CGN Mining Company Limited — Proxy Solicitation & Information Statement 2006

Jun 27, 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other licensed securities dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Vital BioTech Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker, licensed securities dealer or other agent through whom the sale was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1164)

CONTINUING CONNECTED TRANSACTIONS

Independent Financial Adviser to the independent committee of the Board and the Independent Shareholders

A letter from the Independent Board Committee (as defined herein) is set out on pages 12 to 13 of this circular. A letter from VXL Financial Services Limited containing its advice to the Independent Board Committee and the Independent Shareholders (as defined herein) is set out on pages 14 to 19 of this circular.

A notice convening the EGM (as defined herein) to be held at Caine Room, Level 7, Conrad Hong Kong, 88 Queensway, Hong Kong on 27 July 2006 at 9:30 a.m. is set out on pages 24 to 25 of this circular.

Whether or not you are able to attend the EGM in person, you are requested to complete and return the accompanying form of proxy enclosed with this circular in accordance with the instructions printed thereon and deposit the same to the Company’s branch share registrar in Hong Kong, Union Registrars Limited at Room 311-312, Two Exchange Square, Central, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjourned meeting thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting thereof should you so wish.

26 June 2006

CONTENTS

		Pages
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
–	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
–	The New Marketing and Distribution Agreement . . . . . . . . . . . . . . . . . . . . . . . .	5
–	The Annual Caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
–	Reasons for the Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . .	8
–	Relationships between the parties to the New Marketing
	and Distribution Agreement and the Company . . . . . . . . . . . . . . . . . . . . . . . .	9
–	EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
–	Procedure for demanding a poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
–	Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
–	Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		12
Letter from VXLFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		14
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		20
Notice	of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

“2003 Marketing and	the marketing and distribution agreement dated
Distribution Agreement”	31 May 2002 and entered into between Beshabar and
	Pharmco in relation to the purchase of Osteoform
	powder by Beshabar from Pharmco
“Annual Caps”	the maximum aggregate annual value of the
	Continuing Connected Transactions for each of the
	three financial years ending 31 December 2008
“Articles”	the articles of association of the Company as altered
	from time to time
“associate(s)”	has the meaning ascribed to it under the Listing Rules
“Board”	the board of Directors
“Beshabar”	Beshabar (Macao Commercial Offshore) Limited, a
	company incorporated in Macao and a wholly-owned
	subsidiary of the Company
“Company”	Vital BioTech Holdings Limited, an exempted company
	incorporated in the Cayman Islands with limited
	liability, the shares of which are listed on the Main
	Board of the Stock Exchange
“connected person”	has the meaning ascribed to it under the Listing Rules
“Continuing Connected	the continuing connected transactions contemplated
Transactions”	under the New Marketing and Distribution Agreement
“Director(s)”	the director(s) of the Company
“EGM”	the extraordinary general meeting of the Company to
	be held to consider, and if thought fit, approve the
	New Marketing and Distribution Agreement, the
	Continuing Connected Transactions and the Annual
	Caps, the notice of which is set out on pages 24 to 25
	of this circular
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the
	Peoples’ Republic of China

– 1 –

DEFINITIONS

“Independent Board Committee”	an independent board committee of the Company
	comprising all of the Independent non-executive
	Directors, formed to advise the Independent
	Shareholders in respect of the New Marketing and
	Distribution Agreement, the Continuing Connected
	Transactions and the Annual Caps
“Independent Shareholders”	Shareholders other than Pharmco, Mr. Kuo and Ms.
	Bai and any of their respective associates
“Independent Third Parties”	persons or companies who are independent of any of
	the directors, the controlling shareholders, the
	substantial shareholders and the chief executive (as
	such term is defined in the Listing Rules) of the
	Company or its subsidiaries, and their respective
	associates
“Latest Practicable Date”	23 June 2006, being the latest practicable date prior to
	the printing of this circular for ascertaining certain
	information contained therein
“Listing Rules”	the Rules Governing the Listing of Securities on the
	Stock Exchange
“New Marketing and	the new marketing and distribution agreement dated
Distribution Agreement”	26 May 2006 and entered into between Beshabar and
	Pharmco in relation to the purchase of Osteoform
	powder by Beshabar from Pharmco
“Macao”	the Macao Special Administrative Region of the
	People’s Republic of China
“Maxsun”	Maxsun International Limited, a company incorporated
	in Hong Kong and a subsidiary owned as to 51% by
	the Company. The remaining 49% of the entire issued
	capital of Maxsun is beneficially owned as to 24% by
	Ms. Bai and 25% by Mr. Kuo
“Ms. Bai”	Ms. Bai Wei, Betty, the beneficial owner of 50% of the
	entire issued share capital of Pharmco and together
	with Mr. Kuo, holds 49% of the entire issued capital
	of Maxsun and a connected person of the Company
“Mr. Kuo”	Mr. Kuo Tze-Rou, the beneficial owner of 50% of the
	entire issued share capital of Pharmco and together
	with Ms. Bai, holds 49% of the entire issued capital of
	Maxsun and a connected person of the Company

– 2 –

DEFINITIONS

“Osteoform”	the brandname of a calciumamino acid chelate based
	capsule with indication for osteoporosis and calcium
	deficiency. Osteoform is a supplement of calcium, trace
	minerals, vitamin D3 and vitamin C
“Pharmco”	Pharmco International, Inc., a corporation founded in
	Dallas, Texas, the United States of America, the entire
	issued share capital of which is beneficially owned as
	to 50% by Ms. Bai and 50% by Mr. Kuo
“Prospectus”	the prospectus of the Company dated 30 June 2003
“Shareholder(s)”	shareholder(s) of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“VXLFS”	VXL Financial Services Limited, a licensed corporation
	to carry out type 6 (advising on corporate finance)
	regulated activities under the SFO, and the
	independent financial adviser to the Independent
	Board Committee and the Independent Shareholders
	in respect of the New Marketing and Distribution
	Agreement, the Continuing Connected Transaction and
	the Annual Caps
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“US$”	United States dollars, the lawful currency of the United
	States of America
“%”	per cent.

