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CHINDEX INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

The accompanying notes are an integral part of the financial statements.

The accompanying unaudited consolidated condensed financial statements of Chindex International, Inc. (the ''Company'') have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.    

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K and 10-K/A for the year ended December 31, 2001.

Note 4. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted Loss Per Share (LPS) for the periods indicated:

Note 5. SEGMENT INFORMATION

As a result of the growth of the Healthcare Products Distribution unit the Company has split its Healthcare Products segment. The Company now has three reportable segments: Medical Capital Equipment, Healthcare Products Distribution and Healthcare Services. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, not including gains or losses on the Company's investment portfolio.

For the quarter ended June 30, 2002:

	Capital Medical Equipment	Healthcare Products Distribution	Healthcare Services	Total
Assets	$15,243,000	$9,568,000	$8,447,000	$33,258,000
Sales and service revenue	$4,637,000	$6,905,000	$3,426,000	$14,968,000
Gross Profit	1,020,000	982,000	n/a	n/a
Gross Profit %	22%	14%	n/a	n/a
(Loss) income from operations	$(734,000)	$(227,000)	$364,000	$(597,000)
Other income/(expense), net				8,000
Minority interest				(23,000)
Loss before taxes				$(612,000)

For the quarter ended June 30, 2001:

	Capital Medical Equipment	Healthcare Products Distribution	Healthcare Services	Total
Assets	$14,175,000	$10,927,000	$6,469,000	$31,571,000
Sales and service revenue	$6,249,000	$4,760,000	$2,192,000	$13,201,000
Gross Profit	1,730,000	635,000	n/a	n/a
Gross Profit %	28%	13%	n/a	n/a
Income (loss) from operations	$10,000	$(476,000)	$217,000	$(269,000)
Other income/(expense), net				133,000
Minority interest				(4,000)
Loss before taxes				$(140,000)

For the six months ended June 30, 2002:

	Capital Medical Equipment	Healthcare Products Distribution	Healthcare Services	Total
Assets	$15,243,000	$9,568,000	$8,447,000	$33,258,000
Sales and service revenue	$11,290,000	$13,031,000	$6,225,000	$30,546,000
Gross Profit	2,455,000	1,748,000	n/a	n/a
Gross Profit %	22%	13%	n/a	n/a
(Loss) income from operations	$(908,000)	$(388,000)	$406,000	$(890,000)
Other income/(expense), net				(4,000)
Minority interest				(23,000)
Loss before taxes				$(917,000)

For the six months ended June 30, 2001:

	Capital Medical Equipment	Healthcare Products Distribution	Healthcare Services	Total
Assets	$14,175,000	$10,927,000	$6,469,000	$31,571,000
Sales and service revenue	$10,643,000	$9,110,000	$4,054,000	$23,807,000
Gross Profit	3,295,000	1,179,000	n/a	n/a
Gross Profit %	31%	13%	n/a	n/a
Income (loss) from operations	$141,000	$(766,000)	$349,000	$(276,000)
Other income/(expense), net				274,000
Minority interest				(9,000)
Income before taxes				$(11,000)

The Company's revenues for the three months ended June 30, 2002 were $14,968,000, up 13% from the three months ended June 30, 2001 revenues of $13,201,000. Included in the revenues for the earlier period was $1,672,000 attributable to sales (the "Prior Quarter Financed Sales") sourced by the Company for its customers. The Company believes that this type of financing is important to its customers and will continue to try to source such financings in the future. These financings can be very complex and their timing and impact on the Company's results are difficult to predict (see "Timing of Revenues").

The Company recorded a net loss of $207,000 for the three months ended June 30, 2002, as compared to a net loss of $225,000 for the three months ended June 30, 2001.

The capital medical equipment segment is the Company's original core business, exporting top quality Western capital medical equipment to the China market. In the three months ended June 30, 2002 this segment had revenues of $4,637,000, a 26% decrease from revenues of $6,249,000 in the three months ended June 30, 2001. The decrease was primarily attributable to the Prior Quarter Financed Sales, while there were no such sales facilitated by such loans in the recent period. The period to period revenues of this segment fluctuate due to financing programs from time to time facilitated by the Company and due to fluctuating hospital purchasing cycles in China. The U.S. Dollar-based sales of capital medical equipment are often contingent on financing (see "Timing of Revenues").

