Crypto Flow Technology Limited — Capital/Financing Update 2007

Oct 21, 2007

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, 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 announcement.

This announcement is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities mentioned herein.

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

(1) VERY SUBSTANTIAL ACQUISITION INVOLVING THE ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS

(2) PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL AND (3) RESUMPTION OF TRADING

Financial adviser to the Company

Reference is made to the announcement of the Company dated 14 August 2007 in relation to a possible acquisition of a company in the IT business.

The Board is pleased to announce that on 8 October 2007, the Purchaser, a wholly-owned subsidiary of the Company, entered into the Agreement with the Vendor, the Vendor Guarantors, and the Company, pursuant to which the Purchaser has conditionally agreed to acquire at the Consideration of HK$668,000,000 for the Target Sale Shares.

The Target Sale Shares comprise the entire issued share capital of PAL Holdco and 60% of the entire issued share capital of Oasis Rich.

The Consideration will be satisfied by the Company allotting and issuing 72,000,000 Consideration Shares at the issue price of HK$0.85 per Consideration Share credited as fully paid at the Issue Price and issuing the Convertible Bonds in the aggregate principal amount of HK$606,800,000 to the Vendor on Completion.

* For identification purpose only

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The Acquisition constitutes a very substantial acquisition for the Company under the GEM Listing Rules and is subject to the approval of Shareholders at the EGM.

The Board also proposes the increase in authorized share capital from HK$5,000,000 divided into 500,000,000 ordinary Shares of HK$0.01 each to HK$20,000,000 divided into 2,000,000,000 ordinary Shares of HK$0.01 each by the creation of an additional 1,500,000,000 ordinary Shares of HK$0.01 each. Such new Shares, upon issue, shall rank pari passu in all respects with the then existing issued Shares. The proposed increase in authorized share capital of the Company is a conditional precedent of the Completion.

A circular containing further details of the Acquisition and information of the PAL Group and the Oasis Rich Group, increase in authorized share capital together with a notice of the EGM will be sent to the Shareholders as soon as practicable and in accordance with the GEM Listing Rules.

At the request of the Company, dealings in the Shares on the Stock Exchange were suspended with effect from 9:30 a.m. on 8 October 2007 pending the release of this announcement. Application has been made for the resumption of trading in the Shares on the Stock Exchange with effect from 9:30 a.m. on 22 October 2007.

THE AGREEMENT

Date of the Agreement

• 8 October 2007

Parties to the Agreement

• (a) The Purchaser (as buyer);

• (b) The Vendor (as seller);

• (c) The Company (as the guarantor for the Purchaser); and

• (d) Melco, LottVision and Firich (as Vendor Guarantors).

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, each of the Vendor, and its ultimate beneficial owners, Melco, LottVision and Firich is an Independent Third Party.

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Directors of the Vendor Guarantors were acquainted with a director of the Company in social occasions. Discussions between the Company and the Vendor Guarantors started in August 2007 and on 14 August 2007, the Company announced that it had entered into preliminary discussions in relation to a possible acquisition of a company in the IT business, i.e. the Acquisition. Save for entering into of the Agreement, none of the Vendor or the Vendor Guarantors has any business relationship with the Company, Mr. Chan Sek Keung, Ringo and Mr. Ng Lai Yick.

Mr. Chan Sek Keung, Ringo, Chairman, Chief Executive Officer and Executive Director of the Company, is a third party independent of the Vendor and the Connected Persons of the Vendor and is not a Connected Person of the Vendor. Mr. Ng Lai Yick, an ex-Director of the Company until May 2001 and currently does not hold any position in the Group, is a third party independent of the Vendor and the Connected Persons of the Vendor and is not a Connected Person of the Vendor. Mr. Chan Sek Keung, Ringo, Mr. Ng Lai Yick, the Vendor and it ultimate beneficial owners are not parties acting in concert (as defined under the Code).

Assets to be Acquired

The Target Sale Shares comprising the entire issued share capital of PAL Holdco and 60% of the entire issued share capital of Oasis Rich.

Consideration and Payment Terms

The total Consideration of HK$668,000,000 was on normal commercial terms and arrived at after arms’ length negotiations among the parties to the Agreement.

The Consideration was determined with reference to (i) the industrial prospects of lottery business in the PRC; (ii) market comparables of price earnings ratios and price to book ratios of companies engaging in the similar line of business as the PAL Group and WS Technology. The comparable companies are listed companies in Hong Kong and overseas, which are engaged in lottery operation, i.e. similar line of business as the PAL Group and WS Technology. The observed multiples are based on the prevailing market price of the comparable companies and the audited financial results of these comparable companies for the most recent accounting period and period end; and (iii) the Guaranteed Profit. Taking into account the matters above and the reasons and benefits as stated in the paragraph below headed “Reasons for and benefits of the Acquisition”, the Directors (including the independent non-executive Directors) consider the Consideration to be fair and reasonable and in the interests of the Company and the Shareholders as a whole.

The Consideration of HK$668,000,000 will be settled in the following manner:–

• (a) as to HK$61,200,000 to be satisfied by the allotment and issue of the Consideration Shares credited as fully paid at the Issue Price to the Vendor on Completion; and

• (b) as to HK$606,800,000 to be satisfied by the issue of the Convertible Bonds to the Vendor on Completion.

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Consideration Shares

The 72,000,000 Consideration Shares represent approximately 24.17% of the existing issued share capital of the Company, approximately 19.47% of the issued share capital of the Company as enlarged by allotment and issue of the Consideration Shares and approximately 6.64% of the issued share capital of the Company as enlarged by the allotment and issue of both the Consideration Shares and the Conversion Shares, assuming full conversion of the Convertible Bonds and the Conversion Shares were to be issued at the Conversion Price.