– 3 –

LETTER FROM THE BOARD

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1164)

Executive Directors: Mr. Tao Lung (Chairman) Mr. Huang Jianming (Chief Executive Officer) Mr. Shen Songqing Mr. Liu James Jin Mr. Xu Xiaofan

Independent non-executive Directors: Mr. Lui Tin Nang Mr. Lee Kwong Yiu Mr. Lo Wa Kei Roy

Registered office: Century Yard Cricket Square Hutchins Drive George Town Grand Cayman Cayman Islands British West Indies

Head office and principal place of business in Hong Kong: 31st Floor Sunshine Plaza 353 Lockhart Road Wanchai Hong Kong

26 June 2006

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

On 6 June 2006, it was announced that Beshabar, a wholly-owned subsidiary of the Company, entered into the New Marketing Distribution Agreement with Pharmco in respect of the Continuing Connected Transactions for a term of three years commencing from 1 January 2006 up to 31 December 2008 (both dates inclusive). As Pharmco is a connected person of the Company, then the entering into of the New Marketing Distribution Agreement and the Continuing Connected Transactions under Chapter 14A of the Listing Rules are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

– 4 –

LETTER FROM THE BOARD

The Independent Board Committee has been formed to advise the Independent Shareholders on the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps. VXLFS has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

The purpose of this circular is:

• (a) to provide you with details of the New Marketing Distribution Agreement and the Continuing Connected Transactions;

• (b) to set out the recommendations of the Independent Board Committee in respect of the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps;

• (c) to set out the advice of VXLFS to the Independent Board Committee and the Independent Shareholders in respect of the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps;

• (d) to give you notice of the EGM to be held to consider and, if thought fit, approve the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps; and

• (e) to provide you with such other information as is required under the Listing Rules.

THE NEW MARKETING AND DISTRIBUTION AGREEMENT

Background and nature of the Continuing Connected Transactions

Reference is made to the announcement of the Company dated 6 June 2006. As disclosed in such announcement, Beshabar, a wholly-owned subsidiary of the Company, entered into the 2003 Marketing and Distribution Agreement with Pharmco on 31 May 2002 in respect of the purchase of Osteoform powder by Beshabar from Pharmco for a term of 20 years. As Pharmco is equally owned by Ms. Bai and Mr. Kuo and is therefore regarded as a connected person of the Company under the Listing Rules. As such, the 2003 Marketing and Distribution Agreement and the transactions contemplated thereunder constitute continuing connected transactions of the Company under the Listing Rules. Details of the 2003 Marketing and Distribution Agreement are set out in the Prospectus. The Company was granted the waiver (“Waiver”) from strict compliance with the disclosure and shareholders’ approval requirements under the then Chapter 14 of the Listing Rules in respect of the continuing connected transactions contemplated under the 2003 Marketing and Distribution Agreement for the three financial years ended 31 December 2005. In view of the expiration of the Waiver on 31 December 2005 and in compliance with the revised Listing Rules with effect from 31 March 2004 in relation to continuing connected transactions, on 26 May 2006, Beshabar and Pharmco terminated the 2003 Marketing and Distribution Agreement and subsequently entered into the New Marketing and Distribution

– 5 –

LETTER FROM THE BOARD

Agreement to regulate the purchases of Osteoform powder by Beshabar from Pharmco. The New Marketing and Distribution Agreement is for a term of three years commencing from 1 January 2006 to 31 December 2008 (both days inclusive), provided that it shall be renewable for an additional three-year period upon its expiration in the event that Pharmco notifies Beshabar of the renewal at least 30 days prior to the expiration. Save for this, the New Marketing and Distribution Agreement contains the same respective terms and conditions of the 2003 Marketing and Distribution Agreement.

As the Continuing Connected Transactions constitute non-exempt continuing connected transactions under the Listing Rules and the aggregate amount of purchases of Osteoform powder by Beshabar from Pharmco during the period from 1 January 2006 up to 26 May 2006 exceeded 2.5% of the applicable percentage ratios as defined under the Listing Rules, the New Marketing and Distribution Agreement and the Continuing Connected Transactions are subject to the reporting, disclosure and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules during the period from 1 January 2006 up to the date of shareholders’ approval. However, due to the inadvertence of the Company, the Company has not made any reporting or disclosure of such Continuing Connected Transactions during the period from 1 January 2006 up to the publication of the Company’s announcement dated 6 June 2006.

Particulars of the New Marketing and Distribution Agreement

Date: 26 May 2006 Parties: (i) Pharmco, whose relationship with the Company is further described under the paragraph headed “Relationships between the parties to the New Marketing and Distribution Agreement and the Company” below, as vendor; and (ii) Beshabar, as purchaser.

Term: From 1 January 2006 to 31 December 2008 (renewable for an additional three-year period)

Purchase of Osteoform powder

Pursuant to the New Marketing and Distribution Agreement, Pharmco has agreed to sell to Beshabar, and Beshabar has agreed to purchase from Pharmco exclusively Osteoform powder during the term of the New Marketing and Distribution Agreement. An annual minimum purchase is fixed under the terms of the New Marketing and Distribution Agreement.

