Crypto Flow Technology Limited - Proxy Solicitation & Information Statement 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) 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.

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

If you have sold all your shares in Wafer Systems Limited (the “Company”), you should at once hand this circular and the enclosed form of proxy to the purchaser or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser.

This circular, for which the directors of the Company (the “Directors”) collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the Growth Enterprise Market (“GEM”) of the Stock Exchange (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, (i) the information contained in this circular is accurate and complete in all material respects and not misleading; (ii) there are no other matters the omission of which would make any statement in this circular misleading; and (iii) all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase, or subscribe for the securities.

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

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

PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL AND RE-ELECTION OF DIRECTOR AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

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The notice convening the extraordinary general meeting of the Company to be held at Units 901-7, 9/F., Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong on Wednesday, 5 December 2007 at 3:00 p.m. (the “EGM”) is set out on page 185 to 186 of this circular.

A form of proxy for the EGM is enclosed with this circular of the Company. Whether or not you propose to attend the EGM, you are requested to complete the form of proxy and return the same to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1806-7, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong in accordance with the instructions printed thereon not less than 48 hours before the time appointed for the EGM. Completion and delivery of the form of proxy will not preclude you from attending and voting at the EGM if you so wish.

This circular will remain on the GEM website at www.hkgem.com on the “Latest Company Announcements” page for at least 7 days from the date of its posting and the Company’s website at www.wafersystems.com.

19 November 2007

* for identification purpose only

CHARACTERISTICS OF GEM

GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board of the Stock Exchange and no assurance is given that there will a liquid market in the securities traded on GEM.

The principal means of information dissemination on GEM is publication on the internet website operated by the Stock Exchange. GEM listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website at www.hkgem.com in order to obtain up-to-date information on GEM-listed issuers.

	Page
Definitions	1
Letter from the Board
Introduction 6
The Agreement	7
Information on the Vendor, Melco LV, Melco, LottVision and Firich	17
Information on PAL Group 17
Information on the Oasis Rich Group	19
The Reorganisation 20
Reasons for and benefits of the Acquisition 22
Effect on shareholding structure after Completion	23
Increase in authorized capital 27
Re-election of Director	28
EGM	29
Procedures for Demanding a Poll by Shareholders	29
Recommendations	30
Additional information	30
Appendix I – Financial information of the Group	31
Appendix IIA – Accountants’ report of PAL Group	105
Appendix IIB – Financial information of PAL Group 107
Appendix IIC – Management discussion and analysis of PAL Group 137
Appendix IID – Accountants’ report of Oasis Rich Group 140
Appendix IIE – Financial information of Oasis Rich Group	142
Appendix IIF – Management discussion and analysis of Oasis Rich Group	161
Appendix III – Unaudited pro forma financial information of the Enlarged Group 164
Appendix IV – General information	176
Notice of EGM 184

ii -

DEFINITIONS

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

“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
“Announcement” announcement of the Company dated 18 October 2007 in relation to the Acquisition
“Associates” has the meaning ascribed to it under the GEM Listing Rules
“Board” the board of Directors
“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
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DEFINITIONS

“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 (and/or its nominees as it may direct) 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, among other matters, the Agreement and the transactions contemplated thereunder
“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
2 -

DEFINITIONS

“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 adjustments 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 the Announcement
“Latest Practicable Date”	15 November 2007, being the latest practicable date prior to the
	printing of this circular for inclusion of certain information in
	this circular
“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
“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

DEFINITIONS

“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 Holdco” Precious Success Holdings Limited, a company incorporated in the BVI
“PAL Holdco Group” together, PAL Holdco and its subsidiaries from time to time “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 circular, 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
“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 “Subscribers” Legg Mason International Equities (Singapore) Pte. Limited, Enso Global Equities Levered Master Partnership LP, Enso Global Equities Master Partnership LP and Enso Global Opportunities Fund, and each a “Subscriber”
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DEFINITIONS

“Subscription”	the subscription of an aggregate of 58,000,000 new Shares at
	the subscription price of HK$1.8 per Share by the Subscribers
	pursuant to the terms of the Subscription Agreements
“Subscription Agreements”	the Subscription Agreements entered into between the Company
	and each of the Subscribers dated 30 October 2007 in relation
	to the Subscription
“Subscription Shares”	58,000,000 new Shares in aggregate to be subscribed for by the
	Subscribers pursuant to the Subscription Agreements
“Target Group”	the entire PAL Holdco Group and 60% of the Oasis Rich
	Group
“Target Sale Shares”	collectively, the PAL Holdco Sale Shares and the Oasis Rich
	Sale Shares
“Vendor”	Power Way Group Limited, a company incorporated in the
	BVI
“Vendor Guarantors”	collectively, LottVision, Melco and Firich
“WS Technology”	Wu Sheng Computer Technology (Shanghai) Co., Ltd伍盛計
	算機科技(上海)有限公司, a wholly owned foreign enterprise
	established in Shanghai, PRC by Oasis Rich
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

In this circular, all amounts in RMB have been translated in HK$ at a rate of RMB1.00 = HK$1.03 for illustration purposes only.

LETTER FROM THE BOARD

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(Incorporated in the Cayman Islands with limited liability) (Stock Code: 8198)

Executive Director:

Mr. Chan Sek Keung, Ringo (Chairman & Chief Executive Officer)

Independent non-executive Directors:

Mr. Pang Hing Chung, Alfred Mr. David Tsoi

Registered Office: 4th Floor, Scotia Centre P.O. Box 2804 George Town Grand Cayman KY1-1112 Cayman Islands British West Indies

Mr. So Lie Mo, Raymond

Head Office and Principal Place of Business: Units 901-7, 9th Floor Prosperity Millennia Plaza 663 King’s Road North Point Hong Kong 19 November 2007

To the Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION INVOLVING THE ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS AND PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL AND RE-ELECTION OF DIRECTOR AND NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

On 18 October 2007, the Board announces 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.

for identification purpose only
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LETTER FROM THE BOARD

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 (and/or its nominees as it may director) on Completion.

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 Agreement.

The purpose of this circular is to provide you with, among other things, (i) further details of the Agreement and information of the Group; (ii) the accountants’ report of the Target Group; (iii) unaudited proforma financial information of the Enlarged Group; (iv) information relating to the reelection of Mr. So Lie Mo, Raymond as Director; and (v) a notice of the EGM for the purpose of approving, among other matters, the Agreement.

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.

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.

LETTER FROM THE BOARD

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 (and/or its nominees as it may director) on Completion; and
(b) as to HK$606,800,000 to be satisfied by the issue of the Convertible Bonds to the Vendor (and/or its nominees as it may director) on Completion.

Consideration Shares

The 72,000,000 Consideration Shares represent approximately 23.89% of the existing issued share capital of the Company, approximately 19.28% of the issued share capital of the Company as enlarged by allotment and issue of the Consideration Shares and approximately 6.62% of the issued share capital of the Company as enlarged by the allotment and issue of both the Consideration Shares

LETTER FROM THE BOARD

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 2:30p.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 2:30p.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 2:30p.m. on 14 August 2007;
(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; and
(h) a discount of approximately 72.13% to the closing price of approximately HK$3.05 per Share as quoted on the Stock Exchange as at the Latest Practicable Date.

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.

LETTER FROM THE BOARD

Convertible Bonds

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

Issuer the Company Initial subscriber the Vendor (and/or its nominees as it may director) Amount HK$606,800,000 Bonds issue price 100 per cent. of the principal amount of the Convertible Bonds Coupon 0.1% interest, 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% over 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% over 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;
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LETTER FROM THE BOARD

(c) a discount of approximately 35.70% over 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;
(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 at 2:30 p.m. on 14 August 2007;
(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; and
(h) a discount of approximately 72.13% to the closing price of approximately HK$3.05 per Share as quoted on the Stock Exchange as at the Latest Practicable Date.

Conversion Shares

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

Ranking of the Conversion Shares

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

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LETTER FROM THE BOARD

Limitation on Conversion

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 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; 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

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;
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LETTER FROM THE BOARD

(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 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 236.85% of the existing issued share capital of the Company, approximately 191.18% 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 65.66% 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.

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LETTER FROM THE BOARD

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 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; 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. Accordingly, there will be no change in control of the Company as a result of the Acquisition.

Applications for Listing

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

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 (and/or its nominees as it may director) credited as fully paid; (2) the issue of the Convertible Bonds to the Vendor (and/or its nominees as it may director) 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;
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LETTER FROM THE BOARD

(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;
(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.

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LETTER FROM THE BOARD

Completion

Completion of the Acquisition will take place 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 (and/or its nominees as it may director) 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.

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.

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LETTER FROM THE BOARD

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 Latest Practicable Date. 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 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 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.

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LETTER FROM THE BOARD

The chart below shows the corporate structure of the PAL Group as at the Latest Practicable Date:

==> picture [316 x 172] intentionally omitted <==

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

PAL
100% 100% 80% 60%
PAL Development Global Score Trade Express PALTECH
(Beijing) Limited Asia Limited Services Inc. Company 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.

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.

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LETTER FROM THE BOARD

PAL Group was recently established and is yet to become profit making. Since PAL was only established in August 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.

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.

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LETTER FROM THE BOARD

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 Latest Practicable Date, 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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LETTER FROM THE BOARD

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

==> picture [448 x 495] 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)
PAL Development Global Score Trade Express PALTECH KTeMS Co. Ltd. KTeMS I.T.
(Beijing) Limited Asia Limited Services Inc. Company Limited Services Pvt Ltd.
45% 7.50%
100%
Beijing Hua Ying Feng Cai Beijing Telenet Information
Technology Ltd Technology Limited
60% (Note b) 87.5% (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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LETTER FROM THE BOARD

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 China’s welfare lottery through contracting with local authorized retailers, lottery-related POS products to worldwide lottery runners through contracting with 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 interests of the Company and the Shareholders 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.
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LETTER FROM THE BOARD

As at the Latest Practicable Date, 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.

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:

As at the Latest Shareholders Practicable Date No. of Shares % Mr. Chan Sek Keung, Ringo_(Note 1) 79,560,000 26.40 Mr. Ng Lai Yick(Note 2) 40,034,744 13.28 The Vendor(Note 3) – – Public Shareholders 181,807,001 60.32 – Mr. Ng Lai Yick(Note 2)_ Not Not applicable applicable – QPL International Holdings Limited 22,016,745 7.30 – Subscribers – – – Other public Shareholders 159,790,256 53.02 301,401,745 100.00	Upon allotment and issue of the Consideration Shares only No. of Shares % 79,560,000 21.31 40,034,744 10.72 72,000,000 19.28 181,807,001 48.69 Not Not applicable applicable 22,016,745 5.90 – – 159,790,256 42.79 373,401,745 100.00	Upon allotment and issue of the Consideration Shares and Subscription Shares (Note 4) No. of Shares % 79,560,000 18.44 Not Not applicable applicable 72,000,000 16.69 279,841,745 64.87 40,034,744 9.28 22,016,745 5.10 58,000,000 13.45 159,790,256 37.04 431,401,745 100.00	Upon allotment For illustration purpose only– and issue of the Upon allotment and issue of Consideration Shares, the Consideration Shares, Subscription Shares(Note 4) the Subscription Shares and maximum conversion (Note 4)and the Conversion of the Conversion Shares upon full conversion Shares at Completion of the Convertible Bonds No. of Shares % No. of Shares % 79,560,000 15.50 79,560,000 6.95 Not Not Not Not applicable applicable applicable applicable 153,956,000 29.99 785,882,353 68.62 279,841,745 54.51 279,841,745 24.43 40,034,744 7.80 40,034,744 3.50 22,016,745 4.29 22,016,745 1.92 58,000,000 11.30 58,000,000 5.06 159,790,256 31.12 159,790,256 13.95 513,357,745 100.00 1,145,284,098 100.00	Upon allotment For illustration purpose only– and issue of the Upon allotment and issue of Consideration Shares, the Consideration Shares, Subscription Shares(Note 4) the Subscription Shares and maximum conversion (Note 4)and the Conversion of the Conversion Shares upon full conversion Shares at Completion of the Convertible Bonds No. of Shares % No. of Shares % 79,560,000 15.50 79,560,000 6.95 Not Not Not Not applicable applicable applicable applicable 153,956,000 29.99 785,882,353 68.62 279,841,745 54.51 279,841,745 24.43 40,034,744 7.80 40,034,744 3.50 22,016,745 4.29 22,016,745 1.92 58,000,000 11.30 58,000,000 5.06 159,790,256 31.12 159,790,256 13.95 513,357,745 100.00 1,145,284,098 100.00
				100.00

23 -

LETTER FROM THE BOARD

Notes:

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.
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.
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.
The Subscription is conditional, amongst other, upon completion of the Agreement but is not a transaction contemplated under the Acquisition.
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LETTER FROM THE BOARD

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

==> picture [398 x 524] 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(Beijing) Limited Asia Limited Global Score Trade ExpressServices Inc. CompanyLimited KTeMS Co. Ltd. Services Pvt Ltd.KTeMS I.T.
45% 7.50%
100%
Beijing Hua Ying Feng Cai Beijing Telenet Information
Technology Ltd Technology Limited
60% (Note b) 87.50% (Note b)
��
��
(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
25 -

LETTER FROM THE BOARD

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 Latest Practicable Date, 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 Latest Practicable Date, 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 Agreement other than their shareholding interests in the Shares, and accordingly no Shareholder is required to abstain from voting at the EGM.

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

FINANCIAL EFFECTS OF THE ACQUISITION AGREEMENT

Upon completion of the Agreement, PAL Holdco will become a wholly owned subsidiary of the Company while Oasis Rich will become a non-wholly owned subsidiary of the Company and the financial results of PAL Holdco and Oasis Rich will be consolidated with those of the Group.

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LETTER FROM THE BOARD

As set out in the section headed “Unaudited pro forma financial information of the Enlarged Group” in Appendix III to this circular, the financial effects on the earnings and assets and liabilities of the Group is set out as follows:–

		The
		Enlarged
	The Group	Group
	(HK$’000)	(HK$’000)
As at 30 June 2007
Total assets	190,440	952,136
Total liabilities	120,435	582,057
Total net assets	70,005	370,079
Net current assets	63,274	136,508
Gearing ratio (total liabilities/total assets)	63.24%	61.13%
For the year ended 31 December 2006
Profit/(Loss) for the year	5,101	(48,447 )

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.

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LETTER FROM THE BOARD

RE-ELECTION OF DIRECTOR

Resolution will be proposed at the EGM for the re-election of Mr. So Lie Mo, Raymond as Director according to the articles of the association of the Company. His particulars are as follows:

Mr. So, aged 58, has been an independent non-executive Director and a member of the audit committee and remuneration committee of the Board since September 2007. He is also a director of Spectrum Asia Pacific Limited (“Spectrum”), being a private limited company incorporated in the Cayman Islands which principally provides consulting services in business strategy, alliance and merger and acquisition.

Mr. So is an all-rounded businessman with a wealth of experience and contacts in the information technology (“IT”) industry in Asia and particularly in greater China. He has a long and successful track record especially in the IT services industry. Before joining Spectrum in 2004, he served at Datacraft Asia Ltd. as the Regional Director of the greater China region after spending years in senior executive positions in Wang Pacific Ltd., Electronic Data Systems (HK) Ltd. and Novell Hong Kong Ltd.

Mr. So holds a bachelor degree in business administration from The Chinese University of Hong Kong.

Save as being a Director, Mr. So has not held any directorship in public listed companies or other major appointments and qualifications during the past three years and he has not held any position with the Company or any of its subsidiaries. As at the Latest Practicable Date, Mr. So did not have any relationship with any director, senior management, management shareholders, substantial shareholders, or controlling shareholders of the Company, and he did not have any interests in the Shares within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

Pursuant to the appointment letter signed between Mr. So and the Company, Mr. So will receive a director’s fee of HK$120,000 per annum, which was determined having regard to his experience and his duties and responsibilities in the Company. Mr. So will serve the Company for a term of two years, commencing on 5 September 2007. However, he will be subject to retirement at the forthcoming general meeting and by rotation and re-election at annual general meetings of the Company in accordance with the articles of association of the Company.

Save as disclosed above, there is no other information to be disclosed pursuant to any of the requirements of Rule 17.50(2)(h) to 17.50(2)(v) of the GEM Listing Rules or to be brought to the attention of Shareholders.

28 -

LETTER FROM THE BOARD

EGM

The notice of EGM is set out on pages 184 to 185 of this circular.

A form of proxy for the EGM is enclosed with this circular. Whether you intend to attend the EGM or not, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1806-7, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong, not less than 48 hours before the time fixed for the EGM. Completion and delivery of the form of proxy will not preclude you from attending and voting at the EGM in person if you so wish.

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Article 66 of the Company’s articles of association sets out the procedures by which shareholders of the Company may demand a poll.

A resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(a) by the Chairman of such meeting; or
(b) by at least three Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or
(c) by a Member of Members present in person or in the case of a Member 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 Members having the right to vote at the meeting; or
(d) by a Member or Members present in person or in the case of a Member 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 shares conferring that right.
29 -

LETTER FROM THE BOARD

A demand by a person as proxy for a Member or in the case of a Member being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a Member.

RECOMMENDATIONS

The Directors (including the independent non-executive Directors) consider that (i) the terms of the Agreement and the transactions contemplated thereunder (including the issuance of the Consideration Shares and the Conversion Shares) are fair and reasonable; (ii) the Acquisition and the increase in authorized share capital are beneficial to and in the best interests of the Company and the Shareholders as a whole. Accordingly, the Directors (including the independent non-executive Directors) recommend the Shareholders should vote in favour of the relevant resolutions at the EGM.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular.

Yours faithfully For and on behalf of The Board of Directors of Wafer Systems Limited Chan Sek Keung, Ringo Chairman and Chief Executive Officer

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FinAnciAl inFormAtion oF the group

Appendix i

1. SummAry oF FinAnciAl inFormAtion

A summary of the published results and the assets and liabilities of the Group for the last three financial years, as extracted from the audited financial statements, is set out below. CCIF CPA Limited, being the Company’s auditors, has not issued any qualified or modified opinion on the Group’s financial statements for the three years ended 31 December 2004, 2005 and 2006 respectively.

reSultS

Turnover
Other Income
Charges in materials and equipment
Employee benefits costs
Depreciation and amortisation
Other expenses
Finance costs
Total expenses
Profit before taxation
Taxation
Profit for the year
Attributable to:
Equity holders of the Company
Minority Interest
ASSetS And liABilitieS
Total Assets
Total Liabilities
Net Assets
Add: minority interests
Shareholder’s funds

year ended 31 december
2006
2005
2004
HK’000
HK’000
HK’000
326,611
368,250
269,688
639
1,615
747
(268,055 )
(310,684 )
(219,059 )
(20,575 )
(17,817 )
(16,937 )
(4,647 )
(4,431 )
(5,297 )
(23,812 )
(32,151 )
(23,375 )
(4,104 )
(2,707 )
(2,593 )
(321,193 )
(367,790 )
(267,261 )
6,057
2,075
3,174
(956 )
(632 )
(473 )
5,101
1,443
2,701
5,101
1,443
2,736
–
–
(35 )
5,101
1,443
2,701
As at 31 december
2006
2005
2004
HK’000
HK’000
HK’000
200,741
152,516
138,763
(135,528 )
(93,090 )
(81,480 )
65,213
59,426
57,283
–
–
–
65,213
59,426
57,283

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Appendix i

conSolidAted income StAtement

For the year ended 31 December 2006

Notes turnover 6 other income Charges in materials and equipment Employee benefits costs 9 Depreciation and amortisation Other expenses Finance costs 8 total expenses profit before taxation 9 Taxation 12 profit for the year Attributable to: Equity holders of the Company Earnings per share – Basic 14	2006 HK$’000 326,611 639 (268,055 ) (20,575 ) (4,647 ) (23,812 ) (4,104 ) (321,193 ) 6,057 (956 ) 5,101 5,101 HK 1.76 cents	2005 HK$’000 368,250 1,615 (310,684 ) (17,817 ) (4,431 ) (32,151 ) (2,707 ) (367,790 ) 2,075 (632 ) 1,443 1,443 HK 0.50 cents

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Appendix i

conSolidAted BAlAnce Sheet

As at 31 December 2006

Notes non-current assets Property, plant and equipment 15 Software product development costs 16 current assets Inventories Trade and other receivables 18 Pledged bank deposits 19 Cash and cash equivalents 20 current liabilities Trade and other payables 21 Tax payable 22 Bank borrowings 23 Other loans 24 Convertible bonds maturing within one year 25 net current assets total assets less current liabilities non-current liabilities Other loans 24 net assets capital and reserves Share capital 26 Reserves 27 total equity	2006 HK$’000 2,032 7,753 9,785 5,602 133,065 5,013 47,276 190,956 54,721 1,548 49,843 23,843 – 129,955 61,001 70,786 5,573 65,213 2,900 62,313 65,213	2005 HK$’000 3,142 7,527
		10,669 5,866 114,338 4,571 17,072
		141,847 43,989 824 48,277 – –
		93,090
		48,757
		59,426
		–
		59,426

		2,900 56,526
		59,426

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BAlAnce Sheet

As at 31 December 2006

Notes non-current assets Investment in a subsidiary 17 current assets Trade and other receivables 18 current liabilities Trade and other payables 21 Convertible bonds maturing within one year 25 net current assets net assets capital and reserves Share capital 26 Reserves 27 total equity	2006 HK$’000 – 59,325 9,923 – 9,923 49,402 49,402 2,900 46,502 49,402	2005 HK$’000 –
		58,548 9,591 –
		9,591
		48,957
		48,957

		2,900 46,057
		48,957

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conSolidAted StAtement oF chAngeS in eQuity

For the year ended 31 December 2006

At 1 January 2005 Exchange differences on translation of foreign operations Profit for the year Total recognised income and expenses for the year Recognition of equity settled share-based payments At 31 December 2005 Transfer to statutory surplus reserve At 1 January 2006 Exchange differences on translation of foreign operations Profit for the year Total recognised income and expenses for the year Recognition of equity settled share-based payments At 31 December 2006	Share capital HK$’000 2,900 – – – – 2,900 – 2,900 – – – – 2,900	Share-based Share payment premium reserve HK$’000 HK$’000 55,824 453 – – – – – – – 134 55,824 587 – – 55,824 587 – – – – – – – 56 55,824 643	Statutory surplus reserve fund HK$’000 1,003 – – – – 1,003 502 1,505 – – – – 1,505	enterprise expansion fund HK$’000 502 – – – – 502 – 502 – – – – 502	Staff welfare fund HK$’000 502 – – – – 502 (502 ) – – – – – –	retained earnings/ exchange (Accumulated reserve losses) HK$’000 HK$’000 – (3,901 ) 566 – – 1,443 566 1,443 – – 566 (2,458 ) – – 566 (2,458 ) 630 – – 5,101 630 5,101 – – 1,196 2,643	total HK$’000 57,283 566 1,443
							2,009 134
							59,426 –
							59,426 630 5,101
							5,731 56
							65,213

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conSolidAted cASh FloW StAtement

For the year ended 31 December 2006

Notes operAting ActiVitieS Profit before taxation Adjustments for: Interest income Interest expense Depreciation and amortisation Loss on write off of property, plant and equipment Provision for inventories Share-based payment expenses Impairment loss on trade and retention money receivables Reversal of impairment loss on trade and retention money receivables recognised in previous years operating cash flows before movements in working capital (Increase)/decrease in inventories Increase in trade and other receivables Increase in trade and other payables cash generated from/(used in) operations PRC income tax paid net cASh generAted From/(uSed in) operAting ActiVitieS inVeSting ActiVitieS Interest received Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Expenditure on software product development Increase in pledged bank deposits net cASh uSed in inVeSting ActiVitieS FinAncing ActiVitieS Interest paid Net borrowings raised from/(repayment of) short-term bank loans Net increase in/(repayment of) trust receipts and import loans Net borrowings raised from other loans Redemption of convertible bonds net cASh From/(uSed in) FinAncing ActiVitieS net increASe/(decreASe) in cASh And cASh eQuiVAlentS cASh And cASh eQuiVAlentS At 1 JAnuAry eFFect oF Foreign exchAnge rAte chAngeS cASh And cASh eQuiVAlentS At 31 decemBer 20	2006 HK$’000 6,057 (227 ) 4,104 4,647 15 551 56 391 (1,444 ) 14,150 (333 ) (18,035 ) 10,732 6,514 (232 ) 6,282 227 (841 ) – (2,802 ) (442 ) (3,858 ) (4,104 ) 277 6,947 29,416 – 32,536 34,960 11,414 902 47,276	2005 HK$’000 2,075 (155 ) 2,707 4,431 – – 134 3,685 – 12,877 6,029 (42,951 ) 14,354 (9,691 ) (674) (10,365 ) 155 (1,764 ) 66 (2,347 ) (4,562) (8,452 ) (2,707 ) (4,125 ) (1,235 ) – (3,000) (11,067) (29,884 ) 40,752 546 11,414

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Appendix i

noteS to the FinAnciAl StAtementS

For the year ended 31 December 2006

1. generAl

The Company was incorporated in the Cayman Islands as an exempted company with limited liability. The Company’s shares are listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The addresses of the registered office and principal place of business of the Company are disclosed in the corporate information of the annual report.

The consolidated financial statements are presented in Hong Kong dollars (“HK$”), being the measurement currency of the Company and its subsidiaries (the “Group”).

The Company is an investment holding company. Its subsidiaries are principally engaged in the provision of network infrastructure solutions, including the sales of network equipment and software and the provision of related network infrastructure services, provision of network professional services, and sales of its proprietary network software.

2. ApplicAtion oF neW And reViSed hong Kong FinAnciAl reporting StAndArdS (“hKFrSs”)

The Hong Kong Institute of Certified Public Accountants (“HKICPA”) has issued certain new and revised HKFRSs that are first effective for accounting periods beginning on or after 1 January 2006 or available for early adoption for the current accounting period of the Group. The adoption of the new HKFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented.

Note 3 summarises the accounting policies of the Group after the adoption of these developments to the extent that they are relevant to the Group.

new standard, amendment or interpretations that have been issued but are not yet effective

The Group has not early applied the following new standard, amendment or interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these standard, amendment or interpretations will have no material impact to the results and the financial position of the Group.

HKAS 1 (Amendment) Capital Disclosures[1] HKFRS 7 Financial Instruments: Disclosures[1] HK(IFRIC)-Int 7 Applying the restatement approach under HKAS 29 Financial Reporting in Hyperinflationary Economies[2] HK(IFRIC)-Int 8 Scope of HKFRS[3] HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives[4] HK(IFRIC)-Int 10 Interim Financial Reporting and Impairment[5] HK(IFRIC)-Int 11 HKFRS 2 – Group and Treasury Share Transactions[6]

1 Effective for annual periods beginning on or after 1 January 2007 2 Effective for annual periods beginning on or after 1 March 2006 3 Effective for annual periods beginning on or after 1 May 2006 4 Effective for annual periods beginning on or after 1 June 2006 5 Effective for annual periods beginning on or after 1 November 2006
6 Effective for annual periods beginning on or after 1 May 2007
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3. SigniFicAnt Accounting policieS

a) Statement of compliance

These financial statements have been prepared in accordance with all applicable HKFRSs, which collectively includes all applicable individual HKFRSs, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the HKICPA, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange. A summary of the significant accounting policies adopted by the Group is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. Note 2 provides information on the changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements.

b) Basis of preparation of the Financial Statements

The consolidated financial statements for the year ended 31 December 2006 comprise the Company and its subsidiaries.