The Issue Price of HK$0.85 per Consideration Share represents:

• (a) a discount of approximately 48.48% to the closing price of HK$1.65 per Share as quoted on the Stock Exchange on the Last Trading Day;

• (b) a discount of approximately 42.02% to the average closing price of approximately HK$1.466 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;

• (c) a discount of approximately 35.70% to the average closing price of approximately HK$1.322 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day;

• (d) a discount of approximately 19.05% to the closing price of approximately HK$1.05 per Share as quoted on the Stock Exchange before suspension of trading in the Shares at 2:30 p.m. on 14 August 2007;

• (e) a discount of approximately 23.42% to the closing price of approximately HK$1.11 per Share as quoted on the Stock Exchange on the last full trading day before suspension of trading in the Shares at 2:30 p.m. on 14 August 2007;

• (f) a discount of approximately 4.06% to the average closing price of approximately HK$0.886 per Share as quoted on the Stock Exchange for the five consecutive trading days up to and including the last full trading day before suspension of trading in the Shares at 2:30 p.m. on 14 August 2007; and

• (g) a premium of approximately 277.78% over the audited consolidated net asset value per Share of approximately HK$0.225 per Share (based on the then issued share capital of 289,944,745 Shares) as at 31 December 2006.

The Consideration Shares will be allotted and issued pursuant to a specific mandate to be sought at the EGM and will be allotted and issued on the date of Completion.

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Convertible Bonds

The principal terms of the Convertible Bonds are summarised as follows:

Issuer the Company Initial Subscriber the Vendor Amount HK$606,800,000 Bonds Issue Price 100 per cent of the principal amount of the Convertible Bonds Coupon 0.1% interest per annum payable semi-annually in arrears Security secured by pro-rated quantity of the Target Sale Shares Maturity Date 5 years from the date of issue of the Convertible Bonds

Issue of the Convertible Bonds

on Completion

Conversion Period from the date of issue of the Convertible Bonds to and include the Maturity Date

Conversion Price

initial conversion price of HK$0.85 per Conversion Share but subject to standard adjustments clauses including, consolidations or subdivisions of Shares, capitalization of profits or reserves, capital distributions, issue of shares by way of rights, issues of new Shares or securities convertible for new shares at a discount of more than 20% to the then market price of the Shares

The Conversion Price of HK$0.85 per Conversion Share is equivalent to the Issue Price and represents:

• (a) a discount of approximately 48.48% to the closing price of HK$1.65 per Share as quoted on the Stock Exchange on the Last Trading Day;

• (b) a discount of approximately 42.02% to the average of the closing prices of approximately HK$1.466 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;

• (c) a discount of approximately 35.70% to the average of the closing prices of approximately HK$1.322 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day;

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• (d) a discount of approximately 19.05% to the closing price of approximately HK$1.05 per Share as quoted on the Stock Exchange before suspension of trading in the Shares at 2:30 p.m. on 14 August 2007;

• (e) a discount of approximately 23.42% to the closing price of approximately HK$1.11 per Share as quoted on the Stock Exchange on the last full trading day before suspension of trading in the Shares at 2:30 p.m. on 14 August 2007;

• (f) a discount of approximately 4.06% to the average closing price of approximately HK$0.886 per Share as quoted on the Stock Exchange for the five consecutive trading days up to and including the last full trading day in the Shares before suspension of trading in the Shares at 2:30 p.m. on 14 August 2007; and

• (g) a premium of approximately 277.78% over the audited consolidated net asset value per Share of approximately HK$0.225 per Share (based on the then issued share capital of 289,944,745 Shares) as at 31 December 2006

Conversion Shares

Ranking of the Conversion Shares

Limitation on Conversion

the Convertible Bonds may be converted at any time from the date of issue of the Convertible Bonds up to the Maturity Date in multiples of HK$1,000,000 subject to the limitation on conversion set out below

the Conversion Shares, when allotted and issued, will rank pari passu in all respects with each other and all Shares in issue at the date of allotment and issue of such Conversion Shares

No conversion of the Convertible Bonds shall be made, if immediately upon such conversion, (1) the Bondholder and its parties acting in concert (as defined under the Code) with it will be under an obligation to make a general offer under the Code; (2) each of (i) any of the existing Shareholders holding more than 20% or more of the voting rights of the Company at as the date of the Agreement; and (ii) the Bondholder and its parties acting in concert (as defined under the Code) will hold 20% or more of the voting rights of the Company respectively; or (3) the public float of the Shares falls below 25% (or any given percentage as required by the GEM Listing Rules) of the issued Shares

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Redemption

The Convertible Bonds may be redeemed by the Bondholders if (1) upon occurrence of an Event of Default (as defined below) and if so requested in writing by the Bondholders; or (2) at Maturity Date, any outstanding Convertible Bonds could not be converted subject to the Limitation on Conversion will be mandatorily redeemed

Redemption will be at par on the principal amount of the outstanding amounts of the Convertible Bonds

Transferability

Save for the part of the Convertible Bonds in the principal amount of HK$18,000,000 as security for the Guaranteed Profit, the Convertible Bonds may be transferred or assigned in whole or in part by the Bondholders to any person or company not being a Connected Person of the Company, unless relevant disclosures and/ or shareholders approval (if applicable) requirements as prescribed under the GEM Listing Rules have been complied with) provided that the Bondholders shall serve not less than seven days’ prior written notice on the Company before the transfer take place

The Company has undertaken to the Stock Exchange that it will notify the Stock Exchange immediately upon becoming aware of any dealings in the Convertible Bonds by Connected Persons of the Company

Events of Default

Events of default shall include the following:

• (i) non-payment of any amount due under the Convertible Bonds and such failure continues for a period of seven days in the case of principal or 14 days in the case of interest;

• (ii) appointment of receivership, declaration of insolvency or a winding up order made against the Company;