Gross profit in the three months ended June 30, 2002 decreased to $1,020,000 from $1,730,000 in the three months ended June 30, 2001. As a percentage of revenues, gross profit from the capital medical equipment segment for the recent period was 22% as compared to 28% in the prior period. The gross profit in the three months ended June 30, 2001 reflected a different mix of revenue sources having different profit margins. Competitive factors such as the timing and composition of major tenders as well as the ongoing competitive pricing pressures due to Chinese government tendering regulations in the sale of capital medical equipment in the recent period yielded lower margins on such sales.

Expenses for the capital medical equipment segment in the three months ended June 30, 2002 increased to $1,754,000 from $1,641,000 in the three months ended June 30, 2001, and as a percentage of revenues over the period increased to 38% from 26%. Salaries for the segment in the three months ended June 30, 2002 increased by $221,000 from the three months ended June 30, 2001, and as a percentage of revenues over the period increased to 14% from 7%. The salary increase was primarily due to increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expenses for the segment decreased $21,000 (but increased as a percentage of revenues, to 7% from 6%) and other costs decreased $87,000 over the three months, primarily due to decreased promotion fees and reduced administrative expense allocation.

The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had revenues growth of 45% to $6,905,000 in the three months ended June 30, 2002, from the three months ended June 30, 2001 revenues of $4,760,000. These local currency sales of medical consumables and personal healthcare products are made from inventories maintained locally in China (see Foreign Currency Exchange) to a network of sub-dealers and pharmacies.

Gross profit in the three months ended June 30, 2002 rose to $982,000 from $635,000 in the three months ended June 30, 2001. As a percentage of revenue, gross profit from the healthcare products segment for the recent period was 14% as compared to 13% in the prior period.

Expenses for the healthcare products distribution segment in the three months ended June 30, 2002 increased to $1,209,000 from $1,111,000 in the three months ended June 30, 2001, but decreased as a percentage of revenues over the periods from 23% to 18%. Salaries for the segment increased $113,000 (but remained flat as a percentage of revenues over the period at 7%) primarily due to increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expense for the segment increased $18,000 (but was flat at 1% of revenue for both periods) and other costs decreased $33,000.

The healthcare services segment consists of a Western style primary care hospital and outpatient facility, the Beijing United Family Hospital (''BJU''). For the three months ended June 30, 2002, the revenues from this segment were $3,426,000, an increase of 56% over the three months ended June 30, 2001 revenues of $2,192,000. During the recent period, the hospital continued to expand the services offered, which contributed to increased patient visits as well as increased inpatient stays over the three months. Healthcare services costs increased for the three months ended June 30, 2002 to $3,062,000, a 50% increase over the three months ended June 30, 2001 costs of $2,038,000. This increase was due primarily to the costs associated with increased services offered. The hospital is currently expanding its present facility to include space formerly occupied by a sublease tenant (see Liquidity and Capital Resources) and continues to explore the possibi lity of additional satellite clinics to serve as referral sites to its hospital. Salaries increased by $652,000 (salaries were 47% and 43% of revenue for the three months ended June 30, 2002 and 2001, respectively), with all other costs increasing $372,000, including increases of $113,000 in supplies, $63,000 in rent and $29,000 in office expenses. The salary increases resulted from increased staffing for the emergency room and for other expanded facilities as well as additional payroll benefits.

Minority interest in the net income of BJU amounted to $23,000 for the three months ended June 30, 2002 and $4,000 for the three months ended June 30, 2001. This income is directly related to the local entity profitability of the hospital.