The measurement basis used in the preparation of the financial statements is the historical costs basis.

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 4.

c) Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

In the Company’s balance sheet, an investment in a subsidiary is stated at costs less impairment losses.

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d) property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss.

The gain or loss arising from the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives of 3 years, using the straight line method.

Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and it residual value, if any, are reviewed annually.

e) impairment of Assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, and impairment loss previously recognised no longer exists or may have decreased:

property, plant and equipment (other than properties carried at revalued amounts);
intangible assets; and
investments in subsidiaries.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

Recognition of impairment losses

An impairment loss is recognised in income statement whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

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A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to income statement in the year which the reversals are recognised.

f) Software product development costs

Research and development expenditures

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour, and an appropriate proportion of overheads and borrowing costs, where applicable. Capitalised development costs are stated at cost less accumulated amortisation and impairment losses (see note 3(e)). Other development expenditure is recognised as an expense in the period in which it is incurred.

Amortisation of intangible assets with finite useful lives is charged to income statement on a straight-line basis over the assets’ estimated useful lives. The following intangible assets with finite useful lives are amortised from the date they are available for use and their estimated useful lives are as follows:

– capitalised development costs 3 years

Both the period and method of amortisation are reviewed annually.

g) inventories

Inventories, which represent goods held for sale, are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less all the estimated costs of completion and the estimated cost necessary to make the sale.

h) trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts (see note 3(e)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts (see note 3(e)).

i) cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with bank and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

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j) convertible Bonds

Convertible bonds that contain an equity component

Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments which contain both a liability component and an equity component.

At initial recognition the liability component of the convertible bonds is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity component. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds.

The liability component is subsequently carried at amortised cost. The interest expense recognised in income statement on the liability component is calculated using the effective interest method. The equity component is recognised in the capital reserve until either the bond is converted or redeemed.

If the bond is converted, the capital reserve, together with the carrying amount of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the capital reserve is released directly to retained earnings.

k) trade and other payables

Trade and other payables are initially measured at fair value. Trade and other payables are subsequently measured at amortised cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

l) income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in income statement except to the extent that they related to items recognised directly in equity, in which case they are recognised in equity.

Current tax is expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

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The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

m) provisions and contingent liabilities

Provisions are recognised for other liabilities of uncertain timing or amount when the group or the company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where its is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

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FinAnciAl inFormAtion oF the group

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n) revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes.

Sales of network equipment and software are recognised when the network equipment and software are delivered at the customers’ premises which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.
Revenue from the provision of network infrastructure services and network professional services are recognised when the services are provided.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

o) translation of Foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in profit or loss, except those arising from foreign currency borrowings used to hedge a net investment in a foreign operation which are recognised directly in equity.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity.

On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal.

p) operating lease charges

Leases are classified as operating leases whenever, the terms of the lease do not transfer substantially all the risks and rewards of ownership to the lessees.

Rentals payable under operating leases are charged to the income statement on a straight line basis over the period of the respective leases.

q) Borrowing costs

All borrowing costs are recognised as and included in finance costs in the income statement in the period in which they are incurred.

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FinAnciAl inFormAtion oF the group

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r) employee Benefits

(i) Short term employee benefits and contributions to defined contribution retirement plans

Salaries, annual bonuses, paid annual leave, contributions to defined contribution plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

(ii) Share-based payment

The fair value of share options granted to employees is recognised as an employee cost with a corresponding increase in a share-based payment reserve within equity. The fair value is measured at grant date using Black-Scholes Option Pricing Model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognised in prior years is charged/credited to the income statement for the year of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the share-based payment reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The equity amount is recognised in the share-based payment reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to the retained earnings).

The Group has taken advantage of the transitional provisions set out in HKFRS 2 under which the new recognition and measurement policies applies to granted after 7 November 2002 and had not yet vested at 1 January 2005.

(iii) Termination benefits

Termination benefits are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

s) related parties

For the purposes of these financial statements, a party is considered to be related to the Group if:

i) the party has the ability, directly or indirectly through one or more intermediaries, to control the group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;
ii) the Group and the party are subject to common control;
iii) the party is an associate of the group or a joint venture in which the Group is a venturer;
iv) the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;
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FinAnciAl inFormAtion oF the group

Appendix i

v) the party is a close family member of a party referred to in note 3(s)(i) or is an entity under the control, joint control or significant influence of such individuals; or
vi) the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

t) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories, trade receivables and property, plant and equipment. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group entities within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financial expenses.

4. Key SourceS oF eStimAtion uncertAinty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

a) impairment of trade receivables

Note 3 describes that trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in income statement when there is objective evidence that the receivables are not recoverable.

Management considered detailed procedures have been in place to monitor this risk as a significant proportion of the Company’s majority of working capital is devoted to trade receivables. In determining whether impairment on trade receivable occurred, the Company takes into consideration the ageing status and the likelihood of collection. An impairment loss on trade receivables is recognised when they are unlikely to be collected. The measurement of impairment loss requires the Company to estimate the future cash flows expected to be collected. In this regard, the directors of the Company are satisfied that this risk is minimal and adequate impairment has been made in the financial statements in light of the historical records of the Company and the current economic environment.

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FinAnciAl inFormAtion oF the group

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b) recoverability of Software product development costs

During the year, the management reconsidered the recoverability of its internally-generated intangible asset arising from the Group’s software product development expenditure, which is included in its consolidated balance sheet at 31 December 2006 at HK$7,753,000 (2005: HK$7,527,000). The project continues to progress in a satisfactory manner, and customer reaction has reconfirmed management’s previous estimates of anticipated revenues from the project. However, keen competition has caused management to reconsider its assumptions regarding future market shares and anticipated margins on these products. Cash flow forecasts have been carried out and management is confident that the carrying amount of the asset will be recovered in full, even if returns are reduced. This situation will be closely monitored, and adjustments made in future periods if future market activity indicates that such adjustments are appropriate.

5. FinAnciAl riSK mAnAgement oBJectiVeS And policieS

The Group’s major financial instruments include pledged bank deposits, trade and other receivables, bank balances and cash, trade and other payables, bank borrowings and other loans. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

a) currency risk

The Group collects some of its revenue and some of expenditures in Renminbi (“RMB”) are also denominated in RMB. On the other hand, the majority of purchase were denominated in United. States. dollar (“USD”) which are pegged with HK$.

RMB is not a freely convertible currency. Future exchange rates of RMB could vary significantly from the current or historical exchange rates as a result of controls that could be imposed by the government of the People’s Republic of China (the “PRC”). The exchange rates may also be affected by economic developments and political changes domestically and internationally, and supply and demand of RMB. The appreciation or devaluation of RMB against HK$ and USD may have positive or negative impacts on the results of operations of the Group.

Some of trade receivables and bank borrowings of the Group are denominated in RMB. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

b) credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 31 December 2006 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses, if any, are made for irrecoverable amounts. In this regard, the directors of the Group consider that the Group’s credit risk is significantly reduced.

The credit risk on trade receivables is concentrated on a few of customers. However, the management considers the strong financial background and good creditability of these customers, and there is no significant credit risk.

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c) interest rate risk

The Group is exposed to interest rate risk through the impact of rate changes on interest bearing financial assets and liabilities. Interest bearing financial assets are mainly balances with banks which are all short term in nature. Interest bearing financial liabilities are include bank borrowings with fixed and floating interest rates and other loans with fixed interest rates. Therefore, any future variations in interest rate will not have a significant impact on the results of the Group.

d) liquidity risk

Individual operating entities within the Group are responsible for their own cash management, including the short-term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the Company’s board when the borrowings exceed certain predetermined levels of authority. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short or longer term.

e) Fair Values

All financial instruments are carried at amounts not materially different from their fair values as at 31 December 2006 and 2005.

f) estimation of Fair Values

The following summaries the major methods and assumptions used in estimating the fair values of the following financial instruments.

Interest-bearing loans and borrowings

The fair value is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments.

g) Sensitivity Analysis

In managing interest rate and foreign currency risks that the Group aims to reduce the impact of shortterm fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings.

At 31 December 2006, it is estimated that a general increase of one percentage point in interest rates would decrease the Group’s profit before taxation by approximately HK$247,000 (2005: HK$256,000) so far as the effect on interest-bearing financial instruments is concerned.

6. turnoVer

The Company is an investment holding company. The principal activities of the Group are provision of network infrastructure solutions, including the sales of network equipment and software and the provision of related network infrastructure services, provision of network professional services, and sales of its proprietary network software.

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Turnover represents the aggregate of the net amounts received and receivable from third parties in connection with the provision of network infrastructure solutions, network professional services and network software. An analysis of the Group’s turnover for the year is as follows:

Network infrastructure Network professional services Network software	2006 HK$’000 286,398 38,008 2,205 326,611	2005 HK$’000 319,903 45,927 2,420
		368,250

7. Segment reporting

Segment information is presented in respect of the Group’s business and geographical segments. Business segment information is chosen as the primary reporting format because this is more relevant to the Group’s internal financial reporting.

Business segments

The Group comprises the following main business segments:

Network infrastructure	:	The sales of network equipment and software and the provision
		of related network infrastructure services
Network professional services	:	Provision of network professional services
Network software	:	The sales of the Group’s proprietary network software

Analysis by business segments is as follows:

Network infrastructure Network professional services Network software Unallocated corporate income Interest income Unallocated corporate expenses Finance costs Profit before taxation Taxation Profit for the year	revenue 2006 2005 HK$’000 HK$’000 286,398 319,903 38,008 45,927 2,205 2,420 326,611 368,250	results 2006 2005 HK$’000 HK$’000 9,547 3,498 1,854 1,429 (1,537 ) (1,421 ) 9,864 3,506 412 1,460 227 155 (342 ) (339 ) (4,104 ) (2,707 ) 6,057 2,075 (956 ) (632 ) 5,101 1,443	results 2006 2005 HK$’000 HK$’000 9,547 3,498 1,854 1,429 (1,537 ) (1,421 ) 9,864 3,506 412 1,460 227 155 (342 ) (339 ) (4,104 ) (2,707 ) 6,057 2,075 (956 ) (632 ) 5,101 1,443
			3,506 1,460 155 (339 ) (2,707 )
			2,075 (632 )
			1,443

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Assets Segment assets – network infrastructure – network professional services – network software Unallocated corporate assets Total Assets liabilities Segment liabilities – network infrastructure Unallocated corporate liabilities Total Liabilities other inFormAtion capital expenditure – network infrastructure – network professional services – network software depreciation and amortisation – network infrastructure – network professional services – network software Impairment loss on trade and retention money receivables	2006 HK$’000 124,579 4,915 9,668 61,579 200,741 54,722 80,806 135,528 633 147 2,863 3,643 1,590 368 2,689 4,647 391	2005 HK$’000 106,823 5,013 9,483 31,197
		152,516

		43,989 49,101
		93,090

		1,216 485 2,410
		4,111

		1,672 683 2,076
		4,431

		3,685

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geographical segments

The Group’s operations are located in the PRC and Hong Kong. The following table provides an analysis of the Group’s geographical segment information:

PRC, other than Hong Kong Hong Kong	revenue 2006 2005 HK$’000 HK$’000 305,263 351,880 21,348 16,370 326,611 368,250	revenue 2006 2005 HK$’000 HK$’000 305,263 351,880 21,348 16,370 326,611 368,250
		368,250

The following is an analysis of the carrying amount of segment assets and capital expenditure, analysed by the geographical area in which the assets are located.

carrying amount of segment assets 2006 2005 HK$’000 HK$’000 PRC, other than Hong Kong 191,104 142,271 Hong Kong 9,637 10,245 200,741 152,516 FinAnce coStS Interest expenses on bank borrowings wholly repayable within five years Interest expenses on other loans wholly repayable within five years		capital expenditure incurred during the year 2006 2005 HK$’000 HK$’000 3,630 3,466 13 645 3,643 4,111 2006 2005 HK$’000 HK$’000 3,127 2,707 977 – 4,104 2,707	capital expenditure incurred during the year 2006 2005 HK$’000 HK$’000 3,630 3,466 13 645 3,643 4,111 2006 2005 HK$’000 HK$’000 3,127 2,707 977 – 4,104 2,707
			4,111

			2005 HK$’000 2,707 –
			2,707

8. FinAnce coStS

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9. proFit BeFore tAxAtion

Profit before taxation has been arrived at after charging/(crediting):

Directors’ emoluments_(note 10)_ Other staff retirement benefits scheme contributions Salaries, wages and other benefits Share-based payment expenses Less: Staff costs capitalised in software product development costs Impairment loss on trade and retention money receivables Amortisation of software product development costs (included in depreciation and amortisation) Auditors’ remuneration Depreciation of property, plant and equipment Loss on write off of property, plant and equipment Operating lease rentals in respect of minimum lease payments of land and buildings Research and development costs Cost of inventories Exchange gain Interest income Reversal of impairment loss on trade and retention money receivables recognised in previous years	2006 HK$’000 1,545 3,030 18,408 24 (2,432 ) 20,575 391 2,689 470 1,958 15 2,096 329 268,055 (351 ) (227 ) (1,444 )	2005 HK$’000 1,561 2,205 15,971 68 (1,988 ) 17,817 3,685 2,076 470 2,355 – 2,729 289 310,684 (674 ) (155 ) –

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10. directorS’ emolumentS

year ended 31 december 2006

Fees Other emoluments Salaries and other benefits Contributions to retirement benefits schemes Share-based payment expenses Total emoluments	chan Sek Keung, ringo HK$’000 note 1 – 1,191 12 9 1,212	Alasdair gordon nagle HK$’000 note 2 – – – 3 3	clara ho HK$’000 note 2 – – – 3 3	Kwan Kit tong, Kevin HK$’000 note 2 – – – 3 3	pang hing chung, Alfred HK$’000 note 3 120 – – 6 126	david yu tsoi Zhonghou HK$’000 HK$’000 note 3 note 3, 4 120 72 – – – – 6 – 126 72	total HK$’000 312 1,191 12 30
							1,545

Note 1: Chairman and executive director Note 2: Non-executive directors Note 3: Independent non-executive directors Note 4: Resigned on 1 February 2007

year ended 31 december 2005

Fees Other emoluments Salaries and other benefits Contributions to retirement benefits schemes Share-based payment expenses Total emoluments	chan Sek Keung, ringo HK$’000 note 1 – 1,176 12 19 1,207	Alasdair gordon nagle HK$’000 note 2 – – – 6 6	clara ho HK$’000 note 2 – – – 6 6	Kwan Kit tong, Kevin HK$’000 note 2 – – – 6 6	pang hing chung, Alfred HK$’000 note 3 120 – – 12 132	david yu tsoi Zhonghou HK$’000 HK$’000 note 3 note 3 120 72 – – – – 12 – 132 72	total HK$’000 312 1,176 12 61
							1,561

Note 1: Chairman and executive director

Note 2: Non-executive directors Note 3: Independent non-executive directors

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During the year, no emoluments were paid by the Group to the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors has waived any emoluments during the year.

11. FiVe higheSt pAid employeeS

The aggregate emoluments of the five highest paid individuals included one (2005: one) executive director of the Company, whose emoluments are included in note 10 above. The aggregate emoluments of the remaining four (2005: four) highest paid individuals are as follows:

Basic salaries and allowances Retirement benefits scheme contributions Share-based payment expenses	2006 HK$’000 1,972 106 13 2,091	2005 HK$’000 2,036 44 24
		2,104

None of the four highest paid individuals received emoluments in excess of HK$1 million.

12. tAxAtion

(a) income tax in the consolidated income statement represents:

Current tax – Provision for the PRC enterprise income tax Provision for the year Deferred taxation Origination and reversal of temporary differences (note 29)	2006 HK$’000 956 – 956	2005 HK$’000 632 –
		632

Hong Kong Profits Tax has not been provided for in the financial statements as the Group has sufficient taxation losses brought forward to offset against the estimated assessable profits for the years ended 31 December 2006 and 2005.

The charge represents PRC income tax calculated on the estimated assessable profit for the year at the rates applicable to respective PRC subsidiaries.

Pursuant to the relevant laws and regulations in the PRC, the Company’s PRC subsidiaries are entitled to the exemption from PRC income tax for two commencing from their first profit-making year of operation and thereafter entitled to a 50% relief from PRC income tax for the immediate following three years. During the year, one of the Company’s PRC subsidiaries is within its 50% tax relief period, one of the Company’s PRC subsidiaries is subject to full PRC income tax at effective tax rate of 27% and one of the Company’s PRC subsidiaries has not used of its tax exemption period as its first profit-making year of operation has not been started yet.

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(b) reconciliation between tax expense and accounting profit at applicable tax rates:

The charge for the year is reconciled to profit before taxation per consolidated income statement as follows:

Profit before taxation Notional tax at the rates applicable to profits in the tax jurisdictions concerned Tax effect of non-deductible expenses Tax effect of non-taxable income Tax effect of unrecognised tax losses Tax effect of utilisation of tax losses previously not recognised Tax effect of tax concessionary rate granted to PRC subsidiaries Others	2006 HK$’000 6,057 (1,403 ) (35,907 ) 37,488 (1,321 ) 187 – – (956 )	2005 HK$’000 2,075 (363 ) (44,592 ) 44,223 (50 ) 227 (33 ) (44 ) (632)

13. proFit AttriButABle to eQuity ShAreholderS oF the compAny

The consolidated profit attributable to equity shareholders of the Company included a profit of HK$389,000 (2005: HK$1,445,000) which has been dealt with in the financial statements of the Company.

14. eArningS per ShAre

(a) Basic earnings per share

The calculation of basic earnings per share is based on the profit attributable to equity shareholders of the Company of approximately HK$5,101,000 (2005: HK$1,443,000) and the weighted average of 289,944,745 (2005: 289,944,745) ordinary shares in issue during the year.

(b) diluted earnings per share

The diluted earnings per share for the years ended 31 December 2006 and 2005 was the same as the basic earnings per share as the exercise price of the Company’s outstanding share option was higher than the fair price per share of the Company during the years ended 31 December 2006 and 2005.

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15. property, plAnt And eQuipment

the group

cost At 1 January 2005 Additions Exchange differences Disposals At 31 December 2005 Additions Exchange differences Disposals At 31 December 2006 Accumulated amortisation and depreciation At 1 January 2005 Charge for the year Exchange differences Written back on disposals At 31 December 2005 Charge for the year Exchange differences Written back on disposals At 31 December 2006 net book value At 31 December 2006 At 31 December 2005	computer equipment HK$’000 9,211 295 90 (24 ) 9,572 261 98 (338 ) 9,593 7,505 942 82 (24 ) 8,505 705 92 (335 ) 8,967 626 1,067	Furniture, fixtures and office equipment HK$’000 1,825 71 19 – 1,915 102 21 (179 ) 1,859 1,539 201 15 – 1,755 127 19 (179 ) 1,722 137 160	motor vehicles HK$’000 438 450 6 – 894 256 7 – 1,157 355 143 6 – 504 221 6 – 731 426 390	tools HK$’000 5,461 948 62 (239 ) 6,232 222 75 (23 ) 6,506 3,757 1,069 54 (173 ) 4,707 905 62 (11 ) 5,663 843 1,525	total HK$’000 16,935 1,764 177 (263 ) 18,613 841 201 (540 ) 19,115 13,156 2,355 157 (197 ) 15,471 1,958 179 (525 ) 17,083 2,032 3,142

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FinAnciAl inFormAtion oF the group

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16. SoFtWAre product deVelopment coStS

the group cost At 1 January 2005 Additions At 31 December 2005 Additions Exchange differences At 31 December 2006 Accumulated amortisation At 1 January 2005 Charge for the year At 31 December 2005 Charge for the year Exchange differences At 31 December 2006 net book value At 31 December 2006 At 31 December 2005	HK$’000 13,155 2,347
	15,502 2,802 136
	18,440
	5,899 2,076
	7,975 2,689 23
	10,687
	7,753

	7,527

Amortisation of intangible assets is recognised as an expense on a straight-line basis over their useful lives with the period of not exceeding three years.

The amortisation charge for the year is included in “Depreciation and amortisation” in the consolidated income statement.

17. inVeStmentS in A SuBSidiAry

Unlisted shares, at cost Less: Provision for impairment loss	the company 2006 2005 HK$’000 HK$’000 10 10 (10 ) (10 ) – –	the company 2006 2005 HK$’000 HK$’000 10 10 (10 ) (10 ) – –
		–

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As at 31 December 2006, details of the Company’s principal subsidiaries were as follows:

		nominal value
	place of	of issued
	incorporation/	and paid up/	group’s
	establishment	registered	effective
name of Subsidiary	and operations	capital	interest	direct	indirect	principal activities
Wafer Systems Holdings	Hong Kong	HK$10,000	100%	100%	–	Investment holding
Limited*
北京威發新世紀信息	PRC for a term	USD1,500,000	100%	–	100%	Operation of businesses in
技術有限公司	of 15 years					network infrastructure,
(Beijing Wafer New	commencing					provision of network
Century Information	12 January 2001#					professional services and
Technology Co., Ltd.)						sales of proprietary
						network software
上海滬威網絡系統	PRC for a term	USD210,000	100%	–	100%	Operation of businesses in
有限公司	of 15 years					network infrastructure,
(Wafer Network	commencing					provision of network
Systems (Shanghai)	28 July 1999#					professional services and
Co., Ltd.)						sales of proprietary
						network software
Wafer Systems (China)	Hong Kong	HK$10,000	100%	–	100%	Operation of businesses in
Limited						network infrastructure,
						provision of network
						professional services and
						sales of proprietary
						network software
Wafer Systems (Hong Kong)	Hong Kong	HK$10,000	100%	–	100%	Operation of businesses in
Limited						network infrastructure,
						provision of network
						professional services and
						sales of proprietary
						network software
威發（西安）軟件有限公司	PRC for a term of	USD100,950	100%	–	100%	Research and development
(Wafer (Xi’an) Software	15 years
Co., Ltd.)	commencing
	26 July 2001#

* Directly held by the Company. # These are wholly-owned foreign enterprises established in the PRC.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affect the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

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18. trAde And other receiVABleS

Amounts due from a subsidiary Trade receivables Retention money receivables Other receivables Prepaid maintenance charges	the group 2006 2005 HK$’000 HK$’000 – – 113,079 84,061 10,696 20,724 7,458 3,285 1,832 6,268 133,065 114,338	the company 2006 2005 HK$’000 HK$’000 59,213 58,448 – – – – 112 100 – – 59,325 58,548	the company 2006 2005 HK$’000 HK$’000 59,213 58,448 – – – – 112 100 – – 59,325 58,548
			58,548

Payment terms with customers are mainly on credit together with deposits. Invoices are normally payable from 30 to 90 days of issuance, except for certain well established customers. All of the trade and other receivables are expected to be recovered within one year. The following is an aging analysis of trade receivables at the balance sheet date:

Age 0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 365 days Over 365 days Less: Impairment losses	the group 2006 2005 HK$’000 HK$’000 40,652 39,755 32,044 15,016 6,056 6,101 17,285 16,063 15,909 5,856 4,224 4,256 116,170 87,047 (3,091 ) (2,986 ) 113,079 84,061	the group 2006 2005 HK$’000 HK$’000 40,652 39,755 32,044 15,016 6,056 6,101 17,285 16,063 15,909 5,856 4,224 4,256 116,170 87,047 (3,091 ) (2,986 ) 113,079 84,061
		87,047 (2,986 )
		84,061

Retention money receivables represent progress payments receivable on the contract works of network infrastructure, with aged over 180 days.

Prepaid maintenance charges which is expected to be expensed within twelve months after the balance sheet date is classified under current asset as it is expected to be realised in the Company’s normal operating cycle.

The carrying amounts of trade and other receivables approximate their fair value.

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Included in trade receivables are the following amounts denominated in a currency other than the functional currency of the Group to which they relate:

	As at 31 december	As at 31 december
	2006	2005
	’000	’000
USD	3,863	2,353
RMB	89,643	69,543

19. pledged BAnK depoSitS

The deposits have been pledged to secure the banking facilities extended to the Group. Deposits amounting to HK$3,482,000 (2005: HK$3,482,000) carry floating interest rate of LIBOR. The remaining deposits amounting to HK$1,531,000 (2005: HK$1,089,000) carrying at prevailing market interest rate. The directors consider that the carrying amount of deposits approximate their fair value. The pledged bank deposits will be released upon the settlement of relevant bank borrowings.

20. cASh And cASh eQuiVAlentS

Deposits with banks and other financial institutions Cash at bank and in hand Cash and cash equivalents in the consolidated balance sheet Bank overdrafts_(note 23)_ Cash and cash equivalents in the consolidated cash flow statement	the group 2006 2005 HK$’000 HK$’000 5,155 – 42,121 17,072 47,276 17,072 – (5,658 47,276 11,414	the group 2006 2005 HK$’000 HK$’000 5,155 – 42,121 17,072 47,276 17,072 – (5,658 47,276 11,414
		17,072 (5,658
		11,414

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with a maturity of three months or less at prevailing market interest rates. The directors consider that the carrying amounts of these assets approximate their fair value.

	As at 31 december	As at 31 december
	2006	2005
	’000	’000
USD	1,062	522
RMB	39,058	13,403

Other than disclosed above, cash and cash equivalents of approximately HK$1,115,000 and HK$257,000 are denominated in HK$ at 31 December 2006 and 2005 respectively.

RMB is not a freely convertible currency in the international market. The exchange rate of RMB is determined by the Government of the PRC and remittance of these funds out of the PRC is subject to exchange restriction imposed by the Government of PRC.

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21. trAde And other pAyABleS

Amounts due to subsidiaries Trade payables Other payables	the group 2006 2005 HK$’000 HK$’000 – – 43,480 31,859 11,241 12,130 54,721 43,989	the company 2006 2005 HK$’000 HK$’000 9,923 9,579 – – – 12 9,923 9,591	the company 2006 2005 HK$’000 HK$’000 9,923 9,579 – – – 12 9,923 9,591
			9,591

All of the trade and other payables are expected to be settled or recognised as income within one year. The following is an aging analysis of trade payables at the balance sheet date:

Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 270 days 271 to 365 days Over 365 days	the group 2006 2005 HK$’000 HK$’000 11,996 17,831 26,637 10,792 3,024 1,046 171 344 778 60 874 1,786 43,480 31,859	the group 2006 2005 HK$’000 HK$’000 11,996 17,831 26,637 10,792 3,024 1,046 171 344 778 60 874 1,786 43,480 31,859
		31,859

The carrying amounts of trade and other payables approximate their fair value.

Included in trade payables are the following amounts denominated in a currency other than the functional currency of the Group to which they relate:

	As at 31 december	As at 31 december
	2006	2005
	’000	’000
USD	3,471	2,307
RMB	16,395	14,380

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22. tAx pAyABle

PRC enterprise income tax At 1 January Provided for the year PRC enterprise income tax paid At 31 December	the group 2006 2005 HK$’000 HK$’000 824 866 956 632 (232 ) (674 ) 1,548 824	the group 2006 2005 HK$’000 HK$’000 824 866 956 632 (232 ) (674 ) 1,548 824
		824

23. BAnK BorroWingS

BAnK BorroWingS
Bank overdrafts_(note 20)_ Short-term bank loans within one year Trust receipts and import loans Secured Unsecured	the group 2006 2005 HK$’000 HK$’000 – 5,658 14,563 14,286 35,280 28,333 49,843 48,277 6,208 2,819 43,635 45,458 49,843 48,277
		48,277

		2,819 45,458
		48,277

Bank overdrafts are denominated in HK$. They arranged at prevailing market interest rates, repayable on demand and have been secured by pledged bank deposits.