• (iii) the Group as a whole ceases to carry on its ordinary course of business;

• (iv) material change in the business nature of the Group;

• (v) material adverse change in the financial condition of the Company;

• (vi) any material default made by the Company in the performance or observance of any undertaking, warranty or representation given by it under these terms (other than the covenant to pay the principal and interest in respect of the Convertible

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Bonds) and such default is incapable of remedy (in which event no such notice as is referred to below shall be required), or if capable of remedy is not remedied within thirty days of service by any Bondholder on the Company of notice requiring such default to be remedied; or

• (vii) it is or becomes unlawful for the Company to perform or comply with any of its obligations under the instrument or any Convertible Bonds, or due to no fault on the part of any Bondholder any such obligation is not or ceases to be enforceable or is claimed by the Company not to be enforceable

Governing Law

The Convertible Bonds shall be governed by and construed in accordance with the laws of Hong Kong

For illustration purpose only, the 713,882,353 Conversion Shares to be issued under the Convertible Bonds represents approximately 239.69% of the existing issued share capital of the Company, approximately 70.56% of the issued share capital of the Company as enlarged by the allotment and issue of the Conversion Shares, assuming full conversion of the Convertible Bonds and the Conversion Shares were to be issued at the Conversion Price and approximately 65.87% of the issued share capital of the Company as enlarged by the allotment and issue of both the Consideration Shares and the Conversion Shares, assuming full conversion of the Convertible Bonds and the Conversion Shares were to be issued at the Conversion Price.

Notwithstanding the conversion rights attached to the Convertible Bonds, the instrument to be issued at Completion contains provisions that no conversion rights to the Convertible Bonds could be exercised and the Company shall not issue any Conversion Shares if, upon such issue, (1) the holder(s) of the Convertible Bonds and their respective parties acting in concert with it, will be interested in 30% (or such amount as may from time to time be specified in the Code as being the level for triggering a mandatory general offer) or more of the then enlarged issued share capital of the Company at the date of the relevant conversion; (2) each of (i) any of the existing Shareholders holding more than 20% or more of the voting rights of the Company as at the date of the Agreement; and (ii) the Bondholder and its parties acting in concert (as defined under the Code) will hold 20% or more of the voting rights of the Company respectively; and/or (3) the public float of the Company will fall below 25% of its total issued share capital. The Vendor acknowledged and agreed that it cannot exercise the conversion rights under the Convertible Bonds such that its shareholding in the Company will equal to or exceed 30% following such conversion.

Applications for Listing

No application will be made by the Company to the GEM Listing Committee for the listing of the Convertible Bonds.

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Application will be made by the Company to the GEM Listing Committee for the listing of, and permission to deal in, the Consideration Shares and the Conversion Shares. The Consideration Shares and the Conversion Shares, when allotted and issued, will rank pari passu in all respects with the Shares in issue on their date of allotment and issue.

Conditions Precedent

The Acquisition is conditional upon the satisfaction of the followings on or before the Long Stop Date, or such other date as the Vendor and the Purchaser may otherwise agree:

• (a) the Purchaser being reasonably satisfied with the results of the due diligence review to be conducted on the PAL Group and the Oasis Group, such review to be concluded within 32 days after the signing of the Agreement;

• (b) all necessary consents and approvals required to be obtained on the part of the Vendor, the Purchaser, the Vendor Guarantors and the Company in respect of the Agreement and the transactions contemplated thereby having been obtained;

• (c) without prejudice to the generality of (b) above, the passing by the Shareholders at the EGM the necessary resolutions to approve the Agreement and the transactions contemplated hereby, including but not limited to (1) the allotment and issue of the Consideration Shares at the Issue Price to the Vendor credited as fully paid; (2) the issue of the Convertible Bonds to the Vendor and the allotment and issue of the Conversion Shares upon conversion of the Convertible Bonds; (3) the amendment of the memorandum and articles of association of the Company to increase its authorized share capital from HK$5,000,000 comprising 500,000,000 Shares to HK$20,000,000 comprising 2,000,000,000 Shares;

• (d) without prejudice to the generality of (b) above, the passing by way of a written resolution of all the shareholders of the Vendor to approve the Agreement and the transactions contemplated thereunder;

• (e) a PRC legal opinion (in form and substance satisfactory to the Purchaser) in relation to the transactions contemplated under the Agreement having been obtained by the Purchaser from a firm of PRC lawyers acceptable to the Purchaser;

• (f) the warranties remaining true and accurate in all material respects and there shall have been compliance in all respects with the covenants and obligations on the part of the Vendor and/or the Vendor Guarantors contained in the Agreement which are to be complied with at or prior to the time of Completion;

• (g) the GEM Listing Committee of the Stock Exchange granting listing of and permission to deal in the Consideration Shares;

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• (h) the GEM Listing Committee of the Stock Exchange granting listing of and permission to deal in the Conversion Shares;

• (i) completion of the Reorganisation;

• (j) if applicable, and without prejudice to the generality of (b) above, the passing by the shareholders of Firich at a general meeting of Firich to be convened and held of the necessary resolutions to approve the Agreement and the transactions contemplated hereunder;

• (k) if applicable, and without prejudice to the generality of (b) above, the passing by the shareholder of LottVision at a general meeting of LottVision to be convened and transactions contemplated hereunder;

• (l) if applicable, and without prejudice to the generality of (b) above, the passing by the shareholder of Melco at a general meeting of Melco to be convened and held of the necessary resolutions to approve the Agreement and the transactions contemplated hereunder; and

• (m) the Company’s warranties remaining true and accurate in all material respects and there shall have compliance in all respects with the covenants and obligations on the part of the Purchaser and/or prior to the time of Completion.

