866.66 475,009,423.50

Cash paid to and for staff 43,023,786.82 39,896,224.52

Taxes paid 32,735,734.10 32,735,734.10

Other operation related cash payments 49,714,626.98 44,597,357.96

Subtotal of cash flow out 601,307,014.56 592,238,740.08

Net cash flows arising from operating activities 155,043,468.93 159,847,828.61

II. Cash flows arising from investment activities:

Cash received from recovery of investment

Cash received from investment income

Net amount of cash received from disposal of fixed assets, intangible assets and other long term assets 5,976.69 600.00

Other investment related cash receipts 5,610,282.71 1,575,783.95


Cash paid for construction/purchase of fixed assets, intangible assets and other long term assets 44,278,830.23 44,010,580.08

Cash paid for investment 3,310,600.00

Other investment related cash payments


Net cash flow arising from investment activities -38,662,570.83 -45,744,796.13

III. Cash flows arising from fund raising activities:

Cash received from absorption of investment

Cash received from borrowings 205,000,000.00 205,000,000.00

Other fund-raising related cash received


Cash paid for liabilities repayment 205,000,000.00 205,000,000.00

Cash paid for dividend/profit distribution or repayment of interest 24,152,211.25 24,152,211.25

Other fund raising related cash payments


Net cash flow arising from fund-raising activities -24,152,211.25 -24,152,211.25

IV. Influence upon cash due to change of exchange rate -854,392.65 -870,711.78

V. Net increase of cash and cash equivalents 91,374,294.20 89,080,109.45


Financial Report

Cash Flow Statement(Cont`d)


Additional Information to the Cash Flow Statement Report period

Consolidated Parent company

1. Net cash flows arising from adjustment of net profit into operating activities:

Net profit 11,583,419.15 11,318,340.03

Plus: Provision for devaluation of assets 10,472,307.23 10,737,386.35

Depreciation of fixed assets 26,312,992.67 26,073,995.63

Amortization of intangible assets 33,157.79 33,157.79

Long-term expenses to be apportioned

Decrease (less: increase) of expenses to be apportioned -69,891.57 -69,891.57

Increase (less: decrease) of expenses drawn in advance

Loss (less: income) from disposal of fixed assets, intangible assets and other long term assets 472,093.10 472,093.10

Losses from rejection of fixed assets

Financial expenses 218,590.94 247,139.08

Investment loss (less: income) 303,110.98 2,559,277.23

Deferred tax loan (less: debit)

Decrease (less: increase) of inventories 172,167,918.12 172,209,654.37

Decrease (less: increase) of operative items receivable -4,738,901.08 -6,145,112.17

Increase (less: decrease) of operative items payable -61,147,286.84 -57,588,211.23

Others

Minority shareholders' equity -564,041.56

Net cash flows arising from operating activities 155,043,468.93 159,847,828.61

2. Investment and fund-raising activities with no cash income and expenses involved:

Capital converted from liabilities

Convertible company bonds due within a year

Fixed assets rented through financing

3. Net increase of cash and cash equivalents:

Ending cash balance 219,717,939.91 217,423,755.16

Less: Opening cash balance 128,343,645.71 128,343,645.71

Plus: Ending cash equivalent balance

Less: Opening cash equivalent balance

Net increase of cash and cash equivalents 91,374,294.20 89,080,109.45

Legal Representative: Zhou Zhongguo

Person in charge of the Accounting Organ: Li Haijiang

Person in charge of the accounting department: Ren Bo



Financial Report

(IV) Net-assets earning rate and earnings per share calaculated based on the fully diluted approach and weighted average


Profit of the report period Net assets-income ratio % Earnings per share (RMB/share)

Fully Weighted Fully Weighted

diluted average diluted average

Principal business profit 24.63 24.45 1.0798 1.0798

Operating profit 0.69 0.68 0.0301 0.0301

Net profit 2.91 2.89 0.1276 0.1276

Net profit after deduction of 2.86 2.83 0.1252 0.1252

non- recurring loss/gain


(V) Schedule of Reserve for Impairment of Assets


Items Opening increase in the Decrease in the report period Endingbalance report period Reversal due to Reversal due to Total balance

rise of asset value other reasons

I. Total reserve for doubtful debts 3,388,596.15 514,084.53 3,902,680.68

Incl.: Accounts receivable 3,299,395.94 464,504.40 3,763,900.34

Other receivables 89,200.21 49,580.13 138,780.34

II. Provision for price falling of short-term investment 0.00 0.00

Incl.: Stock investment

Bond investment

III. Reserve for price falling of inventories 11,063,540.91 15,773,771.46 471,562.33 471,562.33 26,365,750.04

Incl: goods in stock 200,270.23 630,674.41 830,944.64

Raw materials 10,863,270.68 15,143,097.05 471,562.33 471,562.33 25,534,805.40

IV. Total provision for impairment of long-term investments 0.00 0.00

Incl.: Long-term equity investment

Long term bond investment

V. Provision for impairment of fixed assets 2,416,297.94 0.00 2,416,297.94

Incl.: Housing & buildings

Machines & equipment 2,416,297.94 2,416,297.94

VI. Total reserve for devaluation of intangible assets 0.00

incl.: Patent

Trademark

VII. Total provision for impairment of construction-in-progress

VIII. Total provision for impairment of the consignment loan

IX. Total 16,868,435.00 16,287,855.99 471,562.33 471,562.33 32,684,728.66



Financial Report

(VI) Statement of Change in Shareholders' Equity


Items Share Capital Surplus Statutory Retained Foreign currency Total

capital public public public earnings conversion balance Shareholders'

reserve reserve welfare fund of statement Equity

Opening Balance 90,800,000.00 217,348,865.86 28,427,325.74 14,213,662.87 73,759,302.85 410,335,494.45

Increase in the report period 400,000.00 1,131,834.00 1,131,834.00 11,583,419.15 35,486.24 14,282,573.39

Decrease in the report period 1,609,000.00 26,572,668.00 24,963,668.00

Ending Balance 90,800,000.00 216,139,865.86 30,690,993.74 15,345,496.87 60,379,054.00 35,486.24 398,045,399.84



Financial Report

Notes to the Accounting Statements

Eastcompeace Smart Card CO., LTD.

Notes to the Accounting Statements

For the Year 2005

In RMB

I. Company Profile

The predecessor of Eastcompeace Smart Card CO., LTD. (hereinafter referred to as the Company) was Zhuhai Eastcompeace Smart

Card Co., Ltd. On November 6, 2001, approved by the State Economic & Trade Commission, PRC with Document JING MAO QI GAI

[2001] No. 1143 on November 6, 2001, the Company was incorporated with Putian East Communications Group Co., Ltd., Zhuhai

Putian Peace Telecommunications Industry Co., Ltd., Beijing Xinjie Mobile Communication Technology Co., Ltd., Zhuhai Fuchun

Communication Equipment Co., Ltd. (the former Xiangzhou Electronic Equipment Plant of Zhuhai Special Economic Zone),

Zhou Zhongguo, Shi Jixing, Zheng Guomin, Yang Youwei, Zhang Peide, Huang Ningzhai, Zhang Xiaochuan, Li Haijiang as with

founders, registered with Guangdong Provincial Administration for Industry and Commerce on December 4, 2001, granted the Legal

Entity Business Licence with Registration No: 4400001009956. The Company has the existing registered capital of RMB 90.80 million,

totally 90.80 million shares (with par value of RMB 1 per share), including 25 million negotiable Renminbi based ordinary shares. The

Company's shares were formally listed with Shanghai Stock Exchange dated July 13, 2004 for trading.

On October 24, 2005, approved by the State-owned Assets Supervision and Administration Commission of the State Council with the

Official Reply on Assets Ownership [2005] No. 323, reviewed and approved by the Shareholders' General Meeting on October 28, 2005,

the Company's equity separation reform plan was completed in implementation dated November 7, 2005. Upon implementation of the

Company's equity separation reform plan, the number of the Company's shares remained unchanged, namely 90.80 million shares.

The Company is engaged in electronic information industry. Business scope: development, production and sales of Magnetic Stripe

Card, smart card products and relevant equipment (including SIM cards for mobile phone), system integration; sales of self-made

products and import and export of the relevant technology; processing with materials imported and "processing with foreign-supplied

samples, drawings or material and compensation trade". At present, the Company is mainly engaged in SIM cards for mobile phone,

UIM cards and prepaid calling card.

II. Principal Accounting Policies, Accounting Estimation and Preparation of the Consolidated Accounting Statements

(I) Accounting standards and system

The Company implements the PRC Enterprise Accounting Standards and the PRC Enterprise Accounting System and the complemen-

tary provisions.

(II) Fiscal year

The Company uses the calendar year for its fiscal year. A fiscal year is from January 1 to December 31.

(III) Standard Currency for Book Keeping

The Company uses Renminbi (RMB) as the standard currency for book keeping.

(IV) Basis of Presentation and Principle of Pricing

The Company takes the accrual system as the basis for book keeping and historical cost as the basis of valuation.


Financial Report

(V) Foreign Currency Translation

Foreign currency transactions are translated into Renminbi at the exchange rate (median price) of the foreign exchange market prevail-

ing at the day of transaction as published by the People's Bank of China on the first day of the very month. The foreign currency balances

of various foreign currency accounts at the end of a period are adjusted based on the market price (median price) at the end of the period.

The differences incurred in relation with the fixed assets in process of purchase construction but have not reached the predicted

application status are stated in the purchase/construction costs of the relevant fixed assets; those incurred not in relation with the fixed

assets in process of purchase/construction are stated in the long term expenses to be apportioned; those incurred during the production/

operation process are stated in the financial expenses of the current period.

(VI) The conversion method of foreign currency financial statements

1. All the items of assets and liabilities in the balance sheet are converted into amounts in Renminbi based on the market exchange rate

(median price) as of the statement settlement date; the items of owners' equity re converted into amounts in Renminbi based on the

market exchange rate (median price) at the item of incurrence except the items of "retained earnings". The item of "retained earnings"

is stated in Renminbi after converted in the statement of profit distribution. The balance of the total of the assets and liability based items

and owner's equity based items are separately stated in the "Retained Earnings" as the balance of conversion in foreign currency

statement.

2. All the items in the profit statement and the items reflecting the amount of incurrence in the statement of profit distribution are

converted into the amounts in Renminbi based on the average market exchange rate (median price) in the report period. "Net profit" on

the profit distribution statement is stated on the statement of profit after conversion as the amount of this item. "The retained profit at the

year beginning" is stated in the "retained earnings" at the end of the previous year after conversion. The item of "retained earnings" is

stated in Renminbi after converion in the statement of profit distribution.