The purchase price for the Osteoform powder supplied by Pharmco to Beshalar under the New Marketing and Distribution Agreement was agreed on an arm’s length basis and on normal commercial terms on the basis of the price as agreed between the parties pursuant to the 2003 Marketing and Distribution Agreement. Pursuant to the New Marketing and Distribution Agreement, the agreed purchase price is subject to revision

– 6 –

LETTER FROM THE BOARD

once each calendar year, and the actual purchase price payable by Beshabar for a particular year will be determined after discussion between Beshabar and Pharmco. There is no revision of the purchase price of Osteoform powder ever since the entering into of the 2003 Marketing and Distribution Agreement. Beshabar shall pay for Osteoform powder required in advance pursuant to a drawn down notice that sets out the price and quota by delivery to Pharmco of a documentary letter of credit.

Beshabar shall not be obliged to accept any terms and conditions of the purchase of Osteoform powder that are less favourable to it than those agreed between Pharmco and its other international purchasers of Osteoform powder, other than continental United States of America purchasers, which are Independent Third Parties.

THE ANNUAL CAPS

The following table sets out the approximate total purchase amount of Osteoform powder by Beshabar from Pharmco for each of the preceding three financial years ended 31 December 2005:

	Year	ended 31 December
	2003	2004	2005
	(HK$’ million)	(HK$’ million)	(HK$’ million)
Total amount of purchases
of Osteoform powder by
Beshabar from Pharmco	40.6	55.8	68.4

Note: The above purchase amounts are extracted from the relevant notes to the audited financial statements of the Group for the three years ended 31 December 2005.

During the period from 1 January 2006 up to 31 May 2006, the purchases of Osteoform powder made by Beshabar from Pharmco amounted to approximately HK$45,359,000 and the monthly purchases (on an accumulated basis) are as follows:

	Up to	Up to	Up to	Up to	Up to
	31 January	28 February	31 March	30 April	31 May
	2006	2006	2006	2006	2006
	(HK$)	(HK$)	(HK$)	(HK$)	(HK$)
Amount of purchases
(on an accumulated basis)
of Osteoform powder by
Beshabar from Pharmco	3,541,000	14,165,000	21,248,000	35,414,000	45,359,000

– 7 –

LETTER FROM THE BOARD

The following table sets out the Annual Caps for the Continuing Connected Transactions for the three financial years ending 31 December 2008:

	Year	ending 31 December
	2006	2007	2008
	(HK$’ million)	(HK$’ million)	(HK$’ million)
Annual Caps	88.9	106.7	128.1

The Annual Caps are determined by reference to (i) the historical purchases record of the Group from Pharmco for the three financial years ended 31 December 2005, which shown an annual growth rate of approximately 37.44% and 22.58% in the year ended 31 December 2004 and 2005 respectively; (ii) an estimated growth rate of purchases of Osteoform powder by the Group of approximately 30% for the year ending 31 December 2006 and approximately 20% for each of the two years ending 31 December 2007 and 2008; (iii) the historical sales record of Osteoform for the three years ended 31 December 2005; (iv) the expected expansion in the Group’s customer base; and (v) the expected demand for Osteoform indicated by the Group’s existing customers.

The Directors expect that the demand for the Group’s Osteoform will continue to grow during the three years ending 31 December 2008. Taking into account the existing market condition, it is expected that the estimated purchase amount of Osteoform powder will sustain at the average growth rate for the three years ended 31 December 2005 of approximately 30% for the year ending 31 December 2006. Thereafter, given the keen competition in China pharmaceutical market and the recent changes in pharmaceutical policy in China , the Directors are of the view that the demand for the Group’s Osteoform will experience a steady growth. The estimated growth rate for purchases of Osteoform powder of approximately 20% for each of the two years ending 31 December 2008 is in line with the forecast sales of the Group’s Osteoform for the relevant period. Given this, the Directors believe that based on the estimated growth rate of approximately 30% in the year ending 31 December 2006 and approximately 20% for each of the two years ending 31 December 2007 and 2008, the expected increase in the purchases of Osteoform powder from Pharmco for the three years ending 31 December 2008 will not exceed the Annual Caps.

REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

Osteoform is one of the flagship products of the Group which was developed by Pharmco, being the original owner of the formulation and the trademark thereof, and the sole supplier of the Group’s Osteoform powder. Pursuant to the 2003 Marketing and Distribution Agreement, the Group held an exclusive right to process and distribute Osteoform in the Asian market for a term of 20 years up to 2022. Beshabar has been purchasing Osteoform powder from Pharmco for production of its Osteoform since 2000. For the year ended 31 December 2005, up to approximately 87.4% of the Group’s turnover was derived from the sales of Osteoform. Taking into account Osteoform is the core product of the Group and the sales of which provide a stable income stream to the Group, the Directors believe that the entering into of the New Marketing and Distribution Agreement can ensure a stable supply of Osteoform powder to the Group. In view of the above, the Directors consider that the entering into of the New Marketing and Distribution Agreement

– 8 –

LETTER FROM THE BOARD

and the Continuing Connected Transactions are conducted in the ordinary and usual course of business of the Group and are in the interests of the Company and the Shareholders as a whole.

