The selected consolidated balance sheet data as of December 31, 20042006 and 20052007 and the selected consolidated statement of incomeoperations data and selected consolidated statement of cash flow statementflows data of the Company set forth below for the years ended December 31, 2003, 20042005, 2006 and 20052007 are derived from theour audited consolidated financial statements of the Company included in this Annual Report, which have been audited by KPMG, Independent Registered Public Accounting Firm (the “Consolidated Financial Statements”). TheReport. Our selected consolidated balance sheet data of the Company set forth below as of December 31, 2001, 20022003, 2004 and 20032005 and theselected consolidated statement of incomeoperations data and selected consolidated statement of cash flow statementflows data for the years ended December 31, 20012003 and 20022004 are derived from theour audited consolidated financial statements of the Company, which have been audited by KPMG, but which are not included in this Annual Report.

     The following tables set forth certain information concerning exchange rates between Renminbi and U.S.US dollars for the periods indicated:

     Although we own 76.4% of Yuchai’sthe outstanding shares of Yuchai, and believe we have proper legal ownership of our investment and a controlling financial interest in Yuchai, in the event there is a dispute with Yuchai’s Chinese Shareholdersshareholders regarding our investment in Yuchai, we may have to rely on the Chinese legal system for remedies. The Chinese legal system may not be as effective as compared to other more developed countries such as the United States (seeStates. See “— Risks relating to Mainland China — The Chinese legal system embodies uncertainties which could limit the legal protectionsprotection available to foreign investors”).investors.” We have in the past experienced problems from time to time in obtaining assistance and cooperation of Yuchai’s Chinese Shareholdersshareholders in the daily management and operation of Yuchai. We have, in the past also experienced problems from time to time in obtaining the assistance and cooperation of the State Holding Company in dealing with other various matters, including the implementation of corporate governance procedures, the payment of dividends, the holding of Yuchai board meetings and the resolution of employee-related matters. Examples of these problems are described elsewhere in this Annual Report. The July 2003 Agreement, the Reorganization Agreement and the ReorganizationCooperation Agreement are intended to resolve certain issues relating to our share ownership in Yuchai and the continued corporate governance and other difficulties which we have had with respect to Yuchai. As part of the terms of the Reorganization Agreement, Yuchai agreed that it would seek the requisite shareholder approval prior to entering into any material transactions (including any agreements or arrangements with parties related to Yuchai or any of its shareholders) and that it would comply with its governance requirements. Yuchai also acknowledged and affirmed CYI’sthe Company’s continued rights as majority shareholder to direct the management and policies of Yuchai through Yuchai’s boardBoard of directors.Directors. Yuchai’s Articles of Association have been amended and such amended Articles of Association entitle the Company to elect nine of Yuchai’s 13 directors, thereby reaffirming the Company’s right to effect all major decisions relating to Yuchai. However, Yuchai’s amended Articles of Association are not yet effective pending approval of the Ministry of Commerce, PRC. While Yuchai has affirmed the Company’s continued rights as Yuchai’s majority shareholder and authority to direct the management and policies of Yuchai, no assurance can be given that disagreements and difficulties with Yuchai’s management and/or Yuchai’s Chinese Shareholdersshareholders will not recur, including implementation of the Reorganization Agreement and the Cooperation Agreement, corporate governance matters or related party transactions (such as, for example, the Rmb 205.0 million loan from Yuchai to Yuchai Marketing and Logistics Company, see Note 5 to our company’s Consolidated Financial Statements appearing elsewhere herein).transactions. Such disagreements and difficulties could ultimately have a material adverse impact on the company’sour consolidated financial position, results of operations and cash flows.

     In addition, if import restrictions on the import of motor vehicles and motor vehicle parts into China are reduced, foreign competition could increase significantly. See “— Risks relating to Mainland China — The admission of China into the WTO could lead to increased foreign competition”.