(VII) The determination standard of cash equivalent

Cash equivalent refers to the investment held by the Company with short term (due within 3 months from the purchase date), strong

liquidity and low risk of value fluctuation that is easy to be converted into cash of known amount

(VIII) Short-term investment:

1. Short term investment is stated based on the investment costs at the time of acquisition less the cash dividend announced for

distribution but not yet received or the bond interest already due but not received. The cash dividend or bond interest enjoyable during

the holding period and already received is not recognized as the investment income but treated as offsetting the investment costs. The

balance of the income from sales of the short term investment less the book value of the short term investment already sold and the cash

dividend or bond interest not yet received but already stated in the accounts receivable is stated in the current loss and profit statement

as the investment earning or loss. The investment cost from sales of the short term investment as carried over is recognized based on the

weighted average.

2. The short term investment at the end of the report period is charged based on the lower of the cost and the market price. For the amount

of the market price lower than the cost, provision for price falling of the individual investment is made.

(IX) Doubtful debts:

1. Doubtful debts are calculated based on the allowance method

For the accounts receivable (including the accounts receivable and other receivables), provision for doubtful debts is made based on the

age analysis method. The Company determines the specific provision proportions according to the financial position, cash flow, etc. of

the debtors which are summarized as follows: for the age within 1 year (with 1 year inclusive and so on), provision is made based on 5%

of the balance; for the age of 1 to 2 years, provision is made based on 10% of the balance; for the age of 2 to 3 years, provision is made

based on 30% of the balance; for the age over 3 years, provision is made based on 100% of the balance. In case there is conclusive

evidence showing that there exists significant difference in recoverability of accounts receivable, provision for doubtful debts is made

based on the specific identification method.


Financial Report

2. Determination criteria of doubtful debts

(1) Accounts payable are impossible to be recovered with the property of legacy or liquidation of the remaining assets due to the death

or bankruptcy of the debtor;

(2) A debtor fails to implement the obligation of repayment of the overdue debts and some distinguished evidence shows that it is

impossible to recover the account receivable.

For an account receivable impossible to be recovered, it shall be regarded as the loss of doubtful debt through approval and offset with

the reserve for doubtful debt as provided.

(X) Inventories:

1. Inventories include the finished products or goods held for sales during the normal production and operation process, or the products

in process still in production for the purpose of sales, or the materials, supplies, etc. for consumption during the production or in process

of supplying labor service.

2. Inventories are charged based on the actual costs.

Raw materials purchased and accepted after check for warehouse entry are stated based on the actual costs, and raw materials delivered

are accounted based on the weighted average. Warehoused finished products (self-made semi-finished products) are stated based on the

actual production cost and finished products (self-made semi-finished products) are accounted based on the weighted average. Low cost

short-lived articles are to be amortized in lump sum at the time of requisition. Packing materials requisitioned for products are stated in

the costs directly; packing materials leased or lent are amortized on once-and-for-all basis.

3.The Company adopts the perpetual inventory method for its inventory system.

4.Inventories are stated at the lower of the cost and the realizable net value due to the reasons of being damaged, completely or partially

out-of-date or the cost being lower than the sales price. Reserve for depreciation of inventories is provided based on the balance between

the cost of individual inventory items and their realizable net value. For the raw materials held for production, if the realizable net value

of the finished products produced with such materials is higher than the cost, the materials shall still be measured according to the cost.

If the price falling of the materials shows that the realizable net value of the finished products is lower than the cost, the materials should

be measured according to the realizable net value.

(XI) Long term investment

1. Long-term equity investment regards the actual investment cost at the time of being obtained as the initial investment cost. Invest-

ment with the amount below 20% of the investee's vote-bearing capital or without significant affect upon the investee despite of the

amount being equal to or exceeding 20% is accounted based on cost method. Should the Company hold over 20% (with 20%

inclusive) of the investee's total capital with voting power or below 20% but with material significance, the calculation is based on the

equity method.

2. Equity investment difference is to be amortized over the investment term specified in contracts if the contracts so specify. In case there

is no investment term specified in the contract, the balance of the initial investment cost greater than the owner's equity in the investee

is amortized over 10 years. The balance of the initial investment cost lower than the owner's equity in the investee is stated in the capital

public reserve - provision for equity investment.

3. Long-term credit investment is charged according to the initial investment cost at the time of being obtained. The premium or discount

of bonds is to be amortized with straight-line method over the existence duration of the bonds. The interest receivable from bond

investment is calculated based on the term. The calculated interest income from bond investment after the adjustment of the amortization

of the premium or discount of bond investment is confirmed as the income from investment in the current period. If the initial bond

investment cost has already contained relevant expenses with big amount, such expenses are amortized at the time of recognizing the

relevant bond interest income from the purchase of the bonds to the day before the expiry and stated in the gains/losses. The interest

receivable for other credit investment is calculated based on the term and recognized as the investment income of the current period.


Financial Report

4. At the end of the period if the recoverable amount is lower than their book value due to continuously falling market price, worsened

operation of the investee, reserve for devaluation of long term investment shall be provided based on the balance of the recoverable

amount lower than the book value of the long term investment.

(XII) Fixed assets and depreciation

1. Fixed assets refer to the tangible assets with the following characteristics: (1) the assets held for the purpose of producing commodities,

offering labor services, lease or operative management; (2) service life exceeding one year; (3) higher unit price.

2. Fixed assets are stated at the actual cost at the time of obtainment. The leased fixed assets based on financing are charged based on the

lower of original book value of the assets on the date of starting leasing and the present value of the lowest leasing payment.

3. Fixed assets are depreciated based on the composite life method. Without consideration of provision for impairment, the depreciation

years and the annual depreciation rate are determined according to the types of fixed assets, predicted service life and predicted net

residual rate (the amount equal to 3% of the cost of the land use right whose service life is specified to be higher than the predicted

service life of the housing and buildings is also reserved as the net residual value) as follows:

Types of Fixed Assets Depreciation Years (Year) Annual Depreciation Rate (%)

Housing and buildings 8-30 12.13-3.23

General equipment 4-5 24.25-19.40

Special equipment 8 12.13

Motor vehicle 10 9.70

Other equipment 4-5 24.25-19.40

For the equipment purchased for the purpose of developing new technology and new products with unit price below RMB 50,000,

according to the Document of the State Ministry of Finance CAI GONG ZI [96] No. 41, the method of providing depreciation on once-

and-for-all basis shall be applied in use of the aforesaid equipment.

4. At the end of a period, if the recoverable amount of fixed assets is lower than their book value due to continuously falling market price,

out-of-date technology, damage or long term idleness, reserve for devaluation of fixed assets shall be provided based on the balance of

the recoverable amount of individual assets lower than the book value of the fixed assets.

(XIII) Construction in progress:

1. Construction-in-progress is stated at cost.

2. The construction in progress is charged based on the actual cost and transferred into the fixed assets after the works has reached the

predicted status. The construction in progress which has not yet been handled for the completion settlement should be transferred into

the fixed assets based on the estimated value and further undergo adjustment after the actual value is determined.

3. In one or more of the following cases at the end of a period, reserve for devaluation of construction-in-progress shall be provided

based on the balance of the amount recoverable of individual assets lower than the book value of the construction in progress:

(1) The construction has been stopped for a long time and shall not restart within 3 years;

(2) The project is backward in terms of performances and technology and shall bring the Company about big uncertainty in profit

making;

(3) Other conditions that have proved that the construction-in-progress has been involved in depreciation.

(XIV) Loan Cost

1. Recognition of loan cost

The balance of the amortization and the exchange of the interest, discount or premium arising from the special loan for purchasing/

constructing fixed assets shall be capitalized if it complies with the conditions of capitalization duration and amount of capitalization and

stated in the costs of the assets. Other loan interest, amortization of discount or premium and exchange difference are stated as expenses

of the period of incurrence. The auxiliary expense incurred from arrangement of special loan is capitalized at the time of incurrence in

case such expense incurs before the fixed asset purchased or constructed has reached the predicted application status. Other auxiliary

expenses are recognized in the very period of incurrence. The small auxiliary expenses are stated as expenses at the very period of

incurrence.


Financial Report

2. Duration of loan cost capitalization

(1) starting capitalization: the balance of the amortization of interest, discount or premium incurred from special loans and the exchange

starts capitalization if it complies with all the following three conditions: 1) payment of assets has incurred; 2) loan cost has incurred; 3)

the activity of procurement/construction necessary for the asset to reach the predicted application status has started.

(2) Suspending capitalization: capitalization of the loan cost shall be suspended if the procurement/construction of the fixed asset has

been interrupted abnormally and the interruption has continuously lasted for more than three months. In such a case, the loan cost shall

be stated as the expenses of the very period until the procurement/construction restarts.

(3) Stopping capitalization: when the fixed asset purchased/constructed has reached the predicted application status, the capitalization of

the loan cost shall stop.

3. Amount of the capitalized loan cost

In each accounting duration of capitalization, the amount of the capitalized interest is the product of the weighted average of the

accumulated expenditure of the fixed asset ended the very period times the capitalization rate. If the discount or premium amount

necessary to be amortized is adjusted as the interest, the capitalization interest rate should be adjusted correspondingly. The capitaliza-

tion amount of the exchange balance is the exchange balance arising from the special loan and the interest incurred in the very period.

(XV) Intangible assets

1. Intangible assets are stated based the actual costs at the time of obtainment.

2. Intangible assets are amortized over the predicted service years commencing from the very month when they are obtained and stated

in the gains and losses.

If the predicted service life of intangible assets has exceeded that as specified in the relevant contract or according to the relevant law,

the amortization years of such intangible assets is determined based on the following principle: (1) If the relevant contract has specified

beneficial years but the law has not specified the valid term, the amortization should be conducted in the beneficial years as specified in

the contract; (2) If the relevant contract has not specified beneficial years but the law has specified the valid term, the amortization

should be conducted in the beneficial years as specified, amortization should be conducted over the valid years specified by the law; (3)

If the relevant contract has specified beneficial years and the law has also specified the valid term, the amortization years should be based

on the shorter of the beneficial years and the valid term;

If the contract has not specified the beneficial years nor has the law specified the valid term, the amortization years must not exceed 10

years.

If it is predicted that some intangible asset is unable to bring economic benefit to the Company, the book value of the intangible asset

shall all transferred to the overheads of the current period.