As referred to in the Prospectus, the Company was granted the Waiver from strict compliance with the disclosure and shareholders’ approval requirements under the then Chapter 14 of the Listing Rules in respect of the continuing connected transactions contemplated under the 2003 Marketing and Distribution Agreement for the three financial years ended 31 December 2005. In view of the expiration of the Waiver on 31 December 2005 and in compliance with the revised Listing Rules with effect from 31 March 2004 in relation to the continuing connected transactions which require, among other matters, that the term of the agreement (except in special circumstances) must not exceed three years, on 26 May 2006, Beshabar and Pharmco terminated the 2003 Marketing and Distribution Agreement, which had a term of 20 years, and subsequently entered into the New Marketing and Distribution Agreement to regulate the purchases of Osteoform powder by Beshabar from Pharmco.

The Directors (including the independent non-executive Directors) consider that:

• (a) the terms and conditions of the New Marketing and Distribution Agreement were negotiated between the parties on an arm’s length basis and are on normal commercial terms that are fair and reasonable;

• (b) the Annual Caps for the purchases of Osteoform powder from Pharmco for the three years ending 31 December 2008 as referred to above are fair and reasonable;

• (c) the Continuing Connected Transactions were and will continue to be conducted in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole.

RELATIONSHIPS BETWEEN THE PARTIES TO THE NEW MARKETING AND DISTRIBUTION AGREEMENT AND THE COMPANY

The Group is principally engaged in the research and development, selling and manufacturing of pharmaceutical products.

Beshabar, being a wholly-owned subsidiary of the Company, is principally engaged in the trading of pharmaceutical products.

Pharmco is principally engaged in the manufacture and sale of pharmaceutical products including Osteoform powder, and fruit supplements.

The Company currently holds 51% interest in Maxsun and the remaining 49% interest are held by Ms. Bai and Mr. Kuo. As Ms. Bai and Mr. Kuo are the beneficial owners of the entire issued share capital of Pharmco, Pharmco is regarded as a connected person of the Company under Rule 14A.11(4) of the Listing Rules. Accordingly, the purchase of Osteoform powder from Pharmco by Beshabar under the New Marketing and Distribution Agreement

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LETTER FROM THE BOARD

constitutes continuing connected transactions for the Company and are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

Pursuant to the Listing Rules, the Continuing Connected Transactions are subject to the approval by the Independent Shareholders at the EGM. Since Pharmco and its associates are not Shareholders and no Shareholder has any special interest in the Continuing Connected Transactions, no Shareholder will be required to abstain from voting at the EGM.

EGM

Set out on pages 24 to 25 of this circular is a notice of the EGM to be held at Caine Room, Level 7, Conrad Hong Kong, 88 Queensway, Hong Kong, at 9:30 a.m. on 27 July 2006. At the EGM, an ordinary resolution will be put forward to the Independent Shareholders to consider and, if thought fit, approve the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps. Voting on such ordinary resolution shall be taken by poll and any Shareholders with a material interest and their respective associates are required to abstain from voting on such ordinary resolution. So far as the Company is aware having made all reasonable enquiries, as at the Latest Practicable Date, Pharmco and its associates did not have any interest in the Shares. Given this and no Shareholder has any interest in the Continuing Connected Transactions, no Shareholder will be required to abstain from voting on the ordinary resolution to be proposed at the EGM to approve the New Marketing and Distribution Agreement, the Continuing Connected Transaction and the Annual Caps.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not you intend to attend the EGM in person, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Union Registrars Limited, at Room 311312, Two Exchange Square, Central, Hong Kong as soon as possible but in any event, not less than 48 hours before the time appointed for the holding of the EGM or any adjourned meeting thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting thereof should you so wish.

PROCEDURE FOR DEMANDING A POLL

In accordance with article 72 of the Articles, a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded:

• (i) by the Chairman of the meeting; or

• (ii) by at least three Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or

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LETTER FROM THE BOARD

• (iii) by any Shareholder or Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all the Shareholders having the right to vote at the meeting; or

• (iv) by any Shareholder or Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the Shares conferring that right.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on pages 12 to 13 of this circular which contains the advice of the Independent Board Committee to the Independent Shareholders in respect of the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps; and (ii) the letter from VXLFS set out on pages 14 to 19 of this circular which contains the advice of VXLFS to the Independent Board Committee and the Independent Shareholders in respect of the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps as well as the principal factors and reasons taken into consideration in arriving at its advice.

Having considered reasons set out above, the Board is of the opinion that the entering into of the New Marketing and Distribution Agreement and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole, and that the terms thereof as well as the Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps. You are advised to read the letter from the independent Board Committee and the letter from VXLFS mentioned above before deciding as to how to vote at the EGM.

ADDITIONAL INFORMATION

Your attention is also drawn to the general information set out in the Appendix to this circular.

Yours faithfully,

By order of the Board of

Vital BioTech Holdings Limited Tao Lung Chairman

– 11 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1164)

26 June 2006

To the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular to the Shareholders dated 26 June 2006 (the “Circular”) of which this letter forms part. Terms defined herein shall have the same meanings as defined in the Circular unless the context otherwise requires.

The Independent Board Committee has been formed to advise the Independent Shareholders as to whether, in our opinion, the entering into of the New Marketing and Distribution Agreement and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole and the terms thereof, including the Annual Caps, are fair and reasonable so far as the Independent Shareholders are concerned. VXLFS has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this respect.

We wish to draw your attention to the “Letter from the Board” and the “Letter from VXLFS” as set out in the Circular.

Having taken into account the principal reasons and factors considered by, and the advice of, VXLFS as set out in its letter of advice on pages 14 to 19 of the Circular, and the other factors contained in the “Letter from the Board” as set out on pages 4 to 11 of the Circular, we are of the opinion that the terms of the Continuing Connected Transactions, including the Annual Caps, are fair and reasonable so far as the Independent Shareholders are concerned and the entering into of the New Marketing and Distribution Agreement and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole. We also consider that the Continuing Connected Transactions are on normal commercial terms and in the ordinary course of business of the Group.

