Dear Shareholders

On behalf of the Board of Directors, I am pleased to present for the first time as the Chairman of Salcon Berhad, the Annual Report and audited financial statements of Salcon Berhad for the financial year ended 31st December 2007.

The period under review was indeed a challenging one on the domestic front where there were lower activities and delays in award of contracts in the construction sector.

However, on the bright side, the Group ended 2007 with a strong order book of about RM840 million, through its efforts to expand in the region and in an improving economy,. In addition, the Group also secured a new water concession in Fujian Province, People's Republic of China.

The Group also divested non-core businesses, whilst focusing on our core competencies in water and wastewater engineering and construction; move up the value chain into higher margin business, offering its expertise in design, build and operate, and niche markets such as Non Revenue Water management and reduction.

Financial Performance

For FYE December 2007, the Group, (not including the loss on the sale of Cross Continental Investment Mauritius ("CCI")) achieved an profit before tax of RM 2.1 million on a turnover of RM135 million. This represents an increase of 10.9% in turnover compared to the corresponding period the year before. The increase is due to commencement of new projects secured towards the end of the year.

The Group suffered a loss before and after tax largely due to an exceptional loss of RM6.9 million stemming from the sale of a non core business, CCI as well as an impairment in investments of RM1.0 million. However, these events are non cash items and non-recurring. Excluding these losses, the Group would have reported a net profit, albeit small.

The Group continues to focus on increasing revenues through securing new contracts, reducing operating expenses and conserving cash. Considerable progress was made during the second half of the year with respect to our strategic initiatives to increase our revenue as a total of RM 424 million of new contracts were secured. As our initiatives continue to gain momentum over the fiscal year 2008, we are confident that the Group will record a stronger financial performance.

The Group's balance sheet at end December 2007 remains strong with a shareholders fund and net asset per share of RM224 million and 0.53 sen respectively. The Group's cash/cash equivalents at the end of the financial year stood at a healthy RM118 million. Gearing is also maintained at a manageable level of 0.65 times.

Corporate development
Funding Exercise

During the year under review, the Group strengthened its balance sheet through 2 fund raising exercises.

A total of RM121 million was raised through a renounceable rights issue of 212,045,402 new ordinary shares of RM0.50 each with 106,022,701 free detachable warrants on the basis of two rights shares with one warrant for every two existing ordinary shares of RM0.50 each. The warrants exercise price was fixed at RM0.75. Each warrant entitles the registered holder to subscribe one (1) new ordinary share at any time from 18 May 2007 to 17 May 2014. The warrants were listed on 23 May 2007.

The Group also successfully placed out 42,520,000 new ordinary shares of RM0.50 each representing approximately 10% of the enlarged issued and paid-up share capital of Salcon and in the process raised RM 46.35 million in cash.

The net proceeds of this exercises were utilized for working capital purposes and repayment of loans.

The success of the Rights Issue and private placement demonstrates the confidence of the shareholders in the company and I would like to thank our shareholders for their support and confidence in the Group.

Acquisitions

On 28 August 2007, the Group announced its proposed acquisition of 74,174,592 ordinary shares of RM1.00 each representing approximately 74,2% of the issued and paid-up share capital of Oriental Capital Assurance Berhad (OCA), a general insurance company, from Maika Holdings Berhad for RM1.75 per shares or a total cash consideration of RM129,805,536. As a consequence of the the proposed acquisition and in compliance with the Malaysia Code on Take-Overs and Mergers, 1998, Salcon would be obliged to extend a mandatory take-over offer to the remaining shareholders of OCA to acquire the remaining ordinary shares for a cash consideration of RM1.75 for each offer shares upon the Share Sale Agreement for the proposed acquisition become unconditional.

This proposed investment is in line with Salcon's objective to diversify its revenue base and will enable the Group to capitalise on its shareholders' expertise and experience in the insurance industry. Once established, the insurance business will help to smoothen out the cyclical nature of its existing water & wastewater related construction industry.

Due to a suit filed by Koperasi Nesa Pelbagai Berhad against Maika Holdings Berhad where an injunction has been granted by the High Court of Malaya to restrain Maika Holdings Berhad from, among others, acting upon its resolution approving the disposal of its shares in OCA, the proposed acquisition is still pending and is dependant on the outcome of the suit. Salcon Berhad is not a party to the proceedings.

Disposals

In order to streamline its business activities and to focus on its core business of water supply and wastewater treatment, the Group disposed its investment in CCI and Palm Tech India Limited, India. This disposal raised RM24 million in cash and allows the Group to invest in building our core businesses.

Industry Outlook

In 2007, the Malaysian economy recorded a real GDP of 6.3% driven by robust domestic demand, strong private consumption spending and investment activities. On the supply side, growth was broad based with strong growth recorded in all economic sectors. The construction sector also recorded a sustained growth at 4.7% in the fourth quarter of 2007 supported by activities in the civil engineering and non-residential sub-sectors.