Short-term bank loans are denominated in RMB. They are arranged at fixed interest rate of 6.138% per

annum.

Trust receipts and import loans are denominated in USD, and arranged at prevailing market rates ranged from 7.34% to 8.25%.

The directors consider that the carrying amounts of bank borrowings approximate their fair values.

Included in bank borrowings are the following amounts denominated in a currency other than the functional currency of the Group to which they relate:

	As at 31 december	As at 31 december
	2006	2005
	’000	’000
USD	4,546	3,651
RMB	15,000	15,000

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24. other loAnS

Current portion within 1 year Non-current portion after 1 year but within 2 years	the group 2006 2005 HK$’000 HK$’000 23,843 – 5,573 – 29,416 –	the group 2006 2005 HK$’000 HK$’000 23,843 – 5,573 – 29,416 –
		–

Other loans represent advanced from finance institutions which are related to a major supplier of the Group. The amounts are unsecured, interest-bearing and have fixed terms of repayment.

Other loans amounting to HK$5,373,000 are denominated in USD and carry interest at rates ranging from 9.46% to 9.54%.

Other loans amounting to HK$24,043,000 are denominated in HKD and carry interest at rates ranging from 8.05% to 8.50%

25. conVertiBle BondS

Liability component at the beginning of the year Repayment during the year Interest charged	the group and 2006 HK$’000 – – – –	the company 2005 HK$’000 3,000 (3,000 ) –
		–

The convertible bonds were issued by the Company in April 2002 to replace 50% of the convertible note issued by the Company’s subsidiary which amounted to HK$17,437,500. The redemption monies of the convertible notes were used to subscribe for these convertible bonds which represent an aggregate face value of HK$20,048,100 with various maturity dates between 2003 and 2004 discounted at a rate of 7% per annum. The bondholder, the Applied Research Council, a substantial shareholder of the Company, has the right, at any time during the period from 18 May, 2003 up to and including the maturity date of the convertible bond, to convert into ordinary shares of the Company at a conversion price of HK$0.5267 per share, subject to adjustments. The Company has the right to redeem the convertible bonds prior to its maturity subject to the prior consent of the bondholder.

In appliance with the HKFRSs, the convertible bonds are presented as the liability component and equity component separately in the balance sheet. At the date of issue, the liability component is the carrying amount of the financial liability by discounting the stream of future payments of interest and principle at the prevaility market rate which is 7%. The equity component is an embedded option to convert the liability into equity. The directors consider that the value of the equity component embedded in the convertible bonds is insignificant. Accordingly, no retrospective restatement is considered.

On 1 January 2005, the Company redeemed convertible bonds at face value of HK$3,000,000.

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26. ShAre cApitAl

Ordinary shares of HK$0.01 each Authorised: At 1 January 2005, 31 December 2005 and 2006 Issued and fully paid: At 1 January 2005, 31 December 2005 and 2006 reSerVeS (a) the group Share premium_(note i) Share-based payments reserve(note 28) Statutory surplus reserve(note ii) Enterprise expansion fund(note iii) Staff welfare fund(note iv) Exchange reserve(note v)_ Retained earnings/(accumulated losses)	number of shares 500,000,000 289,944,745 2006 HK$’000 55,824 643 1,505 502 – 1,196 2,643 62,313	Amount HK$’000 5,000 2,900 2005 HK$’000 55,824 587 1,003 502 502 566 (2,458 ) 56,526

27. reSerVeS

Details of the movement in the above reserves during the year are set out in the consolidated statement of changes in equity on page 34.

Notes:–

i. Share premium

The application of the share premium is governed by Sections 48B of the Hong Kong Companies Ordinance.

ii. Statutory surplus reserve

In accordance with the Company Law of the PRC, companies are required to allocate 10% of their profit after tax to the statutory surplus reserve (the “SSR”) until such reserve reaches 50% of the registered capital of the companies, respectively. Subject to certain restrictions set out in the Company Law of the PRC, part of the SSR may be converted to increase paid-in capital, provided that the remaining balance after the capitalisation is not less than 25% of the registered capital.

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iii. Enterprise expansion fund

The enterprise expansion fund is used for expanding the capital based of the PRC subsidiaries by means of capitalisation issue.

iv. Staff welfare fund

The staff welfare fund was previously provided to use for the welfare of the staff and workers of the Company, is capital in nature. However, according to the Ministry of Finance of the PRC announcement number 67 on 15 March 2006, pursuant to the Company Law of the PRC Sec 167, the reserve previously allocated to staff welfare fund will be deemed to be transferred to the statutory surplus reserve on 1 January 2006 and no subsequent profit distribution of staff welfare fund was needed.

v. Exchange reserve

The exchange reserve comprise all foreign exchange differences arising from the translation of the financial statements of foreign operations as well as the effective portion of any foreign exchange differences arising from hedges of the net investment in theses foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 3(o).

(b) the company

the company
At 1 January 2005 Profit for the year Total recognised income and expenses for the year Recognition of equity settles share-based payments At 31 December 2005 Profit for the year Total recognised income and expenses for the year Recognition of equity settles share-based payments At 31 December 2006	Share premium HK$’000 note 27(a)(i) 55,824 – – – 55,824 – – – 55,824	Share-based payment reserve HK$’000 note 28 453 – – 134 587 – – 56 643	Accumulated losses HK$’000 (11,799 ) 1,445 1,445 – (10,354 ) 389 389 – (9,965 )	total HK$’000 44,478 1,445
				1,445 134
				46,057 389
				389 56
				46,502

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Notes:

Under the Companies Law (Revised) of the Cayman Islands, share premium is distributable to shareholders, subject to the condition that the Company cannot declare or pay a dividend, or make a distribution out of share premium if (i) it is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital account.

At 31 December 2006, the aggregate amount of the Company’s reserves available for distribution to shareholders was approximately HK$45,859,000 (2005: HK$45,470,000) computing in accordance with the Companies Law (Revised) of the Cayman Islands and the Company’s articles of association. This includes the Company’s share premium of approximately HK$55,824,000 (2005: HK$55,824,000) less accumulated losses of approximately HK$9,965,000 (2005:HK$10,354,000), which is available for distribution provided that immediately following the date on which the dividend is proposed, the Company will be able to pay off its debts as they fall due in the ordinary course of business.

28. ShAre optionS

a) pre-initial public offering (“ipo”) share option scheme

Pursuant to the pre-IPO share option scheme adopted by the Company on 20 April, 2002, the Company may grant options to any director, employee, adviser or business consultant of the Company or its subsidiaries, for the primary purpose of providing incentives to them, to subscribe for shares in the Company with the payment of HK$1 per offer. Options granted are exercisable for a period of not more than 10 years from the date of grant of the relevant options. Options granted are exercisable as to (i) a maximum of 25% of the total number of options granted six months after 17 May 2002, (the “Date of Listing”); (ii) a maximum additional 6.25% of the total number of options granted after the expiry of each 3-month period twelve months after the date of Listing; and (iii) the remaining options granted on or after the third anniversary of the Date of Listing until the end of the option period or lapse of an option.

Details of the movements in the number of share options during the year under the Company’s pre-IPO share option scheme were as follows:

	number of share options	number of share options	number of share options
outstanding at 1/1/2005	Forfeited during the year	outstanding at 31/12/2005	Forfeited during the year	outstanding at 31/12/2006
3,750,000 5,968,000 9,718,000	– (963,000 ) (963,000 )	3,750,000 5,005,000 8,755,000	– (445,000 ) (445,000 )	3,750,000 4,560,000
				8,310,000

				8310000

8,310,000

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b) post-ipo share option scheme

Pursuant to the post-IPO share option scheme adopted by the Company on 20 April 2002, the Company may grant options to any director, employee, advisor or business consultant of the Company or its subsidiaries, for the primary purpose of providing incentives to them, to subscribe for shares in the Company with the payment of HK$1 per offer. The exercise price of the share option will be determined at the higher of the average of the closing prices of the Company’s shares quoted on the Stock Exchange on the five trading days immediately preceding the date of grant of the options; the closing price of the shares on the Stock Exchange on the date of grant; and the nominal value of the shares.

These grants under the post-IPO share option scheme are exercisable for a period of not more than 10 years from the date of grant, within which there is a total vesting period of four years, starting from the first anniversary of the grant date at stepped annual increments of 25% of the total options granted.

The total number of shares in respect of which options are issuable under this scheme shall not in aggregate exceed 10% of the number of issued shares

Details of the movements in the number of share options during the year under the Company’s post-IPO share option scheme were as follows:

	year ended 31 december 2006 number of share options	year ended 31 december 2006 number of share options
outstanding at 1/1/2006	granted during the year	Forfeited during the year	outstanding at 31/12/2006
3,825,000 2,326,000 2,382,000 165,000 1,624,000 580,000 300,000 11,202,000	– – – – – – – –	– (301,000 ) (421,000 ) (30,000 ) (166,000 ) (265,000 ) – (1,183,000 )	3,825,000 2,025,000 1,961,000 135,000 1,458,000 315,000 300,000
			10,019,000

			7,577,250

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	year ended 31 december 2005 number of share options	year ended 31 december 2005 number of share options
outstanding at 1/1/2005	granted during the year	Forfeited during the year	outstanding at 31/12/2005
3,825,000 2,981,000 3,034,000 290,000 2,404,000 828,000 300,000 13,662,000	– – – – – – – –	– (655,000 ) (652,000 ) (125,000 ) (780,000 ) (248,000 ) – (2,460,000 )	3,825,000 2,326,000 2,382,000 165,000 1,624,000 580,000 300,000
			11,202,000

			5,631,500

Note 1: This is an individual who rendered consultancy services in respect of the technology development to the Group without receiving any compensation. The Group granted share options to him for recognising his services similar to those rendered by other employees.

Note 2: The Group has not applied HKFRS2 to share options granted on or before 7 November 2002 and share options that were granted after 7 November 2002 and had vested before 1 January 2005 in accordance with the relevant transitional provisions.

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These fair values were calculated using the Black-Scholes pricing model. The details were as follows:

		grant dates of share options	grant dates of share options
	20/2/2003	10/10/2003	23/2/2004	11/10/2004
Closing share price
immediately before
date of grant	HK$0.138	HK$0.142	HK$0.155	HK$0.124
Exercise price	HK$0.138	HK$0.142	HK$0.165	HK$0.124
Expected volatility	89.07%	69.88%	62.76%	59.19%
Expected options life	5 years	5 years	5 years	5 years
Risk-free interest rate	3.087%	3.983%	2.65%	2.98%
Expected dividend yield	N/A	N/A	N/A	N/A

Expected volatility was determined by using the historical volatility of the Company’s share price over the previous 1 year. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non transferability, exercise restrictions and behavioral considerations.

The Group recognised the total expense of HK$56,000 for the year ended 31 December 2006 (2005: HK$134,000) in relation to share options granted by the Company.

29. deFerred tAx ASSetS not recogniSed

At the balance sheet date, the Group has unutilised accumulated tax losses of HK$9,333,000 (2005: HK$10,711,000) available for offset against future profits. No deferred tax asset has been recognised due to the unpredictability of future profit streams. The tax losses do not expire under current tax legislation.

30. operAting leASe commitmentS

Total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year In the second to fifth year inclusive	2006 HK$’000 2,366 989 3,355	2005 HK$’000 3,161 787
		3,948

The lease payments represent the rental payable by the Group for certain buildings, the lease payments are fixed for an average of 1.5 years and no arrangements have been entered into for contingent rental payments.

31. employee retirement BeneFitS

i) The Group operates a Mandatory Provident Fund Scheme (the “Scheme”) for all qualifying employees in Hong Kong. The scheme is a defined contribution retirement plan. The assets of the Scheme are held separately from those of the Group in funds under the control of trustee. The Group contributes 5% of relevant payroll costs, subject to a maximum of HK$1,000 for each employee each month, to the Scheme, which contribution is matched by employees.
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ii) The employees of the Company’s PRC subsidiaries are members of the state-managed retirement benefits scheme operated by the PRC government. The scheme is a defined contribution retirement plan. The Company’s PRC subsidiaries are required to contribute a certain percentage of their payroll to the retirement benefits scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefits scheme is to make the required contributions under the scheme.

32. pledge oF ASSetS

At 31 December 2006, the following assets were pledged to banks to secure the general banking facilities granted to the Group.:

Pledged bank deposits_(note 19)_ Trade receivables	2006 HK$’000 5,013 6,920 11,933	2005 HK$’000 4,571 –
		4,571

33. contingent liABilitieS

At the balance sheet date, the Company has issued corporate guarantees to banks in respect of banking facilities totalling HK$50,400,000 (2005: HK$54,300,000) granted to wholly owned subsidiaries.

34. relAted pArty trAnSActionS

compensation of key management personnel

The remuneration of directors and other members of key management during the year is as follows:

Short-term employee benefits Post-employment benefits Share-based payments	2006 HK$’000 2,730 79 19 2,828	2005 HK$’000 2,792 43 44
		2,879

The emoluments of directors and key executives are determined by the remuneration committee and management respectively having regard to the performance of the individuals and market trends.

35. compArAtiVe FigureS

Certain comparative figures of the Group have been re-classified to conform the presentation for the current

year.

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3. interim report oF the compAny For the six months ended 30 June 2007

The following are the unaudited consolidated results of the Group as extracted from the interim report of the Group for the six months ended 30 June 2007.

FinAnciAl inFormAtion

condensed consolidated income statement (unaudited)

Note Turnover 2 Other income Charges in materials and equipment Employee expense Depreciation and amortisation Other expenses Finance costs Profit before taxation Taxation 4 profit for the period Profit attributable to: Equity holders of the Company Minority interest Earnings per share – Basic (cents) 5 – Diluted (cents) 5	For the six months ended 30 June 2007 2006 HK$’000 HK$’000 195,167 140,948 87 509 (159,825 ) (117,605 ) (11,401 ) (10,122 ) (2,269 ) (2,324 ) (15,543 ) (8,583 ) (2,557 ) (1,811 ) 3,659 1,012 – – 3,659 1,012 3,659 1,012 – – 3,659 1,012 1.26 0.35 1.25 N/A

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condensed consolidated Balance sheet

condensed consolidated Balance sheet
		(unaudited)	(Audited)
		As at	As at
		30 June	31 december
		2007	2006
	Note	HK$’000	HK$’000
Non-current assets
Property, plant and equipment	6	2,262	2,032
Software product development costs		8,044	7,753
		10,306	9,785
Current assets
Inventories		12,552	5,602
Trade and other receivables	7	129,035	133,065
Pledged bank deposits		5,013	5,013
Cash and cash equivalents		33,534	47,276
		180,134	190,956
Current liabilities
Trade and other payables	8	52,235	54,721
Tax Payable		1,126	1,548
Bank borrowings		39,337	49,843
Other loans		24,162	23,843
		116,860	129,955
Net current assets		63,274	61,001
Total assets less current liabilities		73,580	70,786
Non-current liabilities
Other loans		3,575	5,573
Net assets		70,005	65,213
Capital and reserves
Share capital	9	2,916	2,900
Reserves		67,089	62,313
Total equity		70,005	65,213

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condensed consolidated statement of changes in equity (unaudited)

share capital HK$’000 As at 1 January 2006 (as previously reported) 2,900 Exchange differences on translation of foreign operations – Profit for the six months ended 30 June 2006 – Recognition of share-based payments – As at 30 June 2006 2,900 As at 1 January 2007 (as previously reported) 2,900 Exchange differences on translation of foreign operations – Profit for the six months ended 30 June 2007 – Recognition of share-based payments – Exercise of share options, net of expenses 16 As at 30 June 2007 2,916	share premium HK$’000 55,824 – – – 55,824 55,824 – – – 308 56,132	share- based payments reserve HK$’000 587 – – 36 623 643 – – 89 (114 ) 618	statutory surplus reserve fund HK$’000 1,003 – – – 1,003 1,505 – – – – 1,505	enterprise expansion fund HK$’000 502 – – – 502 502 – – – – 502	staff welfare fund HK$’000 502 – – – 502 – – – – – –	retained earnings/ exchange (accumulated reserve losses) HK$’000 HK$’000 566 (2,458 ) 339 – – 1,010 – – 905 (1,448 ) 1,196 2,643 834 – – 3,659 – – – – 2,030 6,302	total HK$’000 59,426 339 1,010 36
							60,811

							65,213 834 3,659 89 210
							70,005

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condensed consolidAted cAsh Flow stAtement (unAudited)

Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at the end of period Analysis of the balances of cash and cash equivalents Cash and cash equivalents	six months ended 30 June 2007 HK$’000 1,120 (2,886 ) (11,976 ) (13,742 ) 47,276 33,534 33,534	six months ended 30 June 2006 HK$’000 63,979 (1,315 ) (25,201 ) 37,463 17,619 55,082 55,082

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notes to the condensed FinAnciAl stAtements

(1) BAsis oF presentAtion

The condensed financial statements have been prepared in accordance with Hong Kong Accounting Standard No.34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the applicable disclosure requirements of the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited.

The accounting policies adopted in preparing the condensed consolidated financial report were in consistent with those applied for the annual financial report for the year ended 31 December 2006.

The condensed financial statements are unaudited but have been reviewed by the audit committee of the Company (the “Audit Committee”).

(2) segment inFormAtion

a. Business segment

An analysis of the Group’s turnover and results by business segment is as follows:

Network infrastructure Professional services Network software Other operating income Central administrative expenses Profit from operations Finance costs Profit before taxation Taxation Profit for the period	(unaudited) For the six months ended 30 June 2007 turnover results HK$’000 HK$’000 164,707 3,916 28,258 1,760 2,202 469 195,167 6,145 87 (16 ) 6,216 (2,557 ) 3,659 – 3,659	(unaudited) For the six months ended 30 June 2006 turnover results HK$’000 HK$’000 127,256 2,367 12,478 967 1,214 (1,009 ) 140,948 2,325 509 (11 ) 2,823 (1,811 ) 1,012 – 1,012

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b. geographical segment

An analysis of the Group’s turnover by geographical location is as follows:

Hong Kong PRC	(unaudited) For the six months ended 30 June 2007 2006 HK$’000 HK$’000 9,386 10,805 185,781 130,143 195,167 140,948	(unaudited) For the six months ended 30 June 2007 2006 HK$’000 HK$’000 9,386 10,805 185,781 130,143 195,167 140,948
		140,948

(3) proFit BeFore tAxAtion

Profit before taxation has been arrived at after charging:

	For the six months	For the six months
	ended 30 June
	2007	2006
	HK$’000	HK$’000
Amortisation of software product
development costs	1,390	1,312
Depreciation of property,
plant and equipment	879	1,012
Staff costs (including directors’
remuneration)	11,401	10,122
and after crediting:
Interest income	87	40

(4) tAxAtion

No provision for Hong Kong and overseas profits tax has been made as the Group had either no assessable profit or had tax losses brought forward to set off the estimated assessable profit for the six months ended 30 June 2007 and the corresponding period in 2006.

Pursuant to the relevant laws and regulations in the PRC, the Company’s PRC subsidiaries are entitled to exemption from PRC income tax for two commencing from their first profit-making year of operation and thereafter entitled to a 50% relief from PRC income tax for the immediate following three years. During the Review Period, one of the Company’s PRC subsidiaries is within its 50% tax relief period, one of the Company’s PRC subsidiaries is subject to full PRC income tax at effective tax rate of 27% and one of the Company’s PRC subsidiaries was still in its tax exemption period and its first profit-making year of operation had not started.

No deferred tax asset has been recognised in respect of the unutilised tax losses due to the unpredictability of future profit streams.

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(5) eArnings per shAre

The calculation of basic earnings per share for the three months and the six months ended 30 June 2007 is based on the unaudited profit attributable to equity holders of the Company of approximately HK$4,617,000 (2006: HK$4,902,000) and approximately HK$3,659,000 (2006: HK$1,012,000), respectively and on the weighted average number of approximately 290,376,000 (2006: 289,945,000) shares in issue during the period.

The calculation of diluted earrings per share for the three months and six months ended 30 June 2007 is based on the unaudited profit attributable to equity holders of the Company approximately HK$4,617,000 and HK$3,659,000, respectively and on the weighted average number of approximately 292,757,000 shares in issue during the period.

(6) property, plAnt And equipment

Movements in property, plant and equipment were:

cost At 1 January 2007 Additions Exchange differences Disposals At 30 June 2007 Accumulated depreciation At 1 January 2007 Charged for the period Exchange differences Written back on disposals At 30 June 2007 net book value At 30 June 2007 At 31 December 2006	computer equipment HK$’000 9,593 145 153 (1 ) 9,890 8,967 303 140 (1 ) 9,409 481 626	Furniture, fixtures and office equipment HK$’000 1,859 513 34 (32 ) 2,374 1,722 83 30 (32 ) 1,803 571 137	motor vehicle HK$’000 1,157 – 18 – 1,175 731 119 12 – 862 313 426	tools HK$’000 6,506 446 125 (552 ) 6,525 5,663 374 107 (516 ) 5,628 897 843	total HK$’000 19,115 1,104 330 (585 ) 19,964 17,083 879 289 (549 ) 17,702 2,262 2,032

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(7) trAde And other receivABles

Trade receivables Retention money receivables Other receivables Prepaid maintenance charges	As at 30 June 2007 HK$’000 107,322 10,700 10,501 512 129,035	31 december 2006 HK$’000 113,079 10,696 7,458 1,832
		133,065

There was no change in the Group’s credit policies since 31 December 2005.

The following is an aged analysis of trade receivables at the balance sheet date:

Age 0 to 90 days 91 to 180 days 181 to 365 days over 365 days Less: Accumulated impairment trAde And other pAyABles Trade payables Other payables	As at 30 June 2007 HK$’000 55,564 18,329 30,391 8,418 112,702 (5,380 ) 107,322 As at 30 June 2007 HK$’000 32,974 19,261 52,235	31 december 2006 HK$’000 78,752 17,285 15,909 4,224
		116,170 (3,091 )
		113,079

		31 december 2006 HK$’000 43,480 11,241
		54,721

(8) trAde And other pAyABles

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The following is an aged analysis of trade payables at the balance sheet date:

Age 0 to 90 days 91 to 180 days over 180 days shAre cApitAl Authorised – Ordinary shares of HK$0.01 each – At 1 January 2007 and 30 June 2007 Issued and fully paid – At 1 January 2007 – Exercise of share options – At 30 June 2007	As at 30 June 2007 HK$’000 30,114 690 2,170 32,974 number of shares ’000 500,000 289,945 1,570 291,515	31 december 2006 HK$’000 38,633 3,024 1,823
		43,480

		nominal value HK$’000 5,000

		2,900 16
		2,916

(9) shAre cApitAl

(10) shAre-BAsed pAyments

The Group has two share option schemes for certain directors, advisor and employees. They are the Pre-IPO Share Option Scheme and Post-IPO Share Option Scheme and are described below:

	pre-ipo share option scheme	post-ipo share option scheme
Exercise Price	HK$0.55 per share, which was the same as the placing price per share at the time of IPO	Average closing price of 5 trading days immediately prior to the date of grant
Vesting Period	One-half to three years	One to four years
Contractual Life	10 years from date of grant	10 years from date of grant
Lapse	After 3 months from the departure of grantees from the Group	After 3 months from the departure of grantees from the Group

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Details of the share option outstanding during the Review Period are as follows:

Outstanding at 1 January, Granted during the period Lapsed during the period Exercised during the period Outstanding at 30 June Exercisable at 30 June	2007 weighted number of average share options exercise price ’000 HK$ 18,329 0.354 6,980 0.088 (37 ) 0.245 (1,570 ) 0.138 23,702 0.290 16,186 0.382	2006 weighted number of average share options exercise price ’000 HK$ 19,957 0.349 – – (829 ) 0.301 – – 19,128 0.351 15,867 0.386

Options granted during the six months ended 30 June 2007 were 6,980,000 shares (2006: Nil).

(11) operAting leAse commitments

As at 30 June 2007, the Group had operating lease commitments of approximately HK$6,328,000 (31 December 2006: HK$3,355,000), out of which approximately HK$2,498,000 was payable within 1 year (31 December 2006: HK$2,366,000).

(12) contingent liABilities

As at 30 June 2007, the Company has given corporate guarantees totaling approximately HK$50,400,000 (31 December 2006: HK$50,400,000) to banks to secure the credit facilities granted to its subsidiaries.

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purchAse, sAle or redemption oF listed securities oF the compAny

During the Review Period, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.

shAre option schemes

The Company, at the general meeting held on 20 April 2002, adopted both a Pre-IPO share option scheme (the “Pre-IPO Share Option Scheme”) and a Post-IPO share option scheme (the “Post-IPO Share Option Scheme”).

Share options exercised and lapsed for both schemes are detailed below:–

(a) pre-ipo share option scheme

One single grant of 11,913,000 shares in aggregate was made to various participants on 30 April 2002 under this scheme. As at 30 June 2007, options comprising an aggregate of 8,300,000 shares were outstanding, as detailed below:

exercise price per share HK$ Types of participants: Directors 0.55 Advisor 0.55 Employees 0.55	number of share options lapsed outstanding during as at review 1.1.2007 period 3,750,000 – 750,000 – 3,810,000 10,000 (Note) 8,310,000 10,000	outstanding as at 30.6.2007 3,750,000 750,000 3,800,000
		8,300,000

Note: These options lapsed according to the rules of this scheme due to the employee having left the Group.

Pre-IPO share options are exercisable as to (i) a maximum of 25% of the total number of options granted six months after 17 May 2002 (the “Listing Date”); (ii) a maximum additional 6.25% of the total number of options granted after the expiry of each 3-month period twelve months after the Listing Date; and (iii) the remaining options granted on or after the third anniversary of the Listing Date until the end of the option period or lapse of an option.

The above outstanding options may be exercised, in accordance with the terms of the Pre-IPO Share Option Scheme, before 30 April 2012.

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(b) post-ipo share option scheme

There have been a total of 6 lots of Post-IPO share option grants. The lots were 5,277,000 shares on 12 July 2002, 7,859,000 shares on 20 February 2003, 385,000 shares on 10 October 2003, 2,844,000 shares on 23 February 2004, 828,000 shares on 11 October 2004 and 6,980,000 shares on 12 January 2007.