3. Inspection at the end of a period proves that the intangible assets are predicted to bring the Company with the future ability of

economic benefit, if the predicted recoverable amount of the individual intangible asset is lower than its book value, provision for

impairment of intangible assets is made.

(XVI) Long-term expenses to be amortized

1. Long-term expenses to be apportioned are stated based on actual payment and amortized in average over the benefited period of the

expense items.

2. The expenses incurred in the preparation of the Company (except the fixed assets purchased/constructed) were aggregated in the long

term expenses to be amortized first and then stated in the gain/loss of the very month when the Company started the production and

operation on once-and-for-all basis.

(XVII) Principle of income recognition

1. Income from sales of goods

Sales of commodities: The revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer

provided that the Company maintains neither managerial involvement to the degree usually associated with ownership, nor effective

control over the goods sold; the relevant economic benefit has flown to the Company or the documentary evidence has been received

while the costs in connection with the sales of the goods can be reliably measured.


Financial Report

2. Labor services

(1) Supply of labor service: The business income is recognized when labor services have been provided and payment has been received

or evidence of receipt has been obtained.

(2) In case labor services start and end in different fiscal years, the total income of the labor service contract and completion of the labor

services can be reliably determined and the relevant economic benefit in connection with the transaction can flow to the Company

provided that the costs as already incurred and that to incur upon completion of the labor services can be reliably measured.

3. Use right of assigned assets

Use fee income arising from the use right of the assigned intangible assets such as trademark, patent, exclusive right, copyright, etc. and

other non-cash asset is recognized based on the collection time and calculation method according to the relevant contract/agreement.

The aforesaid income is recognized when (1) the economic interest in connection with the transaction can flow into the Company and (2)

the income amount can be reliably measured.

(XVIII) Accounting treatment of income tax

Income tax is stated based on the tax payable method.

(XIX) Preparation of Consolidated Statements

The parent company puts such investees into the consolidation range of its consolidated statements: the parent holds more than half of

their equity capital or enjoys control power over them although it does not hold more than half of their equity capital. The consolidated

statements are prepared based on the accounting statements of the parent company and the subsidiaries listed in the consolidation range

and other relevant information according to the Provisional Regulation on Consolidating Accounting Statements. For joint venture,

consolidation is made by means of the proportion based consolidation. The principal accounting policies of the subsidiaries are collected

and stipulated based on the accounting policies unifiedly selected by the parent company. Material transactions and current accounts

among the companies in the consolidation are offset at the time of consolidation.

(XX) Notes to change in the accounting policy and accounting estimation

The Company adopts the service life average method for depreciation of fixed assets and the original depreciation time for special

equipment is 4 to 5 years. As the special equipment has been greatly improved in overall performances and technological level through

effective technical innovation and scientific maintenance, the service life has been prolonged. With reference to the depreciation years

for special equipment in this sector, through resolution of the 6th meeting of the Second Board of Directors, the Company adjusted the

depreciation years of the special production equipment from the original 4 to 5 years to 8 years commencing from July 1, 2005. For the

change of this accounting estimation, the Company has adopted the future application method according to the relevant provisions of

the Enterprise Accounting System, and the total amount of profit of the parent company and consolidated profit were added by RMB

11,186,587.93 respectively in the report period.

III. Taxes

(1) Value-added tax

The value-added tax is calculated based on the rate of 17%. Export goods enjoys the tax policy of "exemption, offsetting and rebating"

with the rebating rate of 17% or 13%. The mobile phone smart card operation system TurboCOS developed by the Company was

granted the software product certificate from Guangdong Provincial Department of Science and Technology. Meanwhile, the Company

was certified as a software entity by Guangdong Provincial Department of Information Industry on June 28, 2005. According to the

Document of the State Ministry of Finance CAI SHUI [2000] No. 25 and the Official Reply of Zhuhai National Tax Bureau ZHU GUO

SHUI HAN [2003] No. 149, for the SIM cards and stored value cards which contain this software sold by the Company, the part

exceeding the actual VAT by 3% enjoys rebate at the time of taxation.

(II) Business tax

The business tax is calculated based on the rate of 5%.


Financial Report

(III) Tax for urban development and maintenance

It is based on 7% of the payable circulating tax.

(IV) Educational Surcharge

It is based on 3% of the payable circulating tax.

(V) Business income tax

The Company is a hi-tech enterprise certified by Guangdong Provincial Department of Science and Technology located in Zhuhai Hi-

tech Industry Development Zone approved by the State Council. The Company pays its business income tax at the rate of 15%.

IV. Controlled subsidiaries and joint ventures

(I) Controlled Subsidiary

Full Name Business Type Registered Capital Business Scope Actual investment Proportion

in the equity

Eastcompeace Smart Card Distribution S$ 500,000 Sales of smart cards S$ 400,000 80%

�Singapore�Pte Ltd.

(II) Other Notes

1. Subsidiaries not listed on the consolidated statements

2. Subsidiaries whose equity is held by the Company by less than 50% but listed on the consolidated statements.

3. Note to the change in the consolidation range and the reason

(1) Note to the increase of subsidiaries through equity acquisition in the report period

Singapore based ZEP SMART CARDS PTE.LTD. (hereinafter referred to as ZEP Singapore) was jointly invested and founded by Mr.

Anthony Ong and Mr. Andy Chew and registered and incorporated in Singapore on November 13, 2003 with registered capital of S$

100,000. On August 18, 2004, the Company and Mr. Anthony Ong and Mr. Andy Chew executed the agreement on capital increase for

ZEP Singapore. Approved by the Ministry of Commerce of the People's Republic of China with the Document "Official Reply on

Approval of Zhuhai Eastcompease Smart Card Co., Ltd. to Invest Singapore ZEP SMART CARDS PTE. LTD. by Joint Stock [2004]

No. 861 and the Company unilaterally increased the capital of ZEP Singapore by US$ 400,000 with the self-raised fund by cash remitment

on January 29, 2005. After the capital increase, the registered capital of ZEP Singapore increased from S$ 100,000 to S$ 500,000 and the

name was changed into Eastcompeace Smart Card �Singapore�Pte Ltd. As the Company holds 80% of the registered capital after the

capital increase, the Company has now become the actuall controller of the company. Therefore, commencing from February, 2005, the

Company has listed it in the range of the consolidated statements. The relevant financial data of the company are summarized as follows:

Items Amount as of the date of acquisition (converted into RMB)

Current assets 13,229,003.00

Long-term investment

Fixed assets: 394,032.75

intangible assets and other assets

Current liabilities 13,618,117.26

Long-term liabilities

Items Amount incurred from the date of acquisition to the end of the report period

Principal business income 34,570,830.55

Principal business profit 6,168,025.25

Total profit -2,820,207.81

Income tax

Net profit -2,820,207.81


Financial Report

V. Profit Distribution

Based on 2005 Annual Profit Distribution Proposal approved by the 9th Meeting of the Second Board of Directors on March 16, 2006,

the Company is to provide the statutory surplus public reserve by 10% of the net profit as realized amounting to RMB 1,131,834.00,

provide the statutory public reserve by 10% of the net profit as realized amounting to RMB 1,131,834.00, the balance available for

distribution to the shareholders shall not be distributed. Meanwhile, with the total share capital of 90.80 million shares dated December

31, 2005 as the base, the capital public reserve shall be converted into share capital to the whole shareholders at the rate of 3 shares for

every 10 shares. The aforesaid profit distribution is subject to review and adoption of the Shareholders' General Meeting.

VI. Notes to the items of the consolidated accounting statements

(I) Notes to the items on the consolidated balance sheet

1. Monetary funds Ending balance: RMB 219,717,939.91.

(1) Details


Cash on hand 22,463.23 2,612.39

Bank deposit 219,355,796.81 128,170,478.15

Other Monetary Funds 339,679.87 170,555.17

Total 219,717,939.91 128,343,645.71

(2) Monetary funds - foreign currency

Ending Balance Opening Balance

Items Original currency Exchange RMB amount Original currency Exchange RMB amount

and amount rate after conversion and amount rate after conversion

Cash on hand HKD98.50 1.0403 102.47 HKD98.50 1.0637 104.77

Bank deposit USD2,031,949.77 8.0702 16,398,241.04 USD621,658.33 8.2765 5,145,155.17

HKD105,076.88 1.0403 109,311.48 HKD126,726.19 1.0637 134,798.65

EUR704,090.27 9.5797 6,744,973.56 EUR43.38 11.2627 488.58

Sub-total 23,252,628.55 5,280,547.17

2. Accounts receivable Ending balance: RMB 58,791,957.94.

(1) Age Analysis


Age Book Proportion Provision for Book value Book balance Proportion Provision for Book value

balance (%) bad debts (%) bad debts

Within a year 61,470,709.78 98.26 3,073,535.49 58,397,174.29 57,710,118.84 95.26 2,885,505.94 54,824,612.90

1 to 2 years 386,148.50 0.62 38,614.85 347,533.65 2,244,400.00 3.70 224,440.00 2,019,960.00

2 to 3 years 67,500.00 0.11 20,250.00 47,250.00 631,500.00 1.04 189,450.00 442,050.00

Over 3 years 631,500.00 1.01 631,500.00

Total 62,555,858.28 100.00 3,763,900.34 58,791,957.94 60,586,018.84 100.00 3,299,395.94 57,286,622.90


Financial Report

(2) Of the accounts receivable , the total amount owed by the top five debtors was RMB 31,609,102.93, taking 50.53% of the book

balance of the accounts receivable.

(3) Of the above accounts, there are no arrears owed by the shareholder holding over 5% ( including 5%) of the Company's voting-

bearing shares.

(4) Accounts Receivable - foreign currency

Ending balance Opening Balance

Currencies Amount in original Exchange RMB amount Amount in Exchange RMB amount

currency rate after conversion original currency rate after conversion

US$ 1,845,375.30 8.0702 14,892,547.75 2,190,856.69 8.2765 18,132,625.39

HK$ 200,000.00 1.0403 208,060.00 52,000.00 1.0637 55,312.40

Sub-total 15,100,607.75 18,187,937.79

3. Other receivables Ending balance: RMB 2,269,118.91.

(1) Age Analysis


Age Book balance Proportion (%) Provision for bad debts Book value Book balance Proportion (%) Provision for bad debts Book value

Within a year 2,303,891.72 95.68 115,194.59 2,188,697.13 1,480,378.61 98.70 74,018.93 1,406,359.68

1 to 2 years 89,357.53 3.71 8,935.75 80,421.78 4,812.75 0.32 481.28 4,331.47

2 to 3 years

Over 3 years 14,650.00 0.61 14,650.00 14,700.00 0.98 14,700.00

Total 2,407,899.25 100.00 138,780.34 2,269,118.91 1,499,891.36 100.00 89,200.21 1,410,691.15

(2) Other receivables in bigger amount

Companies Ending balance Description

Zhuhai Smart Card Manufacture & Color Printing Co., Ltd. 658,589.11 Factory building rental and overhead receivable

Procurement Center of Hangzhou Municipal Government 200,000.00 Deposit for residents' card project

Zhang Yajun 127,030.93 Reserves

Sub-total 985,620.04

(3) Of the other receivables, the total amount owed by the top five debtors was RMB 1,127,000.04, taking 46.80% of the book

balance of the other receivables.


bearing shares.