– 12 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps.

Yours faithfully, The Independent Board Committee of

Vital BioTech Holdings Limited Lui Tin Nang Lee Kwong Yiu Lo Wa Kei Roy

– 13 –

LETTER FROM VXLFS

The following is the text of the letter of advice to the Independent Board Committee and the Independent Shareholders from VXLFS dated 26 June 2006, which has been prepared for the purpose of incorporation in this circular, setting out its advise in relation to the Continuing Connected Transactions and the Annual Caps.

VXL Financial Services Limited Unit 3214, 32nd Floor Cosco Tower Grand Millennium Plaza (High Block) 183 Queen’s Road Central Hong Kong

26 June 2006

To the Independent Board Committee and the Independent Shareholders of Vital BioTech Holdings Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps, details of which are set out in a circular issued by the Company to the Shareholders dated 26 June 2006 (the “Circular”), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

The Independent Board Committee, comprising all the three independent nonexecutive Directors, namely Messrs. Lui Tin Nang, Lee Kwong Yiu and Lo Wa Kei Roy, has been established to advise the Independent Shareholders on the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps. In this connection, we have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on whether the entering into of the New Marketing and Distribution Agreement and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole, and the terms thereof as well as the Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned. Any vote of the Independent Shareholders at the EGM shall be taken by poll. Since Pharmco and its associates are not Shareholders and no Shareholder has any special interest in the Continuing Connected Transactions, no Shareholder will be required to abstain from voting in relation to the resolution approving the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps at the EGM.

– 14 –

LETTER FROM VXLFS

In formulating our recommendation, we have relied on the information and facts contained or referred to in the Circular and supplied to us by the Company and the opinions expressed to us by and the representations of the directors and management of the Company. We have assumed that all statements of belief and intention made by the Directors in the Circular were made after due enquiry and that all information, representations and opinions made to us or referred to in the Circular were true, accurate and complete in all respects at the time they were made and continued to be so as at the date of the Circular and may be replied upon. We have also assumed that all statements of beliefs, opinions, assumptions and intentions made by the Directors in the Circular were made reasonably after due and careful enquiry and were based on honestly-held opinion. We have also relied on the responsibility statement set out in section 1 of the Appendix to the Circular. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Company and its directors and management and have been confirmed by the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular.

We consider that we have reviewed sufficient information to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our recommendation. We have no reason to suspect that any relevant information or reports have been withheld, nor are we aware of any facts or circumstances which would render the information provided and the representations made to us to be untrue, inaccurate, or misleading. We have not, however, conducted any independent verification of the information included in the Circular and the information provided by the Directors, the management of the Company and the Company, nor have we conducted any form of in-depth investigation into the businesses, affairs, financial position or future prospects of the Company or Beshabar or Pharmco or any of their respective subsidiaries or associates.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our recommendation in respect of the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps, we have taken into account the following principal factors and reasons:

1. Background to and reasons for the New Marketing and Distribution Agreement and the Continuing Connected Transactions

The Group is principally engaged in research and development, selling and manufacturing of pharmaceutical products. Beshabar, being a wholly-owned subsidiary of the Company, is principally engaged in the trading of pharmaceutical products.

We note that the Group has entered and will continue to enter into transactions with Pharmco for the purchase of Osteoform powder for production of its Osteoform. Pursuant to the 2003 Marketing and Distribution Agreement, Beshabar has granted the exclusive right to process and distribute Osteoform in the Asian market for a term of 20 years up to 2022. It is noted that Osteoform, which was developed by

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LETTER FROM VXLFS

Pharmco, is one of the flagship products of the Group. We understand from the Company that Osteoform powder is the main ingredient of Osteoform. Pharmco, which is principally engaged in the manufacture and sale of pharmaceutical products including Osteoform powder, and fruit supplements, is the original owner of the formulation and the trademark of Osteoform, and the sole supplier of Osteoform powder to the Group. We have been advised that as, so far as the Directors are aware, Pharmco is the sole supplier of Osteoform powder in the market. As noted from the Company’s annual report 2003, 2004 and 2005, the Group’s sales of Osteoform amounted to approximately HK$250 million, HK$310 million and HK$390 million for three years ended 31 December 2005 respectively, representing approximately 89.0%, 90.4% and 87.4% of the total turnover of the Group for the relevant years respectively. Taking into account Osteoform is the core product of the Group and the sales of which provide a stable income stream to the Group, the Directors believe that the entering into of the New Marketing and Distribution Agreement can ensure a stable supply of Osteoform powder to the Group.

As stated in the “Letter from the Board” in the Circular, the Company has been granted the waiver from strict compliance with the disclosure and shareholders’ approval requirements under the then Chapter 14 of the Listing Rules in respect of the continuing connected transactions contemplated under the 2003 Marketing and Distribution Agreement for the three financial years ended 31 December 2005. In view of the expiration of such waiver and in compliance with the revised Listing Rules in relation to continuing connected transactions with effect from 31 March 2004, the 2003 Marketing and Distribution Agreement was terminated and the New Marketing and Distribution Agreement was entered into between Beshabar and Pharmco for a term of three years commencing from 1 January 2006 to 31 December 2008 (both days inclusive) which shall be renewable for an additional three years upon expiration provided a more than 30 days notice is given to Beshabar by Pharmco prior to expiration . We note that save as disclosed above, the New Marketing and Distribution Agreement contains the same respective terms and conditions of the 2003 Marketing and Distribution Agreement.