A summary of the Post-IPO Share Option Scheme movements during the Review Period and as at 30 June 2007 is as follows:

exercise outstanding date of type of exercisable price per as at grant participants period share 1.1.2007 HK$ 12.7.2002 Employees 12.7.2003 to 0.384 2,025,000 11.7.2012 20.2.2003 Directors 20.2.2004 to 0.138 3,825,000 19.2.2013 Advisors 20.2.2004 to 0.138 300,000 19.2.2013 Employees 20.2.2004 to 0.138 1,961,000 19.2.2013 6,086,000 10.10.2003 Employees 10.10.2004 to 0.142 135,000 9.10.2013 23.2.2004 Employees 23.2.2005 to 0.165 1,458,000 22.2.2014 11.10.2004 Employees 11.10.2005 to 0.124 315,000 10.10.2014 12.1.2007 Directors 12.1.2008 to 0.088 – 11.1.2017 Employees 12.1.2008 to 0.088 – 11.1.2017 – Total: 10,019,000	number of share options granted exercised lapsed during during during outstanding review review review as at period period period 30.6.2007 (Note 1) – – – 2,025,000 – 1,500,000 – 2,325,000 (Note 2 & 3) – – – 300,000 – 36,000 10,000 1,915,000 – 1,536,000 10,000 4,540,000 – – 5,000 130,000 – 20,000 – 1,438,000 – 14,000 12,000 289,000 750,000 – – 750,000 6,230,000 – – 6,230,000 6,980,000 – – 6,980,000 6,980,000 1,570,000 27,000 15,402,000	number of share options granted exercised lapsed during during during outstanding review review review as at period period period 30.6.2007 (Note 1) – – – 2,025,000 – 1,500,000 – 2,325,000 (Note 2 & 3) – – – 300,000 – 36,000 10,000 1,915,000 – 1,536,000 10,000 4,540,000 – – 5,000 130,000 – 20,000 – 1,438,000 – 14,000 12,000 289,000 750,000 – – 750,000 6,230,000 – – 6,230,000 6,980,000 – – 6,980,000 6,980,000 1,570,000 27,000 15,402,000
		2,325,000 300,000 1,915,000
		4,540,000
		130,000
		1,438,000
		289,000
		750,000 6,230,000
		6,980,000
		15,402,000

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Notes:

(1) These options lapsed according to the rules of this scheme due to the employees having left the Group.
(2) Out of these 1,500,000 exercised share options, 375,000 shares were granted to each of Mr. Alasdair Gordon Nagle and Ms. Clara Ho, directors appointed to the Board to represent the interests of The Applied Research Council (“ARC”). Both Mr. Nagle and Ms. Ho exercised the options on 3 April 2007 and shares were allotted to them accordingly. They subsequently resigned from directorship in the Company with effect from 13 April 2007 after ARC ceased to be a substantial shareholder of the Company after 12 April 2007.
(3) Out of these 1,500,000 exercised share options, 750,000 shares were granted to Mr. David Tsoi. He exercised the options on 14 June 2007 and shares were allotted to him accordingly.

Post-IPO share options are exercisable starting from the first anniversary of the date of grant at stepped annual increment of 25% of the total options granted, for a period not later than 10 years from the date of grant.

The above outstanding options may be exercised within such exercise period in accordance with the terms of the Post-IPO Share Option Scheme.

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directors’ And chieF executive’s interests or short position in shAres And underlying shAres oF the compAny

As at 30 June 2007, the interests and short positions of the directors, the chief executive of the Company and their respective associates (as defined in the GEM Listing Rules) in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO or as otherwise notified to the Company and the Exchange pursuant to the required standard of dealings by directors as referred to in Rule 5.46 of the GEM Listing Rules, were as follows:

(a) long positions in shares in the company

	number of shares held	number of shares held	number of shares held	number of shares held	number of shares held	number of shares held
	personal interest *Capacity*	Family interest	corporate interest *Capacity*	other interest	total interest in shares	Approximate percentage of the company’s issued share capital
name of director
Mr. Chan Sek Keung, Ringo	23,160,000 Beneficial owner	–	56,400,000 (Note) Interest through a controlled corporation	–	79,560,000	27.29%

SFO, to have an interest in these shares.

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(b) long positions in underlying shares in the company (directors’ rights to acquire shares)

		number of	number of	number of	number of
		unlisted	unlisted	unlisted	unlisted		Approximate
		pre-ipo	pre-ipo	post-ipo	post-ipo		percentage
		share option	share option	share option	share option		of the
		outstanding	outstanding	outstanding	outstanding		company’s
	date of	as at	as at	as at	as at	Aggregate	issued
name of director	grant	1.1.2007	30.6.2007	1.1.2007	30.6.2007	interests	share capital
Mr. Chan Sek Keung,	30.4.2002	3,000,000	3,000,000	–	–
Ringo	20.2.2003	–	–	1,200,000	1,200,000
						4,200,000	1.44%
Mr. Pang Hing Chung,	30.4.2002	750,000	750,000	–	–
Alfred	20.2.2003	–	–	750,000	750,000
						1,500,000	0.51%
Mr. David Tsoi	20.2.2003	–	–	750,000	–
(Note 3)	12.1.2007	–	–	–	750,000
						750,000	0.26%
Mr. Alasdair Gordon	20.2.2003	–	–	375,000	–	–	–
Nagle_(Note 4)_
Ms. Clara Ho_(Note 4)_	20.2.2003	–	–	375,000	–	–	–
Mr. Kwan Kit Tong,	20.2.2003	–	–	375,000	375,000	375,000	0.13%
Kevin

Notes:

(1) Each of the above directors is the personal beneficial owner of the share options granted to him or her.
(2) Each of the directors’ interests represent his or her respective long positions in the underlying shares in the Company by virtue of options granted to the directors pursuant to the Pre-IPO Share Option Scheme and a Post-IPO Share Option Scheme both adopted by the Company on 20 April 2002 (further details are set out under the section headed “Share Option Schemes”).
(3) Mr. David Tsoi exercised his option rights on 14 June 2007 in respect of the 750,000 option granted to him on 20 February 2003.
(4) Both Mr. Nagle and Ms. Ho exercised their respective option rights on 3 April 2007. They subsequently resigned from directorship in the Company with effect from 13 April 2007 after The Applied Research Council, whose interests Mr. Nagle and Ms. Ho were on the Board to represent, ceased to be a substantial shareholder of the Company after 12 April 2007.
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(5) Options granted on 30 April 2002 were exercisable during the period from 17 November 2002 to 29 April 2012 at the exercise price of $0.55 per share.
(6) Options granted on 20 February 2003 were exercisable during the period from 20 February 2004 to 19 February 2013 at the exercise price of $0.138 per share.
(7) Options granted on 12 January 2007 were exercisable during the period from 12 January 2008 to 11 January 2017 at the exercise price of $0.088 per share.

Other than as disclosed above, none of the directors, the chief executive of the Company and their respective associates (as defined in the GEM Listing Rules), had any interests or short positions in any shares, underlying shares or debentures of the Company or any of its associated corporations as at 30 June 2007.

required stAndArd oF securities deAlings By directors

During the six months ended 30 June 2007, the Company had adopted a code of conduct for directors’ securities transactions on terms no less exacting than the required standard of dealings set out in Rules 5.48 to 5.67 of the GEM Listing Rules.

Having made specific enquiry with all the Directors, the Directors confirmed that they had complied with the required standard of dealings and the code of conducts for directors’ securities transactions during the six months ended 30 June 2007.

suBstAntiAl shAreholders And other shAreholders whose interests Are recorded under section 336 oF the sFo

As at 30 June 2007, the following persons or corporations, in addition to the directors, stated under the section headed “Directors’ and chief executive’s interests or short position in shares and underlying shares of the Company”, were interested in shares or underlying shares representing 5% or more in the issued share capital of the Company as recorded in the register of interests required to be kept by the Company pursuant to Section 336 of the SFO.

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long positions in shares in the company

				Approximate
				percentage
				of the
				company’s
		type of	number of	issued
name of shareholder	capacity	interests	shares	share capital
North 22 Nominees	Beneficial owner	Corporate	36,900,000	12.66%
Limited_(Note 1)_
Mr. Ng Lai Yick	Beneficial owner	Personal	3,134,744	1.08%
(Note 1)
	Interest through	Corporate	36,900,000	12.66%
	a controlled
	corporation
QPL International	Beneficial owner	Corporate	35,456,745	12.16%
Holdings Limited
(“QPL”)(Note 2)
Mr. Li Tung Lok	Interest through	Corporate	35,456,745	12.16%
(Note 2)	a controlled
	corporation
Madam Su Ching Wah	Interest of spouse	Family	35,456,745	12.16%
(Note 2)

Notes:

(1) Mr. Ng Lai Yick is deemed, by virtue of the SFO, to have an interest in the 36,900,000 shares held by North 22 Nominees Limited as the company is wholly-owned by him.
(2) Mr. Li Tung Lok is the controlling shareholder of QPL and is deemed, by virtue of the SFO, to have an interest in the 35,456,745 shares held by QPL.

Madam Su Ching Wah is the spouse of Mr. Li Tung Lok and is deemed, by virtue of the SFO, to have an interest in the 35,456,745 shares held by QPL.

Save as disclosed above, the Company had not been notified of any other relevant interests or short positions in the shares or underlying shares in the Company as at 30 June 2007.

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4. mAnAgement discussion And AnAlysis

For the year ended 31 December 2004

Financial performance and segmental result

Highlights

Turnover_(HK$’000) Profit from operations(HK$’000) Net profit(HK$’000) Basic earnings per share(HK cents) Net current assets(HK$’000)_ Current ratio Debt ratio (debts/assets)	2004 269,688 6,054 3,023 1.04 46,248 1.57 59%	2003 165,879 4,349 857 0.30 45,663 1.67 56%	% change +63% +39% +253% +247% +1% -6% +5%

For the year ended 31 December 2004, the Group achieved a turnover of approximately HK$270 million. It represented an increase of approximately 63% compared with last year’s turnover of approximately HK$166 million. Net profit attributable to shareholders reached approximately HK$3.02 million, an increase of approximately 2.5 times compared with the approximately HK$0.86 million recorded in the year ended 31 December 2003.

Mainland China continued to contribute a substantial portion to the Group’s revenue, accounting for approximately 95% of the Group’s total turnover, while the remaining approximately 5% came from Hong Kong.

During 2004, Network Infrastructure business remained as the Group’s main revenue contributor, generating turnover of approximately HK$241 million, accounting for approximately 89% of the Group’s total turnover. (2003: HK$136 million and 82%). The turnover from Professional Services business amounted to approximately HK$25 million (2003: HK$28 million) while turnover from Network Software was approximately HK$4 million (2003: approximately HK$1.9 million).

As at 31 December 2004, the Group had bank balances and cash totaling approximately HK$40.8 million (2003: HK$45.2 million). Total banking facilities was approximately HK$72 million (2003: HK$67 million), of which approximately HK$49 million (2003: HK$43 million) had been utilized.

Final dividend

The Board of Directors does not recommend the payment of any dividend for the year ended 31 December 2004. (2003: Nil).

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Business review

Network infrastructure provides the foundation for service providers in building their NGNbacked operations. During the Review Period, we won contracts from major telecommunications service providers in China, including China Telecom, Shandong Netcom, Shanghai Netcom and China Unicom. The services and technologies we provided, helped strengthen their competitive edges and facilitated their advancement to NGN-backed operations.

In addition to broadening our customer base in major telecommunication service providers, we continued to serve well our traditionally strong market segment, the multinational corporations (the “MNCs”). New customers in this category included KONE Corporation, Federal Express, Dupont, Amway, the German software group SAP and many joint venture industrial undertakings between foreign and Chinese corporations. The Group was awarded the “2004 Cisco China Best IP Communications Partner Award” during the year.

During the Review Period, Wafer Systems also offered a broad range of professional services that met the evolving needs of MNCs as well as large domestic corporations like Shanghai Port & Telecommunication Equipment Co. Ltd., the Shanghai Media Group, Huawei Technologies, Sichuan Chang Hong Electronics, Xin Xiang CATV, etc.

Like in Mainland China, network optimization and security solutions are also in much demand for corporations in Hong Kong. Schneider Electric (Hong Kong), QAD Asia Limited, Bookham Technology plc., Hong Kong Interbank Clearing Ltd., and the outlets of Sogo department stores were our new customers during the Review Period.

On the software front, the Group continued its research and development of the NextG IP Billing Software. The Group developed a suite of Internet Protocol (“IP”) network management and network optimization solutions for customers in the IP telephony industry. Additional sets of software developed also included business support system (“BSS”), operation support system (“OSS”) and network security solutions.

In alliance with the China Division of Cisco Systems Inc. and their headquarters research and development team, the Group expects to accelerate its development of NGN software and solutions, further consolidating its position as an NGN pioneer in the industry.

prospects

With our first mover advantage in the development of NGN and extensive experience and expertise in providing network infrastructure, professional services and network solutions, Wafer Systems has a solid base for future growth. In fiscal year 2005, NGN will remain as a dominant IT trend and the demand for NGN applications from MNCs and telecommunication service providers is expected to see persistent growth. We will continue to capitalize on this trend and help customers streamline their operations and deliver to them new business applications.

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We draw on years of experience in delivering high quality services and solutions to MNCs, telecommunication service providers, manufacturing and enterprise customers. They will continue to support our growth in the coming years. Most importantly, we will actively identify new clients on top of strengthening our recent entry into the cable TV sector. The Group will provide bundled service and products to a number of cable TV operators in major cities in Mainland China.

As the Group enters the new fiscal year, we will continue our software research and development to meet the needs of NGN operations, and particularly to meet the needs of customers from the IP Telephony sector, a business area of promising prospects for the Group. The Group will also continue to actively promote its NGN operation support systems, network security systems and business support systems, to enlarge its market share.

Customer satisfaction will continue to be the focus of the Group’s business philosophy. No efforts will be spared, while providing customers with what they need for communications efficiency, to assure our customers of our commitment for their satisfaction. This business philosophy is also a guarantee to the continued success of your Group to build on the satisfactory performance of the Review Period.

Liquidity, Financial Resources and Capital Structure

During the Review Period, the Group kept its conservative policies in cash and financial management. Surplus funds were placed on interest-bearing deposits with banks. The Group generally financed its operations and serviced its debts with its internal resources, short-term bank loans and convertible bonds.

The Group remained healthy in the financial and liquidity position during the Review Period. As at 31 December 2004, the Group maintained its net current assets steady at approximately HK$46.2 million (2003: HK$45.7 million), a current ratio of 1.57 (2003: 1.67 ). Net current assets included bank balances and cash of approximately HK$40.8 million (2003: HK$45.2 million), total short term bank loans of approximately HK$47.9 million (2003: HK$33.1 million) and convertible bonds maturing within one year of HK$3.0 million (2003: HK$9.3 million).

The Group had no non-current liabilities (2003: HK$2.8 million) as at year end.

As at 31 December 2004, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

Order Book and Prospects of New Business

As at 31 December 2004, the Group had contracts on hand for sales amounting to approximately HK$36.6 million (2003: HK$28.1 million) which would be booked as revenue upon delivery and implementation.

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Significant Investment Held

The Group had not made any significant investment since floatation or during the Review Period.

Charges on Group Assets

As at 31 December 2004 and 2003, the Group did not have any significant charges on assets.

Gearing Ratio

As at 31 December 2004, the gearing ratio, i.e. total liabilities over total assets, slightly increased to approximately 0.59 from approximately 0.56 as at 31 December 2003.

Foreign Exchange Exposure

During the Review Period, the Group earned revenue and incurred costs and expenses mainly in U.S. dollars, Hong Kong dollars and Renminbi. As the exchange rates of such currencies have been stable, no hedging or other alternatives have been implemented.

Contingent Liabilities

As the balance sheet date, the Company has given corporate guarantees totaling HK$54,000,000 (2003: HK$52,000,000) to bank to secure the credit facilities granted to its subsidiaries.

Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisition, disposal or investment during the Review Period.

Future Plans for Investments or Capital Assets and Sources of Funding

With the exception of those plans set out in the Prospectus, there are no plans for any significant investments in capital assets and sources of funding.

Employee Information

As at 31 December 2004, the Group had 142 employees comprising 21 employees based in Hong Kong and 121 employees based in mainland China. Total staff costs, excluding for directors, was approximately HK$17.3 million (2003: HK$15.5 million) during the Review Period. The Group continues to provide remuneration packages to employees according to market practices and past performance. In addition to basic remuneration, the Group also

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provides employees with other benefits such as a mandatory provident fund, medical insurance scheme, share option schemes and staff training program. There has been no major change on staff remuneration policies during the year.

Use of Proceeds

The net proceeds raised from the new issue of shares by way of placing were approximately HK$19.2 million, and were utilized in the following areas:

				Actual
	use of proceeds as			amount
	stated in the	prospectus		utilized
		up to 31		up to 31
		december		december
	total	2004		2004
	HK$’million	HK$’million		HK$’million
Research and development *	6.0		6.0	8.7
Expansion of geographical
establishments **	4.0		4.0	1.1
Establishment of network
monitoring centre	3.0		3.0	2.7
Sales and marketing	2.0		2.0	1.4
Working capitals	4.0		4.0	5.3
Total	19.0		19.0	19.2

* The higher than projected spending on R & D has been due to the speeding up of research on NGN.

** The lower than projected spending on the expansion of geographical establishments has been the result of savings due to the Group’s concentrating its marketing efforts on existing ones, and only establish marketing presence in other parts of the region in collaboration with partners of the Group.

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For the year ended 31 December 2005

Financial performance and segmental result

	2005	2004	%change
		Restated
Turnover_(HK$’000)_	368,250	269,688	+37%
EBITDA_(HK$’000)_	9,213	11,064	-17%
Profit attributable to equity
holders of the parent_(HK$’000)_	1,443	2,701	-47%
Basic earnings per share_(HK cents)_	0.50	0.94	-47%
Net current assets_(HK$’000)_	48,757	46,248	+5%
Current ratio	1.52	1.57	-3%
Debt ratio (debts/assets)	61%	59%	+3%

During the Review Period, China remained the Group’s substantial source of business. Network Infrastructure business accounted for the Group’s main source of revenue, generating turnover of approximately HK$320 million, (2004: HK$241 million). Turnover from Professional Services business amounted to approximately HK$46 million (2004: HK$25 million) while turnover from Network Software was approximately HK$2.4 million (2004: approximately HK$4.0 million).

Final dividend

The Board of Directors does not recommend the payment of any dividend for the year ended 31 December 2005. (2004: Nil).

Business review

Through participation in large scale projects, such as the CN2 project of China Telecom, the Group had gained more experience and knowledge into service providers operations. Such deeper knowledge is most important in the Group’s future success when the markets goes into the 3G era and with new next generation network (“NGN”) services as in voice over IP (“VOIP”) and IPTV services. Even more important will be the groundwork now being laid in the sale of software which the Group has been developing and now near maturity.

Professional Services has shown a very satisfactory growth during the Review Period. Higher market share and penetration had been achieved, especially among the MNCs which your Group has a traditional strong hold as the result of high customer satisfaction.

Although competition has been keen, the Group remained much focused in our core business and has made heavy investments to improve our competitive strength in the areas of advanced technologies and professional services to cope with the challenge & opportunity in the coming NGN Era.

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The ability to master advanced technologies is critical to the continued success of the Group. The business of network communication has evolved into the third phase. The first phase was for pure data transmission network. The second phase saw the pure data network evolving into a network of networks where an IP based backbone supporting multiple services and applications running over it. The third phase is the IP NGN where the network will be used as a platform enabling collaboration and interreaction of applications, converged real time communications, virtual storage and quadruple play services, etc.

Wafer Systems has built up strong capability in advanced technologies and formed strong alliance with leading partners like Cisco Systems Inc. We are specialized partner of Cisco System in the areas of network security, IP telephony and wireless communication. For 2005 the Group was awarded the Global Partner of the Year in the Commercial Sector in recognition of its achievements.

The Group has developed a suite of IP NGN management software in the past few years. In 2005, we have consolidated, productized and packaged them into a portfolio of softwares addressing both the service provider market and the enterprise markets.

Service is a key differentiator of our Group’s go to market strategy. We are serving hundreds of large multinational corporation and telecom operators. The choose Wafer Systems primarily because of our capability to provide good services.

Over the year, Wafer Systems has already established our reputation as a reliable provider of traditional services like product installation, maintenance and project management. In 2005 we have invested heavily to equip us in the advanced services space to provide support across the entire network lifecycle. These included from planning to the implementation and ongoing network improvement. This will enhance our position in the services value chain, further securing our partnership with our customer and most important of all, ensure our customers’ success.

prospects

The Group has successfully penetrated into the telecommunications service provider market and established stable revenue source. With the advent of the 3G communication, tipped to be launched in China in the near future, the Group will benefit.

On the other hand the strong technical capabilities of the Group’s networking engineers has advanced the Group’s ability to provide high value advanced Professional Services in consultancy, for the MNC market.

The overall market while competitive have become more rationalized and will improve gradually. Over the past two years, the Group phase invested to transform itself to a new business model focusing in advanced technologies and network life cycle services. This will position the Group in a more favorable competitive position.

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With customer satisfaction in mind as our prime motivator, we will continue to provide the most suitable solution and professional services to clients who wish to reap the full benefits of the IP NGN era.

Liquidity, Financial Resources and Capital Structure

The Group remained healthy in the financial and liquidity position during the Review Period. As at 31 December 2005, the Group had net current assets of approximately HK$48.8 million, a 5% increase over last year end of HK$46.2 million. The current ratio dropped slightly from 1.57 to 1.52. Net current assets included bank balances and cash of approximately HK$17.1 million (2004: HK$40.8 million) and bank borrowings of approximately HK$48.3 million (2004: HK$48.0 million).

The Group had no long term liabilities (2004: Nil) as at year end.

As at 31 December 2005, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

Order Book and Prospects of New Business

As at 31 December 2005, the Group had contracts on hand for sales amounting to approximately HK$28.9 million (2004: HK$36.6 million) which would be booked as revenue upon delivery and implementation.

Significant Investment Held

The Group had not made any significant investment since floatation or during the Review Period.

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Charges on Group Assets

As at 31 December 2005, the Group had a pledged bank deposit of approximately HK$4.6 million for securing certain bank overdrafts facilities (2004: Nil).

Save as disclosed above, the Group did not have any significant charges on assets.

Contingent Liabilities

At the balance sheet date, the Company has issued corporate guarantees to banks in respect of banking facility totaling HK$54,300,000 (2004: HK$54,000,000) granted to wholly owned subsidiaries.

Gearing Ratio

As at 31 December 2005, the gearing ratio, i.e. total liabilities over total assets, slightly increased to approximately 0.61 from approximately 0.59 as at 31 December 2004.

Foreign Exchange Exposure

During the Review Period, the Group earned revenue and incurred costs and expenses mainly in U.S. dollars, Hong Kong dollars and Renminbi. As the impact of foreign exchange exposure has been insignificant and positive, no hedging or other alternatives have been implemented.

Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisition, disposal or investment during the Review Period.

Future Plans for Investments or Capital Assets and Sources of Funding

There are no plans for any significant investments in capital assets and sources of funding.

Employee Information

As at 31 December 2005 the Group had 162 employees comprising 24 employees based in Hong Kong and 138 employees based in mainland China. Total employee expense, excluding for directors, was approximately HK$18.2 million (2004: HK$17.3 million) during the Review Period. The Group continues to provide remuneration package to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides employees with other benefits such as a mandatory provident fund, medical insurance scheme, share option schemes and staff training program. There has been no major change on staff remuneration policies during the year.

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For the year ended 31 December 2006

Financial performance and segmental result

	2006	2005	% change
Turnover_(HK$’000)_	326,611	368,250	-11%
EBITDA_(HK$’000)_	14,808	9,213	+61%
Profit attributable to equity holders
of the Company_(HK$’000)_	5,101	1,443	+253%
Basic earnings per share_(HK cents)_	1.76	0.50	+252%
Net current assets_(HK$’000)_	61,001	48,757	+25%
Current ratio	1.47	1.52	-3%
Debt ratio (debts/assets)	68%	61%	11%

During the Review Period, mainland China continued to contribute the Group’s bulk business. Network infrastructure business accounted for the Group’s main source of revenue, generating revenue of approximately HK$286 million (2005: HK$320 million). Revenue from professional services business amounted to approximately HK$38 million (2005: HK$46 million) while revenue from network software was approximately HK$2.2 million (2005: HK$2.4 million).

Final dividend

The Board does not recommend the payment of any dividend for the year ended 31 December 2006 (2005: Nil).

Business review

Competition in the market continued to be very keen during the Review Period. However, such competition had become more rationalized. As a result, with concerted efforts, the Group was able to turn in better profits in spite of the slightly lower turnover.

The overall better performance of the Group in 2006 has been mainly due to the higher value-added solutions and services of network infrastructure business.

For the past year, the Group continued its emphasis in the sector of service provider customers. Close working relations have been maintained with all four major telecommunication carriers in the Mainland. The Group’s participation in Phase 2 of the China Telecom business network project (“CN2”) in the first half of 2006 had its significance not only on the revenue aspect. It also signified the Group’s advancement in technical ability in addition to further understanding the business of service providers. Such deeper knowledge into the systems requirements of the service providers is important for the Group to increase its technical and business competitiveness in offering seamless solutions when the market goes into the 3rd generation (“3G”) era.

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Professional services, while maintaining about the same percentage of total revenue as the year before, has also returned a better margin during the year. These reflected the higher satisfaction level from enterprise customers; especially multi-national corporation (“MNCs”) customers on whom your Group has always place high priority.

The policy to stay focused in our core business areas has proved most appropriate. Therefore, the Group continued to invest to improve our competitive strength to equip ourselves for next generation network (“NGN”) readiness. With the second phase of Internet protocol (“IP”) based communications further enhanced technologically, the Group has started to get itself ready for the third phase. The ultimate NGN era will see the network used as a platform to enable collaboration and inter-reaction of different applications, converged real time communications, and various other services. Technically, the Group is now more capable than ever in providing its customers the professional services in networking.

Enhancement of the suite of IP NGN management software, which the Group has consolidated last year, continued during the Review Period. Productizing them has made them now more readily available for both service provider and enterprise market applications.

The Group’s dedication to align partners’ collaborations has given us the ability to master advanced technologies. It is this ability that made us an important Partner for Unified Call Centre Technology of Cisco Systems Inc. in the Asia Pacific area as well as one of it’s first Advanced Specialization Partner in the areas of network security, IP telephony and wireless communications. We are also close working partners with other well-known names in the technology field.

prospects

The economic growth in China being witnessed now will continue with its open door policy. This will encourage the expansion of the enterprise market further when enterprises, both local and MNCs, invest on higher efficiency communications. With the strong technical capabilities of the Group’s networking engineers, we shall benefit from the ability to provide high value advanced professional services in consultancy services to the enterprise market.

With the emergence of new technology, opportunity for high growth will be available for companies that have the technical capability as well as a reputation for good customer satisfaction. The Group will benefit accordingly since it has been investing in this direction for the past years and has been a pioneer in the areas of unified communications and advanced communications security.

For the telecommunications sector, your Group foresees a reasonable level of growth in business in 2007. Telecom service providers will speed up their investment on IP network infrastructure. This will be even more so with the issue of the 3G licences, which has been reported widely as an imminent move on the part of the Chinese government. When this happens, the Group will benefit from its established good relationship with the telecom service providers

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Appendix i

and our ability to propose tailor made solutions to match their needs. The fact that the Group has been working on testing trials on 3G with solution and system vendors will put the Group in a favourable competing position.

The reputation of delivering good services and high concern for customer satisfaction will continue to place the Group in a very favourable position. The deeper knowledge into the operations of the service providers will enable the Group to present technical and business proposals to the service providers, which are in seamless match of their needs. Such better understanding is also important for the Group in its future direction of software development.

In the past, we were more focused on infrastructure projects for both service providers and MNCs. Now, we have begun to focus on value-added solutions of our own. We have formed a dozen of hot solutions ready for release in the near future. Some are integrated with Cisco and other worldwide leading vendors and some are designed to fulfil the requirements of specific industries. They are all for the latest communication technology deployment and subscriber management.

Continuing to place high importance on technology up-grading, customer satisfaction, congenial partnership with technology leaders and the perseverance for self-improvement, the Group will continue to grow and be able to take on the opportunities available to us in the coming year and beyond.