     In the medium-duty diesel engine market, our 6108 medium-duty engine, introduced in 1997, has been competing with the 6110 medium-duty engine offered by our competitors. We cannot assure you, however, that we will be able to maintain or improve our current market share or develop new markets for our medium-duty diesel engines. Based on current industry trends, although there is a perceived shift in the market demand from medium-duty engines to heavy-duty diesel engines. Therefore, we would expect declining sales volume of our 6108 medium-duty engines, in the coming years. In 2005, we experienced lower unit sales volume of 6108 medium-duty engines due principally to the effects of the general credit tightening by banks may however affect this trend. In 2006, 6108 medium-duty engine sales volumes declined 53.1% compared to its sales in China.2005. In 2007, however, 6108 medium-duty engine sales volumes improved approximately 41.0% compared to its sales in 2006. With the improved highway road system as a result of the Chinese government’s investment in infrastructure, truck market sales growth is trending towards heavy-duty engines.

     In the heavy-duty diesel engine market, we introduced the 6112 heavy-duty engine in late 1999. Due to a delay in the commercial production of the 6112 engine;engine, however, we were not able to benefit from the competitive advantages of an early entry into the China domestic market for heavy-duty engines. Moreover, the market for heavy-duty diesel engines in China is price-sensitive. We commenced engine development of the 6L heavy-duty engine (formerly referred to as 6113) in 2003 with a rated power ranging from 280 to 350 horsepower, and we also introduced the 6M heavy-duty engine family for heavy-duty trucks and passenger buses with a rated power ranging from 280 to 390 horsepower, in 2004. We had limited initial sales of 963 and 818 units of the 6L and 6M engines, respectively, in 2004. We sold 782 units of the 6L engines and 3,471 units of the 6M engines in 2005. We cannot assure you that our 6112, 6L or 6M heavy-duty engines will be able to compete successfully in the heavy-duty diesel engine market in China with the existing producers or any new entrants.

     In the light-duty diesel engine market, our 4108, 4110 and 4112 light-duty engines introduced in 2000 were met with weak consumer demand due to strong competition and a high pricing structure. The 4F diesel engine is a four-cylinder, four-stroke engines with a rated power ranging from 90 to 115 horsepower. Yuchai’s first sales of the 4F engines occurred in March 2005 and sold 4,510 units in 2005. Yuchai expects growth of this new engine to strengthen over the next few years and become a significant contributor to its sales growth for Yuchai. Yuchai produced 7,009 units of the 4F engines in 2005 and embarked upon major capital expenditures to increase the production capacity to 50,000 units per year by 2007. The expansion is expected to enable Yuchai to enter into light duty diesel engines market for light duty trucks and buses.growth. Although there had been an increase in sales of our 4-Series engines infrom 2003 2004 and 2005,to 2007, this has been primarily due to the average selling price of the 4-Series engines being lower than the medium and heavy-duty diesel engines, thereby making the 4-Series more affordable to the buyers especially due to the credit tightening by banks in China. Accordingly, weIn 2006, the 4-Series engines continued a healthy growth of 18.5% over 2005 in unit sales amid increasing selling price pressure due to strong growth in light-duty engine truck sectors and the Chinese government’s subsidy to the agriculture sector. In 2007, the 4-Series engines had a growth of approximately 38.7% in unit sales over 2006. We cannot assure you that we will be able to continue to improve our market share for light-duty diesel engines, and we may, in the future, decide to cease production of one or more of the models we are currently producing.

     Our long-term business prospects will depend largely upon our ability to develop and introduce new or improved products at competitive prices. Our competitors in the diesel engine markets may be able to introduce new or improved engine models that are more favorably received by customers. Competition in the end-use markets, mainly the truck market, may also lead to technological improvement and advances that render our current products obsolete at an earlier than expected date, in which case we may have to depreciate or impair our production equipment more rapidly than planned. Failure to introduce or delays in the introduction of new or improved products at competitive prices could have a material adverse effect on our financial condition, results of operations, business or prospects.