Nonetheless, rising global crude oil prices has also brought about increases in the cost of raw materials such as steel, cement, concrete etc. Against this backdrop, the Group seeks to cushion the impact of escalating costs via escalation clauses, where possible.

The Water Service Industry Act 2006 and the Suruhanjaya Perkhidmatan Air Negara Act 2006 which came into force in January 2008 and February 2007 respectively has bought positive structural changes In the water and wastewater industry in Malaysia, With these two Acts in place, the National Water Services Commission (Suruhanjaya Perkhidmatan Air Negara - SPAN) was established with the aim of improving efficiencies and regulating all water service providers in the industry through the issuance of licenses. This is coupled with the setting-up of the Water Asset Management Company (WAMCO) which will acquire existing water supply assets and develop new water infrastructure like pipelines and treatment plans and lease it to the service providers.

In terms of water demand, the domestic and industrial water demand in Malaysia is expected to multiply more than 3-fold in 50 years. The domestic demand is expected to increase from 5.6 million m3 per day in 2000 to 16.2 million m3 in 2050 and the industrial demand from 3.9 million m3 in 2000 to 15.5 million m3 in 2050. The total water demand for Peninsular Malaysia is expected to increase from 29.6 million m3 in 2000 to 48.4 million m3 in 2050. In order to meet this demand, under the 9th Malaysia Plan a total of RM8,203.6 million has been allocated to develop water supply facilities.

Besides this, Non Revenue Water (NRW) reduction has become an increasing important issue in Malaysia. The current national average NRW level is at 41% of which 25% comprises physical losses due to pipe leakages, while 16% due to commercial losses for which water is used but no revenue collected. The national NRW rate is expected to decrease to 30% in 2010 through strict enforcement against water theft, pipe and meter replacement, Geographical information System (GIS) mapping of distribution networks, rehabilitation of distribution systems and upgrading of existing water treatment plants as well as setting up operation centres. The Government's long-term target is to bring down NRW level to a target of 20% by the year 2015.

It is obvious that public spending in the water sector is a necessity to ensure public health and to sustain economic growth. As a result, growing demand and more constant prices make the water industry, in general, less exposed to economic cycles. Given the changing landscape of the water and wastewater industry in Malaysia and an ever increasing demand for drinking water, the Group is constantly on the look-out for opportunities to capitalize on and enhance our presence and position in the market. Based on our established track record, years of experience and technical expertise, the Group is confident of capitalizing on such opportunities as they arise.

Prospects

The Group will continue to implement the projects it had in hand with a residual contractual value of RM590 million from the original portfolio of projects worth RM840 million. Construction works from the balance of the order book should keep the Group busy for the next 2 to 3 years. Approximately 22% of the current projects involve long term operation and maintenance contracts with duration of five years.

The Group has also signed various Memorandum of Understanding (MOU) with the Government in West Java and Sumatera, Indonesia, to undertake feasibility studies for the provision of treated water in Indonesia.

The Group has also participated in tenders and submitted proposals for water and wastewater projects/concessions in Vietnam, Indonesia, India and Sri Lanka. As more and more emphasis is put on environmental conservation and sustainability, the Group sees excellent opportunities in these new markets where we can leverage on our expertise, technological know-how. We see key potential areas in the development and upgrading of water distribution network, consisting of laying of new pipes of various sizes and replacement of existing asbestos cement pipeline to reduce non-revenue water (NRW). Based on our successful track record in Malaysia and overseas, we are confident that these Government initiatives and policies will provide opportunities for Salcon

Against the backdrop of strong Malaysian macro-economic fundamentals and a broadly-balanced economic structure the Board is optimistic that the Group will perform satisfactorily in the financial year ahead and the outlook for the Group for the next few years remains strong.

Corporate Governance

Our statement on Corporate Governance is set out on page 40 to 45 in Annual Report of 2007. There were no sanctions, reprimands and/or penalties imposed on the Company or the Group, Directors or Management by the relevant authorities during the financial year.

BOARD CHANGES AND ACKNOWLEDGEMENTS

On behalf of the Board of Directors, I would like to express my sincere appreciation and gratitude to Tan Sri Razali Ismail, who resigned from the Board on 18 October 2007. I appreciate the trust given to me to assume the position of Chairman, and shall endeavour to serve and add value to the success of the Group.

I would also like to take this opportunity to express my gratitude to all our customers, shareholders, government authorities and agencies, bankers and business partners for their continued trust and confidence in us, Their cooperation, assistance, support and advice are crucial to the successful implementation of our projects.

Last but not least, my heartfelt thanks goes to all the Board members, management and staff for their strong commitment and contribution towards the success of our Group.

Dato' Seri Goh Eng Toon
Chairman