Liquidity, Financial Resources and Capital Structure

The Group remained healthy in the financial and liquidity position during the Review Period. As at 31 December 2006, the Group had net current assets of approximately HK$61.0 million, a 25% increase over last year end of HK$48.8 million. The current ratio dropped slightly from 1.52 to 1.47. Net current assets included bank balances and cash of approximately HK$47.3 million (2005: HK$17.1 million), bank borrowings of approximately HK$49.8 million (2005: HK$48.3 million) and current portion of other loans of approximately HK$23.8 million (2005: Nil).

Non-current portion of other loans at year end amounted to approximately HK$5.6 million (2005: Nil).

As at 31 December 2006, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

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Appendix i

Order Book and Prospects of New Business

As at 31 December 2006, the Group had contracts on hand for sales amounting to approximately HK$20.2 million (2005: HK$28.9 million) which would be booked as revenue upon delivery and implementation.

Significant Investment Held

The Group had not made any significant investment since floatation or during the Review Period.

Charges on Group Assets

As at 31 December 2006, the Group had a pledged bank deposit of approximately HK$5.0 million (2005:4.6 million) and certain trade receivables of approximately HK$6.9 million (2005: Nil) for securing certain banking facilities.

Save as disclosed above, the Group did not have any significant charges on assets.

Contingent Liabilities

At the balance sheet date, the Company has issued corporate guarantees to banks in respect of banking facility totaling HK$50,400,000 (2005: HK$54,300,000) granted to wholly owned subsidiaries.

Gearing Ratio

As at 31 December 2006, the gearing ratio, i.e. total liabilities over total assets, slightly increased to approximately 0.68 from approximately 0.61 as at 31 December 2005.

Foreign Exchange Exposure

Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisition, disposal or investment during the Review Period.

Future Plans for Investments or Capital Assets and Sources of Funding

There are no plans for any significant investments in capital assets and sources of funding.

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Appendix i

Employee Information

As at 31 December 2006, the Group had 170 employees comprising 21 employees based in Hong Kong and 149 employees based in mainland China. Total employee expense, excluding for directors, was approximately HK$21.5 million (2005: HK$18.2 million) during the Review Period. The Group continues to provide remuneration package to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides employees with other benefits such as a mandatory provident fund, medical insurance scheme, share option schemes and staff training program. There has been no major change on staff remuneration policies during the year.

For the six months ended 30 June 2007

Business overview and review

Financial Highlights

	q2/2007	q2/2006	change	1h/2007	1h/2006	change
	HK$’000	HK$’000		HK$’000	HK$’000
Turnover	144,615	94,590	+52.9%	195,167	140,948	+38.5%
Operating Profit	5,972	5,964	+0.1%	6,216	2,823	+120.2%
Profit attributable to
equity holders of
the Company	4,617	4,902	-5.8%	3,659	1,012	+261.6%
Basic EPS_(HK Cents)_	1.59	1.69	-5.9%	1.26	0.35	+260.0%

Financial review and segmental result

During the Review Period, the Group recorded a turnover of approximately HK$195.2 million (2006: HK$140.9 million), an increase of 38.5% as compared to the corresponding period in 2006.

Profit of the period increased from HK$1.0 million to HK$3.7 million, representing an increase of 261.6% as compared to the corresponding period in 2006. Basic earnings per share were approximately HK1.26 cents (2006: HK0.35 cents).

During the Review Period, mainland China continued to be the major market of the Group, accounting for 95.2% (2006: 92.3%) of the total turnover, with the remaining 4.8% (2006: 7.7%) generated in Hong Kong. Turnover generated from Network Infrastructure business amounted to HK$164.7 million (2006: HK$127.3 million). The turnover of Professional Services business amounted to HK$28.3 million (2006: HK$12.5 million). The turnover of Network Software business amounted to HK$2.2 million (2006: 1.2 million).

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FinAnciAl inFormAtion oF the group

Appendix i

interim dividend

The Board does not recommend the payment of an interim dividend for the six months ended 30 June 2007 (2006: Nil).

Business review

The development of information technology and internet industry in China has brought good potentials for network services and solutions providers. The Group’s continued investment on the development of its capabilities in advanced technology of networking in the past years has enabled the Group to produce better turnover and profit during the first half of the year.

During the Review Period, the Group continued to expand its customer base which now covers a large number of multi-national corporations (“MNCs”), all major telephone companies, telecommunications service provider (“SP”), local industries and governmental bodies. The collaborations with globally renowned vendors in the telecommunications and networking sector continued to enable the Group to upgrade its capabilities in technology and applications.

Focusing on technologies in unified communications, network optimisation and network security, the Group continued to gain customer confidence and supplier appreciation. The diversified customer base has helped the Group in its grasp of user experience in the direction of technology migration. The Review Period has seen the Group’s participation in the sizeable Chinanet Next Carrying Network (“CN2”) project as well as awarded by vendor partners, such as Cisco China “The Best Partner Award in the Telco Sector” for their last financial year.

prospects

After experiencing the keen market competition and relatively slow business season in past years, the Group has entered into a more reasonable business climate. Leveraging on the advancement in technology of network infrastructure, enlarged customer and user bases and improvement of network services, the Group is cautiously optimistic towards business growth in the foreseeable future, though competition in the market will continue to be keen.

As the Group enters the third quarter of 2007, there was a healthy backlog of orders on hand. As at 30 June 2007, the total value of backlog on hand amounted to approximately HK$50 million.

Wafer Systems will place high priority to further develop its advanced technologies including unified communications, network securities, network optimisation, proprietary networking software and other emerging technologies such as wi-max. Like always, the Group will endeavor to provide seamless solutions from the perspective of user-experience.

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FinAnciAl inFormAtion oF the group

Appendix i

Looking forward, Wafer Systems will continue to strive for greater breakthrough in research and development, so as to enhance the Group’s competitiveness, strengthen its position in the industry and enlarge its market share. The Group will continue to look for and grasp business development opportunities in mergers and acquisitions for the benefits and better returns to the Company and its shareholders.

Liquidity, Financial Resources and Capital Structure

The Group had total cash and bank deposits of HK$33.5 million as at 30 June 2007 (31 December 2006: 47.3 million). The Group had no bank overdraft as at 30 June 2007 (31 December 2006: Nil).

The Group remained healthy in the financial and liquidity position during the Review Period. As at 30 June 2007, the Group recorded net current assets of approximately HK$63.3 million as compared with approximately HK$61.0 million as at 31 December 2006. The current ratio slightly increased to approximately 1.54 from 1.47 as at 31 December 2006.

Non-current portion of other loan as at 30 June 2007 amounted to approximately HK$3.6 million (31 December 2006: HK$5.6 million).

As at 30 June 2007, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisitions, disposals or investments since floatations or during the Review Period.

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Appendix i

Employee Information

As at 30 June 2007, the Group had 167 employees (2006: 161 employees) comprising 20 employees (2006: 19 employees) based in Hong Kong and 147 employees (2006: 142 employees) based in mainland China. The Group continues to provide remuneration packages to employees in accordance with market practices and staff past performance. In addition to basic remuneration, the Group also provides other benefits such as a mandatory provident fund, medical scheme, share option scheme and staff training programs to employees.

Charges on Group Assets

As at 30 June 2007, the Group had a pledged bank deposit of approximately HK$5.0 million for securing certain bank overdraft facilities (31 December 2006: HK$5.0 million).

Save as disclosed above, the Group did not have any significant charges on its assets.

Gearing Ratio

As at 30 June 2007, the gearing ratio, i.e. total liabilities over total assets, decreased to approximately 63.2% from approximately 67.5% as at 31 December 2006.

Foreign Exchange Exposure

Order Book & Prospects for New Business

As at 30 June 2007, the Group had contracts on hand for sales amounting to approximately HK$50.0 million (2006: HK$43.8 million) which would be booked as revenue upon delivery and implementation.

Contingent Liabilities

Future plans for Investments or Capital Assets and Sources of Funding

The Group does not have any plan for any significant investments, acquisitions of capital assets or additional sources of funding.

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Appendix i

indeBtedness stAtement

As at the close of business on 30 September 2007, being the latest practicable date for the purpose of ascertaining information contained in this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of approximately HK$98,320,000, comprising secured bank overdrafts of approximately HK$1,990,000; unsecured bank overdrafts of approximately HK$1,557,000; secured short-term bank loans of approximately HK$7,604,000; unsecured short-term bank loans of approximately HK$43,736,000 and unsecured other loans of approximately HK$43,433,000 (of which approximately HK$4,957,000 were long-term unsecured other loans repayable more than 1 year but less than 5 years). The bank overdrafts and bank loans were secured by certain pledged bank deposits of the Group and corporate guarantee given by the Company.

The Group’s banking facilities of approximately HK$77,472,000 are secured by pledged bank deposits of approximately HK$9,006,000 and corporate guarantee given by the Company.

Details of the issue of the Convertible Bonds are set out in the circular. The Convertible Bonds may be converted into ordinary shares of the Company at an initial convertible price of HK$0.85 per share during its conversion period. The maturity date of the Convertible Bonds is the fifth anniversary of the date of issue thereof. The Convertible Bonds are interest-bearing at 0.1% per annum payable semi-annually on the outstanding principal amount of the Convertible Bonds.

Save as aforesaid and apart from intra-group liabilities, the Group did not have any mortgages, charges, debentures, loan capital, bank loans and overdrafts, debt securities or other similar indebtedness, finance leases or hire purchase commitment, liabilities under acceptances or acceptance credits, or any guarantees, or other material contingent liabilities outstanding at the close of business on 30 September 2007.

For the purpose of this indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the approximate rates of exchange prevailing as at 30 September 2007.

The directors are not aware of any material adverse changes in the Group’s indebtedness position and contingent liabilities since 30 September 2007.

worKing cApitAl

The Directors, after due and careful consideration, are of the opinion that, taking into account the financial resources available of the Group, including internally generated funds, the available banking facilities, loan from a shareholder, related companies and a jointly controlled entity, the estimated net proceeds of the share offer and the issue of Convertible Bonds, the Group will have sufficient working capital for at least twelve months from the date of this circular.

mAteriAl Adverse chAnge

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2006, being the date of which the latest audited financial statements of the Group were made up.

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AccouNtANts’ rEPort of PAL GrouP

APPENDIX IIA

AccouNtANts’ rEPort

The following is the text of a report, prepared for the sole purpose of incorporation in this circular, received from the independent reporting accountants of the Company, CCIF CPA Limited, Certified Public Accountants, Hong Kong. As described under “Documents available for inspection” in Appendix IV to this circular, a copy of the accountants’ report is available for inspection.

==> picture [93 x 63] intentionally omitted <==

19 November 2007

The Directors

Wafer systems Limited

Dear Sirs,

We set out below our report on the financial information regarding PAL Development Limited (“PAL”) and its subsidiaries (hereinafter collectively referred to as “PAL Group”) for the period from 17 August 2006 (date of incorporation) to 31 December 2006 and the six months ended 30 June 2007 (the “Relevant Periods”) for inclusion in the circular of Wafer Systems Limited (the “Company”) dated 19 November 2007 (the “Circular”) in connection with the proposed acquisition of the entire equity interest in Precious Success Holdings Limited (“PAL Holdco”), which is the immediate holding company of PAL.

PAL was a company incorporated in Hong Kong on 17 August 2006 with limited liability. During the Relevant Periods, PAL Group was principally engaged in the provision of lottery terminals and venue management.

For the purpose of this report, the directors of PAL have prepared the financial statements of PAL Group for the Relevant Periods in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). We have audited the financial statements of PAL Group for the Relevant Periods in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

For the purpose of this report, we have examined the PAL Financial Information for the Relevant Periods in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

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AccouNtANts’ rEPort of PAL GrouP

APPENDIX IIA

The preparation of the PAL Financial Information is the responsibility of the directors of PAL who approve its issue. The directors of PAL are responsible for the contents of the Circular in which this report is included. In preparing the PAL Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the PAL Financial Information and to report our opinion to you.

In our opinion, the PAL Financial Information, for the purpose of this report and prepared on the basis set out in Note 3(b) of the PAL Financial Information below, gives a true and fair view of the results and cash flows of PAL Group for each of the Relevant Periods, and of the state of affairs of PAL Group and PAL as at 31 December 2006 and 30 June 2007.

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APPENDIX IIB

fINANcIAL INformAtIoN

consolidated income statement

Period from
17 August
2006 (date of
incorporation)
to 31 December
2006
Note
HK$’000
turnover
6
–
Other income
7
507
Share of results of jointly controlled entities
(70 )
Employee benefits costs
(63 )
Depreciation and amortisation
(1,333 )
Other expenses
(2,813 )
Loss before taxation
8
(3,772 )
Taxation
11
–
Loss for the period
(3,772 )
Attributable to:
Equity holders of PAL
(3,771 )
Minority interests
(1 )
(3,772 )

six months
ended 30 June
2007
HK$’000
411
1,148
(1,178 )
(4,128 )
(3,978 )
(7,293)
(15,018 )
–
(15,018 )
(15,018 )
–
(15,018 )

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

consolidated balance sheet

Note Non-current assets Property, plant and equipment 12 Intangible assets 13 Interests in jointly controlled entities 14 current assets Inventories 16 Amount due from a jointly controlled entity 17 Trade and other receivables 18 Cash and cash equivalents 19 current liabilities Accruals and other payables 20 Amount due to a shareholder 21 Amounts due to related companies 21 Amount due to a shareholder of a jointly controlled entity 21 Net current assets Net assets capital and reserves Share capital 22 Reserves Minority interests total equity	As at 31 December 2006 HK$’000 11 48,667 95,415 144,093 – 4 – 64,064 64,068 890 1,607 853 8,558 11,908 52,160 196,253 200,000 (3,771 ) 196,229 24 196,253	As at 30 June 2007 HK$’000 19,505 45,167 94,532 159,204 128 1,062 28,887 62,996 93,073 15,441 – 59 4,680 20,180 72,893 232,097 250,000 (17,927) 232,073 24 232,097

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

Balance sheet

Note Non-current assets Property, plant and equipment 12 Intangible assets 13 Interests in jointly controlled entities 14 Investments in subsidiaries 15 current assets Amounts due from subsidiaries 17 Amount due from a jointly controlled entity 17 Trade and other receivables 18 Cash and cash equivalents 19 current liabilities Accruals and other payables 20 Amount due to a shareholder 21 Amounts due to related companies 21 Amount due to a shareholder of a jointly controlled entity 21 Net current assets Net assets capital and reserves Share capital 22 Reserves 23 total equity	As at 31 December 2006 HK$’000 11 48,667 15,560 44,755 108,993 35,245 4 – 63,970 99,219 890 1,607 853 8,558 11,908 87,311 196,304 200,000 (3,696 ) 196,304	As at 30 June 2007 HK$’000 64 45,167 15,560 74,755 135,546 44,251 1,062 11,623 53,644 110,580 2,034 – 59 4,680 6,773 103,807 239,353 250,000 (10,647) 239,353

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

consolidated statement of changes in equity

At 17 August 2006 (date of incorporation) Issue of shares Minority interest arising from contribution of subsidiaries from a shareholder_(note24)_ Loss for the period At 31 December 2006 and 1 January 2007 Issue of shares Exchange differences on translation of foreign operations Loss for the period At 30 June 2007	At 17 August 2006 (date of incorporation) Issue of shares Minority interest arising from contribution of subsidiaries from a shareholder_(note24)_ Loss for the period At 31 December 2006 and 1 January 2007 Issue of shares Exchange differences on translation of foreign operations Loss for the period At 30 June 2007	Attributable to equity holders of PAL share Exchange Accumulated capital reserve losses total HK$’000 HK$’000 HK$’000 HK$’000 – – – – 200,000 – – 200,000 – – – – – – (3,771 ) (3,771 ) 200,000 – (3,771 ) 196,229 50,000 – – 50,000 – 862 – 862 – – (15,018 ) (15,018 ) 250,000 862 (18,789 ) 232,073	Attributable to equity holders of PAL share Exchange Accumulated capital reserve losses total HK$’000 HK$’000 HK$’000 HK$’000 – – – – 200,000 – – 200,000 – – – – – – (3,771 ) (3,771 ) 200,000 – (3,771 ) 196,229 50,000 – – 50,000 – 862 – 862 – – (15,018 ) (15,018 ) 250,000 862 (18,789 ) 232,073	minority interests HK$’000 – – 25 (1 ) 24 – – – 24	total HK$’000 – 200,000 25 (3,772 ) 196,253 50,000 862 (15,018 ) 232,097
		share capital HK$’000 – 200,000 – – 200,000 50,000 – – 250,000	Exchange Accumulated reserve losses HK$’000 HK$’000 – – – – – – – (3,771 ) – (3,771 ) – – 862 – – (15,018 ) 862 (18,789 )

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

consolidated cash flow statement

Period from
17 August
2006 (date of
incorporation)
to 31 December
2006
Note
HK$’000
oPErAtING ActIVItIEs
Loss before taxation
(3,772 )
Adjustments for:
Depreciation of property, plant and equipment
–
Share of results of jointly controlled entities
70
Amortisation of intangible assets
1,333
Interest income
(507 )
operating cash flows before changes in
working capital
(2,876 )
Increase in inventories
–
Increase in trade and other receivables
–
Increase in amount due from a jointly
controlled entity
(4 )
Increase in accruals and other payables
890
Increase/(decrease) in amount due
to a shareholder
1,607
Increase/(decrease) in amounts due to
related companies
853
Decrease in amount due to a shareholder
of a jointly controlled entity
–
NEt cAsH GENErAtED from/(usED IN)
oPErAtING ActIVItIEs
470
INVEstING ActIVItIEs
Investment in a jointly controlled entity
(7,002 )
Purchase of property, plant and equipment
(11 )
Interest received
507
NEt cAsH usED IN INVEstING
ActIVItIEs
(6,506 )
fINANcING ActIVItIEs
Proceeds from issue of shares
24/22(c)
70,000
Cash from subsidiaries contributed
by a shareholder
24
100
NEt cAsH from fINANcING ActIVItIEs
70,100
NEt INcrEAsE/(DEcrEAsE) IN cAsH
AND cAsH EQuIVALENts
64,064
cAsH AND cAsH EQuIVALENts
At BEGINNING of tHE PErIoD
–
EffEct of forEIGN EXcHANGE rAtE
cHANGEs
–
cAsH AND cAsH EQuIVALENts
At END of tHE PErIoD
64,064

six months
ended 30 June
2007
HK$’000
(15,018 )
478
1,178
3,500
(1,148)
(11,010 )
(128 )
(28,887 )
(1,058 )
14,551
(1,607 )
(794 )
(3,878)
(32,811 )
–
(19,972 )
1,148
(18,824)
50,000
–
50,000
(1,635 )
64,064
567
62,996

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

Notes to the financial statements

1. GENErAL

PAL is a private limited company incorporated in Hong Kong. PAL is a jointly controlled entity of Bright Ally Investments Limited (“BA”) and LottVision Limited (“LV”), which are incorporated in the British Virgin Islands (the “BVI”) and Singapore, respectively. The address of the registered office and principal place of business of PAL is 38/F, The Centrium, 60 Wyndham Street, Central, Hong Kong and the People’s Republic of China (the “PRC”) respectively.

In August 2006, BA and LV entered in to a shareholder agreement (the “Agreement”) for the formation of PAL. Pursuant to the Agreement, BA contributes cash and certain intangible assets including technology know-how and license right relating to lottery business to PAL for 60% equity interest in PAL while LV contributes cash, a jointly controlled entity, and certain subsidiaries for 40% equity interest of PAL.

In consideration of the above assets contributed from the shareholders, PAL issued a total of 200,000,000 shares of HK$1 each to the shareholders and PAL has accounted for these assets contributed from the shareholders with reference to the fair value of these assets at the date of contribution (note 24).

The consolidated financial statements are presented in Hong Kong dollars (“HK$”), being the measurement currency of PAL Group.

PAL Group is principally engaged in the provision of lottery terminals and venue management.

2. APPLIcAtIoN of NEW AND rEVIsED HoNG KoNG fINANcIAL rEPortING stANDArDs (“HKfrss”)

The Hong Kong Institute of Certified Public Accountants (the “HKICPA”) has issued certain new and revised HKFRSs that are first effective for accounting periods beginning on or after 1 January 2007 or available for early adoption for the current accounting period of PAL Group. The adoption of the new HKFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented.

Note 3 summarises the accounting policies of PAL Group after the adoption of these developments to the extent that they are relevant to PAL Group.

New standard, amendment or interpretations that have been issued but are not yet effective

PAL Group has not early applied the following new standard, amendment or interpretations that have been issued but are not yet effective. The directors of PAL anticipate that the application of these standard, amendment or interpretations will have no material impact to the results and the financial position of PAL Group.

HKAS 23 (Revised) Borrowing costs[1] HKFRS 8 Operating segements[1] HK(IFRIC)-Int 11 HKFRS 2 – Group and Treasury Share Transactions[2] HK(IFRIC)-Int 12 Service concession arrangement[3]

1 Effective for accounting periods beginning on or after 1 January 2009

2 Effective for accounting periods beginning on or after 1 March 2007

3 Effective for accounting periods beginning on or after 1 January 2008

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

3. summArY of sIGNIfIcANt AccouNtING PoLIcIEs

a) statement of compliance

These financial statements have been prepared in accordance with all applicable HKFRSs, which collectively includes all applicable individual HKFRSs, Hong Kong Accounting Standards (the “HKASs”) and Interpretations issued by the HKICPA, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange. A summary of the significant accounting policies adopted by PAL Group is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of PAL Group and PAL. Note 2 provides information on the changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to PAL Group for the current and prior accounting periods reflected in these financial statements.

b) Basis of Preparation of the financial statements

The consolidated financial statements for the Relevant Periods comprise PAL and its subsidiaries.

The measurement basis used in the preparation of the financial statements is the historical cost basis.

The preparation of financial statements in conformity to HKFRSs requires the management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Judgements made by the management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 4.

c) subsidiaries

Subsidiaries are entities controlled by PAL Group. Control exists when PAL Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

In PAL’s balance sheet, the investment in subsidiaries is stated at cost less impairment losses.

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

d) Jointly controlled Entities

Joint ventures arrangements that involve the establishment of a separate entity in which venturers have joint control over the economic activity of the entity are referred to as jointly controlled entities.

The results and assets and liabilities of jointly controlled entities are incorporated in the consolidated financial statements of PAL Group using the equity method of accounting. Under the equity method, investments in jointly controlled entities are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in PAL Group’s share of the profit or loss and of changes in equity of the jointly controlled entities, less any identified impairment loss. When PAL Group’s share of losses of a jointly controlled entity equals or exceeds its interest in that jointly controlled entity (which includes any long-term interest that, in substance, form part of PAL Group’s net investment in the jointly controlled entity), PAL Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that PAL Group has incurred legal or constructive obligations or made payments on behalf of that jointly controlled entity.

Any excess of the cost of acquisition over PAL Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the jointly controlled entity recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of investment and is assessed for impairment as part of the investment.

Any excess of PAL Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

When a group entity transacts with a jointly controlled entity of PAL Group, unrealised profits or losses are eliminated to the extent of PAL Group’s interest in the jointly controlled entity, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred, in which case, the full amount of losses is recognised.

e) Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives of 5 years after taking into account of their estimated residual value (if any) of 5% on cost, using the straight-line method.

f) Intangible Assets (other than goodwill)

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour, and an appropriate proportion of overheads and borrowing costs, where applicable. Capitalised development costs are stated at cost less accumulated amortisation and impairment losses (see note 3(g)). Other development expenditure is recognised as an expense in the period in which it is incurred.

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Other intangible assets acquired in a business combination, where they satisfy with the definition of intangible assets and their fair value can be measured reliably, are stated in the balance sheet at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see note 3(g)). Expenditure on internally generated goodwill and brands is recognised as an expense in the period in which it is incurred.

Amortisation of intangible assets with finite useful lives is charged to the income statement on a straightline basis over the assets’ estimated useful lives. The following intangible assets with finite useful levies are amortised from the date they are available for use and their estimated useful lives are as follows:

license right 5 years – technical know-how 5 years

Both the period and method of amortisation are reviewed annually.

Intangible assets are not amortised while their useful lives are assessed to be indefinite. Any conclusion that the useful life of an intangible asset is indefinite is reviewed annually to determine whether events and circumstances continue to support the indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite is accounted for prospectively from the date of change and in accordance with the policy for amortisation of intangible assets with lives as set out above.

g) Impairment of Assets

property, plant and equipment (other than properties carried at revalued amounts);
intangible assets; and
investment in subsidiaries.

– Calculation of recoverable amount

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Recognition of impairment losses

Reversal of impairment losses

h) Inventories

Inventories, which represent goods held for sale, are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the first-in, first-out method. Net realisable value represents the estimated selling price in the ordinary course of business less all the estimated costs of completion and the estimated cost necessary to make the sale.

i) trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts (see note 3(f)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts (see note 3(f)).

j) cash and cash Equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with bank and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of PAL Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

k) trade and other Payables

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l) Income tax

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary differences or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria is adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, PAL Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

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Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, PAL Group or PAL has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, PAL Group or PAL intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either; or
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

m) Provisions and contingent Liabilities

Provisions are recognised for other liabilities of uncertain timing or amount when PAL Group or PAL has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

n) revenue recognition

Service fee income from provision of lottery terminals is recognised on a monthly basis in accordance with the terms and condition of the service agreements.

o) translation of foreign currencies

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p) operating Lease charges

Leases are classified as operating leases whenever, the terms of the lease do not transfer substantially all the risks and rewards of ownership to the lessees.

Rentals payable under operating leases are charged to the income statement on a straight line basis over the period of the respective leases.

q) Employee Benefits

Short-term employee benefits and contributions to defined contribution retirement plans

Salaries, annual bonuses, paid annual leaves, contributions to defined contribution plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

r) related Parties

For the purposes of these financial statements, a party is considered to be related to PAL Group if:

i) the party has the ability, directly or indirectly through one or more intermediaries, to control PAL Group or exercise significant influence over PAL Group in making financial and operating policy decisions, or has joint control over PAL Group;
ii) PAL Group and the party are subject to common control;
iii) the party is an associate of PAL Group or a joint venture in which PAL Group is a venturer;
iv) the party is a member of key management personnel of PAL Group or PAL Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;
v) the party is a close family member of a party referred to in note 3(r)(i) or is an entity under the control, joint control or significant influence of such individuals; or
vi) the party is a post-employment benefit plan which is for the benefit of employees of PAL Group or of any entity that is a related party of PAL Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

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4. KEY sourcEs of EstImAtIoN uNcErtAINtY

The key assumptions concerning the future, and other key sources of estimation uncertainties at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

a) Estimated Impairment of Interest in Jointly controlled Entities

Determining whether interests in jointly controlled entities are impaired requires an estimation of the recoverable amount of investment. The recoverable amount of investment calculation requires PAL Group to estimate the future cash flows expected to arise from the investment and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. As at 30 June 2007, the carrying amount of interest in jointly controlled entities is approximately HK$94,532,000 (2006: HK$95,415,000).

b) Estimated Impairment of Intangible Assets

Determining whether intangible assets are impaired requires an estimation of the recoverable amount. The recoverable amount calculation requires PAL Group to estimate the future cash flows expected to arise from the intangible assets and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. As at 30 June 2007, the carrying amount of intangible assets is approximately HK$45,167,000 (2006: HK$48,667,000).

c) Impairment of Property, Plant and Equipment

In determining whether an asset is impaired or the event previously causing the impairment no longer exists, PAL Group has to exercise judgement in the area of asset impairment, particularly in assessing: (i) whether an event has occurred that may affect the assets value or such event affecting the asset value has not been in existence; (ii) whether the carrying value of an asset can be supported by the net present value of future cash flows which are estimated based upon the continued use of the asset or derecognition; and (iii) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the case of cash flow projections, could materially affect the net present value used in the impairment test. PAL Group determines whether an asset is impaired at least on an annual basis or where an indication of impairment exists. This requires an estimation of the value in the use of the assets. Estimating the value in use requires PAL Group to make an estimate of the expected future cash flows from the assets and also to choose a suitable discount rate in order to calculate the present value of those cash flow.