The Purchaser may at any time waive in writing any of the conditions (a), (e) and (f) set out above. If the conditions set out above have not been satisfied (or waived by the Purchaser) on or before the Long Stop Date, or such later date as the Vendor and the Purchaser may agree, the Agreement shall cease and determine and thereafter neither party shall have any obligations and liabilities towards each other thereunder save for any antecedent breaches of the terms thereof.

Completion

Completion of the Acquisition will take place on the date falling two Business Days after the fulfillment (or waiver) of the conditions precedent.

After Completion, PAL Holdco will become a wholly-owned subsidiary of the Company while Oasis Rich will become a non-wholly owned subsidiary of the Company. The financial statements of PAL Holdco and Oasis Rich and their respective subsidiaries will be consolidated in the accounts of the Group after Completion.

The Vendor shall not transfer or otherwise dispose of or create any Encumbrance or other rights in respect of any of the Consideration Shares or transfer or otherwise dispose of or create any Encumbrance or other rights over any shares in any company controlled by it which is for the time being the beneficial owner of any of the Consideration Shares for a period of six months from the Completion Date.

Under the terms of the Convertible Bonds, pro-rated quantity of the Target Sale Shares will be charged as security of the Convertible Bonds during its subsistence.

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Guaranteed Profit

Firich has agreed to warrant and guarantee to the Purchaser the Guaranteed Profit. If the Actual Profit is less than the Guaranteed Profit, Firich (in case the Convertible Bonds are issued to it or its nominees directly) or as the case may be, the Vendor (in case the Convertible Bonds are issued to the Vendor but allotted for the benefit of Firich) shall set off against the payment obligations of the Company under the Convertible Bonds on a dollar to dollar basis in an amount calculated as follows:

A = (Guaranteed Profit – Actual Profit)

where A is the amount (the “Profit Guarantee Set Off Amount”) the Vendor (or as the case may be, Firich) shall set off against the payment obligations of the Company under the Convertible Bonds and the escrow agent shall deliver and transfer the Convertible Bonds of such principal amount representing the portion of the Profit Guarantee Set Off Amount to the Company for cancellation, in addition to such shortfall payable in cash, if applicable.

If WS Technology records a loss in its audited consolidated financial statements for the year ending 31 December 2008, A shall be equal to the Guaranteed Profit PLUS the amount of loss.

Firich and the Purchaser shall procure that the audited consolidated financial statements of WS Technology for the year ending 31 December 2008 shall be prepared and reported on by the auditors of the Company by 31 March 2009.

INFORMATION ON THE VENDOR, MELCO LV, MELCO, LOTTVISION AND FIRICH

The Vendor is a company incorporated in the BVI and is a wholly owned subsidiary of Melco LV as at the date of this announcement. Upon completion of the Reorganisation, the Vendor will be owned as to 54.79% by Melco LV, 18.26% by LottVision and 26.95% by Firich.

Melco LV is a company incorporated in the BVI with limited liability and is a wholly owned subsidiary of Melco. Melco is a company incorporated in Hong Kong with limited liability and is principally engaged in four main business streams, namely (i) leisure, gaming and entertainment; (ii) technology; (iii) investment banking and financial services; and (iv) property and other investments. Melco also provides investment banking and financial services. Melco is a company listed on the Main Board of the Stock Exchange. Melco conducts its gaming activities in Asia via its partnership with Australia’s largest conglomerate and gaming group – Publishing & Broadcasting Limited in Melco PBL Entertainment (Macau) Ltd. Melco holds a 41.39% stake in Melco PBL Entertainment (Macau) Ltd which is now listed on NASDAQ. Melco PBL Entertainment (Macau) Ltd holds one of the six gaming licenses in Macau.

LottVision is a company incorporated in Bermuda with limited liability and is headquartered in Hong Kong and has been listed on the Singapore Exchange Securities Trading Limited Main Board since December 2002. LottVision intends to be a “technology enabler” of choice in license-restricted markets providing revenue-generating IT-related solutions and services for various industries. It is principally

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engaged in the development of lottery-related solutions and services in Asia. It is also engaged in the provision of outsourced security and IT-related services, such as video surveillance and online gaming services, and the manufacture of special purpose devices, such as smart identity card devices.

Firich is a company incorporated in Taiwan and is principally engaged in the development, manufacture and distribution of lottery-related POS system and touch terminals used in restaurants and retail businesses. Firich is a company listed on the Taiwan Gre Tai Securities Market.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, each of the Vendor, Melco LV, Melco, LottVision and Firich is an Independent Third Party and none of these entities has any prior transaction with the Group which requires aggregating pursuant to Rule 19.22 of the GEM Listing Rules.

INFORMATION ON PAL GROUP

PAL is a company incorporated in Hong Kong with limited liability and is the holding company for a group of companies whose activities are focused on lottery business in the Pan-Asia region.

The chart below shows the corporate structure of the PAL Group as at the date of this announcement:

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----- Start of picture text -----

PAL
100% 100% 80% 60%
PALTECH
PAL Development Global Score Trade Express
Company
(Beijing) Limited Asia Limited Services Limited Limited
45% 7.50%
100%
Beijing Hua Ying Feng Cai Beijing Telenet Information
Technology Ltd Technology Limited
----- End of picture text -----

PAL Development (Beijing) Limited is a PRC registered foreign company which is wholly-owned by PAL and is principally engaged in the business of providing technology related systems and venue management consultancy services to authorized operators of lottery halls across the PRC.

北京華盈風彩科技有限公司 (Beijing Hua Ying Feng Cai Technology Limited) is a PRC registered company and is principally engaged in the business providing technology related systems and venue management consultancy services to authorized operators of welfare lottery halls across the PRC.

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PALTECH Company Limited is incorporated in Hong Kong and is owned as to 60% by PAL and as to 40% by a Korean lottery technology company. PALTECH Company Limited is principally engaged in the development, modification, customization, promotion and exploitation of computer systems and software applications and related technologies in connection with the printed lottery and/or online or mobile lottery operations worldwide with a particular focus on Asian market.