4. Advance to Suppliers Ending balance: RMB 2,880,958.08.

(1) Age Analysis

Age Ending Balance Opening Balance

Amount Proportion (%) Amount Proportion (%)

Within a year 2,673,491.52 92.80 1,971,277.01 100.00

1 to 2 years 207,466.56 7.20

Total 2,880,958.08 100.00 1,971,277.01 100.00


Financial Report


bearing shares.

(3) Advance to Suppliers - foreign currency


Currencies Amount in Exchange RMB amount Amount in Exchange RMB amount

original currency rate after conversion original currency rate after conversion

US$ 84,035.03 8.0702 678,179.50 220,038.01 8.2765 1,821,144.59

Euro 70,298.50 9.5797 673,438.54 12,375.00 11.2627 139,375.91

HK$ 9,166.00 1.0637 9,749.87

Sub-total 1,351,618.04 1,970,270.37

5. Subsidies receivable Ending balance: RMB 8,735.40


Rebated export tax receivable 8,735.40 2,981,309.71

Total 8,735.40 2,981,309.71

6. Inventories: Ending balance: RMB 105,620,721.97

(1) Details

Ending balance Opening balance

Items Book Balance Provision for Book value Book Balance Provision for Book value

price falling price falling

Supplies purchased 26,499,151.04 26,499,151.04

Raw materials 51,626,333.73 20,227,942.57 31,398,391.16 136,300,530.37 10,226,931.08 126,073,599.29

Packing materials 986,543.91 986,543.91 1,180,364.01 1,180,364.01

Low-value consumption goods 328,222.33 328,222.33 511,578.05 511,578.05

Self-made semi-finished products 5,444,493.56 5,444,493.56 5,633,324.67 636,339.60 4,996,985.07

Goods in stock 68,225,790.55 793,821.04 67,431,969.51 128,685,455.56 200,270.23 128,485,185.33

Materials involved in procession on commission 31,101.50 31,101.50

Total 126,642,485.58 21,021,763.61 105,620,721.97 298,810,403.70 11,063,540.91 287,746,862.79

(2) The ways of obtaining the inventories in the report period were all self-making or purchase.

(3) The aforesaid inventories were not used to secure liabilities.

(4) Provisions for impairment of inventories

1� Details

Items Increase in the Decrease in the report period

Opening Balance report period Carry-back due Transfer out due Ending balance

to price rising to other reason

Raw materials 10,226,931.08 10,001,011.49 20,227,942.57

Self-made semi-finished products 636,339.60 636,339.60

Goods in stock 200,270.23 593,550.81 793,821.04

Sub-total 11,063,540.91 10,594,562.30 636,339.60 21,021,763.61


Financial Report

(2) The basis for confirming the realizable net value of inventories:

Realizable value of inventories is recognized based on the net of the market price accepted by both parties willingly in trading less the

additional costs necessary for further processing or sales during the market trading of individual inventories on fair basis. Reserve for

inventory impairment is provided according to the difference between the net realizable value and cost of individual inventories.

However, for the materials held for production, if the realizable net value of the finished products made of such materials is higher than

cost, such materials are still measured based on the costs; if the price falling of the materials shows that the realizable net value of the

finished products is lower than cost, such materials are measured based on the realizable net value. At the end of the report period,

provision for price falling of inventories is made for the inventories with the realizable net value lower than the cost or the held-up,

overdue and inferior inventories.

7. Expenses to be apportioned Ending balance: RMB 240,490.73.

Items Ending balance Opening Balance Reason of balance at the end of the period

Insurance premium 35,289,56 50,599.16 Insurance premium from January to June, 2006

Expenses for information disclosure 119,166.67 120,000.00 Expenses for information disclosure from January to June, 2006

Property management 86,034.51 Property management fee of Beijing Office from January to September, 2006

Total 240,490.73 170,599.16

8. Long-term equity investment Ending balance: RMB 3,003,554.23.

(1) Details


Book balance Provision for price falling Book value Book balance Provision for price falling Book value

Investment to subsidiaries 3,003,554.23 3,003,554.23

Total 3,003,554.23 3,003,554.23

(2) Long term equity investment calculated based on the equity method

1) Details

a. Details composed of balance at the end of the report period

Investees Proportion of investment Investment Adjustment of Reserve for equity Equity investment Ending

shares held term costs gain/loss investment difference balance

Eastcompeace Smart Card 80% Unidentified 3,003,554.23 3,003,554.23

(Singapore) CO., LTD.

Sub-total 3,003,554.23 3,003,554.23

b. Details of increase/decrease in the report period

Investees Opening Increase/decrease Increase/decrease Cash dividend Increase/decrease Increase/ decrease Ending

Balance of investment of gain/loss obtained in of investment of equity Balance

cost in the adjustment in the report period reserve in investment in the

report period the report period the report period report period

Eastcompeace Smart Card 3,003,554.233,003,554.23


Sub-total 3,003,554.233,003,554.23


Financial Report

2} Consolidated price difference

a) Details

Investees Initial Opening Increase in the Amount amortized Transfer out in the Ending Amortization

amount Balance report period in the period report period Balance Term

Eastcompeace 3,306,665.21 3,306,665.21 303,110.98 3,003,554.23 10 years

Smart Card


Sub-total 3,306,665.21 3,306,665.21 303,110.98 3,003,554.23

b. Note to the reason of formation of the consolidated price difference

On January 29, 2005, the Company made premium capital increase unilaterally on ZEP Singapore and paid US$ 400,000 (equivalent to

RMB 3,310,600.00 after conversion). With comparison with RMB 3,934.79, 80% of ZEP's net assets amounting to RMB 4,918.49

ended January 31, 2005, the equity investment balance (borrowing balance) produced amounting to RMB 3,306,665.21 is to be amor-

tized over 10 years. The amortization over 11 months in the report period totals RMB 303,110.98.

9. Costs of fixed assets Ending balance: RMB 276,788,493.98

(1) Details

Types Opening Balance Increase in the report period Decrease in the report period Ending Balance

Housing and buildings 52,565,148.36 13,492,559.41 744,951.13 65,312,756.64

General equipment 2,279,612.97 232,740.84 2,512,353.81

Special equipment 184,487,715.56 17,909,881.12 202,397,596.68

Motor vehicles 3,203,240.00 344,000.00 3,547,240.00

Other equipment 2,035,647.42 1,001,742.29 18,842.86 3,018,546.85

Total 244,571,364.31 32,980,923.66 763,793.99 276,788,493.98

(2) In the increase in the report period, the amount transferred in from the construction in progress upon completion amounted to RMB

12,959,243.32.

(3) Decrease in the report period includes the fixed assets sold amounting to RMB 10,780.00; the discarded fixed assets amounted to

RMB 744,951.13. The Company has not been involved in displacement of fixed assets with any other unit.

(4) The Company has not been involved in financing rent of fixed assets.

(5) Operating lease of fixed assets

Types Original book Accumulative Provision for Book value

value depreciation impairment

Housing and buildings 8,321,153.10 263,503.19 8,057,649.91


Sub-total 15,441,581.70 4,570,235.61 10,871,346.09

(6) Temporarily idle fixed assets



Special equipment 11,391,024.00 8,632,995.34 2,416,297.94 341,730.72

Sub-total 11,391,024.00 8,632,995.34 2,416,297.94 341,730.72


Financial Report

(7) Fixed assets of which depreciation has been fully provided but are still in use



Housing and buildings 162,023.30 153,922.13 8,101.17

General equipment 1,897,806.77 1,838,057.25 59,749.52


Other equipment 971,897.46 944,329.06 27,568.40

Sub-total 59,479,264.56 55,527,371.82 3,951,892.74

(8) There were no fixed assets already out of service and ready for disposal

(9) There were no fixed assets used for liability guarantee at the end of the report period

(10) The certification of title for all the other fixed assets had been handled except that for the newly constructed factory

building phase II and the office building of Beijing office with original value of RMB 31,488,580.34.

10. Accumulative depreciation Ending balance: RMB 142,825,921.18

Types Opening Balance Increase period Decrease in Ending Balance

in the report the reportperiod

Housing and buildings 3,381,646.94 1,987,003.08 272,581.43 5,096,068.59

General equipment 1,745,753.09 466,040.74 2,211,793.83


Motor vehicles 756,135.42 310,590.48 1,066,725.90

Other equipment 908,744.57 1,202,384.26 13,142.77 2,097,986.06

Total 116,795,966.54 26,315,678.84 285,724.20 142,825,921.18

11. Net value of fixed assets Ending balance: RMB 133,962,572.80

Types Ending balance Opening Balance

Housing and buildings 60,216,688.05 49,183,501.42

General equipment 300,559.98 533,859.88

Special equipment 70,044,249.88 74,484,029.04

Motor vehicles 2,480,514.10 2,447,104.58

Other equipment 920,560.79 1,126,902.85

Total 133,962,572.80 127,775,397.77

12. Provisions for impairment of fixed assets Ending balance: RMB 2,416,297.94

(1) Details

Types Opening Balance Increase in the Decrease in the Ending Balance

report period report period

Special equipment 2,416,297.94 2,416,297.94

Total 2,416,297.94 2,416,297.94


Financial Report

(2) Note to the reason for provision for impairment of fixed assets

At the end of the period, if the recoverable amount of fixed assets is lower than their book value due to continuously falling market price,

out-of-date technology, damage or long term idleness, reserve for devaluation of fixed assets shall be provided based on the balance of

the recoverable amount of individual assets lower than the book value of the fixed assets. For the equipment already purchased for a long

time but with backward technology and left unused, provision for impairment of fixed assets amounting to RMB 2,416,297.94 was

reserved.