In view of the foregoing and in particular the Group’s turnover is mainly derived from the sales of its Osteoform and Pharmco is the sole supplier of Osteoform powder in the market, we concur with the view of the Directors that the entering into of the New Marketing and Distribution Agreement can ensure a stable supply of Osteoform powder to the Group. In this regard, we consider that the entering into of the New Marketing and Distribution Agreement and the Continuing Connected Transactions are conducted in the ordinary and usual course of business of the Group and are in the interests of the Company and the Shareholders as a whole.

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LETTER FROM VXLFS

2. Principal terms of the New Marketing and Distribution Agreement

Pursuant to the New Marketing and Distribution Agreement, Pharmco has agreed to sell to Beshabar, and Beshabar has agreed to purchase from Pharmco exclusively Osteoform powder for the period from 1 January 2006 to 31 December 2008 which is renewable for an additional three-year period upon expiration. We note that save for the duration of the New Marketing and Distribution Agreement, terms of the New Marketing and Distribution Agreement are principally the same as those of the 2003 Marketing and Distribution Agreement which were then determined after arm’s length negotiations between the parties and on normal commercial terms.

Pursuant to the New Marketing and Distribution Agreement, a minimum annual purchase amount was required to be made by the Group. As advised by the Company, the minimum annual purchase amount for each of the three years ending 31 December 2008 has been determined based on arm’s length negotiations between Beshabar and Pharmco and on a fair and reasonable basis taking into account the historical market demand and the projected demand for the Group’s Osteoform. We have reviewed the Group’s historical purchases amount of Osteoform powder for each of the three years ended 31 December 2005 and the five months ended 31 May 2006 respectively, and noted that (i) the minimum annual purchase amount stipulated under the 2003 Marketing and Distribution Agreement had been satisfied by the Group in each of the three years ended 31 December 2005; and (ii) the total purchases amount of Osteform powder as at 31 May 2006 has exceeded the minimum annual purchase amount required under the New Marketing and Distribution Agreement for the year ending 31 December 2006.

We have also been advised that the agreed purchase price payable by Beshabar to Pharmco for the purchase of Osteoform powder under the New Marketing and Distribution Agreement has been determined after arm’s length negotiations between the parties and based on normal commercial terms with reference to the purchase price stipulated under the 2003 Marketing and Distribution Agreement. Pursuant to the New Marketing and Distribution Agreement, such agreed purchase price is subject to revision once each calendar year, and the actual purchase price payable by Beshabar for a particular year will be determined after discussion between Beshabar and Pharmco. We have reviewed the relevant documents and have also been confirmed by the Company that no revision has been made to the agreed purchase price of Osteoform powder ever since the entering into of the 2003 Marketing and Distribution Agreement and the actual purchase price payable by Beshabar for the year ending 31 December 2006 remains as the agreed purchase price under the New Marketing and Distribution Agreement. In addition, it is noted that Beshabar shall not be obliged to accept any terms and conditions of the purchase of Osteoform powder that are less favourable to it than those agreed between Pharmco and its other international purchasers of Osteoform powder, other than continental United States of America purchasers, which are Independent Third Parties.

We have been advised that as, so far as the Directors are aware, Pharmco is the sole supplier of Osteoform powder in the market, the Group therefore has not entered into similar transactions with any Independent Third Parties.

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LETTER FROM VXLFS

Having considered the above, we consider that the terms of the Continuing Connected Transactions are fair and reasonable as the Company and the Independent Shareholders are concerned.

3. The Annual Caps

The following is a summary of the historical amounts of the transactions contemplated under the 2003 Marketing and Distribution Agreement for the three years ended 31 December 2005 and the Continuing Connected Transactions for the five months ended 31 May 2006:

				(Unaudited)
				Five months
				ended
	Year ended 31 December			31 May
	2003	2004	2005	2006
	(HK$ million)	(HK$ million)	(HK$ million)	(HK$ million)
Total purchases amount of
Osteoform powder from
Pharmco by Beshabar	40.6	55.8	68.4	45.4

The Directors are of the view that the aggregate amount of the Continuing Connected Transactions for each of the consecutive financial years ending 31 December 2008 of the Group shall not exceed HK$88.9 million, HK$106.7 million and HK$128.1 million respectively. We note that in determining the Annual Caps, the Directors have taken into account the following factors:

• (i) the historical purchases record of the Group from Pharmco for the three financial years ended 31 December 2005 which indicated an annual growth rate of approximately 37.4% and 22.6% in the year ended 31 December 2004 and 2005 respectively;

• (ii) an estimated growth rate of purchases of Osteoform powder by the Group of approximately 30% for the year ending 31 December 2006 and approximately 20% for each of the two years ending 31 December 2007 and 2008;

• (iii) the historical sales record of Osteoform for the three years ended 31 December 2005;

• (iv) the expected expansion in the Group’s customer base; and

• (v) the expected demand for Osteoform indicated by the Group’s existing customers.