Other Income and Expenses

Other expense (other than interest) for the three months ended June 30, 2002 was $3,000, compared to other income of $99,000 for the three months ended June 30, 2001. The prior period other income was derived from a sublease of space in the building housing BJU that ended on December 31, 2001. In 2001, income attributable to this sublease was approximately $550,000. The part of the building that was sublet is now being renovated as part of the hospital expansion. Although the Company does not anticipate sublease revenues in 2002, it nevertheless anticipates that once the space is renovated and put into service for use by BJU, the Company will recognize additional revenues through the expanded operations of BJU, which additional revenues may offset part or all of the loss of income from the sublease.

As of the end of 2001 the Company had substantially completed a global restructuring. The Company is modifying inter-company relationships to better accommodate its predominantly Chinese operations. This restructuring was motivated, in part, by the Company's desire to "incorporate" various functions previously operated as divisions or branches of the Company and, in part, by the Company's intent to expand its presence in the direct healthcare market by opening an additional hospital.

As a result of this restructuring the Company expects to make use of a portion of its U.S. federal net operating losses. The Company recorded a $405,000 benefit from taxes for the three months ended June 30, 2002 as compared to a provision for taxes of $85,000 for the three months ended June 30, 2001. This tax computation is in line with current accounting standards but assumes a certain level of future profitability. The Company may have to reverse this treatment by the end of the year should current expectations not be fully met.

The Company's revenues for the six months ended June 30, 2002 were $30,546,000, up 28% from the six months ended June 30, 2001 revenues of $23,807,000. Of these amounts, $2,002,000 in the recent period and $1,812,000 in the prior period, were due to sales (the "Prior Six Month Financed Sales") financed by loans sourced by the Company for its customers. The Company believes that this type of financing is important to its customers and will continue to source such financings in the future. These financings can be very complex and their timing and impact on the Company's results are difficult to predict (see "Timing of Revenues").

The Company recorded a net loss of $399,000 for the six months ended June 30, 2002 , as compared to a net loss of $200,000 for the six months ended June 30, 2001.

In the six months ended June 30, 2002 this segment had revenues of $11,290,000, a 6% increase over the revenues of $10,643,000 in the six months ended June 30, 2001. The six months-to-six months revenues of this segment fluctuate due to financing programs from time to time facilitated by the Company and due to fluctuating hospital purchasing cycles in China. The increase for the six months ended June 30, 2002 was primarily attributable to the Prior Six Month Financed Sales, which were $2,002,000 in the recent period as compared to $1,812,000 in the prior period. The U.S. Dollar-based sales of capital medical equipment are often contingent on financing (see "Timing of Revenues").

Gross profit in the six months ended June 30, 2002 decreased to $2,455,000 from $3,295,000 in the six months ended June 30, 2001. As a percentage of revenues, gross profit from the capital medical equipment segment for recent period was 22% as compared to 31% in the prior period. The gross profit in the six months ended June 30, 2001 reflected a different mix of revenue sources having different profit margins. In particular, in the recent period, the Company had substantially less service contract revenues than in the prior period, which revenues carry higher margins. The reduction in these revenues over the six months resulted in part from sales of products under loans arranged by the Company for its customers, after which sales the Company is not required to provide warranty service. In addition, competitive factors such as the timing and composition of major tenders as well as the ongoing competitive pricing pressures due to Chinese government tendering regulations in the sale of capital medical eq uipment in the recent six months yielded lower margins on such sales. Based on historical gross profit levels, the results for the six months ended June 30, 2002 were low while the results for the six months ended June 30, 2001 were high.

Expenses for the capital medical equipment segment in the six months ended June 30, 2002 increased to $3,363,000 from $3,028,000 in the six months ended June 30, 2001, and as a percentage of revenues over the period increased to 30% from 28%. Salaries for the segment in the six months ended June 30, 2002 increased by $272,000 from the six months ended June 30, 2001 and as a percentage of revenues over the period increased to 11% from 9%. The salary increase was primarily due to increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expenses for the segment increased $27,000 (but was flat at 5% of revenues in both six month periods) and other costs increased $36,000 over the six month period, primarily due to increased exhibition fees.

The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had revenues growth of 43% to $13,031,000 in the six months ended June 30, 2002, from the six months ended June 30, 2001 revenues of $9,110,000.