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5. fINANcIAL rIsK mANAGEmENt oBJEctIVEs AND PoLIcIEs

PAL Group’s major financial instruments include trade and other receivables, bank balances and cash, trade and other payables, other loans and jointly controlled entity. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

a) currency risk

Certain payables of PAL Group are denominated in foreign currencies. PAL Group currently does not have a foreign hedging policy. However, the management monitors foreign exchange exposure will consider hedging significant foreign currency exposure should the need arises.

b) credit risk

Bank balances carry interest at market rates and are placed in various authorised institutions. The directors of PAL consider the credit risk for such is minimal.

c) Interest rate risk

PAL Group is exposed to interest rate risk through the impact of rate changes on interest bearing financial assets and liabilities. Interests bearing financial assets are mainly balances with banks which are all short term in nature. Interests bearing financial liabilities are including bank borrowings with fixed and floating interest rates and other loans with fixed interest rates. Therefore, any future variations in interest rate will not have a significant impact on the results of PAL Group.

d) Liquidity risk

Individual operating entities within PAL Group are responsible for their own cash management, including the short-term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by PAL’s board when the borrowings exceed certain predetermined levels of authority. PAL Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short or longer term.

e) fair Values of financial Instrument

The fair value of financial assets and financial liabilities are determined as follows:

the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and
the fair value of financial assets and financial liabilities are determined in accordance with generally pricing models based on discounted cash flow analysis using prices from observable current market transactions.

The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate to their fair values.

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f) market risk

Majority of PAL Group’s transactions take place in the PRC and denominated in RMB, which is not a freely convertible currency. PAL Group manages the foreign exchange exposure arising from its normal course of business activities and investments in foreign operations by funding its local operations and investments through cash flow generated from business transactions locally.

PAL Group is not exposed to significant price risk.

As PAL Group has no significant interest-bearing assets and liabilities, PAL Group’s income and operation cash flows are substantially independent of changes in market interest rates.

6. turNoVEr

PAL is an investment holding company. PAL Group are principally engaged in provision of lottery terminals and venue management.

An analysis of PAL Group’s turnover is as follows:

Service fee income from provision of lottery terminals otHEr INcomE Bank interest income Loan interest income	Period from 17 August 2006 (date of incorporation) to 31 December 2006 HK$’000 – Period from 17 August 2006 (date of incorporation) to 31 December 2006 HK$’000 507 – 507	six months ended 30 June 2007 HK$’000 411

		six months ended 30 June 2007 HK$’000 1,044 104
		1,148

7. otHEr INcomE

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8. Loss BEforE tAXAtIoN

Loss before taxation is arrived at after charging:

Directors’ remunerations Salaries, wages and other benefits Other staff retirement benefits scheme contribution Auditors’ remuneration Amortisation of intangible assets Depreciation of property, plant and equipment Share of results of jointly controlled entities Operating lease rentals in respect of minimum lease payments of land and building Exchange loss	Period from 17 August 2006 (date of incorporation) to 31 December 2006 HK$’000 – 61 2 63 248 1,333 – 70 – 10	six months ended 30 June 2007 HK$’000 1,112 3,004 12
		4,128 136 3,500 478 1,178 873 294

9. DIrEctors’ rEmuNErAtIoN

For the six months ended 30 June 2007

Gao Xiangnong Ko Chun Fung, Henry Luk Chung Po Tso Chung Wing Tsui Che Yin, Frank Wang John Peter Ben Wong Pui San, Stephanie	fees HK$’000 – 1,112 – – – – – 1,112	contributions salaries to retirement and other benefits benefits schemes HK$’000 HK$’000 – – – – – – – – – – – – – – – –	share- based payments expenses HK$’000 – – – – – – – –	total HK$’000 – 1,112 – – – – –
				1,112

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

Gao Xiangnong Ko Chun Fung, Henry Luk Chung Po Tso Chung Wing Tsui Che Yin, Frank Wang John Peter Ben *Wong Pui San, Stephanie	fees HK$’000 – – – – – – – –	contributions salaries to retirement and other benefits benefits schemes HK$’000 HK$’000 – – – – – – – – – – – – – – – –	share- based payment expenses HK$’000 – – – – – – – –	total HK$’000 – – – – – – –
				–

* All directors are appointed on 18 August 2006.

During the period, no emoluments were paid by PAL Group to the five highest paid individuals (including directors and employees) as an inducement to join or upon joining PAL Group or as compensation for loss of office. None of PAL Group’s directors has waived any emoluments during the period.

10. fIVE HIGHEst PAID EmPLoYEEs

The aggregate emoluments of the five highest paid individuals included one (2006: Nil) director of the PAL Group, whose emoluments are included in note 9 above. The aggregate emoluments of the remaining four (2006: one) highest paid individuals are as follows:

Basic salaries and allowances Retirement benefits scheme contributions	Period from 17 August 2006 (date of incorporation) to 31 December 2006 HK$’000 61 2 63	six months ended 30 June 2007 HK$’000 689 6
		695

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The numbers of non-directors, highest paid employees whose remuneration fell within the following band are as follows:

	Number of employees	Number of employees
	Period from
	17 August
	2006 (date of
	incorporation)	six months
	to 31 December	ended 30 June
	2006	2007
Nil to HK$1,000,000	1	4

11. tAXAtIoN

No Hong Kong profits tax has been provided at the rate of 17.5% (2006: 17.5%) on the estimated assessable profits for the Relevant Periods.

No taxation on overseas profits has been provided on the estimated assessable profit for the Relevant Periods at the rates of taxation prevailing in the countries in which PAL Group operates.

Loss before taxation Notional tax on loss before taxation, calculated at the rates applicable to loss in the countries concerned Tax effect of temporary differences not recognised Tax effect of share of losses of jointly controlled entities Tax effect of income not taxable for tax purpose Tax effect of tax loss not recognised	Period from 17 August 2006 (date of incorporation) to 31 December 2006 HK$’000 3,772 (660 ) (2 ) 12 (89 ) 739 –	six months ended 30 June 2007 HK$’000 15,018

		(3,695 ) (9 ) 206 (177 ) 3,675
		–

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12. ProPErtY, PLANt AND EQuIPmENt

PAL Group

cost At 17 August 2006 (date of incorporation) Additions At 31 December 2006 and 1 January 2007 Additions At 30 June 2007 Accumulated depreciation At 17 August 2006 (date of incorporation), 31 December 2006 and 1 January 2007 Charge for the period At 30 June 2007 Net book value At 30 June 2007 At 31 December 2006	computer equipment HK$’000 – – – 12,545 12,545 – 289 289 12,256 –	furniture, fixtures and office equipment HK$’000 – 11 11 7,427 7,438 – 189 189 7,249 11	total HK$’000 – 11
			11 19,972
			19,983

			– 478
			478

			19,505

			11

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PAL

	furniture,
	fixtures and
	office equipment
	HK$’000
cost
At 17 August 2006 (date of incorporation)	–
Additions	11
At 31 December 2006 and 1 January 2007	11
Additions	60
At 30 June 2007	71
Accumulated depreciation
At 17 August 2006 (date of incorporation), 31 December 2006 and 1 January 2007	–
Charge for the period	7
At 30 June 2007	7
Net book value
At 30 June 2007	64
At 31 December 2006	11

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13. INtANGIBLE AssEts

PAL Group and PAL

cost At 17 August 2006 (date of incorporation) Contribution from a shareholder At 31 December 2006, 1 January 2007 and 30 June 2007 Accumulated amortisation At 17 August 2006 (date of incorporation) Charge for the period At 31 December 2006 and 1 January 2007 Charge for the period At 30 June 2007 Net book value At 30 June 2007 At 31 December 2006	License right HK$’000 – 30,000 30,000 – – – 1,500 1,500 28,500 30,000	technical know-how HK$’000 – 20,000 20,000 – 1,333 1,333 2,000 3,333 16,667 18,667	total HK$’000 – 50,000
			50,000

			– 1,333
			1,333 3,500
			4,833

			45,167

			48,667

The above intangible assets were contributed to PAL in accordance with the Agreement as disclosed in note 1.

Amortisation of the above intangible assets is recognised as an expense on a straight-line basis over their definite useful lives with the period of five years.

The amortisation charge for the year is included in “Depreciation and amortisation” in the consolidated income statement.

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14. INtErEst IN JoINtLY coNtroLLED ENtItIEs

As at 31 December 2006 and 30 June 2007, PAL Group had interest in the following jointly controlled

entities:

		Nominal value
	Place of	of paid up	PAL
	incorporation/	and issued/	Group’s
Name of	establishment	registered	effective
subsidiary	and operations	capital	interest	Direct	Indirect	Principal activities
PALTECH Company Limited	Hong Kong	HK$10,000	60%	60%	–	Research and
						development
Beijing Telenet Information	The PRC	RMB10,000,000	51%	–	51%	Distribution of point of
Technology Limited (“BTI”)						sale terminals and
北京電信達信息技術有限公司						equipment

Notes:

a) PAL Group directly owns 60% interest in this jointly controlled entity. Pursuant to certain terms and conditions given in a shareholder agreement, the financial and operating policies of the jointly controlled entity require approval from 75% of the shareholders, as such, it is accounted for as a jointly controlled entity.
b) PAL Group indirectly owns 51% interest in this jointly controlled entity. However, under a shareholder agreement, BTI is jointly controlled with other significant shareholders of PAL. Therefore, BTI is classified as a jointly controlled entity of PAL Group.

Cost of unlisted investment in jointly controlled entities Share of post-acquisition loss Exchange difference	31 December 2006 HK$’000 95,485 (70 ) – 95,415	30 June 2007 HK$’000 95,485 (1,248 ) 295
		94,532

Included in the cost of investment in jointly controlled entities is goodwill arising from contribution of a jointly controlled entity in the current period (note 24). The movement of goodwill is set out below.

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	HK$’000
cost
Goodwill arising from contribution of a jointly controlled entity
from a shareholder, at 31 December 2006 and 30 June 2007	70,414

During the Relevant Periods, the management of PAL Group determines that there is no impairment of any of its interests in jointly controlled entities.

The recoverable amount of the interests in jointly controlled entities has been determined on the basis of recoverable amount calculations. All recoverable amount calculations use cash flow projections based on financial budgets approved by the management covering a 10-year period, which represents the management’s best estimate of future cash flow, and a discount rate of approximately 20%. The cash flows beyond the 10-year period are extrapolated using a zero growth rate for an indefinite period. Another key assumption is the budgeted revenue which is determined based on the jointly controlled entities’ past performance and management’s expectations for the market development. The management believes that any reasonably possible changes in any of these assumptions would not cause the aggregate carrying amount of the interests in jointly controlled entities to exceed the aggregate recoverable amount of the interests in jointly controlled entities.

The summarised financial information in respect of PAL Group’s jointly controlled entities which are accounted for using equity method are set out below:

Non-current assets Current assets Current liabilities Non-current liabilities Income Expense	31 December 2006 HK$’000 10,750 24,569 (10,318 ) – Period from 17 August 2006 (date of incorporation) to 31 December 2006 HK$’000 9,384 (9,454 )	30 June 2007 HK$’000 13,205 22,786 (11,873 ) –

		six months ended 30 June 2007 HK$’000 32,236 (33,414 )

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15. INVEstmENts IN suBsIDIArIEs


	31	December	30 June
		2006	2007
		HK$’000	HK$’000
Unlisted shares, at cost		44,755	74,755

As at 30 June 2007, the details of PAL’s principal subsidiaries were as follows:

		Nominal value
	Place of	of paid up	PAL
	incorporation/	and issued/	Group’s
Name of	establishment	registered	effective
subsidiary	and operations	capital	interest	Direct	Indirect	Principal activities
Global Score Asia	The British Virgin	US$20,000	100%	100%	–	Investment holding
Limited	Islands (the “BVI”)
Trade Express Services	The BVI	US$20,000	80%	80%	–	Investment holding
Inc.
寶加（北京）信息技術	The PRC	HK$30,000,000	100%	100%	–	Provision of
有限公司						lotteries business
北京華盈風彩科技	The PRC	RMB10,000,000	100%	–	100%	Provision of
有限公司						lotteries business

The above table lists the subsidiaries of PAL which, in the opinion of the directors, principally affect the results or assets of PAL Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

16. INVENtorIEs

		PAL Group
	31	December	30 June
		2006	2007
		HK$’000	HK$’000
Consumables, at cost		–	128

17. AmouNts DuE from suBsIDIArIEs AND A JoINtLY coNtroLLED ENtItY

The amounts are interest-free, unsecured and repayable on demand.

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18. trADE AND otHEr rEcEIVABLEs

Trade Receivables Prepayment Deposits and other receivables Loan receivables	PAL 31 December 2006 HK$’000 – – – – –	Group 30 June 2007 HK$’000 411 347 16,725 11,404 28,887	PAL 31 December 30 June 2006 2007 HK$’000 HK$’000 – – – – – 219 – 11,404 – 11,623	PAL 31 December 30 June 2006 2007 HK$’000 HK$’000 – – – – – 219 – 11,404 – 11,623
				11,623

The following is an ageing analysis of trade receivables at the balance sheet date:

Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 365 days Over 365 days	PAL Group 31 December 30 June 2006 2007 HK$’000 HK$’000 – 188 – 140 – 77 – 6 – – – 411	PAL Group 31 December 30 June 2006 2007 HK$’000 HK$’000 – 188 – 140 – 77 – 6 – – – 411
		411

The carrying amounts of trade and other receivables approximate their fair value.

Included in trade receivables are the following amounts denominated in a currency other than the functional currency of PAL Group to which they relate:

		PAL Group
	31	December	30	June
		2006		2007
		’000		’000
RMB		–		411

19. cAsH AND cAsH EQuIVALENts

As at 31 December 2006 and 30 June 2007, PAL Group had cash and bank balances denominated in RMB of approximately HK$ Nil and HK$250,000 respectively. The remittance of RMB out of the PRC is subject to the exchange control restrictions imposed by the PRC government.

The carrying amounts of PAL Group’s and PAL’s cash and bank balances approximate their fair values.

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20. AccruALs AND otHEr PAYABLEs

The carrying amounts of accruals and other payables approximate their fair values.

21. AmouNts DuE to A sHArEHoLDEr/rELAtED comPANIEs/A sHArEHoLDEr of A JoINtLY coNtroLLED ENtItY

The amounts are interest-free, unsecured and repayable on demand.

22. sHArE cAPItAL

Ordinary shares of HK$1 each Authorised: At 17 August 2006 (date of incorporation)(note a) Increased in authorised share capital_(note b) At 31 December 2006, 1 January 2007 and 30 June 2007 Issued and fully paid: At 17 August 2006 (date of incorporation)(note a) Issue of shares during the period(note b) At 31 December 2006 and 1 January 2007 Issue of shares during the period(note c)_ At 30 June 2007	Number of shares 10,000 999,990,000 1,000,000,000 1 199,999,999 200,000,000 50,000,000 250,000,000	Amount HK$’000 10 999,990
		1,000,000

		– 200,000
		200,000 50,000
		250,000

Notes:

a) PAL was incorporated with an authorised share capital of HK$10,000. At the time of incorporation, 1 shares of HK$1 was issued at par to the subscriber to provide the initial capital to PAL.
b) Pursuant to a special resolution passed at an extraordinary general meeting held on 7 September 2006, the authorised share capital of PAL was increased from HK$10,000 to HK1,000,000,000 by the creation of 999,990,000 additional shares of HK$1 each. On the same date, PAL issued 199,999,999 ordinary shares of HK$1 each. The shares issued rank pari passu in all respect with the then existing shares of PAL.
c) In January 2007, PAL issued additional 50,000,000 shares of HK$1 each to its existing shareholders at a total cash consideration of HK$50,000,000.

The consideration of shares issued to the shareholders above was satisfied by the contributions of certain assets by the shareholders (note 1 and note 24).

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APPENDIX IIB

23. rEsErVEs

At 17 August 2006 (date of incorporation) Loss for the period At 31 December 2006 and 1 January 2007 Loss for the period At 30 June 2007	PAL Accumulated losses HK$’000 – (3,696 ) (3,696 ) (6,951 ) (10,647 )

24. coNtrIButIoN from sHArEHoLDErs

Pursuant to the Agreement as disclosed in note 1, BA contributed certain intangible assets and HK$70,000,000 cash to PAL. The fair value of the intangible assets at the time of contributions as determined by an independent valuer is HK$20,000,000 and HK$30,000,000 for the technology know-how and a license right, respectively.

In additions, LV contributed certain of its subsidiaries including Global Score Asia Limited, Trade Express Services Inc. and a jointly controlled entity, BTI Technology Limited, to PAL.

The net assets contributed are as follows:

Interest in a jointly controlled entity Bank balances Minority interests	HK$’000 79,925 100 80,025 (25 ) 80,000

25. DIVIDEND

No dividend was paid or proposed for the Relevant Periods, nor has any dividend been proposed since the balance sheet date.

26. DEfErrED tAX

At 31 December 2006 and 30 June 2007, there were no material unrecognised deferred tax assets and liabilities arising from any temporary differences.

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

27. commItmENts

a) capital commitments

At the balance sheet date, the Group had capital commitments contracted but not provided for in the financial statement as follows:

	PAL Group
	31 December	30 June
	2006	2007
	HK$’000	HK$’000
Contract for:
– purchase of property, plant and equipment	–	313

b) operating lease commitments

Total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year In the second to fifth year inclusive	PAL Group 31 December 30 June 2006 2007 HK$’000 HK$’000 – 1,411 – 650 – 2,061	PAL Group 31 December 30 June 2006 2007 HK$’000 HK$’000 – 1,411 – 650 – 2,061
		2,061

28. rELAtED PArtY trANsActIoNs

In addition to transactions and balances disclosed elsewhere in these financial statements, PAL had the following material related party transaction during the period:

	Period from
	17 August
	2006 (date of
	incorporation)	six months
	to 31 December	ended 30 June
	2006	2007
	HK$’000	HK$’000
Consultancy fee paid to a fellow subsidiary of a shareholder	680	–

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fINANcIAL INformAtIoN of PAL GrouP

APPENDIX IIB

29. NoN-cAsH trANsActIoNs

As disclosed in note 24, the issue of 200,000,000 shares of PAL at HK$1 each was satisfied by cash of HK$70,000,000 and the remaining consideration was satisfied by contribution of intangible assets, a jointly controlled entity and certain subsidiaries to PAL from shareholders during the Relevant Periods.

During the period from 17 August 2006 (date of incorporation) to 31 December 2006, PAL Group set up a jointly controlled entity, PALTECH Development Limited, with an investment cost of HK$15,560,000. There were portions of the investment cost of HK$8,558,000 and HK$4,680,000 being unsettled as at 31 December 2006 and 30 June 2007 respectively.

30. comPArAtIVE fIGurEs

Certain comparative figures of PAL Group have been re-classified to conform to the current period’s presentation of PAL Financial Information.

31. suBsEQuENt fINANcIAL stAtEmENts

No audited financial statements have been prepared by PAL Group and PAL in respect of any periods subsequent to 30 June 2007.

Yours faithfully,

ccIf cPA Limited

Certified Public Accountants Hong Kong

Kwok cheuk Yuen

Practising Certificate Number P02412

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MAnAgeMent disCussion And AnAlysis of pAl group

Appendix iiC

finAnCiAl suMMAry

set out below is the management discussion and analysis on pAl group for the period ended 31 december 2006 and the six months ended 30 June 2007.

for the period from 17 August 2006 (date of incorporation) to 31 december 2006 and six months ended 30 June 2007 for pAl group

	from 17 August 2006	six months
	to 31 december 2006	ended 2007
	HK$’000	HK$’000
Revenue	–	411
Loss for the period	3,772	15,018

PAL Group was established in August 2006 and was still in its investment phase, thus incurring a loss due to operating expenses during the period.

As the PAL Group was at its early stage of investment, a consolidated turnover of approximately HK$411,000 was recorded for the period ended 30 June 2007 incurring a loss mainly attributed to the operating expenses during the period.

Amount due to a shareholder

As at 31 December 2006, amount due to a shareholder are unsecured, interest free and repayable on demand.

treasury policies

As at 31 December 2006 and 30 June 2006, there was no other borrowing from bank or financial institution during the period.

liQuidity, finAnCiAl resourCes

net Assets/liabilities

Set out below is a summary of the audited accountants’ report of PAL Group as at 31 December 2006 and 30 June 2007 which was prepared on the bases as set out on page 108 of this circular and details of which are set out in Appendix IIB this circular.

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MAnAgeMent disCussion And AnAlysis of pAl group

Appendix iiC

	As at	As at
	31 december 2006	30 June 2007
	HK$’000	HK$’000
Total assets	208,161	252,277
Total liabilities	11,908	20,180
Net assets/liabilities	196,253	232,097
Amount due to a shareholder	1,607	–
*Gearing ratio	5.72%	8.00%

* The gearing ratio is the basis of total liabilities over total assets

liquidity

PAL Group had cash and bank balances of approximately HK$64,064,000 and HK$62,996,000 as at 31 December 2006 and 30 June 2007. The current ratio was approximately 5.38 and 4.61.

Contingent liabilities

As at 31 December 2006 and 30 June 2007, PAL Group did not have any contingent liabilities.

prospeCts for neW Business

The management has no future plan for material investments or in capital assets.

ACQuisitions And disposAls

PAL Group had not made any acquisition and disposal during the relevant period under review.

signifiCAnt inVestMent Held

PAL Group had 60% equity interest in PALTECH Company Limited and 51% equity interest in Beijing Telenet Information Technology Limited.

segMentAl inforMAtion

No business segment analysis and geographical segment analysis as presented since substantially all the PAL Group’s turnover and contribution to results were derived from service fee income from provision of lottery terminals in the PRC.

future plAns for MAteriAl inVestMents

There were no future plan for any significant investments in capital assets and sources of funding.

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Appendix iiC MAnAgeMent disCussion And AnAlysis of pAl group

CHArges on group Assets

As at 31 December 2006 and 30 June 2007, PAL Group had no interest – bearing borrowings and no assets were pledged.

foreign exCHAnge exposure

PAL Group does not hedge its foreign currency risk, as the management does not expect any significant movements in exchange rate between, U.S. dollars, Hong Kong dollars and Renminbi. During the relevant periods under review, as the impact of foreign exchange exposure has been insignificant, no hedging or other alternatives have been implemented.

eMployee inforMAtion

As at 31 December 2006 and 30 June 2007, PAL Group had 59 and 112 employees comprising 1 and 6 employees based in Hong Kong and 58 and 106 employees based in the PRC.

As at 31 December 2006 and 30 June 2007, the total staff costs, excluding for directors, were approximately HK$63,000 and HK$3,016,000 respectively. PAL Group continues to provide remuneration packages to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides employees with other benefits such as a mandatory provident fund, medical insurance scheme and staff training program.

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AccouNtANts’ rEPort of oAsIs rIch GrouP

APPENDIX IID

AccouNtANts’ rEPort

==> picture [94 x 63] intentionally omitted <==

19 November 2007

The Directors

Wafer systems Limited

Dear Sirs,

We set out below our report on the financial information regarding Oasis Rich International Limited (“Oasis Rich”) and its subsidiary (hereinafter collectively referred to as “Oasis Rich Group”) for the period from 15 May 2006 (date of incorporation) to 31 December 2006 and the six months ended 30 June 2007 (the “Relevant Periods”) for inclusion in the circular of Wafer Systems Limited (the “Company”) dated 19 November 2007 (the “Circular”) in connection with the proposed acquisition of 60% equity interest in Oasis Rich.

Oasis Rich was a company incorporated in the Republic of Mauritius on 15 May 2006 with limited liability. During the Relevant Periods, Oasis Rich Group was principally engaged in assembly of point of sales terminals and equipment.

No statutory audited financial statements have been prepared for Oasis Rich Group and Oasis Rich since the incorporation of Oasis Rich. For the purpose of this report, the directors of Oasis Rich have prepared the financial statements of Oasis Rich Group for the Relevant Periods in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). We have audited the financial statements of Oasis Rich Group for the Relevant Periods in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

For the purpose of this report, we have examined the Oasis Rich Financial Information for the Relevant Periods in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

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AccouNtANts’ rEPort of oAsIs rIch GrouP

APPENDIX IID

The preparation of the Oasis Rich Financial Information is the responsibility of the directors of Oasis Rich who approve its issue. The directors of Oasis Rich are responsible for the contents of the Circular in which this report is included. In preparing the Oasis Rich Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Oasis Rich Financial Information and to report our opinion to you.

In our opinion, the Oasis Rich Financial Information, for the purpose of this report and prepared on the basis set out in Note 3(b) of the Oasis Rich Financial Information below, gives a true and fair view of the results and cash flows of Oasis Rich Group for each of the Relevant Periods, and of the state of affairs of Oasis Rich Group and Oasis Rich as at 31 December 2006 and 30 June 2007.

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

fINANcIAL INformAtIoN

consolidated income statement

Period from 15 may 2006 (date of incorporation) to 31 December 2006 Note HK$’000 Other income 7 – Employee benefits costs – Depreciation – Other expenses – Loss before taxation 8 – Taxation 11 – Loss for the period – Attributable to: Equity holders of Oasis Rich –	six months ended 30 June 2007 HK$’000 3 (211 ) (31 ) (959) (1,198 ) – (1,198 ) (1,198 )

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

consolidated balance sheet

Note Non-current assets Property, plant and equipment 12 current assets Prepayment, deposits and other receivables 14 Cash and cash equivalents 15 current liabilities Accruals and other payables 16 Amount due to a fellow subsidiary 17 Net current assets Net assets capital and reserves Share capital 18 Reserves total equity	As at 31 December 2006 HK$’000 – 3,839 – 3,839 – – – 3,839 3,839 3,839 – 3,839	As at 30 June 2007 HK$’000 2,366 569 14 583 102 140 242 341 2,707 3,839 (1,132) 2,707

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

Balance sheet

Note Non-current assets Investment in a subsidiary 13 current assets Prepayment, deposits and other receivables 14 Net current assets Net assets capital and reserves Share capital 18 Reserves total equity	As at 31 December 2006 HK$’000 – 3,839 3,839 3,839 3,839 – 3,839	As at 30 June 2007 HK$’000 3,839 –
		3,839
		3,839

		3,839 –
		3,839

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

consolidated statement of changes in equity

At 15 May 2006 (date of incorporation) Loss for the period At 31 December 2006 and 1 January 2007 Exchange differences on translation of foreign operations Loss for the period At 30 June 2007	Attributable to equity holders of oasis rich share Exchange Accumulated capital reserve losses total HK$’000 HK$’000 HK$’000 HK$’000 3,839 – – 3,839 – – – – 3,839 – – 3,839 – 66 – 66 – – (1,198 ) (1,198 ) 3,839 66 (1,198 ) 2,707

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

consolidated cash flow statement

Period from
15 may
2006 (date of
incorporation)
to 31 December
2006
HK$’000
oPErAtING ActIVItIEs
Loss before taxation
–
Adjustments for:
Depreciation of property, plant and equipment
–
Interest income
–
operating cash flows before changes
in working capital
–
(Increase)/decrease in prepayment,
deposits and other receivables
(3,839 )
Increase in accruals and other payables
–
Increase in amount due to a fellow subsidiary
–
NEt cAsh (usED IN)/GENErAtED
from oPErAtING ActIVItIEs
(3,839 )
INVEstING ActIVItIEs
Purchases of property, plant and equipment
–
Interest received
–
NEt cAsh usED IN INVEstING ActIVItIEs
–
fINANcING ActIVItIEs
Proceeds from issue of shares
3,839
NEt cAsh from fINANcING ActIVItIEs
3,839
NEt DEcrEAsE IN cAsh AND
cAsh EQuIVALENts
–
cAsh AND cAsh EQuIVALENts
At BEGINNING of thE PErIoD
–
EffEct of forEIGN EXchANGE
rAtE chANGEs
–
cAsh AND cAsh EQuIVALENts
At END of thE PErIoD
–

six months
ended 30 June
2007
HK$’000
(1,198 )
31
(3 )
(1,170 )
3,270
102
140
2,342
(2,397 )
3
(2,394 )
–
–
(52 )
–
66
14

146 -

fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

NotEs to thE fINANcIAL stAtEmENts

1. GENErAL

Oasis Rich is a private limited company incorporated in the Republic of Mauritius. The address of the registered office and principal place of business of Oasis Rich is Felix House, 24 Dr. Joseph Riviere Street, Port Louis, Republic of Mauritius.