     We have achieved consistent growth in net sales during the last fourfive fiscal years, with net sales increasing by 22.0%19.0% from 2005 to Rmb 5,582.16,920.5 million in 20042006 and by 4.4%38.1% from 2006 to Rmb 5,829.49,556.3 million (US$1,398.2 million) in 2005.2007. We cannot assure you that we can continue to increase our net sales or maintain our present level of net sales. For example, during 2005, we have increased production capacity to approximately 290,000 units after the completion of our second foundry and the new 6L and 6M heavy-duty engines lines, and we may not be able to increase our net sales commensurate with our increased levels of production capacity. Moreover, our future growth is dependent in large part on factors beyond our control, such as the continued economic growth in China. The recent global financial crisis has had an adverse impact on the economic growth outlook for China and in response, the Chinese government, on November 10, 2008 announced a 4 trillion yuan stimulus package with an aim to maintain economic stability and development through spending on infrastructure projects. There is no assurance that such a stimulus package will be sufficient or successful to ensure continued economic growth of the same levels as in previous quarters. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.

     We are subject to Chinese national and local environmental protection regulations which currently impose fees for the discharge of waste substances, require the payment of fines for pollution, and provide for the closure by the Chinese government of any facility that fails to comply with orders requiring us to cease or improve upon certain activities causing environmental damage. Due to the nature of our business, we produce certain amounts of waste water, gas, and solid waste materials during the course of our production. We believe our environmental protection facilities and systems are adequate for us to comply with the existing national, provincial and local environmental protection regulations. However, Chinese national, provincial or local authorities may impose additional or more stringent regulations which would require additional expenditure on environmental matters or changes in our processes or systems.

     The amount of our insurance coverage for our buildings and equipment is at cost which could be less than replacement value, and we have no plans to increase the coverage. The amount of our insurance coverage for our inventory is at book value which could be less than replacement value, and we also have no plans to increase this coverage. In accordance with what we believe is customary practice among industrial equipment manufacturers in China, we insure only high risk assets, such as production property and equipment and certain inventory. However, our underinsurance of other properties, facilities and inventory in accordance with this Chinese practice exposes us to substantial risks so that in the event of a major accident, our insurance recovery may be inadequate. We do not currently carry third party liability insurance to cover claims in respect of bodily injury, property or environmental damage arising from accidents on our property or relating to our operations. We also do not carry business interruption insurance as such coverage is not customary in China. Losses incurred or payments required to be made by us which are not fully insured could have a material adverse effect on our financial condition.

     Until August 2002, the Company waswe were controlled by Diesel Machinery, (BVI) Limited (“DML”), a company that was 53.0% owned by Hong Leong Asia, Ltd. (“HLA”) through its wholly-owned subsidiary, Hong Leong (China) Limited (“HLC”). HLCChina. Hong Leong China owns HL Technology Systems Pte Ltd (“HLT”), which held shares in the Companyus through DML. DMLDiesel Machinery. Diesel Machinery was also 47.0% owned by China Everbright Holdings Company Limited, (“EB Holdings”)or China Everbright Holdings, through its wholly-owned subsidiary, Coomber Investments Ltd. (“Coomber”). HLA,Coomber. Hong Leong Asia, a company listed on the Singapore Exchange Securities Trading Limited, (“or Singapore Exchange”)Exchange, is part of the Hong Leong Group Singapore,Investment group, which was founded in 1941 by the Kwek family of Singapore and isremains one of the largest privately-controlled business groups in Southeast Asia. EBChina Everbright Holdings is a state-owned enterprise of China. In 2002, EBChina Everbright Holdings and Coomber gave notice to DMLDiesel Machinery and itsthe other shareholders of DMLDiesel Machinery to effect a liquidation of DML.Diesel Machinery. As a result of the liquidation, HLAHong Leong Asia acquired the special share of the Company through HLTHL Technology which entitles HLAHong Leong Asia to elect a majority of theour directors of the Company and also to veto any resolution of shareholders of the Company. See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders”. EBour shareholders. China Everbright Holdings sold its shareholding in Coomber, which held shares in the Company,of our Common Stock, in October 2002 to Goldman Industrial Limited, (“Goldman”),or Goldman, and EBChina Everbright Holdings is no longer a shareholder of the Company.our company. Goldman iswas a subsidiary of Zhong Lin Development Company Limited, (“or Zhong Lin”),Lin, an investment vehicle of the city government of Yulin in Guangxi, China. See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders”.China until September 29, 2006 when Zhong Lin sold its shareholding in Goldman to the State Holding Company.