13. Construction-in-progress Ending balance: RMB 10,260,611.75

(1) Details

Ending Balance Opening balance

Projects Book Balance Provision for Book value Book Balance Provision for Book value

deterioration deterioration

R & D Building 10,260,611.75 10,260,611.75 330,781.40 330,781.40

Total 10,260,611.75 10,260,611.75 330,781.40 330,781.40

(2) Increase/decrease of construction-in-progress

Projects Opening Increase in Transferred into the Other decreases Ending Funds Budget Proportion of

Balance the report fixed assets reversed in the report balance source (in RMB'000) project

period in the report year year investment

Office building of Beijing Office 6,061,226.87 6,061,226.87

Factory building Phase II 6,898,016.45 6,898,016.45

R & D Building 330,781.40 9,929,830.35 10,260,611.75 Proceeds 17,916,80 57.27%

from offering

Total 330,781.40 22,889,073.67 12,959,243.32 10,260,611.75

(3) In the aforesaid projects, there was no capitalized borrowing expense.

(4) In the report period, there existed no such condition that the recoverable amount was lower than the book value in the aforesaid

construction-in-progress. Therefore, it is unnecessary to make provision for impairment of construction-in-progress.

14. Intangible Assets Ending balance: RMB 5,311,847.23

(1) Details


Type Book Balance Provision for Book value Book Balance Provision for Book value

impairment impairment

Land use right 5,311,847.23 5,311,847.23 1,248,496.62 1,248,496.62

Total 5,311,847.23 5,311,847.23 1,248,496.62 1,248,496.62


Financial Report

(2) Increase/decrease of intangible assets

Type Way of Initial Opening Increase in the Transfer out in Amount amortized Ending Accumulative Remaining time

acquisition amount Balance report period the report period in the period balance amortization for amortization

Land use right I As transferee 1,316,516.54 1,248,496.62 26,330.28 1,222,166.34 94,350.20 557 months

Land use right II As transferee 4,096,508.40 4,096,508.40 6,827.51 4,089,680.89 6,827.51 599 months

� � 5,413,024.94 1,248,496.62 4,096,508.40 33,157.79 5,311,847.23 101,177.71

(3) In the report period, there existed no such condition that the recoverable amount was lower than the book value in the aforesaid

intangible assets. Therefore, it is unnecessary to make provision for impairment of intangible assets.

(4) The certification of title for all the other intangible assets had been handled except that for the newly added land use right with the

amount of RMB 4,096,508.40.

15. Notes payable Ending balance: RMB 0.00

Type Ending balance Opening Balance

Bank acceptance 26,499,151.04

Total 26,499,151.04

16. Accounts payable Ending balance: RMB 90,041,086.54

(1) There were no accounts payable to the shareholders holding more than 5% (including 5%) of the Company's shares.

(2) Accounts payable - foreign currency


Currencies Initial amount Exchange rate Conversion into Renminbi Initial amount Exchange rate Conversion into Renminbi

US$ 3,511,918.16 8.0702 28,341,881.93 6,844,793.73 8.2765 56,650,935.31

Euro 174,751.53 9.5797 1,674,067.23 207,403.40 11.2627 2,335,922.27

Sub-total 30,015,949.16 58,986,857.58

17. Advance Receipts Ending balance: RMB 153,728.51

(1) There were no advance receipts from the shareholders holding more than 5% (including 5%) of the Company's shares.

(2) Advance receipts - foreign currency


Currencies Initial amount Exchange rate Conversion into Renminbi Initial amount Exchange rate Conversion into Renminbi

US$ 18,860.00 8.0702 152,203.97 11,196.64 8.2765 92,668.99

Sub-total 152,203.97 92,668.99

18. Salaries payable Ending balance: RMB 7,642,755.60

The balance at the end of the period was the salaries payable to the employees for December, 2005 and the bonus for the year 2005.


Financial Report

19. Taxes Dutiable Ending balance: RMB -899,596.35

Taxes Ending balance Opening balance Statutory tax rate

Business income tax -1,287,967.49[Note] 1,906,662.49 For the detail, refer to Note

III (V) to the Accounting

Statements.

Value-added tax 107,932.55 -8,507,789.24 For the detail, refer to Note III

(I) to the Accounting Statements.

Tax for urban development 191,949.47 Based on 7% of the circulation

and maintenance tax payable

Business tax 5,472.48 Paid based on 5%

Real estate tax 6,333.88 Paid based on the relevant

provision

Individual income taxesdeducted 76,682.76 93,688.62 Paid based on the relevant

and paid on behalf provision

Total -899,596.35 -6,507,438.13

[Note]: The income tax paid in advance in the report period was greater than the balance of the income tax payable.

20. Other payable to government Ending balance: RMB 82,264.06

Items Ending balance Opening Balance Payment rate

Educational Surcharge 82,264.06 Based on 3% of the

circulation tax payable

Total 82,264.06

21. Other payables Ending balance: RMB 24,191,613.74

(1) There were no payable to the shareholders holding more than 5% (including 5%) of the Company's shares.

(2) Other payables - foreign currency


Currencies Initial amount Exchange Conversion into Initial amount Exchange Conversion into

rate Renminbi rate Renminbi

US$ 21,673.55 8.0702 174,909.88 1,400.00 8.2765 11,587.10

Euro 37,104.00 9.5797 355,445.19 21,000.00 11.2627 236,516.70

Sub-total 503,355.07 248,103.80

(3) Note to the outstanding of the lump other payables with age exceeding 3 years

Of the other receivables, the age of the partial payable to the customer for the supplementary materials and training fee amounting to

RMB 8,070,503.76 exceeding over 3 years was mainly due to that innovation of the present network information and new mobile

technology has speeded up, personalized application has become popular and diversified while the relevant technical standard is still in

discussion and in process of transition, and the corresponding technical training program has been suspended in compliance with the

requirements of the customers of mobile companies. In addition, the market competition of smart cards in the report period was

extremely intense, the Company is speeding up the business integration of the market and establishment of the network mechanism,

which therefore caused the progress of partial technical training program slowed down. The Company has undertaken to carry out the

corresponding technical training program as soon as possible to various mobile companies.


Financial Report

(4) Note to the nature or description of the other payables with bigger amount

Items Description Amount

Supplementary materials and training Supplementary material 8,070,503.76

fee payable to the customers [Note] fee and training fee

Balance of the staff education budget Staff education budget 2,614,272.56

Balance of the trade union fund Trade Union Budget 2,691,442.24

Balance of the staff's housing fund Staff's housing fund 2,216,334.48

Sub-total 15,592,553.04

��

[Note]: The Company supplied the supplementary materials or number of trainees according to the sales contracts executed with the

sales customers. The balance is the outstanding of the supplementary materials and training fee payable to the sales customers.

22. Special accounts payable Ending balance: RMB 7,450,000.00

(1) Details

��

Items Ending balance Opening Balance

Special purpose fund provided 7,450,000.00 9,900,000.00

by the central government

Total 7,450,000.00 9,900,000.00

��

(2) Description of the outlay

The balance amounting to RMB 7,450,000.00 at the end of the report period is the project research and development fee received with

details as follows:

��

Fund provider Project description Balance

State Ministry of Information Industry Research and development of non-contact IC 400,000.00

card reading equipment and the industrial

application system

Electronic information industry Mobile communication SIM card COS and 1,000,000.00

development fund management multiple application development system

office of the State Ministry of

Information Industry

Guangdong Provincial Department JAVA Card Project 200,000.00

of Science and Technology

Zhuhai Municipal Bureau of Science CDMA System R-UIM project 1,500,000.00

and Technology

Zhuhai Municipal Bureau of Science CDMA UTK card project 500,000.00

and Technology

Zhuhai Municipal Bureau of Science Project of Guangdong Smart Card Project 900,000.00

and Technology Technology Research & Development Center

Zhuhai Municipal Bureau of Science Multiple card transaction terminal 550,000.00

and Technology improved cashier project

Zhuhai Xiangzhou District Bureau CDMA System R-UIM project 2,000,000.00

of Science and Technology

Zhuhai Xiangzhou District Bureau Smart card based mobile application 400,000.00

of Science and Technology security certification platform

Sub-total 7,450,000.00

��

Ended December 31, 2005, the aforesaid research & development projects had not undergone completion acceptance inspection.


Financial Report

23. Share capital Ending balance: RMB 90,800,000.00

(1) Details

Items Opening Balance Increase/ Decrease (+ / -) in the report period Ending balance

Quantity Proportion New Bonus Shares converted Others Sub-total Quantity Proportion

(%) issuing shares from public reserve (shares) (%)

(I) Shares with limited sales conditions

1�State shares

2. State legal person shares 56,147,140.00 61.84 -7,466,375.00 -7,466,375.00 48,680,765.00 53.61

3. Other domestic shares 9,652,860.00 10.63 -1,283,625.00 -1,283,625.00 8,369,235.00 9.22

including:

Domestic legal person shares 5,474,560.00 6.03 -728,000.00 -728,000.00 4,746,560.00 5.23

Domestic natural person shares 4,178,300.00 4.60 -555,625.00 -555,625.00 3,622,675.00 3.99

4�Foreign shares

including:

Foreign legal person shares

Foreign natural person shares

Total shares with limited sales conditions 65,800,000.00 72.47 -8,750,000.00 -8,750,000.00 57,050,000.00 62.83

(II) Shares with limited sales conditions

1. RMB ordinary shares 25,000,000.00 27.53 8,750,000.00 8,750,000.00 33,750,000.00 37.17

2. Domestic shares listed domestically

3. Foreign shares listed abroad

4. Others

Total negotiable shares 25,000,000.00 27.53 8,750,000.00 8,750,000.00 33,750,000.00 37.17

(III) Total shares 90,800,000.00 100.00 90,800,000.00 100.00

(2) Quantity of negotiable shares held by the shareholders of negotiable shares with limited sales conditions and the limited sales

conditions

Shareholders Quantity of shares Time of listing Limited sales

with limited sales for trading conditions

conditions (shares)

Putian East 4,540,000.00 Nov 8, 2006 The non-negotiable shares as held are

Communications 4,540,000.00 Nov 8, 2007 not allowed to get listed for trading or

Group Co., Ltd. 17,693,565.00 Nov 8, 2008 assigned within 12 months commencing

from the date of obtaining the option

for listing. When the aforesaid committed

Zhuhai Putian Peace 4,540,000.00 Nov 8, 2006 term is due, thequantity of the original

Telecommunications 4,540,000.00 Nov 8, 2007 non-negotiable shares to be sold through

Industrial Co., Ltd. 12,827,200.00 Nov 8, 2008 the stock exchange shall not exceed 5%

of the Company's total shares within

12 months and not exceed 10% of the

same within 24 months upon expiry

of the committed term.