Gross profit in the six months ended June 30, 2002 rose to $1,748,000 from $1,179,000 in the six months ended June 30, 2001. As a percentage of revenues, gross profit from the healthcare products distribution segment was flat at 13% of revenues for both periods.

Expenses for the healthcare products distribution segment in the six months ended June 30, 2002 increased to $2,136,000 from $1,945,000 in the six month period ended June 30, 2001, but decreased as a percentage of revenues over the six month period from 21% to 16%. Salaries for the segment increased $171,000, but remained flat as a percentage of revenues over the six month periods at 6%. The increase is primarily due to increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expense for the segment increased $37,000 (but was flat at 1% of revenues for both six month periods) and other costs decreased $17,000.

For the six months ended June 30, 2002, the revenues from this segment were $6,225,000, an increase of 54% over the six months ended June 30, 2001 revenues of $4,054,000. During the recent period, the hospital continued to expand the services offered, which contributed to increased patient visits as well as increased inpatient stays over the six months. Healthcare services costs during the six months ended June 30, 2002 were $5,819,000, an increase of 52% over the six months ended June 30, 2001 costs of $3,831,000. This increase was due primarily to the costs associated with increased services offered. The hospital is currently expanding its present facility to include space formerly occupied by a sublease tenant (see Liquidity and Capital Resources) and continues to explore the possibility of additional satellite clinics to serve as referral sites to its hospital. Salaries increased by $1,355,000 (salaries were 50% and 43% of revenue for the six months ended June 30, 2002 and 2001, respectively), with all other costs increasing $633,000, including $143,000 in supplies, $126,000 in rent and $57,000 in office expenses. The salary increases resulted from increased staffing for the emergency room and for other expanded facilities as well as additional payroll benefits.

Minority interest in the net income of BJU amounted to $23,000 for the six months ended June 30, 2002 and $9,000 for the six months ended June 30, 2001. This income is directly related to the local entity profitability of the hospital.

Other Income and Expenses

Other expense (other than interest) for the six months ended June 30, 2002 was $20,000, compared to other income of $198,000 for the six months ended June 30, 2001. The prior period other income was derived from a sublease of space in the facility housing BJU that ended on December 31, 2001. In 2001, income attributable to this sublease was approximately $550,000. The part of the building that was sublet is now being renovated as part of the hospital expansion. Although the Company does not anticipate any sublease revenues in 2002, it nevertheless anticipates that once the space is renovated and put into service for use by BJU, the Company will recognize additional revenues through the expanded operations of BJU. Which additional revenues may offset part or all of the loss of income from the sublease.

The Company recorded a $518,000 benefit from taxes for the six months ended June 30, 2002 as compared to a provision for taxes of $189,000 for the six months ended June 30, 2001. This tax computation is in line with current accounting standards but assumes a certain level of future profitability. The Company may have to reverse this treatment by the end of the year should current expectations not be fully met.

As of June 30, 2002, total accounts receivable decreased by $643,000 compared to total accounts receivable on December 31, 2001. While the Company collected the loan project receivable from the end of the year, it was partially offset by shipment of the remainder of the loan project that will not be collected until the second half of 2002. Other sales were comparable to the prior year.

Substantially all of the $1,125,000 decrease as of June 30, 2002 in accounts payable and accrued expenses was related to vendor payments for inventory.

As of June 30, 2002, inventories were $7,819,000, an increase of $454,000 from the December 31, 2001 balance of $7,365.000. This increase was mainly attributable to expanding inventory supply and currently limited vendor credit.

The Company has recorded a deferred tax asset of $1,040,000, or $808,000 over the prior year end balance. The Company expects the tax situation to reverse by year end and almost all of the deferred tax will be reversed to a small tax payable.

As of June 30, 2002 the Company capitalized an additional $977,000 of improvements and equipment, primarily for the expansion of BJU. The Company plans to continue to renovate the facility housing BJU during 2002. The estimated cost of such renovation and related expenses is approximately $1,300,000 and will be primarily financed through internal cash flows, bank borrowings and vendor financing.