     Through the Company, HLA providesWe provide certain management, financial planning and other services to Yuchai and, has designated one financial controlleras of December 1, 2008, have seconded six employees to key management positions to work full-time at Yuchai’s principal manufacturing facilities in Yulin City as part of Yuchai’s day-to-day management team.

     To the Company’sour knowledge, since January 1, 2005,2007, there have not been any public takeover offers by third parties in respect of the Company’s shares of our Common Stock, nor, has the Companyhave we made any public takeover offers in respect of the shares of other companies.

     As part of the enlarged TCL Sharesbusiness expansion and diversification plan, in issue (assuming no conversion of bonds and exercise of share options of TCL). The Company believes that through VDL it is currently the second largest shareholder in TCL.

     Notwithstanding the Company’s business expansion plans and minority investments described above, the Company’s main operating asset continues to be its ownership interest in Yuchai. The following is primarily a discussion of the business of Yuchai.

     Yuchai was founded in 1951 and became a state-owned enterprise in 1959. Prior to 1984, Yuchai was a small producer of low-power diesel engines for agricultural machinery. In 1984, Yuchai introduced the earliest model of its 6105 medium-duty diesel engine for medium-duty trucks. In 1989, Yuchai became one of China’s 500 largest industrial enterprises in terms of profitability and tax contribution. In July 1992, in order to raise funds for further expansion, Yuchai became the first state-owned enterprise in the Guangxi Zhuang Autonomous Region to be restructured into a joint stock company.

     As a result of this restructuring, Yuchai was incorporated as a joint stock company in July 1992 and succeeded to the machinery business of Yulin Diesel, and allDiesel. All of Yulin Diesel’s businesses, other than its machinery business, as well as certain social service related operations, assets, liabilities and employees (for example, cafeterias, cleaning and security services, a hotel and a department store), were transferred to the State Holding Company. The State Holding Company also became the majority shareholder of Yuchai through its ownership stake of approximately 104 million shares of Yuchai, (“or State Shares”).Shares. The State Holding Company is owned by the Guangxi localYulin City government. In connection with its incorporation, Yuchai also issued 7 million shares to various Chinese institutional investors, (“or Legal Person Shares”).Shares.

     In May 1993, in order to finance further expansion, Yuchai sold shares to the Company, (“or Foreign Shares”)Shares, and became a Sino-foreign joint stock company.

     TheOur initial shareholders, of the Company, consisting of HLT,HL Technology, Sun Yuan Overseas (BVI) Ltd. (“, or Sun Yuan BVI”),BVI, the Cathay Investment Fund, Limited, (“Cathay”),or Cathay, GS Capital Partners L.P. (“GSCP”), or GSCP, and Coomber, then a wholly-owned subsidiary of EBChina Everbright Holdings and, thus, controlled by China Everbright International Limited, (“or China Everbright”),Everbright International, made their initial investments in Yuchai in May 1993, when their respective wholly-owned subsidiaries purchased for cash in the aggregate 200 million newly-issued shares of Yuchai (51.3% of the then-outstanding Yuchai Shares). These shareholders exchanged with the Company their shareholdings in their wholly-owned subsidiaries, six companies which held Foreign Shares of Yuchai, for 20 million shares of the Company’sour Common Stock (after giving effect to a 10-for-1 stock split in July 1994, (the “Stock Split”))or the Stock Split). In connection therewith, Yuchai became a Sino-foreign joint stock company and became subject to the laws and regulations relating to joint stock limited liability companies and Sino-foreign joint venture companies in China. Foreign Shares may be held by and transferred to non-Chinese legal and natural persons, subject to the approval of the Ministry of Commerce, (“MOC”),or MOC, the successor entity ofto the Ministry of Foreign Trade and Economic Cooperation of China, (“MOFTEC”).or MOFTEC. Foreign Shares are entitled to the same economic rights as State Shares and Legal Person Shares. State Shares are shares purchased with state assets by government departments or organsorganizations authorized to represent state investment. Legal Person Shares are shares purchased by Chinese legal persons or institutions or social groups with legal person status and with assets authorized by the state for use in business.