Financial Report

(Cont`d)

Shareholders Quantity of shares Time of listing Limited sales

with limited sales for trading conditions

conditions (shares)

Beijing Xinjietong Mobile 2,915,255.00 Nov 8, 2006

Communication Tec

hnology Co., Ltd.

Zhuhai Fuchun Communication 1,831,305.00 Nov 8, 2006 The non-negotiable shares as

Equipment Co., Ltd.Zhou Zhongguo 701,715.00 Nov 8, 2006 held were not allowed to get

Shi Jixing 467,810.00 Nov 8, 2006 listed for trading or assigned

Zheng Guomin 467,810.00 Nov 8, 2006 within 12 months commencing

Yang Youwei 467,810.00 Nov 8, 2006 from the date of obtaining the

Zhang Peide 467,810.00 Nov 8, 2006 option for listing.

Huang Ningzhai 467,810.00 Nov 8, 2006

Li Haijiang 290,955.00 Nov 8, 2006

Zhang Xiaochuan 290,955.00 Nov 8, 2006

(3) Note to the change of share capital

In the report period, the Company exercised reform for equity separation. For the change of the share capital, refer to Note XII (IV) 2 to

the accounting statements.

(4) In the report period, Putian East Communication Group Co., Ltd. pledged its 15,430,000.00 shares in the Company (taking 16.99%

of the Company's total share capital) to Minsheng Bank Hangzhou Branch. For the detail, please refer to Note XII (IV) 1 to the

accounting statements.

24. Capital public reserve Ending balance: RMB 216,139,865.86

(1) Details

Items Opening Increase in the Decrease in the Ending balance

Balance report period report period

Share capital premium 217,348,865.86 1,609,000.00 215,739,865.86

Allocated accounts, transferred-in 400,000.00 400,000.00

Total 217,348,865.86 400,000.00 1,609,000.00 216,139,865.86

(2) Note to increase/decrease of the share capital and the basis

According to the Contract of Zhuhai Science & Technology Planning Project executed between the Company and Zhuhai Municipal

Bureau of Science and Technology (ZHU CAI HANG [2003] No. 39), the Company received the fund for WIB card project amounting

to RMB 900,000 provided by Zhuhai Municipal Bureau of Science and Technology in December, 2003 as "special account payable" in

the account. On January 20, 2005, the project passed the acceptance inspection conducted by Zhuhai Municipal Bureau of Science and

Technology. According to the contract and the payment of the project, the Company transferred partial fund of WIB card project for

finally formed fixed assets amounting to RMB 400,000.00 into the "Capital Public Reserve".

Decrease of the capital public reserve amounting to RMB 1,609,000.00 was due to payment of the relevant expenses carried over for the

reform for equity separation in the report period according to the resolution of the 9th meeting of the Second Board of Directors of the

Company.


Financial Report

25. Surplus public reserve Ending balance: RMB 30,690,993.74

(1) Details

Items Opening Increase in the Decrease in the Ending

Balance report period report period balance

Statutory surplus public reserve 14,213,662.87 1,131,834.00 15,345,496.87

Statutory public welfare fund 14,213,662.87 1,131,834.00 15,345,496.87

Total 28,427,325.74 2,263,668.00 30,690,993.74

(2) For the change of the surplus public reserve in the report period, refer to Note V (I) 26 [Note 2] (2) of the accounting statement.

26. Retained earnings Ending balance: RMB 60,379,054.00

Opening Balance 73,759,302.85

Increase in the report period 11,583,419.15[Note 1]

Decrease in the report period 24,963,668.00[Note 2]

Ending balance 60,379,054.00

[Note1]: Increase in the report period is due to transfer in of the net profit in the report period.

[Note2]: Decrease in the report period totaling RMB 24,963,668.00 includes: (1) Through resolution of 2004 Shareholders' General

Meeting on March 1, 2005, with the total share capital of 90.80 million shares at the end of 2004 as the base, the Company distributed

cash dividend to the whole shareholders at the rate of RMB 2.5 (with tax inclusive) for every 10 shares and distributed cash dividend

totaling RMB 22,700,000.00 (with tax inclusive) which was paid up in June, 2005.

(2) Through the resolution approved by the 9th meeting fo the Second Board of Directors on March 16, 2006, the Company provided the

statutory public reserve based on 10% of the net profit in 2005 amounting to RMB 1,131,834.00 and provided the statutory public

reserve based on 10% of the same amounting to RMB 1,131,834.00.

(II) Notes to Consolidated Profit and Items of the Profit Distribution Statement

1. Income/cost from principal business

Amount in the report period: RMB 647,634,721.69/RMB 545,675,768.13

(1) Business divisions (based on the nature of products)

Items Amount in the Amount of the same period

report period of the previous year

Principal business income

SIM card (including UIM card) 435,314,777.95 429,517,739.60

Stored value card 50,929,014.24 85,407,227.68

Prepaid calling card 152,492,094.59 125,141,179.82

Others 38,063,339.83 16,014,332.87

Sub-total 676,799,226.61 656,080,479.97

Offsetting 29,164,504.92

Total 647,634,721.69 656,080,479.97

Principal business cost




Others 24,025,339.68 10,736,793.04

Sub-total 573,245,014.83 531,786,096.66


Total 545,675,768.13 531,786,096.66


Financial Report

(2) Regional divisions (based on the product sales regions)




East China 108,208,467.30 127,004,140.42

South China 136,418,320.39 115,696,708.69

Southwest China 49,352,519.40 45,876,756.19

North China 100,828,887.31 124,811,691.69

Central China 50,805,754.52 66,745,468.98

Northeast China 52,455,986.23 44,899,690.59

Northwest China 15,941,346.96 9,413,709.39

Outside PRC 162,787,944.50 121,632,314.02

Sub-total 676,799,226.61


Total 647,634,721.69 656,080,479.97




East China 96,817,716.00 102,588,977.83

South China 116,615,676.49 92,690,387.88

Southwest China 43,290,261.30 38,267,083.36

North China 89,166,631.10 97,961,652.92

Central China 45,079,665.16 55,662,950.83

Northeast China 44,531,524.56 37,450,310.57

Northwest China 14,860,640.54 7,552,611.13

Outside PRC 122,882,899.68 99,612,122.14

Sub-total 573,245,014.83


Total 545,675,768.13 531,786,096.66

(3) In the report period, the total amount of income received from sales to the top five customers was RMB 282,515,704.09,

taking 43.62% of the total income from the principal business.

2. Taxes and surcharge of principal business Amount in report year: RMB 3,915,379.32

Items Amount in the Amount of the same period Payment rate


Tax for urban development and maintenance 2,740,765.53 842,658.83 Based on 7% of the circulation tax payable

Educational Surcharge 1,174,613.79 361,139.50 Based on 3% of the circulation tax payable

Total 3,915,379.32 1,203,798.33


Financial Report

3. Profit from other business lines Amount in report year: RMB -444,974.20

Amount in the report period Amount of the same period of the previous year

Items Business income Business expenses Profit Business income Business expenses Profit

Sales of raw materials 5,347,105.72 5,952,644.87 -605,539.15 10,133,483.04 9,527,961.16 605,521.88

Lease 982,158.19 821,593.24 160,564.95

Processing 28,618.94 28,618.94

Total 6,329,263.91 6,774,238.11 -444,974.20 10,162,101.98 9,527,961.16 634,140.82

4. Financial expenses Amount in report year: RMB 780,532.31

Items Amount in the report year Amount of the same period

of the previous year

Interest payment 952,211.25[Note] 2,938,580.00

Less: interest income 1,623,499.20 1,336,459.97

Exchange losses 1,117,430.80 844,426.04

Less: Exchange income 227,551.91 321,117.14

Others 561,941.37 532,313.50

Total 780,532.31 2,657,742.43

[Note]: According to the Contract of Zhuhai Science & Technology Planning Project executed between the Company and Zhuhai

Municipal Bureau of Science and Technology (ZHU CAI HANG [2003] No. 39), the Company received the fund for WIB card project

amonting to RMB 900,000 provided by Zhuhai Municipal Bureau of Science and Technology in December, 2003 as "special account

payable" in the account. On January 20, 2005, the project successfully passed the acceptance inspection conducted by

Zhuhai Municipal Bureau of Science and Technology. According to the contract, the Company would offset the interest payment

with partial discount amounting to RMB 500,000 of the fund for WIB card project.

5. Investment income Amount in report year: RMB -303,110.98

Details


report year of the previous year

Equity investment difference amortization -303,110.98

Total -303,110.98

6. Subsidy income Amount in report year: RMB 11,714,693.67

(1) Detaisl



Top brand product award fund 100,000.00

Software enterprise development award fund 200,000.00

Rebated VAT 10,975,269.67 1,361,289.88

Export discount 260,230.00

Allowance for developing trade with science and technology 179,194.00

International market development fund 300,000.00

Total 11,714,693.67 1,661,289.88


Financial Report

(2) Note to subsidiary income sources, relevant approval documents, approval authority and time validness of documents in the

report period

1) The mobile phone smart card operation system TurboCOS developed by the Company was granted the software product certificate

issued by Guangdong Provincial Department of Science and Technology and the Company was certified as a software enterprise by

Guangdong Provincial Department of Information Industry on June 28, 2005. According to the Document of CAI SHUI [2000] No. 25

and the Official Reply of Zhuhai Municipal National Tax Bureau (GUO SHUI HAN [2003] No. 149, for the software contained SIM

card and stored value card on sale by the Company, the part of VAT exceeding the actual taxation by 3% shall be rebated at the time of

collection. In the report period, the Company actually received RMB 10,975,269.67 of the aforesaid rebated VAT.

2) According to the provions of Zhuhai Municipal Bureau of Foreign Trade & Economic Cooperation, the Company received RMB 260,230.00

of discount for the foreign exchange earned through export in the report period.

3) According to the Circular of Zhuhai Municipal Bureau of Foreign Trade & Economic Cooperation on Doing a Good Job in connec-

tion with Special Fund for Developing Trade with Science and Technology in 2003 in Guangdong Province. The company received

amounting to RMB179,194.00 for Subsidy for Developing Trad with Science and Technology.

4) According to the relevant provisions of the Rules for Implementation of the Measures for Management of International Market

Development Funds of Medium and Small Enterprises, the Company received international market development fund amounting to

RMB 300,000.00.