北京電信達信息技術有限公司 (Beijing Telenet Information Technology Limited) is a PRC registered company and is principally engaged in the business of supplying technology systems, namely, the point of sale systems and related equipment, for use in connection with the sports lottery in the PRC.

PAL Group was recently established and is yet to become profit making. Since PAL was only established in September 2006, set out below is the audited consolidated results of the PAL Group for the period from 17 August 2006 (date of incorporation) to 31 December 2006 prepared under the Hong Kong Financial Reporting Standards and the Hong Kong Companies Ordinance:

For the period from 17 August 2006 (date of incorporation) to 31 December 2006

Turnover (Loss) before taxation (Loss) after taxation Attributable to: Equity holders of the Company Minority Interest Net asset value (attributable to equity holders)	(HK$) – (3,772,507) (3,772,507) (3,771,355 ) (1,152) (3,772,507) 196,252,797

INFORMATION ON THE OASIS RICH GROUP

Oasis Rich is an investment holding company incorporated in the Republic of Mauritius and holds the entire share capital of WS Technology.

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WS Technology is a wholly owned foreign enterprise established in Shanghai, PRC and is principally engaged in the manufacturing of lottery terminals for China’s sports lottery and China’s welfare lottery through contracting with local authorized retailers, lottery-related point of sales (“POS”) products to worldwide lottery runners through contracting with Firich. Other operations involve the supply of POS products for retail and hospitality industries. From 2006 to 2010, only six authorized distributors are allowed to distribute POS machine to sport lottery in the PRC. WS Technology is the POS machine supplier to the largest authorized distributor.

WS Technology is the principal operating subsidiary of Oasis Rich and set out below is the unaudited results of WS Technology for the period from 17 April 2007, being the date of incorporation of WS Technology, to 30 June 2007 prepared by the management in accordance with the PRC Accounting Regulations:

For the period from 17 April 2007 (date of incorporation) to 30 June 2007

Turnover (Loss) before taxation (Loss) after taxation Net asset value (attributable to equity holders)	(RMB’000) – (1,425 ) (1,425 ) 2,415	(HK$’000) – (1,467) (1,467) 2,487

THE REORGANISATION

Pursuant to the Agreement, it is a condition precedent that the Vendor, LottVision, Melco LV and Firich shall conduct and complete the Reorganisation.

As at the date of this announcement, PAL is owned as to 40% by LottVision and as to 60% by Melco LV whereas Oasis Rich is owned as to 90% by Firich and 10% by an Independent Third Party.

The Reorganisation will be conducted such that (i) Melco LV and LottVision will respectively inject 60% and 20% of the issued share capital of PAL into PAL Holdco, a wholly owned subsidiary of the Vendor; and (ii) Firich will inject 60% of the issued share capital of Oasis Rich into the Vendor, in exchange for approximately 54.79%, 18.26% and 26.95% of the issued share capital of the Vendor, to be held by Melco LV, LottVision and Firich respectively.

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The following table shows the simplified shareholding structure of PAL and Oasis Rich after the Reorganisation:

==> picture [469 x 518] intentionally omitted <==

----- Start of picture text -----

Firich Melco LV LottVision
26.95% 54.79% 18.26%
The Vendor
30% 60% 100%
Oasis Rich PAL Holdco
100% 80% 20%
WS Technology PAL
100% 100% 80% 60% 25% (Note a) 35% (Note a)
PALTECH
PAL Development Global Score Trade Express Company KTeMS Co. Ltd. KTeMS I.T.
(Beijing) Limited Asia Limited Services Limited Limited Services Pvt Ltd.
45% 7.50%
100%
Beijing Hua Ying Feng Cai Beijing Telenet Information
Technology Ltd Technology Limited
60% (Note b) 87.50% (Note b)
山東省開創紀元電子商務 上海智珏網絡科技
信息有限公司 有限公司
(Shandong Kai Chuan Ji Yuan (Shanghai Zhi Jue
Electronic and Information Information
Technology Ltd.) Technology Ltd.)
----- End of picture text -----

Notes:

• (a) In the stage of finalizing the legal documents for forming the joint venture

• (b) The share transfer transaction is expected to be completed before the end of November 2007

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REASONS FOR AND BENEFITS OF THE ACQUISITION

The Group is principally engaged in the provision of network infrastructure solutions including network infrastructure, network management services and network software.

The PAL Group is principally engaged in the business of developing and providing technology systems and services for use in connection with lottery operations in the PRC and also in a number of other lottery business initiatives in other Asian jurisdictions. PAL has introduced advanced lottery technologies and equipments for lottery administrative authorities in the PRC, and provides consultancy services, implementation solutions, as well as related training, technical support and marketing assistance with respect to specific projects. Based on PAL’s in-depth analysis, PAL has decided to establish its initial foothold in the PRC lottery market through venue management. Owing to its positioning as a venue management expert, PAL expects to capitalize on (i) the anticipated launch of fixed-odds-betting which is expected to grow the market immediately; and (ii) the video lottery terminals market which is expected to be a catalyst for the welfare market.

WS Technology is a wholly owned foreign enterprise established in Shanghai, PRC and is principally engaged in the manufacturing of lottery terminals for China’s sports lottery and PRC’s welfare lottery through contracting with local authorized retailers, lottery-related POS products to worldwide lottery runners through contracting will Firich. Other operations involved the supply of POS products for retail and hospitality industries. From 2006 to 2010, only six authorized distributors are allowed to distribute POS machine to sport lottery in the PRC. WS Technology is the POS machine supplier to the largest authorized distributor.