     In November 1994, the Companywe purchased from an affiliate of China Everbright Holdings 78,015,500 Foreign Shares of Yuchai in exchange for the issuance of 7,801,550 shares of our Common Stock (after giving effect to the Stock Split) (the “China, or the China Everbright Purchase”).Holdings Purchase. The 78,015,500 Foreign Shares of Yuchai held by Earnest Assets Ltd,Limited, a subsidiary of EBChina Everbright Holdings and China Everbright International before its sale to the Company,us had been originally issued as Legal Person Shares and State Shares and were converted to Foreign Shares, pursuant to approvals granted by MOFTEC. As a result, the Company became the owner of each of these six companies: Hong Leong Technology

     Subsequent to the execution of the Reorganization Agreement, (see “Item 19. Exhibits — Exhibit 4.12”), a number of steps have been taken by the parties thereto towards its implementation. For example, Yuchai’s directors and shareholders have confirmed that the amendments to Yuchai’s Articles of Association and corporate governance guidelines required to be adopted by Yuchai pursuant to the Reorganization Agreement have been ratified and implemented, and that steps are being taken to have such amendments and guidelines approved by the relevant Chinese authorities. Yuchai has also paid a consultancy fee of US$1.5 million to the Company.us in 2005. Yuchai has also declared and paid dividends to its shareholders forfrom profits earned in the financialfiscal years ended December 31, 2003 and 2004, resulting in the Company receiving dividends of Rmb 231.3 million (US$27.9 million, based on an exchange rate of Rmb 8.29 to US$1.00), following which the Companywe declared dividends representing approximately 50% of the amount of dividends paid to the Companyus by Yuchai, as contemplated in Section 1.5(c) of the Reorganization Agreement. On June 26, 2006, Yuchai has declared dividends payable to the Company of Rmb 72.3 million (US$9.0 million) in respect of the financialfiscal year ended December 31, 2005 and this will be paid by July 31,the amount of Rmb 72.3 million due to the Company was received in 2006.

     Completion of the transactions contemplated by the Reorganization Agreement is subject to various conditions, including the receipt of all required regulatory and shareholder approvals. On December 2, 2005, the CompanyJune 30, 2007, we entered into a Reorganizationthe Cooperation Agreement Amendment (No. 1) with Yuchai, Coomber and Coomber; the terms of which were acknowledged and agreed by the State Holding Company. The Cooperation Agreement amends certain terms of the Reorganization Agreement, as amended, includes an extension foramong CYI, Yuchai and Coomber, and as so amended, incorporates the termterms of the Reorganization Agreement. The Reorganization Agreement was scheduled to terminate on June 30, 2007.

     Pursuant to the amendments to the Reorganization Agreement, the Company agreed that the restructuring and spin-off of Yuchai would not be effected, and, recognizing the understandings that have been reached between the Company and the State Holding Company to jointly undertake efforts to expand the business of Yuchai, the Company would not seek to recover the anti-dilution fee of US$20 million from Yuchai.

     Yuchai has a history of more than 40 years for producing diesel generator set, with wide application in civil, military and marine sectors. Yuchai produces diesel power generators which are primarily used in the construction and mining industries. The diesel power generators offer a rated power of 12 kilowatts to 160 kilowatts. Yuchai’s diesel power generators use both the 6105 and 6108 medium-duty engines as their power source. The Genset includes an intelligent digital controlling system, remote control, group control, remote monitoring, automatic parallel operation, and automation protection against breakdown.

     Yuchai also produces special vehicles such as waste transfer equipment, constrictive dumpcart, demountable carriage dumpcart, pendular dumpcart, dumpcart, adsorb dung vehicle, tank car and others.

     Yuchai supplies diesel engine parts to its nationwide chain of customer service stations.stations in China. Although sales of diesel engine parts do not constitute a major percentage of Yuchai’s net revenues, the availability of such parts to its customers and to end-users through its nationwide chain of customer service stations is an important part of Yuchai’s customer service program.