In June, 2002, BJU renewed and increased its short term financing arrangement in China with Hongkong Shanghai Banking Corp. ("HSBC") for up to $600,000 in revolving loans or standby credit. As of June 30, 2002 the Company had fully utilized this facility and had $600,000 outstanding. In addition, the Company also utilized its short term credit facility with Allfirst Bank, under which, as of June 30, 2002, the Company had $910,000 outstanding.

The Company received the business license for its Shanghai United Hospital on July 17, 2002. Under Chinese law the Company is required to begin making its payment of registered capital for the hospital within 3 months of the receipt of the business license. The Company's total registered capital obligation is $4 million, with the first payment of 15% of that amount, or $600,000, due by the end of October 2002. In connection with the Company's efforts to locate additional funding to meet this investment obligation, the Company has been negotiating with a major supplier for the provision of extended credit terms for up to $4 million of purchases. Such terms would allow the Company to defer payment on purchases from that supplier for up to two years and utilize the funds received from customers for the development of Shanghai United Hospital. The arrangement would carry an interest component of 5%. Preliminary agreement has been reached on this program but as of the date of this filing the final docume ntation has not been completed. The Company anticipates finalizing this arrangement within a few weeks but there can be no assurances that the final documentation will be completed as contemplated or that any such financing will be consummated.

The Company continues to consider various other financing alternatives to satisfy its future expansion, capital improvements and equipment requirements.

The timing of the Company's revenues is affected by several significant factors. Many end-users of the capital equipment products sold by the Company depend to a certain extent upon the allocation of funds in the budgeting processes of the Chinese government and the availability of credit from the Chinese banking system. These processes and the availability of credit are based on policy determinations by the Chinese government and are not necessarily subject to fixed time schedules.

In addition, the sales of certain products often require protracted sales efforts, long lead times and other time-consuming steps. Further, in light of the dependence of purchasers of capital equipment on the availability of credit, the timing of sales may depend upon the timing of the Company's or its purchasers' abilities to arrange for credit sources, including Export-Import Bank or other loan financing. As a result, the Company's operating results have varied and are expected to continue to vary from period to period and year to year. In addition, a relatively limited number of orders and shipments may constitute a meaningful percentage of the Company's revenue in any one period. As a result, a relatively small reduction in the number of orders can have a material impact on the Company's revenues in any year. Furthermore, because the Company recognizes revenues and expenses as products are shipped, the timing of shipments could affect the Company's operating results for a particular period. At the s ame time, a growing percentage of the Company's revenues are attributable to hospital services and local currency sales through the Healthcare Products Distribution Segment, both of which have more even revenue streams.

The results of operations of the Company for the periods discussed in this report have not been significantly affected by inflation or foreign currency fluctuation. Since the Company sells goods and services in local Chinese currency as well as U.S. dollars, the Company is exposed to some extent to foreign currency risk. Changes in the valuation of the Chinese Renminbi or Hong Kong Dollar may have an impact on the Company's results of operations in the future. The Company's subsidiaries, Chindex Tianjin, Chindex Shanghai, Chindex Beijing and Beijing United, sell products and services in Renminbi.

Also, the Company has purchased and will continue to purchase some products in Western currencies other than U.S. dollars and has sold and will continue to sell such products in China for U.S. dollars. To the extent that the value of the U.S. dollar declines against such other currencies, the Company could experience a negative impact on profitability. The Company anticipates entering into hedging transactions whenever necessary to minimize such negative impacts. Currently, the Company is not a party to any such hedging transactions.

FORWARD-LOOKING STATEMENTS

With the exception of historical information, certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the Company's (i) performance goals, including successful conclusion of efforts to secure government-backed financing, (ii) future revenues and earnings, including revenues from the Company's developmental businesses such as the health services segment, (iii) markets, including growth in demand in China for the Company's products and services, and (iv) proposed new operations, including expansion of its health services business. Actual results could differ materially from such forward-looking statements because of, among other things, the following factors: developments relating to conducting business in China (including political, economic and legal matters), the timing of the Company's revenues, risks relating to commencement and early operation of healthcare services, dependence on certain suppliers, and extension of credit terms.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks in a variety of ways. The principal market risk has to do with the nature of the Chinese economy and political system. Since the Company generates all of its revenues from its operations in China, any risk having to do with the environment in China for a foreign business operating there can have a significant impact on the Company.