7. Non-operating income Amount in report year: RMB 28,475.36



Net income from disposal of fixed assets 276.60 50,550.10

Others 28,198.76 7,000.00

Total 28,475.36 57,550.10

8. Non-operating expenses Amount in report year: RMB 685,504.92



Donation payment 20,000.00 70,000.00

Net loss on disposal of fixed assets 472,369.70 1,533,186.84

Dike maintenance fee 175,135.22 120,000.00

others 18,000.00

Total 685,504.92 1,723,186.84

(III) Notes to the Items on the Consolidated Cash Flow Statement

1. rebated taxes received

Items Amount in the report period

VAT rebated at the time of payment for the software products as received 10,975,269.67

Rebated duty for product export 7,580,507.03

18,555,776.70


Financial Report

2. Other business related cash with big amount as received


Fund allotted for research and development of scientific research products 950,000.00

Export discount 260,230.00

Allowance for developing trade with science and technology 179,194.00

International market development fund 300,000.00

Deposit in security for cargo transport 300,000.00

Factory buildings and equipment rental 603,734.04

Sub-total 2,593,158.04

3. Other business related cash with big amount as paid


Business travel 4,785,664.40

Entertainment expenses 6,381,329.26

Office expenses 2,343,970.85

consulting fee 2,324,112.30

Automobile expenses 615,136.71

Freight 12,928,558.90

Advertisement and promotion fee 898,508.81

Sub-total 30,277,281.23

4. Other investment related cash receipts


Interest income 1,623,499.20

Eastcompeace Smart Card (Singapore) CO., LTD.

Margin of the monetary fund balance less 3,986,783.51

the investment fund at the date of merger

Sub-total 5,610,282.71

VII. Notes to the accounting statements of the parent company

1. Accounts receivable Ending balance: RMB 64,046,801.64

(1) Aging Analysis


Age Book Balance Proportion Provision for Book value Book Balance Proportion Provision for Book value

(%) bad debts (%) bad debts

Within a year 67,002,124.20 98.40 3,350,106.21 63,652,017.99 57,710,118.84 95.26 2,885,505.94 54,824,612.90

1 to 2 years 386,148.50 0.57 38,614.85 347,533.65 2,244,400.00 3.70 224,440.00 2,019,960.00

2 to 3 years 67,500.00 0.10 20,250.00 47,250.00 631,500.00 1.04 189,450.00 442,050.00

Over 3 years 631,500.00 0.93 631,500.00

Total 68,087,272.70 100.00 4,040,471.06 64,046.801.64 60,586,018.84 100.00 3,299,395.94 57,286,622.90


Financial Report

(2) Of the accounts receivable, the total amount owed by top 5 debtors was RMB 38,482,751.62, taking 56.52% of the book

balance of the account receivable.

(3) There were no arrears owed by the shareholders holding more than 5% (including 5%) of the Company's shares.

(4) Accounts receivable - in foreign currency

Ending Balance Opening balance

Currencies Initial Exchange Conversion into Initial Exchange Conversion

amount rate Renminbi amount rate into Renminbi

US$ 2,529,427.61 8.0702 20,412,986.70 2,190,856.69 8.2765 18,132,625.39

HK$ 200,000.00 1.0403 208,060.00 52,000.00 1.0637 55,312.40

Sub-total 20,621,046.70 18,187,937.79

2. Other receivables Ending balance: RMB 2,140,136.09

(1) Aging Analysis


Age Book Balance Proportion Provision for Book value Book Balance Proportion Provision for Book value

(%) bad debts (%) bad debts

Within a year 2,252,774.83 99.35 112,638.74 2,140,136.09 1,480,378.61 98.70 74,018.93 1,406,359.68

1 to 2 years 4,812.75 0.32 481.28 4,331.47

2 to 3 years

Over 3 years 14,650.00 0.65 14,650.00 14,700.00 0.98 14,700.00

Total 2,267,424.83 100.00 127,288.74 2,140,136.09 1,499,891.36 100.00 89,200.21 1,410,691.15

(2) Other receivables with bigger amount:

Items Ending Balance Description

Zhuhai Smart Card Manufacture 658,589.11 Factory building rental and

& Color Printing Co., Ltd. overhead receivable

Procurement Center of Hangzhou 200,000.00 Deposit for residents' card project

Municipal Government

Zhang Yajun 127,030.93 Reserves


(3) Of the other receivables, the total amount owed by the top five debtors was RMB 1,127,000.04, taking 49.70% of the book balance

of the other receivables.


bearing shares.

3. Long-term equity investment Ending balance: RMB 751,322.77.

(1) Details

Items Ending balance Opening Balance

Book balance Provision for price falling Book value Book balance Provision for price falling Book value

Investment to subsidiaries 751,322.77 751,322.77

Total 751,322.77 751,322.77


Financial Report

(2) Long term equity investment calculated based on the equity method

1) Details

a. Details composed of balance at the end of the report period

Investees Proportion of Investment Investment Adjustment of Reserve for equity Equity investment Ending balance

shares held term costs gain/loss investment difference

Eastcompeace Smart 80% Unidentified 3,934.79 -2,256,166.25 3,003,554.23 751,322.77

Card (Singapore) Pte Ltd.

Sub-total 3,934.79 -2,256,166.25 3,003,554.23 751,322.77

b. Details of the increase/decrease in the report period

Investees Opening Increase/decrease Increase/decrease Cash dividend Increase/decrease of Increase/ decrease Ending Balance

Balance of investment cost in of gain/loss adjustment received in the investment reserve of equity investment

the report period in the report period report period in the report period in the report period

Eastcompeace Smart 3,934.79 -2,256,166.25 3,003,554.23 751,322.77

Card (Singapore)Pte Ltd.

Sub-total 3,934.79 -2,256,166.25 3,003,554.23 751,322.77

2) Equity investment difference

a. Details

Investees Initial amount Opening Increase in the Amount amortized Transfer out in the Ending Amortization

Balance report period in the period report period Balance Term

Eastcompeace Smart Card 3,306,665.21 3,306,665.21 303,110.98 3,003,554.23 10�


Sub-total 3,306,665.21 3,306,665.21 303,110.98 3,003,554.23 10�

b. Reason of formation of the equity investment balance

For the reason of formation of the equity investment balance, refer to Note VI (I) 8 (2) 2) b of the accounting statements.

(3) Through analysis, there is no significant sign shows that any deterioration has occurred in the aforesaid long term investment.

Therefore, no provision for deterioration of the long term investment is provided.

(II) Notes to the Profit of the Parent Company and Items of the Profit Distribution Statement

1. Income and Costs of the Principal Business Amount in the report period: RMB 642,228,396.06/RMB 544,842,209.53

(1) Details







Others 37,237,096.98 16,014,332.87

Total 642,228,396.06 656,080,479.97





Others 23,346,512.63 10,736,793.04

Total 544,842,209.53 531,786,096.66


Financial Report

(2) In the report period, the total amount of income received from sales to the top five customers was RMB 282,515,704.09, taking 43.99%

of the total income from the principal business.

2. Investment income Amount in report year: RMB -2,559,277.23

(1) Details



Investees involved in calculation based

on the equity method Net increase/decrease of gain/loss -2,256,166.25

Equity investment difference amortization -303,110.98

Total -2,559,277.23

VIII. Related Parties and Related Transactions

(I) Relationship with the Related Parties

1. Related parties with controlling relationship

1 Related parties with controlling relationship

Related parties Registered address Principal Business Relationship with Ownership Legal

the Company or type representative

Putian East No. 398 Wensan Technology development, consulting, service, Parent company Company Xing Wei

Communications Road, Hangzhou training, manufacture, processing, wholesale, with limited

Group Co., Ltd. retail; communication equipment, computer liability

and computer external equipment, electronic

components and parts; contracting,communication

engineering; consulting; economic in

formation, import and export (business

scope is based on the Document of the

Provincial Department of Economic

Relations & Trade ZHE WAI JING MAO CHU

[1999] No. 99; including the business scope

of the subsidiaries.

China Putian No. 2 Shangdi Erjie, Technology development, production, sales of Controlling Joint stock Xing Wei

Information Zhongguancun mobile communication and terminal equipment, shareholder co., ltd.

Industry Co., Ltd. Technology Park, data communication, network communication, of the parent

Haidian District, computer and software, relevant supplementary company

Beijing components and parts, services, technology

licencing, consulting and services; construction

contract, project planning, design; industrial

investment.


Financial Report

(Cont`d)

Related parties Registered address Principal Business Relationship with Ownership Legal

the Company or type representative

China Putian No 2 Jiangtai Organizing the subsidiaries to produce: communication Controlling Solely state Xing Wei

Information Road, Chaoyang equipment, special equipment of post and shareholder owned

Industry District, Beijing telecommunication, communication circuit of the parent

Group Co., Ltd. equipment and spares and parts for repair service, company's

communication equipment, special- purpose controlling

electronic components and parts, motorcycles for shareholder

post and telecommunication purpose, development,

wholesale, retail, purchase on commission, sales on

commission, exhibition and sales of other products for

the Group (except those specified by the central

government), self-made mechanical and electrical

products, spares and parts, accessories, technology

import (except the Category 1 imported commodities

specified by the central government). Carry out

Sino-foreign joint venture and cooperative production

of the Company. Self operation and sales on

commission of other commodities and technology

import and export business except the import and

export commodities designated by the central

government. Carrying out processing with materials

imported and "processing with foreign-supplied samples,

drawings or material and compensation trade";

engaged in counter trade and transit trade.

Eastcompeace No 137 Telok Sales of smart cards; consulting services of smart Subsidiary A limited Zhou Zhongguo

Smart Card Ayer Street, card proposals company

(Singapore) Singapore

CO., LTD.

(2) Registered capital of the related party with control relationship and the change

Related parties Year beginning Increase in the Decrease in the Ending balance


Putian East Communications Group Co., Ltd. 871,885,086.00 871,885,086.00

China Putian Information Industry Group Co. 1,900,000,000.00 1,900,000,000.00

China Putian Information Industry Group Co. 3,086,940,000.00 3,086,940,000.00

Eastcompeace Smart Card (Singapore) Pte Ltd. S$ 100,000.00 S$ 400,000.00 S$ 500,000.00

(3) Shares/equity held by the related parties with control relationship and the change

Related parties Opening balance Increase in the Decrease in the Ending balance


Amount % Amount % Amount % Amount %

Putian East Communications 30,879,940.00 34.01 4,106,375.00 4.52 26,773,565.00 29.49

Group Co., Ltd.[Note1]

Eastcompeace Smart Card S$ 400,000.00 80.00 S$ 400,000.00 80.00



Financial Report

[Note 1]: At the end of the period, the company directly held 29.49% of the Company's shares and it is the biggest shareholder of the

Company. Meanwhile, the company indirectly held 24.12% of the Company's shares through the Company's second biggest shareholder,

Zhuhai Putian Peace Telecommunications Industry Co., Ltd. (as the said company holds 50% of the shares of Zhuhai Putian Peace

Telecommunications Industry Co., Ltd. and enjoys majority voting power in the board of directors of the said company), holds directly

and indirectly 53.61% of the Company's shares and has actual control power over the Company.