In assessing the reasonableness and fairness of the Annual Caps, we have reviewed (i) the historical amount of the transactions contemplated under the 2003 Marketing and Distribution Agreement for each of the three years ended 31 December 2005 respectively; (ii) the unaudited actual amount of the Continuing Connected

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LETTER FROM VXLFS

Transactions for the five months ended 31 May 2006; and (iii) the projected amount of the Continuing Connected Transactions for the period from 1 June 2006 to 31 December 2008 provided by the Company. We have also discussed with the management of the Company on the underlying principal assumptions and bases considered in the determination of the Annual Caps, including (i) the pharmaceutical market condition in the PRC; (ii) Osteoform will remain as the Group’s core product while Pharmco will continue to be the Group’s sole supplier of Osteoform powder during the three years ending 31 December 2008; (iii) the expected expansion in the Group’s customer base; (iv) the expected demand for the Group’s Osteoform indicated by the Group’s existing customers; (v) the increase in the Group’s turnover generated from the sales of Osteoform during the three years ended 31 December 2005; (vi) the unaudited actual amount of the Continuing Connected Transactions for the five months ended 31 May 2006; and (vii) the expected increase in the purchases of Osteoform powder to be supplied by Pharmco for the three years ending 31 December 2008 in accordance with the anticipated growth in sales of Osteoform for the relevant period. Having considered the above and in particular the aggregate value of the Continuing Connected Transactions for the five months ended 31 May 2006 of approximately HK$45.4 million represents approximately 51.1% of the annual cap of HK$88.9 million for the year ending 31 December 2006, we regard it fair and reasonable for the Directors to anticipate the purchases amount that the Group may be made under the Continuing Connected Transactions for the three years ending 31 December 2008 respectively based on the foresaid assumptions and bases. In light of the above, we consider that the Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned. However, as the Annual Caps relate to future events and do not represent forecast of the total purchases amount of the Continuing Connected Transactions for the three years ending 31 December 2008, we therefore express no opinion as to how closely the actual purchases amount of the Continuing Connected Transactions for the three years ending 31 December 2008 corresponds with the Annual Caps.

RECOMMENDATION

Having considered the principal factors and reasons referred to the above, we are of the opinion that the entering into of the New Marketing and Distribution Agreement and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole, and that the terms thereof as well as the Annual Caps are fair and reasonable so far as the Company and Independent Shareholders are concerned. Accordingly, we advise the Independent Shareholders and also the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the New Marketing and Distribution Agreement, the Continuing Connected Transactions and the Annual Caps.

Yours faithfully, For and on behalf of

VXL Financial Services Limited

Gary Mui Director

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APPENDIX

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular with regard to the Company and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement contained herein misleading.

2. DISCLOSURE OF INTERESTS

(a) The Directors’ and chief executives’ interests and short position in the shares, underlying shares and debentures of the Company or any associated corporation

As at the Latest Practicable date, the interests and short positions of the Directors, chief executives of the Company and their associates in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in the Listing Rules, to be notified to the Company and the Stock Exchange, were as follows:

				Percentage
				shareholding
	Company/name		Number and class of	in the same
	of associated		securities	class of
Name of Director	corporation	Capacity	(Note 1)	securities
Mr. Tao Lung	Company	Beneficial owner	110,891,648 Shares (L)	7.19%
	Company	Interest of a	522,526,940 Shares (L)	33.89%
		controlled
		corporation_(Note 2)_
	Perfect Develop	Beneficial owner	4,000 ordinary shares	58.28%
	Holding Inc.		of US$0.01 each (L)
	(“Perfect
	Develop”)
Mr. Liu James Jin	Company	Beneficial owner	14,630,400 Shares (L)	0.95%
Mr. Shen Songqing	Company	Beneficial owner	12,160,000 Shares (L)	0.79%

Notes:

1. The letter “L” stands for the Director’s long position in such securities.

– 20 –

APPENDIX

GENERAL INFORMATION

1. The interests in the shares are held by Perfect Develop. The issued share capital of Perfect Develop is beneficially owned as to 11.05% by Mr. Liu James Jin, 58.28% by Mr. Tao Lung and 25.51% by Mr. Huang Jianming. Accordingly, Mr. Tao Lung is deemed to be interested in all the Shares which Perfect Develop is interested by virtue of the SFO.

Save as disclosed above, as at the Latest Practicable date, none of the Directors and the chief executive of the Company had any interest and short positions in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Division 7 and 8 of part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange.

(b) Substantial Shareholders’ interest and short positions in the shares, underlying shares of the Company

As at the Latest Practicable date, according to the register of members kept by the Company pursuant to section 336 of the SFO and so far as is known to, or can be ascertained after reasonable enquiry by the Directors, the following persons/entities, other than a director or chief executive of the Company, had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, directly, or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote on all circumstances at general meetings of the Company:

		Company/ Name			Approximate
		of Group		Number of shares	percentage of
Name		member	Capacity	(Note 1)	shareholding
Perfect	Develop	Company	Beneficial owner	522,526,940 Shares (L)	33.89%
(Note	2)

Notes:

1. The letter “L” denotes the person’s/entity’s long position in the shares.

2. The issued share capital of Perfect Develop is owned as to 58.28% by Mr. Tao Lung, 11.05% by Mr. Liu James Lin and 25.51% by Mr. Huang Jianming. Mr. Tao Lung and Mr. Liu James Jin are the founders of the Group and the executive Directors, whose interests in the Company are set out in paragraph 2(a) above in this appendix.

Save as disclosed above, the Directors are not aware of any person as at the Latest Practicable date who had an interest or short positions in the shares, underlying shares and debentures of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of part XV of the SFO, or was directly or indirectly, interested in 10% or more of the nominal value of any class of shares capital carrying rights to vote in all circumstances at general meetings of the Company and any other member of the Group.

– 21 –

APPENDIX

GENERAL INFORMATION

3. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and their respective associates had any interests in a business which competes or may compete with the business of the Group or had any other conflict of interests with the Group.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into or proposed to enter into any service contract with the Company or any of its subsidiaries (other than contracts expiring or determinable by the employer within one year without payment of compensation, other than statutory compensation).