The consolidated financial statements are presented in Hong Kong dollars (“HK$”), being the measurement currency of Oasis Rich Group.

Oasis Rich Group is principally engaged in assembly of point of sales terminals and equipment.

2. APPLIcAtIoN of NEW AND rEVIsED hoNG KoNG fINANcIAL rEPortING stANDArDs (“hKfrss”)

The Hong Kong Institute of Certified Public Accountants (the “HKICPA”) has issued certain new and revised HKFRSs that are first effective for accounting periods beginning on or after 1 January 2007 or available for early adoption for the current accounting period of Oasis Rich Group. The adoption of the new HKFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented.

Note 3 summarises the accounting policies of Oasis Rich Group after the adoption of these developments to the extent that they are relevant to Oasis Rich Group.

New standard, amendment or interpretations that have been issued but are not yet effective

Oasis Rich Group has not early applied the following new standard, amendment or interpretations that have been issued but are not yet effective. The directors of Oasis Rich anticipate that the application of these standard, amendment or interpretations will have no material impact to the results and the financial position of Oasis Rich Group.

HKAS 23 (Revised) Borrowing costs[1] HKFRS 8 Operating segments[1] HK(IFRIC)-Int 11 HKFRS 2 – Group and Treasury Share Transactions[2] HK(IFRIC)-Int 12 Service concession arrangements[3]

1 Effective for accounting periods beginning on or after 1 January 2009

2 Effective for accounting periods beginning on or after 1 March 2007

3 Effective for accounting periods beginning on or after 1 January 2008

3. summArY of sIGNIfIcANt AccouNtING PoLIcIEs

a) statement of compliance

These financial statements have been prepared in accordance with all applicable HKFRSs, which collectively includes all applicable individual HKFRSs, Hong Kong Accounting Standards (the “HKASs”) and Interpretations issued by the HKICPA, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange. A summary of the significant accounting policies adopted by Oasis Rich Group is set out below.

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of Oasis Rich Group and Oasis Rich. Note 2 provides information on the changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to Oasis Rich Group for the current and prior accounting periods reflected in these financial statements.

b) Basis of Preparation of the financial statements

The consolidated financial statements for the Relevant Periods comprise Oasis Rich and its subsidiary.

The measurement basis used in the preparation of the financial statements is the historical cost basis.

c) subsidiary

Subsidiary is an entity controlled by Oasis Rich Group. Control exists when Oasis Rich Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

In Oasis Rich’s balance sheet, the investment in a subsidiary is stated at cost less impairment losses.

d) Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss.

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

e) Impairment of Assets

property, plant and equipment (other than properties carried at revalued amounts); and
investment in a subsidiary.

Calculation of recoverable amount

Recognition of impairment losses

Reversal of impairment losses

f) trade and other receivables

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

g) cash and cash Equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with bank and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of Oasis Rich Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

h) trade and other Payables

i) Income tax

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary differences or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria is adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, Oasis Rich Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, Oasis Rich Group or Oasis Rich has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, Oasis Rich Group or Oasis Rich intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

j) Provisions and contingent Liabilities

Provisions are recognised for other liabilities of uncertain timing or amount when Oasis Rich Group or Oasis Rich has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

k) revenue recognition

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

l) translation of foreign currencies

m) operating Lease charges

Leases are classified as operating leases whenever, the terms of the lease do not transfer substantially all the risks and rewards of ownership to the lessees.

Rentals payable under operating leases are charged to the income statement on a straight line basis over the period of the respective leases.

n) Employee Benefits

Short-term employee benefits and contributions to defined contribution retirement plans

o) related Parties

For the purposes of these financial statements, a party is considered to be related to Oasis Rich Group

if:

i) the party has the ability, directly or indirectly through one or more intermediaries, to control Oasis Rich Group or exercise significant influence over Oasis Rich Group in making financial and operating policy decisions, or has joint control over Oasis Rich Group;
ii) Oasis Rich Group and the party are subject to common control;
iii) the party is an associate of Oasis Rich Group or a joint venture in which Oasis Rich Group is a venturer;
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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

iv) the party is a member of key management personnel of Oasis Rich Group or Oasis Rich Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;
v) the party is a close family member of a party referred to in note 3(o)(i) or is an entity under the control, joint control or significant influence of such individuals; or
vi) the party is a post-employment benefit plan which is for the benefit of employees of Oasis Rich Group or of any entity that is a related party of Oasis Rich Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

4. KEY sourcEs of EstImAtIoN uNcErtAINtY

Impairment of Property, Plant and Equipment

In determining whether an asset is impaired or the event previously causing the impairment no longer exists, Oasis Rich Group has to exercise judgement in the area of asset impairment, particularly in assessing: (i) whether an event has occurred that may affect the assets value or such event affecting the asset value has not been in existence; (ii) whether the carrying value of an asset can be supported by the net present value of future cash flows which are estimated based upon the continued use of the asset or derecognition; and (iii) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the case of cash flow projections, could materially affect the net present value used in the impairment test. Oasis Rich Group determines whether an asset is impaired at least on an annual basis or where an indication of impairment exists. This requires an estimation of the value in the use of the assets. Estimating the value in use requires Oasis Rich Group to make an estimate of the expected future cash flows from the assets and also to choose a suitable discount rate in order to calculate the present value of those cash flow.

5. fINANcIAL rIsK mANAGEmENt oBJEctIVEs AND PoLIcIEs

Oasis Rich Group’s major financial instruments include trade and other receivables, bank balances and cash, trade and other payables. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

a) credit risk

Oasis Rich Group’s credit risk is primarily attributable to other receivables.

Oasis Rich Group’s management has a credit policy in place and exposures to these credit risks are monitored on an ongoing basis. In respect of accounts and other receivables, credit evaluations are performed on all debtors requiring credit over for irrecoverable amounts.

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APPENDIX IIE

b) Interest rate risk

Oasis Rich Group is exposed to interest rate risk through the impact of rate changes on interest bearing financial assets and liabilities. Interests bearing financial assets are mainly balances with banks which are all short term in nature. Interests bearing liabilities are including bank borrowings with fixed and floating interest rates and other loans with fixed interest rates. Therefore, any future variations in interest rate will not have a significant impact on the results of Oasis Rich Group.

c) Liquidity risk

Individual operating entities within Oasis Rich Group are responsible for their own cash management, including the short-term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by Oasis Rich’s board when the borrowings exceed certain predetermined levels of authority. Oasis Rich Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short or longer term.

d) fair Values of financial Instrument

The fair value of financial assets and financial liabilities are determined as follows:

the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and
the fair value of financial assets and financial liabilities are determined in accordance with generally pricing models based on discounted cash flow analysis using prices from observable current market transactions.

The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate to their fair values.

6. turNoVEr

No turnover is derived during the Relevant Periods.

7. othEr INcomE

	Period from
	15 may
	2006 (date of
	incorporation)	six months
	to 31 December	ended 30 June
	2006	2007
	HK$’000	HK$’000
Bank interest income	–	3

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

8. Loss BEforE tAXAtIoN

Loss before taxation is arrived at after charging/(crediting):

	Period from
	15 may
	2006 (date of
	incorporation)	six months
	to 31 December	ended 30 June
	2006	2007
	HK$’000	HK$’000
Salaries, wages and other benefits	–	211
Auditors’ remuneration	–	14
Depreciation of property, plant and equipment	–	31
Exchange gain	–	(13 )

9. DIrEctors’ rEmuNErAtIoN

For the period from 15 May 2006 (date of incorporation) to 31 December 2006 and six months ended 30 June

2007

* Liu Fu Cai _#_Lan Chieu-Lun	fees HK$’000 – – –	contributions salaries retirement and others benefits benefits schemes HK$’000 HK$’000 – – – – – –	share- based payments expenses HK$’000 – – –	total HK$’000 – –
				–

* Appointed on 7 December 2006

# Appointed on 14 April 2007

During the period, no emoluments were paid by Oasis Rich Group to the five highest paid individuals (including directors and employees) as an inducement to join or upon joining Oasis Rich Group or as compensation for loss of office. None of Oasis Rich Group’s directors has waived any emoluments during the period.

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

10. fIVE hIGhEst PAID EmPLoYEEs

None (2006: None) of the five highest paid individuals are the directors of Oasis Rich Group, whose emoluments are included in note 9 above. The aggregate emoluments of the remaining five (2006: Nil) highest paid individuals are as follows:

	Period from
	15 may
	2006 (date of
	incorporation)	six months
	to 31 December	ended 30 June
	2006	2007
	HK$’000	HK$’000
Basic salaries and allowances	–	34

None of the five (2006: Nil) highest paid individuals received emoluments in excess of HK$1,000,000.

11. tAXAtIoN

No Hong Kong profits tax has been provided at the rate of 17.5% (2006: 17.5%) on the estimated assessable profit for the Relevant Periods.

No taxation on overseas profits has been provided on the estimated assessable profit for the Relevant Periods at the rates of taxation prevailing in the countries in which Oasis Rich Group operates.

Loss before taxation National tax on loss before taxation, calculated at the rates applicable to loss in the countries concerned Tax effect of tax loss not recognised	Period from 15 may 2006 (date of incorporation) to 31 December 2006 HK$’000 – – – –	six months ended 30 June 2007 HK$’000 (1,198 )

		(395 ) 395
		–

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

12. ProPErtY, PLANt AND EQuIPmENt

oasis rich Group

cost At 15 May 2006 (date of incorporation), 31 December 2006 and 1 January 2007 Additions At 30 June 2007 Accumulated depreciation At 15 May 2006 (date of incorporation), 31 December 2006 and 1 January 2007 Charge for the period At 30 June 2007 Net book value At 30 June 2007 At 31 December 2006 13. INVEstmENt IN A suBsIDIArY Unlisted shares, at cost	furniture, fixtures and office Plant and equipment machinery total HK$’000 HK$’000 HK$’000 – – – 1,597 800 2,397 1,597 800 2,397 – – – 15 16 31 15 16 31 1,582 784 2,366 – – – oasis rich 31 December 30 June 2006 2007 HK$’000 HK$’000 – 3,839	total HK$’000 – 2,397
		2,397
		– 31
		31
		2,366

		–

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

As at 30 June 2007, the details of Oasis Rich’s principal subsidiary were as follows:

		Nominal value
	Place of	of paid up	oasis rich
	incorporation/	issued/	Group’s
Name of	establishment	registered	effective
subsidiary	and operations	capital	interest	Direct	Indirect	Principal activities
*Wu Sheng Technology	The People	US$500,000	100%	100%	–	Assembly of point
Co., Limited (伍盛	Republic of					of sales terminals
計算機科技(上海)	China (the “PRC”)					and equipment
有限公司)

* Set up in 2007

14. PrEPAYmENt, DEPosIts AND othEr rEcEIVABLEs

Prepayment Deposits and other receivables	oasis rich Group 31 December 30 June 2006 2007 HK$’000 HK$’000 3,839 293 – 276 3,839 569	oasis rich 31 December 30 June 2006 2007 HK$’000 HK$’000 3,839 – – – 3,839 –	oasis rich 31 December 30 June 2006 2007 HK$’000 HK$’000 3,839 – – – 3,839 –
			–

15. cAsh AND cAsh EQuIVALENts

As at 31 December 2006 and 30 June 2007, Oasis Rich Group had cash and bank balances denominated in RMB of approximately HK$ Nil and HK$14,000 respectively. The remittance of these funds out of the PRC is subject to the exchange control restrictions imposed by the PRC government.

The carrying amounts of Oasis Rich Group’s and Oasis Rich’s cash and bank balances approximate their fair values.

16. AccruALs AND othEr PAYABLEs

The carrying amounts of accruals and other payables approximate their fair values.

17. AmouNt DuE to A fELLoW suBsIDIArY

The amount is interest-free, unsecured and repayable on demand.

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fINANcIAL INformAtIoN of oAsIs rIch GrouP

APPENDIX IIE

18. shArE cAPItAL

Ordinary shares of US$1 each Authorised: At 15 May 2006 (date of incorporation) Increased in authorised share capital_(Note) As at 31 December 2006, 1 January 2007 and 30 June 2007 Issued and fully paid: At 15 May 2006 (date of incorporation) Issued of shares during the period(Note)_ As at 31 December 2006, 1 January 2007 and 30 June 2007	Number of shares – 500,000 500,000 – 500,000 500,000	Amount HK$’000 – 3,839
		3,839

		– 3,839
		3,839

Note:

Oasis Rich was incorporated with an authorised share capital of US$500,000. At the time of incorporation, 1 share of US$1 was issued at par to the subscriber to provide the initial capital to Oasis Rich.

19. DIVIDEND

No dividend was paid or proposed for the Relevant Periods, nor has any dividend been proposed since the balance sheet date.

20. DEfErrED tAX

At 31 December 2006 and 30 June 2007, there were no material unrecognised deferred tax assets and liabilities arising from any temporary differences.

21. rELAtED PArtIEs trANsActIoNs

In the opinion of the directors, Oasis Rich Group has no significant related party transaction as required by the HKAS 24 “Related Party Disclosures” to be disclosed in the financial statements.

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APPENDIX IIE fINANcIAL INformAtIoN of oAsIs rIch GrouP

22. suBsEQuENt fINANcIAL stAtEmENts

No audited financial statements have been prepared by Oasis Rich Group and Oasis Rich in respect of any periods subsequent to 30 June 2007.

Yours faithfully, ccIf cPA Limited

Certified Public Accountants Hong Kong

Kwok cheuk Yuen

Practising Certificate Number P02412

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MAnAgeMent discussion And AnAlysis oF oAsis Rich gRoup

Appendix iiF

FinAnciAl suMMARy

set out below is the management discussion and analysis on oasis Rich group for the period ended 31 december 2006 and the six months ended 30 June 2007.

For the period from 15 May 2006 (date of incorporation) to 31 december 2006 and six months ended 30 June 2007 for oasis Rich group

	From 15 May 2006	six months
	to 31 december 2006	ended 2007
	HK$’000	HK$’000
Revenue	–	–
Loss for the period	–	1,198

Oasis Rich Group was established in May 2006. As Oasis Rich Group was in the stage of establishment, there was no turnover, and had recorded a loss to cover the administrative expenses incurred during the period.

treasury policies

As at 31 December 2006 and 30 June 2007, there was no other borrowing from bank or financial institution during the period.

liQuidity, FinAnciAl ResouRces

net Assets/liabilities

Set out below is a summary of the audited accountants’ report of Oasis Rich Group as at 31 December 2006 and 30 June 2007 which was prepared on the bases set out on pages 143 of this circular and details of which are set out in Appendix IID this circular.

	As at	As at
	31 december 2006	30 June 2007
	HK$’000	HK$’000
Total assets	3,839	2,949
Total liabilities	–	242
Net assets/(liabilities)	3,839	2,707
*Gearing ratio	N/A	8.21%

* The gearing ratio is the basis of total liabilities over total assets.

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MAnAgeMent discussion And AnAlysis oF oAsis Rich gRoup

Appendix iiF

liquidity

Oasis Rich Group had cash and bank balances of Nil and approximately HK$14,000 as at 31 December 2006 and 30 June 2007. The current ratio was approximately 2.41 as at 30 June 2007.

contingent liabilities

As at 31 December 2006 and 30 June 2007, Oasis Rich Group did not have any contingent liabilities

pRospects FoR neW Business

The management has no future plan for material investments or in capital assets.

AcQuisitions And disposAls

Oasis Rich Group had not made any acquisition and disposal during the relevant period under review.

signiFicAnt inVestMent held

Oasis Rich Group had 100% equity interest in Wu Sheng Technology Co., Limited.

segMentAl inFoRMAtion

No business segment analysis and geographical segment analysis for Oasis Rich Group as there was no turnover during the relevant period under review.

FutuRe plAns FoR MAteRiAl inVestMents

There were no future plan for any significant investments in capital assets and sources of funding.

chARges on gRoup Assets

As at 31 December 2006 and 30 June 2007, Oasis Rich Group had no interest –bearing borrowings and no assets were pledged.

FoReign exchAnge exposuRe

Oasis Rich Group does not hedge its foreign currency risk, as the management does not expect any significant movements in exchange rate between, U.S. dollars, and Renminbi. During the Relevant Periods under review, as the impact of foreign exchange exposure has been insignificant, no hedging or other alternatives have been implemented.

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Appendix iiF

eMployee inFoRMAtion

As at 31 December 2006, Oasis Rich Group was in the stage of setting up the holding company and did not employ any employees during the period.

As at 30 June 2007, Oasis Rich Group has set up its operation team and had 58 employees based in the PRC and 1 employee based in Taiwan. The total staff costs, excluding for directors, was approximately HK$211,000. Oasis Rich Group continues to provide remuneration packages to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides employees with other benefits such as a mandatory provident fund, medical insurance scheme and staff training program.

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APPENDIX III uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

The following are the unaudited pro forma financial information of the Enlarged Group and the text of a comfort letter thereon received from the reporting accountants, CCIF CPA Limited, prepared for the purpose of inclusion in this circular:

==> picture [98 x 66] intentionally omitted <==

19 November 2007

1. ACCOuNtANtS’ REPORt ON uNAuDItED PRO FORMA FINANCIAL INFORMAtION tO tHE DIRECtORS OF WAFER SYStEMS LIMItED

We report on the unaudited pro forma financial information of Wafer Systems Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the directors of the Company (“Directors”) for illustrative purposes only, to provide information about how the proposed acquisition (the “Proposed Acquisition”) of the entired equity interest in Precious Success Holdings Limited (“PAL Holdco”) and 60% equity interest in Oasis Rich International Limited (“Oasis Rich”) might have affected the financial information presented, for inclusion in Section 2 of Appendix III (“Unaudited Pro Forma Financial Information of the Enlarged Group”) to the circular of the Company dated 19 November 2007 (the “Circular”). The basis of preparation of the unaudited pro forma financial information is also set out in the page 166 to 175 to the Circular.

RESPECtIVE RESPONSIBILItIES OF DIRECtORS OF tHE COMPANY AND REPORtING ACCOuNtANtS

It is the responsibility solely of the Directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 7.31(1) of the Rules Governing the Listing of Securities on the Growth Enterprises Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 7.31(1) of the GEM Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owned to those to whom those reports were addressed by us at the dates of their issue.

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

BASIS OF OPINION

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagement 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the Directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly compiled by the Directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 7.31(1) of the GEM Listing Rules.

The unaudited pro forma financial information is for illustrative purposes only, based on the judgements and assumptions of the Directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any events will take place in the future and may not be indicative of:

the financial position of the Enlarged Group (as defined in the Circular) as at 30 June 2007 or at any future dates; or
the financial results and cash flows of the Enlarged Group for the year ended 31 December 2006 or for any future periods.

OPINION

In our opinion:

a. the unaudited pro forma financial information has been properly compiled by the Directors of the Company on the basis stated;
b. such basis is consistent with the accounting policies of the Group; and
c. the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 7.31(1) of the GEM Listing Rules.

Yours faithfully,

CCIF CPA Limited

Certified Public Accountants

Hong Kong

Kwok Cheuk Yuen

Practising Certificate Number P02412

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APPENDIX III uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

2. uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

The following unaudited pro forma balance sheet of the Enlarged Group is prepared based on the unaudited interim balance sheet of the Company as at 30 June 2007 as set out in its published interim report 2007, assuming that the Proposed Acquisition had been taken place on 30 June 2007.

This unaudited pro forma balance sheet has been prepared for illustrative purposes only and, because of its nature, may not give a true picture of the financial position of the Enlarged Group as at 30 June 2007, or at any future dates.

uNAuDItED PRO FORMA BALANCE SHEEt OF tHE ENLARGED GROuP

the Group as at 30 June 2007 HK$’000 (Note 1) Non-current assets Property, plant and equipment 2,262 Software product development cost 8,044 Intangible assets – Interests in jointly controlled entities – Goodwill – 10,306 Current assets Inventories 12,552 Trade and other receivables 129,035 Amount due from a jointly controlled entity – Pledged bank deposits 5,013 Cash and cash equivalents 33,534 180,134 Current liabilities Trade and other payables 52,235 Amount due to a related company – Amount due to a fellow subsidiary – Amount due to a shareholder of a jointly controlled entity – Tax payable 1,126 Bank borrowings 39,337 Other loans 24,162 116,860 Net current assets 63,274	PAL Group as at 30 June 2007 HK$’000 (Note 2) 19,505 – 45,167 94,532 – 159,204 128 28,887 1,062 – 62,996 93,073 15,441 59 – 4,680 – – – 20,180 72,893	Oasis Rich Group as at Pro Forma 30 June 2007 Adjustments HK$’000 HK$’000 Note (Note 3) 2,366 185 8 – – 80,244 8 – – – 426,041 2,366 – 569 – – 14 583 102 140 14 – 140 (140 ) 14 – – – – 242 341	the Enlarged Group HK$’000 24,318 8,044 125,411 94,532 426,041
			678,346
			12,680 158,491 1,062 5,013 96,544
			273,790
			67,918 59 – 4,680 1,126 39,337 24,162
			137,282
			136,508

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

the Group as at 30 June 2007 HK$’000 (Note 1) total assets less current liabilities 73,580 Non-current liabilities Other loans 3,575 Convertible bonds – NEt ASSEtS 70,005 Capital reserves Share capital 2,916 Reserves 67,089 Equity attributable to equity holders of the Company 70,005 Minority interests – TOTAL EQUITY 70,005	PAL Group as at 30 June 2007 HK$’000 (Note 2) 232,097 – – 232,097 250,000 (17,927 ) 232,073 24 232,097	Oasis Rich Group as at Pro Forma 30 June 2007 Adjustments HK$’000 HK$’000 Note (Note 3) 2,707 – – 407,510 7 34,297 9 (607 ) 9 2,707 3,839 (250,000 ) 16 (3,839 ) 17 720 6 (1,132 ) 60,480 6 199,290 10 17,927 10 1,132 10 (34,297 ) 9 607 9 2,707 – 73,250 11 2,707	the Enlarged Group HK$’000 814,854 3,575 441,200
			370,079

			3,636 293,169
			296,805 73,274
			370,079

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

The following unaudited pro forma income statement and cash flow statement of the Enlarged Group are prepared based on the audited income statement and cash flow statement of the Company for the year ended 31 December 2006 as set out in its published annual report for the year ended 31 December 2006, assuming that the Proposed Acquisition had been taken place on 1 January 2006.

These unaudited pro forma income statement and cash flow statement have been prepared for illustrative purposes only and, because of its nature, may not give a true picture of the financial results and cash flows of the Enlarged Group for the year ended 31 December 2006, or for any future periods.

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

uNAuDItED PRO FORMA INCOME StAtEMENt OF tHE ENLARGED GROuP FOR tHE YEAR ENDED 31 DECEMBER 2006

Turnover Other income Charges in materials and equipment Employee benefits cost Depreciation and amortisation Other expenses Finance costs Total expenses Profit/(Loss) from operations Share of results of jointly controlled entities Profit/(Loss) before taxation Taxation Profit/(Loss) for the year Attributable to: Equity holders of the Company Minority interests	the Group HK$’000 (Note 4 ) 326,611 639 (268,055 ) (20,575 ) (4,647 ) (23,812 ) (4,104 ) (321,193 ) 6,057 – 6,057 (956 ) 5,101 5,101 – 5,101	PAL Group HK$’000 (Note 2 ) – 507 – (63 ) (1,333 ) (2,813 ) – (4,209 ) (3,702 ) (70 ) (3,772 ) – (3,772 ) (3,771 ) (1 ) (3,772 )	Oasis Pro Forma Rich Group Adjustments HK$’000 HK$’000 Note (Note 3 ) – – – (16,086 ) 15 – – (34,297 ) 9 607 9 – – – – – – – (49,776 ) 9/15 5,151 13 755 12 – (5,151 ) 13 (755 ) 12 –	the Enlarged Group HK$’000 326,611 1,146 (268,055 ) (20,638 ) (22,066 ) (26,625 ) (37,794 ) (375,178 ) (47,421 ) (70 ) (47,491 ) (956 ) (48,447 ) (42,540 ) (5,907 ) (48,447 )

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

uNAuDItED PRO FORMA CASH FLOW StAtEMENt OF tHE ENLARGED GROuP FOR tHE YEAR ENDED 31 DECEMBER 2006

Cash flows from operating activities Profit/(Loss) before taxation Adjustments for: Interest income Finance costs Depreciation and amortisation Loss on disposal of property, plant and equipment Impairment loss on inventories Impairment loss on trade and retention money receivables Reversal of impairment loss on trade and retention money receivables recognised in previous years Share of results of jointly controlled entities Share-based payment expenses Operating cash flows before changes in working capital Increase in inventories Increase in prepayment, trade and other receivables Increase in trade and other payables Increase in amount due from a jointly controlled entity Increase in amount due to a shareholder Increase in amount due to a related company Cash from operations PRC enterprise income tax paid Net cash from operating activities	the Group HK$’000 (Note 4 ) 6,057 (227 ) 4,104 4,647 15 551 391 (1,444 ) – 56 14,150 (333 ) (18,035 ) 10,732 – – – 6,514 (232 ) 6,282	PAL Group HK$’000 (Note 2 ) (3,772 ) (507 ) – 1,333 – – – – 70 – (2,876 ) – – 890 (4 ) 1,607 853 470 – 470	Oasis Pro Forma Rich Group Adjustments HK$’000 HK$’000 Note (Note 3 ) – (49,776 ) 9/15 – – 34,297 9 (607 ) 9 – 16,086 15 – – – – – – – – (3,839 ) – – – – (3,839 ) – (3,839 )	the Enlarged Group HK$’000 (47,491 ) (734 ) 37,794 22,066 15 551 391 (1,444 ) 70 56 11,274 (333 ) (21,874 ) 11,622 (4 ) 1,607 853 3,145 (232 ) 2,913

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

Cash flows from investing activities Interest received Purchase of property, plant and equipment Expenditure on software product development Increase in pledged bank deposits Investment in a jointly controlled entity Net cash used in investing activities Cash flows from financing activities Interest paid Net borrowings raised from short-term bank loans Net increase in trust receipts and import loans Net borrowings raised from other loans Issue of shares Cash from subsidiaries contributed by a shareholder Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign exchange rate changes Cash and cash equivalents at end of the year	the Group HK$’000 (Note 4 ) 227 (841 ) (2,802 ) (442 ) – (3,858 ) (4,104 ) 277 6,947 29,416 – – 32,536 34,960 11,414 902 47,276	PAL Group HK$’000 (Note 2 ) 507 (11 ) – – (7,002 ) (6,506 ) – – – – 70,000 100 70,100 64,064 – – 64,064	Oasis Pro Forma Rich Group Adjustments HK$’000 HK$’000 Note (Note 3 ) – – – – – – – (607 ) 9 – – – 3,839 – 3,839 – – – –	the Enlarged Group HK$’000 734 (852 ) (2,802 ) (442 ) (7,002 ) (10,364 ) (4,711 ) 277 6,947 29,416 73,839 100 105,868 98,417 11,414 902 110,733

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

Notes:

The balances are extracted from the unaudited interim report of the Group for the six months ended 30 June 2007.
The balances are extracted from the audited financial information of PAL Group as set out in Appendix IIB to the Circular.
The balances are extracted from the audited financial information of Oasis Rich Group as set out in Appendix IIE to the Circular.
The balances are extracted from the audited financial statements of the Group for the year ended 31 December 2006 as set out in Appendix I to the Circular.
On 8 October 2007, Rising Move International Limited, a wholly-owned subsidiary of the Company, entered into an agreement with the Vendor, the Vendor Guarantors, and the Company, pursuant to which the Purchaser has conditionally agreed to acquire 100% of the entired equity interest in PAL Holdco and 60% equity interest in Oasis Rich (the “Target Companies”). The fair value of total consideration of the acquisition is HK$668,000,000 as at 30 June 2007 which is to be satisfied in the following manners:–

Issue of Consideration Shares (including a premium of HK$60,480,000) Issue of Convertible Bonds Cost of investment at Completion of the Proposed Acquisition	HK$’000 61,200 606,800 *
	668,000

The valuation of the Convertible Bonds was carried out by Vigers Appraisal & Consulting Limited, an independent firm of chartered surveyors.
The adjustment is to reflect the effect of the issue of Consideration Shares by the Company at value of HK$61,200,000.