2. Related parties with non-control relationship

Related parties Relationship with the Company

Zhuhai Putian Peace Telecommunications Industrial Co., Ltd. The Company's second biggest shareholder

Beijing Julong East International Information Technology Co., Ltd. Controlled by the same controlling shareholder

of the parent company

Ningbo Bird Co., Ltd. An associate of a subsidiary of China Putian Information

Industry Group Co. Ltd.

Ningbo Bird Sagem Electronics Co., Ltd. An associate of Ningbo Bird Sagem Electronics Co., Ltd.

Hangzhou Eastcom Industrial Co., Ltd. Controlled by the same parent company

Hangzhou Eastcom Lingtong Electronic Industrial Co., Ltd. Controlled by the same parent company

East Communication Co., Ltd. Controlled by the same parent company

Hangzhou Eastcom Tianyu Mobile Technology Co., Ltd. Controlled by the same parent company

Hangzhou Eastcom Optical Communication Technology Co., Ltd. Controlled by the same parent company

Hangzhou East Communication Sales Service Co., Ltd. Controlled by the same parent company

(II) Related transactions

1. Goods purchased from the non-related parties

2. Sales of Goods

Related parties Amount in report year Amount of the same period

of the previous year

Amount Pricing policy Amount Pricing policy

China Putian Information Industry Group Co. 853,418.80 Agreement price 1,631,280.05 Agreement price

Beijing Julong East International Information Technology Co., Ltd. 455,726.50 Agreement price

Ningbo Bird Co., Ltd. 63,936.75 Agreement price

Ningbo Bird Sagem Electronics Co., Ltd. 204,102.56 Agreement price

Hangzhou Eastcom Industrial Co., Ltd. 1,196.58 Agreement price 1,940.17 Agreement price

Hangzhou Eastcom Lingtong Electronic Industrial Co., Ltd. 20,512.82 Agreement price 2,564.10 Agreement price

East Communication Co., Ltd. 2,459,914.53 Agreement price 2,129,991.45 Agreement price

Hangzhou Eastcom Tianyu Mobile Technology Co., Ltd. 256.41 Agreement price

Hangzhou Eastcom Optical Communication Technology Co., Ltd. 615.38 Agreement price

Hangzhou East Communication Sales Service Co., Ltd. 6,410.26 Agreement price

Sub-total 4,059,680.33 3,772,186.03


Financial Report

3. Balance of the accounts receivable (received in advance) from /payable (prepaid) to the related parties

Items and Related Parties Balance Proportion in the balance

of all the accounts receivable

(received in advance)

/payable (prepaid) (%)

Ending Opening Ending Opening

Balance Balance Balance Balance

(1) Accounts receivable

China Putian Information Industry Group Co. 1,656,147.66 2.73

Beijing Julong East International Information Technology Co., Ltd. 533,200.00 0.85

Ningbo Bird Co., Ltd. 17,404.00 0.03

Ningbo Bird Sagem Electronics Co., Ltd. 72,200.00 0.12

Sub-total 622,804.00 1,656,147.66 1.00 2.73

(2) Other payables

China Putian Information Industry Group Co. 54,004.16 0.29

Sub-total 54,004.16 0.29

4�Other Related Transactions

�1�On June 20, 2003, Putian East Communications Group Co., Ltd., signed a guarantee contract with Industrial and Commercial

Bank of China Zhuhai Seashore Sub-branch and agreed to provide guarantee for the loan of RMB 30 million borrowed by the Company

from the bank with the term from June 20, 2003 to June 19, 2008. As of December 31, 2005, the balance of loan borrowed by the

Company from this bank was RMB 0. At the end of 2005, the balance of loan was RMB 0.

�2�According to the house tenancy contract signed by the Company and Putian East Communications Group Co., Ltd.,, the rental

charge for offices paid by the Company to it in 2005 was RMB 349,322.95. The rental charge paid in the same period of the previous

year was RMB 243,404.49.

5. Remuneration Paid to the Persons from the Related Parties

In the year 2005, there were 18 persons from the related parties in the Company and 8 of them enjoyed remuneration from the Company

with total amount of RMB 1,766,595.30 in the whole year. In the year 2004, there were 13 persons from the related parties in the

Company and 8 of them enjoyed remuneration from the Company with total amount of RMB 1.3915 million.

2005

Name of the key managerial personnel Titles of the key managerial personnel 2005

Zhou Zhongguo President 515,795.00

Zhang Peide Vice-President 339,495.00

Zhang Xiaochuan Vice President / Secretary of the Board 288,855.30

Huang Ningzhai Vice-President 319,545.00

Li Haijiang Chief Financial Officer; 194,905.00

Fan Lian Independent director 36,000.00

Zhu Wuxiang Independent director 36,000.00

Dai Xiangbo Independent director 36,000.00

Total 1,766,595.30


Financial Report

2004

Remuneration Level RMB 10 to RMB 100-300 RMB 300-500 Over RMB 500

100 thousand thousand thousand thousand

Number of persons 4 3 1

IX. Contingencies

There were no material contingencies.

X. Commitments

There were no material commitments.

XI. Subsequent events not involved in adjustment after balance sheet

In accordance with 2005 Annual Profit Distribution Proposal adopted through resolution of the 9th Meeting of the Second Board of

Directors, the Company converted its capital public reserve to the whole shareholders on 3-for-10 basis with the total share capital ended

December 31, 2005 totaling 90.80 million shares as the base. After the conversion, the Company's total share capital increased to 118.04

million shares. The aforesaid proposal is subject to review and approval by the Shareholders' General Meeting of the Company.

XII. Other important events

(I) Reorganization of Liabilities

The Company had not conducted reorganization of any liabilities.

(II) Non-monetary Transactions

The Company had not conducted any non-monetary transactions.

(III) Note to important assets transfer and sales activities

The Company had not conducted any activities of important assets transfer and sales.

(IV) Other important events which may affect the decision making of the users of the accounting statements

1. On September 5, 2005, Putian East Communications Group Co., Ltd., the Company's biggest shareholder, executed a Pledge Contract with

Minsheng Bank Hangzhou Branch. According to the contract, Putian East Communications Group Co., Ltd. pledged its 15,430,000.00 shares

in the Company (which takes 16.99% of the Company's total shares) to Minsheng Bank Hangzhou Branch for as the security of its loan

with the bank. The pledge term was from September 5, 2005 to July 31, 2006. Putian East Communications Group Co., Ltd. made the

registration of the aforesaid equity pledge with China Securities Registration and Clearing Co., Ltd.

2. Reform for Equity Separation

The Company started the reform for equity separation in September, 2005 and announced the revised memorandum of the reform

for equity separation on October 11, 2005. According to the memorandum, the Company would adopt the approach of valuable

consideration for the bonus shares; a shareholder of the Company's negotiable shares was qualified toobtain shares paid


Financial Report

by the shareholders of non-negotiable shares at the rate of 3.5 shares for every 10 negotiable shares. Upon implementation of the

proposal, the Company's total shares remained unchanged. On the first trading day upon implementation of the plan of equity separation

reform, the non-negotiable shares held by the shareholders of the Company's non-negotiable shares were authorized to be listed for trading

as the negotiable shares with limited conditions of sale.

On October 21, 2005, the Company's equity separation reform plan was approved by the State-owned Assets Supervision and Admin-

istration Commission of the State Council with the Document GUO ZI CHAN QUAN [2005] No. 1323.

On October 28, 2005, the Company's equity separation reform plan was reviewed and approved by the Shareholders' General Meeting.

On November 7, 2005, shareholders of the Company's negotiable shareholders obtained the shares of valuable consideration paid by the

shareholders of non-negotiable shares. The non-negotiable shares used to be held by the shareholders of non-negotiable shares turned

into negotiable shares with limited sales conditions. On November 8, 2005, the Company's shares were restored for trading. The

Company's total number of shares 90.80 million shares remained unchanged. For the specific change of the share capital shares, refer to

the Note VI (I) 23 (1).

(V) According to the Questions and Answers on Information Disclosure Criteria for Public Issuing Companies No. 1 - Non-

recurring Gains and Losses promulgated by the State-owned Assets Supervision and Administration Commission of the State

Council, the Company's non-recurring gains and losses incurred are as follows (gain is expressed with + and loss with -):

Items 2005

Gains/losses arising from disposal of long term equity investment, -472,093.10

fixed assets, construction in progress, intangible assets, other long term assets

Tax rebate, exemption or reduction approved by overstepping the authority

or without official approval document

Various types of government subsidies 739,424.00

Fund occupancy fee collected by non-financial enterprises stated in the gains

and losses in the very period

Gains/losses from short term investment, with that obtained from an organization

with operating amount established through approved by the authority exclusive.

Gain/loss of the entrusted investment

Various non-recurring and non-operating income/expenditure -9,801.24

Carry-back of the reserves for devaluation provided in the previous years.

Provision for deterioration of various assets arising from force majeure.

Gains and losses from debts reorganization

Gains and losses from assets exchange

Gains/losses exceeding the fair value arising from transactions with obviously unfair prices

In the comparative financial statements, retroactive adjustment of the net profit prior to

change in accounting policy

Other non-recurring gain and loss items


Less: Amount affected by the business income tax 38,629.45

(decrease of the income tax is expressed with "-")

Amount affected by the minority shareholders' gain

and loss (loss is expressed with "-")

Non-recurring gain and loss items 218,900.21


I. Annual Report carried with personal signature of Mr. Zhou Zhongguo, Chairman of the Board;

II.. Accounting Statements signed by and under seal of Mr. Zhou Zhongguo, the legal representative, Mr. Li

Haijiang, Chief Financial officer and Mr. Ren Bo, person in charge of accounting department;

III. Original copy of the Auditors' Report under the seal of the accounting firm and signed by and under the seal

of certified public accountants.

IV. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public in the

newspapers as designated by China Securities Regulatory Commission.

Section 11 Documents Available for Inspection

Eastcompeace Smart Card CO.,LTD.

Chairman of the board:Zhou zhongguo

March 16,2006