The Board considers that the Acquisition is in the interest of the Company for the following reasons:

• a. the Acquisition builds up the Company’s portfolio of lottery-related technologies and expertise and positioned the Company to be a leading provider of lottery solutions and services;

• b. the Acquisition allows the Company to leverage on extensive range of technologies and joint experience of PAL and WS Technology which placed the Company in a good position to jumpstart the plans for its entry into the Asian lottery markets, particularly in the PRC;

• c. the Acquisition facilitates the close collaboration between the Company, Melco, LottVision and Firich, which allows the Company to leverage on their distinctive leadership and proven experience in gaming-related business in the Asian region; and

• d. the Acquisition is in line with the Company’s growth strategy of acquiring strategic stakes in potential growth businesses, with a view to enhancing long-term value for the Shareholders.

As at the date of this announcement, the executive Director is Mr. Chan Sek Keung, Ringo, and the independent non-executive Directors are Mr. Pang Hing Chung, Alfred, Mr. David Tsoi and Mr. So Lie Mo, Raymond.

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The Directors, including the independent non-executive Directors, consider the terms and conditions of the Agreement to be fair and reasonable and on normal commercial terms and are in the best interests of the Company and the Shareholders as a whole.

EFFECT ON SHAREHOLDING STRUCTURE AFTER COMPLETION

Existing substantial Shareholders include Mr. Chan Sek Keung, Ringo and Mr. Ng Lai Yick.

QPL International Holdings Limited is one of the public Shareholders and was an initial management Shareholders at the time of initial public offering of the Shares on GEM in May 2002. Mr. Kwan Kit Tong who was appointed to the Board to represent the interest of QPL International Holdings Limited resigned as a non-executive Director with effect from 26 August 2007.

To the best knowledge of the Directors, the existing shareholding structure of the Company and the shareholding structure of the Company upon the allotment and issue of the Consideration Shares and the Conversion Shares under different scenarios are as follows:

Shareholders Mr. Chan Sek Keung, Ringo (Note 1) Mr. Ng Lai Yick (Note 2) The Vendor (Note 3) Public Shareholders – Mr. Ng Lai Yick (Note 2) – QPL International Holdings Limited – Other public Shareholders Total	As at the date of this announcement No. of Shares % 79,560,000 26.71 40,034,744 13.44 – – 178,236,501 59.84 Not Not applicable applicable 29,360,745 9.86 148,875,756 49.99 297,831,245 100	Upon allotment and issue of the Consideration Shares only No. of Shares % 79,560,000 21.51 40,034,744 10.83 72,000,000 19.47 178,236,501 48.19 Not Not applicable applicable 29,360,745 7.94 148,875,756 40.26 369,831,245 100	Upon allotment and issue of the Consideration Shares and maximum conversion of the Conversion Shares at Completion No. of Shares % 79,560,000 18.70 Not Not applicable applicable 127,600,000 29.99 218,271,245 51.31 40,034,744 9.41 29,360,745 6.90 148,875,756 34.99 425,431,245 100	For illustration purpose only – Upon allotment and issue of the Consideration Shares and the Conversion Shares upon full conversion of the Convertible Bonds(Note 3) No. of Shares % 79,560,000 7.34 Not Not applicable applicable 785,882,353 72.52 218,271,245 20.14 40,034,744 3.69 29,360,745 2.71 148,875,756 13.74 1,083,713,598 100	For illustration purpose only – Upon allotment and issue of the Consideration Shares and the Conversion Shares upon full conversion of the Convertible Bonds(Note 3) No. of Shares % 79,560,000 7.34 Not Not applicable applicable 785,882,353 72.52 218,271,245 20.14 40,034,744 3.69 29,360,745 2.71 148,875,756 13.74 1,083,713,598 100
					100

Notes:

1. Mr. Chan Sek Keung, Ringo, Chairman, Chief Executive Officer and Executive Director of the Company, is deemed, by virtue of the SFO, to be interested in the 56,400,000 Shares held by Woodstock Management Limited, a company wholly-owned by him, in addition to 23,160,000 Shares held by him personally.

2. Mr. Ng Lai Yick is deemed, by virtue of the SFO, to be interested in the 36,900,000 Shares held by North 22 Nominees Limited, a company wholly-owned by him, in addition to 3,134,744 Shares held by him personally.

3. Since no conversion of the Convertible Bonds could be validly converted under the terms of the Instrument, the figures in this column is for illustration purpose only showing the hypothetical position if all the Convertible bonds are converted into Conversion Shares unless the terms of the Instrument are complied with, for details, please see sub-section headed “Limitation on Conversion” in the section headed “Convertible Bonds” above.

4. 17 -

The simplified shareholding structure of the Company with the allotment and issue of the Consideration Shares and assuming maximum conversion of the Conversion Shares at Completion is shown as follows:

==> picture [426 x 551] intentionally omitted <==

----- Start of picture text -----

Firich Melco LV LottVision
26.95% 54.79% 18.26%
Mr. Chan Sek Public
The Vendor
Keung, Ringo shareholders
18.70% 29.99% 51.31%
Company
100%
Purchaser
30% 60% 100%
Oasis Rich PAL Holdco
100% 80% 20%
WS Technology PAL
100% 100% 80% 60% 25% (Note a) 35% (Note a)
PALTECH
PAL Development Global Score Trade Express Company KTeMS Co. Ltd. KTeMS I.T.
(Beijing) Limited Asia Limited Services Limited Limited Services Pvt Ltd.
45% 7.50%
100%
Beijing Hua Ying Feng Cai Beijing Telenet Information
Technology Ltd. Technology Limited
60% (Note b) 87.50% (Note b)
山東省開創紀元電子商務 上海智珏網絡科技
信息有限公司 有限公司
(Shandong Kai Chuan Ji Yuan (Shanghai Zhi Jue
Electronic and Information Information
Technology Ltd.) Technology Ltd.)19
----- End of picture text -----

Notes:

• (a) In the stage of finalizing the legal documents for forming the joint venture

• (b) The share transfer transaction is expected to be completed before the end of November 2007

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UNDERTAKING TO HOLD SHARES

On 8 October 2007, Mr. Chan Sek Keung, Ringo, being an executive Director, Chairman and Chief Executive Officer of the Company, irrevocably and unconditionally agreed and undertook to the Vendor that unless with the prior written consent of Melco or the Vendor, Mr. Chan Sek Keung, Ringo shall, from the date of such undertaking until the date upon which the Acquisition is completed or is withdrawn, hold not less than 40,000,000 Shares. As at the date of this announcement, Mr. Chan Sek Keung, Ringo was beneficially interested in 79,560,000 Shares.