The Company's growth plan includes continuing expansion of the Capital Medical Equipment Segment, rapid expansion of the Healthcare Products Distribution Segment product portfolio, with an emphasis on increasing the number and variety of products that are sold directly to retail pharmacies, and the development of a network of private family hospitals, based on the BJU model, to serve China's growing middle class. Management continues to develop this growth plan, the implementation of which will be contingent on a number of factors, including requisite financing.

Although the Company remains optimistic about the marketplace, there are some continuing uncertainties as to the direction of China's on-going political and economic reforms, the possibility for future devaluation of the Chinese or Hong Kong currencies, as well as China's relationship with the United States. These uncertainties may influence the budgeting and purchasing process in China. Any of the foregoing circumstances may impede trade with China, thus impairing the ability of the Company's customers to purchase the Company's products and services. In the Company's view, China's entry into the World Trade Organization in 2001 has made the risks from these uncertainties less significant. Other possibly adverse circumstances include decreased funds available to Chinese end-users as a result of a general economic slowdown and increased competition from other American and European companies.

The Company's interests may be adversely affected by the political environment in China. China is a socialist state which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China. Changes in the top political leadership of the Chinese government and/or the Communist Party, may have a significant impact on policy and the political and economic environment in China. Moreover, economic reforms and growth have been more successful in certain sections of the country than others, and the continuation or increase of such disparities could affect political or social stability.

The government of China has exercised and continues to exercise substantial control over virtually every section of the Chinese economy through regulation and state ownership. China's continued commitment to reform and the development of a vital private sector in that country have, to some extent, limited the practical effects of the control currently exercised by the government over business enterprises. However, the economy continues to be subject to significant government controls which, if applied to business activities in which the Company engages could have a significant adverse impact on the Company. For example, if the government were to limit the number of foreign personnel who could work in the country or were to substantially increase taxes on foreign businesses or were to impose any number of other possible types of limitations on the Company's operations, the Company could be subject to a significant adverse impact.

China's legal system is a civil law system, which is based on written statutes and in which decided legal cases have little precedential value. Moreover, China's legal system is still in the early stage of development and there are not sufficient numbers of trained judges or other legal professionals to manage disputes that may arise. As a result, the administration of laws and regulations by government agencies in China may be subject to considerable discretion, which may cause uncertainty with respect to certain legal aspects of the Company's operations.

In the sale of its capital equipment to China, the Company must make most of its sales through foreign trade corporations ("FTCs"). Although purchasing decisions are made by the end-user, which is obligated to pay the applicable purchase prices, the Company enters into a formal purchase contract only with the FTC. By virtue of its direct contractual relationship with the FTC, rather than the end-user, the Company is to some extent dependent upon the continuing existence of and contractual compliance by the FTC until the particular transaction is completed.

The Company has made commitments for the lease of the building for its Shanghai hospital. Fulfillment of this commitment is dependent upon the Company locating a source of financing for the hospital. The Company believes that arranging the financing will be accomplished during 2002. However, should this prove not to be the case, the Company will have to renegotiate its lease commitments in Shanghai.

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Certain of the Company's accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, estimation of useful lives of long-term assets, income tax recognition of deferred tax items and accruals and contingencies.

Sales and most commissions are recognized upon product shipment. Costs associated with installation, after-sale servicing and warranty are not significant and are recognized in cost of sales as they are incurred. Revenues related to services provided by BJU are recognized in the period such services are provided. Costs associated with such services are recognized in the period such costs are incurred.

PART II. OTHER INFORMATION

The exhibits listed below are filed as a part of this quarterly report:

- -- -- -- -- -- -- -- -- --

* Confidential treatment has been granted as to a portion of this Exhibit.

+ English translation of summary from Chinese original.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.