Share capital – Issue of Consideration Shares (Being 72,000,000 ordinary shares of HK$0.01 each) Premium on shares issues – Issued of Considerations Shares	HK$’000 720

	60,480

The adjustment represents the liability and equity components of the Convertible Bonds issued for the Proposed Acquisition as if they were issued on 1 January 2006. The estimated fair value of the liability component of the Convertible Bonds is HK$407,510,000, determined using the binominal model and the estimated fair value of the equity component is HK$199,290,000. The fair values of liability and equity components of the Convertible Bonds are subject to change upon Completion.
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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

The adjustment is to reflect the effect of the Proposed Acquisition on the consolidated balance sheet of the Group as if the Proposed Acquisition had taken place on 30 June 2007.

Details of net identifiable assets to be acquired and the goodwill arising on the Proposed Acquisition are as follows:–

Cost of investments at Completion of the Proposed Acquisition_(note 5)_ Less: Fair value of net identifiable assets to be acquired – as shown below Goodwill	HK$’000 668,000 (241,959 ) 426,041

The identifiable assets and liabilities arising from the Proposed Acquisition are as follows:

Property, plant and equipment Intangible assets Interests in jointly controlled entities Inventories Trade and other receivables Amount due from a jointly controlled entity Cash and cash equivalents Trade and other payables Amount due to a fellow subsidiary Amount due to a related company Amount due to a jointly controlled entity Minority interests Net assets as at 30 June 2007 Minority interests Net identifiable assets to be acquired	Fair value HK$’000 22,056 125,411 94,532 128 29,456 1,062 63,010 (15,543 ) (140 ) (59 ) (4,680 ) (24 ) 315,209 (73,250 ) 241,959	Acquiree’s carrying amount HK$’000 21,871 45,167 94,532 128 29,456 1,062 63,010 (15,543 ) (140 ) (59 ) (4,680 ) (24 ) 234,780

It is assumed that the fair value of the identifiable assets and liabilities of PAL Group and Oasis Rich Group was prepared by independent qualified valuers – Vigers Appraisal & Consulting Limited, with reference to the Balance sheet set out in the management accounts as at 30 September 2007. The Company has made an assumption that there will be no material change in the fair value of the identifiable assets and liabilities of the Target Group between valuation date and reporting date, the above adjustments are to reflect the effect of the change between the carrying amount and fair value.

On Completion, the fair value of the consideration and the identifiable assets and liabilities of the Target Group will have to be reassessed. As a result of the assessment, the amount of goodwill may be different from that estimated based on the basis stated above for the purpose of preparation of the unaudited pro forma financial information. Accordingly, the actual goodwill at the date of Completion may be different from that presented above.

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

The adjustment of approximately of HK$34,297,000 and HK$607,000 represents the imputed interest expenses and coupon interest expenses respectively for the period ended 31 December 2006 on the Convertible Bonds, assuming effective interest rate of 8.42% per annum and 0.1% per annum payable semi-annually respectively, as if they were issued on 1 January 2006. The basis of determining the effective interest rate of 8.42% per annum was made by the independent valuer with reference to the Group’s financial information. The independent valuer justified the rating of grade BB/B for Convertible Bonds by comparing with the yield with the same grading bond in the market. The basis of determining the 0.1% per annum payable semi-annually refers to the interest rate of the Convertible Bonds which is the rate mutually agreed between the Vendor and the Company during the negotiation of the Agreement. The unaudited pro forma adjustments will have continuing income statement effect to the Enlarged Group, and the actual amount will vary according to the timing of the whole or any part of the Convertible Bonds being converted and changes in the applicable effective interest rates.
The adjustments are to reflect the following transactions arising upon the Completion of the Proposed Acquisition:–

Premium on issue of shares_(note 6)
Reserves of PAL Group as at 30 June 2007
Reserves of Oasis Rich Group as at 30 June 2007
Equity component of the Convertible Bonds
Finance costs – imputed interest expenses(note 9)
Finance costs – coupon interest expenses(note 9)_
Adjustment at the Completion of the Proposed Acquisition
11.
The adjustment represents the minority interests after the Proposed Acquisition:
Net asset value of Target Group as at 30 June 2007
Minority interests (20% of PAL Group and 40% of Oasis Rich Group)
12.
The adjustment is to reflect the share of minority interest after the Proposed Acquisition.

HK$’000
60,480
17,927
1,132
199,290
(34,297 )
607
245,139
HK$’000
315,209
(73,250)

The adjustment is to reflect the minority interests on the amortisation of intangible assets and depreciation on property, plant and equipment after the Proposed Acquisition.
The adjustment is to reflect the effect on the amount due to a fellow subsidiary to be reclassified after the Proposed Acquisition.
The adjustment is to reflect the amortisation of intangible assets and depreciation on property, plant and equipment after the Proposed Acquisition, the amortisation and depreciation are calculated to write off the intangible assets over their estimated useful lives on the straight-line basis as if the Proposed Acquisition had been taken place on 1 January 2006 as follows:

Property, plant and equipment 20% per annum Intangible assets 5 years

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uNAuDItED PRO FORMA FINANCIAL INFORMAtION OF tHE ENLARGED GROuP

APPENDIX III

The adjustment is to reflect the elimination of the share capital and pre-acquisition reserves of PAL Group of approximately HK$250,000,000 and HK$17,927,000 respectively after the Proposed Acquisition.
The adjustment is to reflect the elimination of the share capital and pre-acquisition reserves of Oasis Rich Group of approximately HK$3,839,000 and HK$1,132,000 respectively after the Proposed Acquisition.

3. SuBSEQuENt FINANCIAL StAtEMENtS

No audited financial statements have been prepared by PAL Group and Oasis Rich Group in respect of any periods subsequent to 30 June 2007.

175 -

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

2. SHARE CAPITAL

As at the Latest Practicable Date, the authorized and issued share capital of the Company were, and immediately following issue of the Consideration Shares, the Conversion Shares and the Subscription Shares will be as follows:

Authorised share capital Issued and fully paid share capital or credited as fully paid	As at the Latest Practicable Date No. of Shares HK$ 500,000,000 5,000,000 301,401,745 3,014,017 301,401,745 3,014,017	As at the Latest Practicable Date No. of Shares HK$ 500,000,000 5,000,000 301,401,745 3,014,017 301,401,745 3,014,017	Upon the increase in authorised share capital becoming effective No. of Shares HK$ 2,000,000,000 20,000,000 301,401,745 3,014,017 301,401,745 3,014,017	Upon the increase in authorised share capital becoming effective No. of Shares HK$ 2,000,000,000 20,000,000 301,401,745 3,014,017 301,401,745 3,014,017	Upon allotment and issue of the Consideration Shares and the Conversion Shares No. of Shares HK$ 2,000,000,000 20,000,000 301,401,745 3,014,017 72,000,000 720,000 (Consideration (Consideration Shares) Shares) 713,882,353 7,138,824 (Conversion (Conversion Shares) (Note) Shares) (Note) 1,087,284,098 10,872,841	Upon allotment and issue of the Consideration Shares and the Conversion Shares No. of Shares HK$ 2,000,000,000 20,000,000 301,401,745 3,014,017 72,000,000 720,000 (Consideration (Consideration Shares) Shares) 713,882,353 7,138,824 (Conversion (Conversion Shares) (Note) Shares) (Note) 1,087,284,098 10,872,841	Upon allotment and issue of the Consideration Shares, the Conversion Shares and Subscription Shares No. of Shares HK$ 2,000,000,000 20,000,000 301,401,745 3,014,017 72,000,000 720,000 (Consideration Shares) 713,882,353 7,138,824 (Conversion Shares) (Note) 58,000,000 580,000 (Subscription Shares) 1,145,284,098 11,452,841	Upon allotment and issue of the Consideration Shares, the Conversion Shares and Subscription Shares No. of Shares HK$ 2,000,000,000 20,000,000 301,401,745 3,014,017 72,000,000 720,000 (Consideration Shares) 713,882,353 7,138,824 (Conversion Shares) (Note) 58,000,000 580,000 (Subscription Shares) 1,145,284,098 11,452,841
	301,401,745	3,014,017	301,401,745	3,014,017	1,087,284,098	10,872,841		11,452,841

Note: This represent the maximum number of the Conversion Shares to be issued upon the exercise of the conversion rights attached to the Convertible Bonds in full.

All the issued shares in the capital of the Company rank pari passu with each other in all respects including the rights as to dividends, voting and return of capital. The Consideration Shares, the Conversion Shares and the Subscription Shares to be allotted and issued will, when issued and fully paid, rank pari passu in all respects with the then existing Shares in issue on the date of their allotment. The Company had no debt securities in issue as at the Latest Practicable Date.

176 -

GENERAL INFORMATION

APPENDIX IV

3. DIRECTORS’ INTERESTS

(i) Long positions in the Shares

As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executives of the Company in the Shares, underlying Shares and debentures of the Company and any of its associated corporations (within the meaning of Part XV of the SFO) which were required, (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules relating to securities transactions by the Directors, to be notified to the Company and the Stock Exchange, were as follows:

			Approximate
		Number and class	percentage
Name	Capacity	of securities	of interest
Chan Sek Keung,	Beneficial Owner	23,160,000 Shares	7.68%
Ringo*
	Interest through a
	controlled corporation	56,400,000 Shares	18.71%
Pang Hing Chung,	Beneficial Owner	1,500,000 Shares	0.50%
Alfred
David Tsoi	Beneficial Owner	526,000 Shares	0.17%

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.

(ii) Share options

		No. of			Percentage
		underlying			of the
		Shares (in			issued share
Name of	Date of	respect of share	Subscription	Exercise	capital of
Director	grant	options) held	price	period	the Company
			(HK$)
Chan Sek Keung,	30.04.2002	3,000,000	0.55	17.11.2002 to	1.00%
Ringo				29.04.2012
	20.02.2003	1,200,000	0.138	20.02.2004 to	0.40%
				19.02.2013
David Tsoi	12.01.2007	750,000	0.088	12.01.2008 to	0.25%
				11.01.2017

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GENERAL INFORMATION

APPENDIX IV

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or the chief executive of the Company had or deemed to have any interests or short positions in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required, (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to rules 5.46 to 5.67 of the GEM Listing Rules relating to securities transactions by the Directors, to be notified to the Company and the Stock Exchange.

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Enlarged Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Enlarged Group since 31 December 2006, the date to which the latest published audited financial statements of the Group were made up.

4. SUBSTANTIAL SHAREHOLDERS’ INTERESTS

So far as is known to any Directors or chief executives of the Company, as at the Latest Practicable Date, the following person (not being a Director or chief executive of the Company) had, or was deemed to have, interest or short position in the Shares or underlying Shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who were expected, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group:

Long positions in the Shares

			Approximate
		Number and	percentage
Name	Capacity	class of securities	of interest
North 22 Nominees	Beneficial Owner	36,900,000 Shares	12.24%
Limited_(Note 1)_
Mr. Ng Lai Yick_(Note 1)_	Beneficial Owner	3,134,744 Shares	1.04%
	Interest through a	36,900,000 Shares	12.24%
	Controlled Corporation
QPL International	Beneficial Owner	22,016,745 Shares	7.30%
Holdings Limited
(“QPL”)(Note 2)
Mr. Li Tung Lok	Interest through a	22,016,745 Shares	7.30%
(Note 2)	Controlled Corporation
Madam Su Ching Wah	Interest of Spouse	22,016,745 Shares	7.30%
(Note 2)

178 -

GENERAL INFORMATION

APPENDIX IV

			Approximate
		Number and	percentage
Name	Capacity	class of securities	of interest
The Vendor_(Note 3)_	Beneficial Owner	785,882,353 Shares	260.74%
The Subscribers	Beneficial Owner	30,000,000 Shares	9.95%
– Legg Mason
International
Equities
(Singapore) Pte.
Limited
– Enso Global	Beneficial Owner	18,391,011 Shares	6.10%
Equities Master
Partnership LP

Notes:

(1) Mr. Ng Lai Yick is deemed, by virtue of the SFO, to have an interest 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.
(2) Mr. Li Tung Lok is the controlling shareholder of QPL and is deemed, by virtue of the SFO, to have an interest in the 22,016,745 shares held by QPL.
Madam Su Ching Wah is the spouse of Mr. Li Tung Lok and is deemed, by virtue of the SFO, to have an interest in the 22,016,745 shares held by QPL.
(3) These 785,882,353 Shares represent the Vendor’s interest in the 72,000,000 Consideration Shares and 713,882,353 Shares upon conversion of the Convertible Bonds interest to the Agreement. The percentage is calculated from the aggregate interests in the Consideration Shares and the Conversion shares of the Vendor over the existing issued share capital of the Company as at the Latest Practicable Date. However, 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 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; 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.

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executives of the Company were not aware of any other person (other than the Directors and the chief executives of the Company) who had, or was deemed to have, interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who were expected, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group.

179 -

GENERAL INFORMATION

APPENDIX IV

5. DIRECTORS’ INTEREST IN COMPETING BUSINESS

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

6. LITIGATION

As at the Latest Practicable Date, so far as is known to the Directors, no member of the Enlarged 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 against any member of the Enlarged Group.

7. SERVICE CONTRACTS

The Company entered into a service contract with Mr. Chan Sek Keung, Ringo, executive director, for a term of three years from 1 January 2006 and subject to retirement by rotation as required in accordance with the Articles of Association of the Company.

Mr. Pang Hing Chung, Alfred and Mr. David Tsoi, independent non-executive directors, were appointed for a term of two years from 1 April 2004, subject to retirement by rotation as required in accordance with the Articles of Association of the Company. Their appointment terms were renewed for a further term of two years from 1 April 2006 under the same level of remunerations.

Mr. So Lie Mo, Raymond was appointed independent non-executive director of the Company with effect from 5 September 2007 for a term of two years and subject to retirement by rotation as required in accordance with the Articles of Association of the Company.

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors has entered into any service contract with the Company or any member of the Enlarged Group or any of its subsidiaries or associated companies in force, which was entered into or amended within 6 months prior to the Latest Practicable Date, or is continuous with a notice period of 12 months or more, or which is a fixed term contract with more than 12 months to run irrespective of the notice period (excluding contracts expiring or determinable by the employer within one year without payment of compensation, other than statutory compensation).

180 -

GENERAL INFORMATION

APPENDIX IV

8. MATERIAL CONTRACTS

The following agreements, being contracts not entered into in the ordinary course of business, have been entered into by members of the Enlarged Group after the date falling two years prior to the date of the Announcement and up to the Latest Practicable Date and which are or may be material:

(i) the Agreement;
(ii) a Subscription Agreement dated 30 October 2007 entered into between Legg Mason International Equities (Singapore) Pte Ltd as subscriber and the Company as issuer in relation to the placing of an aggregate of 30,000,000 shares at the price of HK$1.80 per placing share. Please refer to the Company’s announcement dated 31 October 2007 for further details;
(iii) a Subscription Agreement dated 30 October 2007 entered into between Enso Global Opportunities Fund as subscriber and the Company as issuer in relation to the placing of an aggregate of 3,200,000 shares at the price of HK$1.80 per placing share. Please refer to the Company’s announcement dated 31 October 2007 for further details;
(iv) a Subscription Agreement dated 30 October 2007 entered into between Enso Global Equities Master Partnership LP as subscriber and the Company as issuer in relation to the placing of an aggregate of 18,391,011 shares at the price of HK$1.80 per placing share. Please refer to the Company’s announcement dated 31 October 2007 for further details; and
(v) a Subscription Agreement dated 30 October 2007 entered into between Enso Global Equities Levered Master Partnership LP as subscriber and the Company as issuer in relation to the placing of an aggregate of 6,408,989 shares at the price of HK$1.80 per placing share. Please refer to the Company’s announcement dated 31 October 2007 for further details.

9. QUALIFICATIONS AND CONSENTS OF EXPERT

(a) The followings is the qualification of the expert who has given its reports, opinions or advice which are contained in this circular:

Name

Qualifications

CCIF CPA Limited

Certified Public Accountants

(b) CCIF CPA Limited does not have any shareholding, directly or indirectly, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group be for or to nominate persons to subscribe for securities in any member of the Group.
181 -

GENERAL INFORMATION

APPENDIX IV

(c) CCIF CPA Limited has given and has not withdrawn its written consent to the issue of this circular, with the inclusion of the references to its name and/or its opinion in the form and context in which they are included.
(d) CCIF CPA Limited had any direct or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Enlarged Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Enlarged Group since 31 December 2006, the date to which the latest published audited financial statements of the Group were made up.

10. MISCELLANEOUS

(a) The registered office of the Company is at 4th Floor, Scotia Centre, P.O. Box 2804, George Town, Grand Cayman KY1-1112, Cayman Islands, British West Indies.
(b) The head office and principal place of business of the Company in Hong Kong is at Units 901-907, 9th Floor, Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong.
(c) The company secretary of the Company is Mr. Pang Kin Man, Edmond, Fellow of the Hong Kong Institute of Chartered Secretaries and Fellow of the Institute of Chartered Secretaries and Administrators. The qualified accountant of the Company is Mr. Lau Kwok Wing, an associate member of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants.
(d) The compliance officer of the Company is Mr. Chan Sek Keung, Ringo.
(e) The principal share registrar of the Company in the Cayman Islands is Butterfield Fund Services (Cayman) Limited at Butterfield House, 68 Fort Street, P.O. Box 705, George Town, Grand Cayman, Cayman Islands. The branch share registrar of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited at 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(f) The English text of this circular shall prevail over the Chinese text in case of inconsistency.
182 -

GENERAL INFORMATION

APPENDIX IV

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at Units 901-907, 9th Floor, Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong during normal business hours i.e. 9:30 a.m. to 6:00 p.m., on any weekday other than public holiday from the date of this circular up to and including the date of the EGM:

(i) the Memorandum and Articles of Association;
(ii) the annual reports of the Company for the three financial years ended 30 December 2004, 2005 and 2006;
(iii) the accountants’ report issued by CCIF CPA Limited in respect of the Target Group as set out in Appendices IIA to IIF to this circular;
(iv) the accountants’ report issued by CCIF CPA Limited in connection with the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to this circular;
(v) the material contracts referred to under “Material contracts” in Appendix IV to this circular;
(vi) the service contracts referred to under “Service contracts” in Appendix IV to this circular;
(vii) the letter of consent from CCIP CPA Limited referred to under “Qualifications and consents of experts” in Appendix IV to this circular;
(viii) the working capital comfort letter as provided by CCIF CPA Limited to the Board pursuant to the requirements of rule 19.66(4) of the GEM Listing Rules; and
(ix) the interim report of the Company for the six months ended 30 June 2007.
183 -

Notice of eGm

==> picture [206 x 83] intentionally omitted <==

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 8198)

Notice of eXtRAoRDiNARY GeNeRAL meetiNG

Notice iS HeReBY GiVeN that an extraordinary general meeting (the “ eGm ”) of Wafer Systems Limited (the “ company ”) will be held at Units 901-7, 9/F., Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong on Wednesday, 5 December 2007 at 3:00 p.m. for the purpose of considering and, if thought fit, passing with or without amendments, the following resolutions as ordinary resolutions of the Company:

oRDiNARY ReSoLUtioNS

“ tHAt
(a) the agreement (the “ Agreement ”) dated 8 October 2007 entered into among Power Way Group Limited (the “ Vendor ”), Rising Move International Limited as purchaser, Firich Enterprises Co., Ltd., LottVision Limited, Melco International Development Limited as Vendor’s guarantors and the Company as the purchaser’s guarantor in relation to the sale and purchase (the “ Acquisition ”) of all equity interests in Precious Success Holdings Limited and majority equity interests in Oasis Rich International Limited at a total consideration of HK$668,000,000 (the “ consideration ”), a copy of the Agreement having been produced to the EGM marked “ A ” and initialed by the chairman of the EGM for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified;
(b) the allotment and issue of 72,000,000 new shares of the Company (the “ consideration Shares ”) of HK$0.01 each in the share capital of the Company at the issue price of HK$0.85 per Consideration Share (subject to adjustments pursuant to the terms of the Agreement) to the Vendor or its nominee(s) credited as fully paid to satisfy part of the Consideration be and are hereby approved;
(c) the issue of the convertible bonds in the principal amount of HK$606,800,000 (the “ convertible Bonds ”) by the Company to the Vendor or its nominee(s) to satisfy part of the Consideration pursuant to the terms of the Agreement be and are hereby approved;
for identification purpose only
184 -

Notice of eGm

(d) the allotment and issue of such number of new shares of the Company (the “ conversion Shares ”) of HK$0.01 each in the share capital of the Company at the initial conversion price of HK$0.85 per Conversion Share (subject to adjustments pursuant to the terms and conditions of the Convertible Bonds) upon exercise of the conversion rights attached to the Convertible Bonds be and are hereby approved; and
(e) the directors of the Company (the “ Directors ”) be and are hereby authorised to execute all such documents and do all such acts and things as they consider desirable, necessary or expedient in connection with and to give effect to the Agreement and the transactions contemplated thereunder including but not limited to the issue of the Convertible Bonds, the allotment and issue of the Consideration Shares and the Conversion Shares.”
“ tHAt the authorised share capital of the Company be and is hereby increased from HK$5,000,000 divided into 500,000,000 shares of the Company (the “ Shares ”) of HK$0.01 each to HK$20,000,000 divided into 2,000,000,000 Shares by the creation of an additional 1,500,000,000 unissued Shares and the Directors be and are hereby authorised for and on behalf of the Company to execute all such documents and to do all such acts and things as they consider desirable, necessary or expedient in connection with and to give effect to such increase in the authorised share capital of the Company.”
“ tHAt Mr. So Lie Mo, Raymond be and is hereby re-elected as Director of the Company.”

By Order of the Board Wafer Systems Limited Pang Kin man, edmond Company Secretary

Hong Kong, 19 November 2007

Notes:

(i) A member of the Company entitled to attend and vote at the above meeting is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is holder of two or more shares may appoint more than one proxy to attend and vote instead of him. A proxy need not be a member of the Company.
(ii) In order to be valid, a form of proxy together with the power of attorney or other authority (if any) under which it is signed, or a certified copy thereof, must be deposited at the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 1806-7, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong no later than 48 hours before the time appointed for the meeting (or any adjournment thereof).
(iii) Completion and return of the form of proxy will not preclude members of the Company from attending and voting in person at the meeting or any adjournment thereof should they so desire.
185 -

AI assistant

Crypto Flow Technology Limited — Proxy Solicitation & Information Statement 2007

51323_rns_2007-11-16_0c27f7fa-6049-4d64-8d78-de7d2a2640d2.pdf

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

PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL AND RE-ELECTION OF DIRECTOR AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

VERY SUBSTANTIAL ACQUISITION INVOLVING THE ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS AND PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL AND RE-ELECTION OF DIRECTOR AND NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

THE AGREEMENT

Parties to the Agreement

LETTER FROM THE BOARD

Assets to be Acquired

Consideration and Payment Terms

Consideration Shares

LETTER FROM THE BOARD

Convertible Bonds

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Redemption

LETTER FROM THE BOARD

Governing Law

LETTER FROM THE BOARD

Applications for Listing

Conditions precedent

Completion

Guaranteed Profit

A = (Guaranteed Profit – Actual Profit)

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

INFORMATION ON PAL GROUP

LETTER FROM THE BOARD

LETTER FROM THE BOARD

INFORMATION ON THE OASIS RICH GROUP

LETTER FROM THE BOARD

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

THE REORGANISATION

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ACQUISITION

LETTER FROM THE BOARD

EFFECT ON SHAREHOLDING STRUCTURE AFTER COMPLETION

LETTER FROM THE BOARD

UNDERTAKING TO HOLD SHARES

IMPLICATIONS UNDER THE GEM LISTING RULES

FINANCIAL EFFECTS OF THE ACQUISITION AGREEMENT

LETTER FROM THE BOARD

INCREASE IN AUTHORIZED SHARE CAPITAL

RE-ELECTION OF DIRECTOR

EGM

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

LETTER FROM THE BOARD

RECOMMENDATIONS

ADDITIONAL INFORMATION

1. SummAry oF FinAnciAl inFormAtion

reSultS

conSolidAted income StAtement

conSolidAted BAlAnce Sheet

BAlAnce Sheet

conSolidAted StAtement oF chAngeS in eQuity

conSolidAted cASh FloW StAtement

noteS to the FinAnciAl StAtementS

1. generAl

2. ApplicAtion oF neW And reViSed hong Kong FinAnciAl reporting StAndArdS (“hKFrSs”)

new standard, amendment or interpretations that have been issued but are not yet effective

3. SigniFicAnt Accounting policieS

a) Statement of compliance

b) Basis of preparation of the Financial Statements

c) Subsidiaries

d) property, plant and equipment

e) impairment of Assets

f) Software product development costs

g) inventories

h) trade and other receivables

i) cash and cash equivalents

j) convertible Bonds

k) trade and other payables

Crypto Flow Technology Limited Proxy Solicitation & Information Statement 2007