On 8 October 2007, Mr. Ng Lai Yick, being one of the substantial Shareholders, irrevocably and unconditionally agreed and undertook to the Vendor that unless with the prior written consent of Melco or the Vendor, Mr. Ng Lai Yick shall, from the date of such undertaking until the date upon which the Acquisition is completed or is withdrawn, hold not less than 20,000,000 Shares. As at the date of this announcement, Mr. Ng Lai Yick was beneficially interested in 40,034,744 Shares.

IMPLICATIONS UNDER THE GEM LISTING RULES

The Acquisition constitutes a very substantial acquisition for the Company under the GEM Listing Rules and is subject to the approval of Shareholders at the EGM. There is no current intention to change the composition of the Board after the Completion. The Company intends to maintain its existing principal business after the Completion.

The Company will seek the approval of its Shareholders at the EGM to be convened and held by the Company to approve the Agreement and the transactions contemplated thereunder including the allotment and issue of the Consideration Shares and the Conversion Shares upon conversion of the Convertible Bonds. To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiry, no Shareholder have a material interest in the Acquisition other than their shareholding interests in the Shares, and accordingly no Shareholder is required to abstain from voting at the EGM.

A circular containing, among other things, (i) further details of the Acquisition and information of the Group; (ii) the accountants’ report of PAL Holdco and Oasis Rich; (iii) proforma financial information of the Enlarged Group; and (iv) a notice of the EGM for the purpose of approving the Agreement and the transactions contemplated therein will be sent to the Shareholders as soon as practicable and in accordance with the GEM Listing Rules.

Shareholders and investors should note that the Agreement is subject to various conditions as stated in the section headed “Conditions precedent” above and investors and Shareholders are urged to exercise caution when dealing in the Shares.

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INCREASE IN AUTHORIZED SHARE CAPITAL

In order to ensure that sufficient number of unissued Shares are available for the issue of the Consideration Shares and Conversion Shares and also for future purpose, the Board also proposes the increase in authorized share capital from HK$5,000,000 divided into 500,000,000 ordinary Shares of HK$0.01 each to HK$20,000,000 divided into 2,000,000,000 ordinary Shares of HK$0.01 each by the creation of an additional 1,500,000,000 ordinary shares of HK$0.01 each. Such new Shares, upon issue, shall rank pari passu in all respects with the then existing Shares. The increase of the authorized share capital of the Company by 1,500,000,000 Shares is determined by taking into account the Company’s need for the issue of the Consideration Shares and Conversion Shares and provide flexibility in issuing Shares to satisfy the consideration for the acquisition of any future investments and developments.

The proposed increase in authorized share capital of the Company is conditional upon the passing of an ordinary resolution by the Shareholders at the EGM. The proposed increase in authorized share capital of the Company is a condition precedent of the Completion.

RESUMPTION OF TRADING

At the request of the Company, dealings in the Shares on the Stock Exchange were suspended with effect from 9:30 a.m. on 8 October 2007 pending the release of this announcement. Application has been made for the resumption of trading in the Shares on the Stock Exchange with effect from 9:30 a.m. on 22 October 2007.

DEFINITIONS

In this announcement, unless the context otherwise requires, the following expressions shall have the following meaning:

• “Acquisition” the acquisition of the Target Sale Shares under the Agreement and the transactions contemplated thereunder

• “Actual Profit”

• the actual aggregate audited consolidated net profits after tax and extraordinary or exceptional items of WS Technology for the financial year ending 31 December 2008 attributable to the Oasis Rich Sale Shares

• “Agreement” an agreement dated 8 October 2007 and entered into among the Purchaser, the Vendor, the Vendor Guarantors and the Company for the sale and purchase of the Target Sale Shares

• “Associates” has the meaning ascribed to it under the GEM Listing Rules

• “Board” the board of Directors

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“Bondholder”	a holder or holder(s) in whose name the Convertible Bonds is
	registered in the Register, and “holder” in relation to the Convertible
	Bonds shall have the corresponding meaning
“Business Day”	a day (other than a Saturday and a Sunday) on which licensed banks
	are generally open for business in Hong Kong throughout their normal
	business hours
“BVI”	British Virgin Islands
“Code”	the Hong Kong Code on Takeovers and Mergers
“Company”	Wafer Systems Limited, a company incorporated in the Cayman
	Islands and the issued Shares of which are listed on GEM
“Completion”	completion of the Agreement in accordance with the terms thereof
“Connected Persons”	has the meaning ascribed thereto in the GEM Listing Rules
“Consideration Shares”	72,000,000 new Shares to be allotted and issued at the Issue Price
	(subject to adjustments) to satisfy part of the Consideration
“Consideration”	HK$668,000,000 for the acquisition of the Target Sale Shares
“Conversion Price”	initial conversion price of HK$0.85 per Conversion Share but subject to
	standard adjustments clauses including, consolidations or subdivisions
	of Shares, capital distributions, bonus issues, rights issues and other
	usual events which may have a dilution effect on the Conversion
	Shares
“Convertible Bonds”	the convertible bonds in the principal amount of HK$606,800,000 to
	be issued by the Company in favour of the Vendor to satisfy part of
	the Consideration
“Conversion Shares”	713,882,353 new Shares to be issued upon the exercise of the
	conversion rights attaching to the Convertible Bonds
“Directors”	the directors of the Company from time to time
“EGM”	an extraordinary general meeting of the Company to be convened
	and held to approve the Agreement and the transactions contemplated
	thereunder