5. LITIGATION

As at the Latest Practicable Date, neither the Company nor any member of the Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against the Company or any member of the Group.

6. MATERIAL ADVERSE CHANGE

As the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2005, being the date to which the latest published audited financial statements of the Company were made up.

7. EXPERT AND CONSENT

The following is the qualification of the expert who has given its opinions or advice which are contained in this circular:

Name Qualification

VXL Financial Services Limited a licensed corporation to carry out type 6 (advising on corporate finance) regulated activities under the SFO

VXLFS has given and has not withdrawn its written consent to the issue of this circular with inclusion of its letter and reference to its name included herein in the form and context in which they respectively appear.

As at the Latest Practicable Date, VXLFS did not have any shareholding in any member of the Group and did not have any right, whether legally enforceable or not, to subscribe for or nominate persons to subscribe for securities of any member of the Group.

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APPENDIX

GENERAL INFORMATION

As at the Latest Practicable Date, VXLFS had no direct or indirect interest in any assets which had been, since 31 December 2005 (being the date to which the latest published audited financial accounts of the Company were made up), acquired, disposed of by, or leased to any member of the Group, or were proposed to be acquired, disposed of by, or leased to any member of the Group.

8. GENERAL

• (a) The registered office of the Company is at Century Yard, Cricket Square, Hutchins Drive, George Town, Grand Cayman, Cayman Islands, British West Indies and the head office and the principal place of business of the Company in Hong Kong is at 31st Floor, Sunshine Plaza, 353 Lockhart Road, Wanchai, Hong Kong.

• (b) The branch share registrar of the Company in Hong Kong is Union Registrars Limited at Room 311-312, Two Exchange Square, Central, Hong Kong.

• (c) The qualified accountant and the company secretary of the Company is Mr. Leung Wai Pong, who is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practising Accountant (Aust.) of CPA Australia.

• (d) The English texts of this circular and the accompanying form of proxy shall prevail over the Chinese text in the case of inconsistency.

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of the Company in Hong Kong at Unit 7, 31st Floor, Tower One, Lippo Centre, 89 Queensway, Hong Kong during normal business hours on any business day from the date of this circular up to and including 14 July 2006:

1. the 2003 Marketing and Distribution Agreement;

2. the New Marketing and Distribution Agreement;

3. the letter from the Independent Board Committee to the Independent Shareholders dated 26 June 2006, the text of which is set out on pages 12 to 13 of this circular;

4. the letter from VXLFS dated 26 June 2006, the text of which is set out on pages 14 to 19 of this circular;

5. the written consent of VXLFS referred to in the paragraph headed “Expert and consent” in this Appendix.

– 23 –

NOTICE OF EGM

==> picture [247 x 115] intentionally omitted <==

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1164)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Vital BioTech Holdings Limited (the “ Company ”) will be held at 9:30 a.m. on 27 July 2006 at Caine Room, Level 7, Conrad Hong Kong, 88 Queensway, Hong Kong for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT

• (a) the new marketing and distribution agreement (the “ New Marketing and Distribution Agreement ”) dated 26 May 2006 and entered between Beshabar (Macao Commercial Offshore) Limited (“ Beshabar ”), a wholly owned subsidiary of the Company, and Pharmco International, Inc. (“ Pharmco ”) in relation to the purchase of Osteoform powder by Beshabar from Pharmco (a copy of which has been produced to the meeting marked “A” and has been initiated by the chairman of the meeting for the purpose of identification) and the continuing connected transactions contemplated under the New Marketing and Distribution Agreement be and it is hereby approved;

• (b) the maximum aggregate annual value of the continuing connected transactions contemplated under the New Marketing and Distribution Agreement for each of the financial year ending 31 December 2006, 2007 and 2008 is HK$88.9 million, HK$106.7 million and HK$128.1 million respectively; and

• (c) any one of the Directors be and he is hereby authorised to do or execute for and on behalf of the Company all such acts and things and such other documents by hand and where required, under the common seal of the Company together with such other Director or person authorised by the board of Directors, which in his or their opinion may be necessary, desirable or expedient to carry into effect or to give effect to the New Marketing and Distribution Agreement and all the transactions contemplated therein, including such changes and amendments thereto as any one Director may consider necessary, desirable and expedient.”

By order of the Board of Vital BioTech Holdings Limited Tao Lung Chairman

Hong Kong, 26 June 2006

– 24 –

NOTICE OF EGM

Head office and principal place of business in Hong Kong: 31st Floor, Sunshine Plaza 353 Lockhart Road Wanchai, Hong Kong

Notes:

• (1) A member of the Company entitled to attend and vote at the EGM convened by the above notice is entitled to appoint one or more proxies to attend and, subject to the provisions of the articles of association of the Company, vote in his stead. A proxy need not be a member of the Company.

• (2) A form of proxy for use at the EGM is enclosed. In order to be valid, the form of proxy must be duly completed and signed in accordance with the instructions printed thereon and together with a power of attorney or other authority (if any), under which it is signed or a notarially certified copy of that power or authority must be deposited at the branch share registrar of the Company in Hong Kong, Union Registrars Limited at Room 311-312, Two Exchange Square, Central, Hong Kong not less than 48 hours before the time holding the meeting or any adjournment thereof.

• (3) Completion and return of the form of proxy will not preclude members of the Company from attending and voting in person at the meeting should he so wish.

• (4) In the case of joint holders of a share, any one of such joint holders may vote, either in person or by proxy, in respect of such share as if he/she were solely entitled thereto; but if more than one of such joint holders are present at the above meeting, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For this purpose, seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.

– 25 –