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“Encumbrance”	any mortgage, charge, pledge, lien, (otherwise than arising by statute
	or operation of law), hypothecation or other encumbrance, priority or
	security interest, deferred purchase, title retention, leasing, sale-and-
	repurchase or sale-and-leaseback arrangement whatsoever over or in
	any property, assets or rights of whatsoever nature and includes any
	agreement for any of the same
“Enlarged Group”	the Group immediately after the Completion
“Firich”	Firich Enterprises Co., Ltd., a company incorporated in Taiwan and
	the issued shares of which are listed on the Taiwan Gre Tai Securities
	Market
“GEM”	the Growth Enterprise Market of the Stock Exchange
“GEM Listing Committee”	the listing sub-committee of the board of directors of the Stock
	Exchange with responsibility for GEM
“GEM Listing Rules”	the Rules Governing the Listing of Securities on GEM
“Group”	together, the Company and its subsidiaries
“Guaranteed Profit”	the guarantee by Firich to the Purchaser that the audited consolidated
	net profits after tax and any extraordinary or exceptional items of WS
	Technology will not be less than HK$30,000,000 for the financial
	year ending 31 December 2008 and the profit attributable to the Oasis
	Rich Sale Shares shall be not less than HK$18,000,000
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Independent Third Party”	a third party independent of the Company and the Connected Persons
	of the Company and is not a Connected Person of the Company
“Issue Price”	the initial issue price of HK$0.85 per Consideration Share, subject to
	adjustment for alteration to the nominal value of the Shares as a result
	of consolidation or subdivision at any time prior to Completion
“Last Trading Day”	5 October 2007, being the last trading day immediately before the
	publication of this announcement
“Long Stop Date”	8 January 2008
“LottVision”	LottVision Limited, a company incorporated in Bermuda and the
	issued shares of which are listed on the Singapore Stock Exchange

• 22 -

“Maturity Date”	in relation to the Convertible Bonds, five years from the date of issue
	of the Convertible Bonds
“Melco”	Melco International Development Limited, a company incorporated
	in Hong Kong and the issued shares of which are listed on the Main
	Board of the Stock Exchange
“Melco LV”	Melco LottVentures Holdings Limited (formerly known as Bright
	Ally Investments Limited), a company incorporated in the BVI and
	is a wholly owned subsidiary of Melco
“Oasis Rich”	Oasis Rich International Ltd., a company incorporated in the Republic
	of Mauritius with limited liability
“Oasis Rich Group”	together, Oasis Rich and its subsidiary
“Oasis Rich Sale Shares”	300,000 issued shares of Oasis Rich, representing 60% of the issued
	share capital of Oasis Rich
“PAL”	PAL Development Limited, a company incorporated in Hong Kong
	with limited liability
“PAL Group”	together, PAL and its subsidiaries
“PAL Holdco”	Precious Success Holdings Limited, a company incorporated in the
	BVI
“PAL Holdco Sale Shares”	the entire issued share capital of PAL Holdco
“PRC”	the People’s Republic of China, which, for the purpose of this
	announcement, shall exclude Hong Kong, the Macau Special
	Administration Region of the PRC and Taiwan
“Profit Guarantee Set Off	being the amount of the Guaranteed Profit in excess of the Actual
Amount”	Profit
“Purchaser”	Rising Move International Limited, a wholly owned subsidiary of the
	Company incorporated in the BVI
“Reorganisation”	the reorganisation to be conducted by the Vendor, Melco LV, LottVision
	and Firich as a result of which the Vendor will become the beneficial
	owner of the PAL Holdco Sale Shares and the Oasis Rich Sale Shares
	for sale to the Purchaser

• 23 -

“SFO”	Securities of Futures Ordinance, Chapter 571 of the Laws of Hong
	Kong
“Shareholders”	shareholders of the Company
“Shares”	ordinary shares of HK$0.01 each in the issued share capital of the
	Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Target Sale Shares”	collectively, the PAL Holdco Sale Shares and the Oasis Rich Sale
	Shares
“Vendor”	Power Way Group Limited, a company incorporated in the BVI
“Vendor Guarantors”	collectively, LottVision, Melco and Firich
“WS Technology”	Wu Sheng Computer Technology (Shanghai) Co., Ltd伍盛計算機科
	技（上海）有限公司, a wholly owned foreign enterprise established in
	Shanghai, PRC by Oasis Rich
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

All amounts in RMB have been translated in HK$ at a rate of RMB1.00 = HK$1.03 in this announcement for illustration purposes only.

By Order of the Board WAFER SYSTEMS LIMITED Chan Sek Keung, Ringo Chairman and Executive Director

Hong Kong, 18 October 2007

• 24 -

As at the date of this announcement, the Board consists of one executive director, namely Mr. CHAN Sek Keung, Ringo, three independent non-executive directors, namely Mr. PANG Hing Chung, Alfred, Mr. David TSOI and Mr. SO Lie Mo, Raymond.

This announcement, for which the Directors, including all independent non-executive Directors, collectively and individually accept full responsibility, includes particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:

• (1) the information contained in this announcement is accurate and complete in all material respects and not misleading;

• (2) there are no other matters the omission of which would make any statement in this announcement misleading; and

• (3) all opinions expressed in this announcement have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

This announcement will remain on the “Latest Company Announcement” page of the GEM website (www.hkgem.com) for at least 7 days from its date of publication and the Company’s website at www.wafersystems.com.

• 25 -