Crypto Flow Technology Limited - Proxy Solicitation & Information Statement 2008

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or otherwise transferred all your shares in Melco LottVentures Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser(s) or transferee(s) or to the bank, licensed securities dealer or another agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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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Melco LottVentures Limited 新濠環彩有限公司

(Incorporated in the Cayman Islands with limited liability) website: http://www.melcolottventures.com.hk

(Stock Code: 8198)

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

(2) PROPOSED APPOINTMENT OF EXECUTIVE DIRECTOR;

(3) PROPOSED CHANGE OF NAME OF THE COMPANY;

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

The notice convening the extraordinary general meeting of the Company (“ EGM ”) to be held at 31/F, The Centrium, 60 Wyndham Street, Central, Hong Kong on 4 December 2008 at 3:30 p.m. is set out on page 170 to 172 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 registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1806-7, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong in accordance with the instruction 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 “Latest Company Announcements” page of the GEM website at www.hkgem.com for at least 7 days and the Company’s website at www.melcolottventures.com.hk from the date of its publication.

11 November 2008

CHARACTERISTICS OF GEM

GEM has been positioned as a market designed to accommodate companies to which a higher investment risk may be attached than other companies listed on the Exchange. 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 be a liquid market in the securities traded on GEM.

			Page
DEFINITIONS	. . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			12
APPENDIX I	–	VALUATION REPORT OF THE SOFTWARE LICENCE. . . . . . . . . . .	50
APPENDIX II	–	FINANCIAL INFORMATION OF THE GROUP. . . . . . . . . . . . . . . . . .	63
APPENDIX III	–	UNAUDITED PRO FORMA FINANCIAL INFORMATION
		OF THE ENLARGED GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	147
APPENDIX IV	–	GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	158
NOTICE OF EGM		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	170

DEFINITIONS

In this circular, the following expressions have the meanings set out below unless the context requires otherwise.

“Acquisition”

the acquisition of the Assets under the Asset Transfer Agreement and the Transactions

“Announcement”

the announcement of the Company dated 28 September 2008

“Articles”

the memorandum and articles of association of the Company

“Assets”
(a) (i) perpetual, exclusive license right, terminable only in extraordinary circumstances (as described in the section headed “Software Licence Agreement” below in this circular) to use and sublicense the Software (including any updates released by the Vendor) in connection with CSLA Projects in the PRC commencing from the Completion Date. While the term of the licence is perpetual, the exclusivity arrangement is for an initial period of three years. This exclusivity arrangement may be indefinitely extended in blocks of two years upon satisfaction of certain conditions (as described in the section headed “Software Licence Agreement” below in this circular); and
(ii) perpetual, non-exclusive license right, terminable only in extraordinary circumstances (as described in the section headed “Software Licence Agreement” below in this circular) to use and sublicense the Software (including any updates released by the Vendor) in connection with CWL Projects in the PRC commencing from the Completion Date,

valued in the aggregate at HK$255,130,367.558; and

(b) HK$50,000,000 cash.

“Asset Transfer Agreement”

an agreement dated 7 September 2008 (as amended by a supplemental agreement dated 26 September 2008) and entered into between the Company and the Vendor for the sale and purchase of the Assets

“associates” has the meaning ascribed to it under the GEM Listing Rules unless the context requires otherwise

DEFINITIONS

“Balance Of Interests”	has the meaning ascribed to it under the section headed “Balance
	Of Interests in the Company” in this circular
“Board”	the board of Directors
“Bondholder(s)”	a holder or holders in whose name the Convertible Bonds is
	registered in the register of Bondholders, and “holder” in relation
	to the Convertible Bonds shall have the corresponding meaning
“Bondholder(s) II”	a holder or holders in whose name the Convertible Bonds II
	is registered in the register of Bondholders II, and “holder” in
	relation to the Convertible Bonds II shall have the corresponding
	meaning
“Business Day”	a day (other than a Saturday and a Sunday) on which licensed
	banks are generally open in Hong Kong for normal business
“BVI”	British Virgin Islands
“Change of Control”	(i) a change in the Company’s shareholdings such that a person
	who is Intralot’s Competitor possesses, directly or indirectly a
	holding, or aggregate holdings, of 30% or more of the voting
	rights of a company, irrespective of whether that holding or
	holdings gives de facto control, or (ii) Melco disposing more than
	2/3 of its MLV Interests as it stands on Completion
“Code”	the Hong Kong Code on Takeovers and Mergers
“Company”	Melco LottVentures Limited, a company incorporated in the
	Cayman Islands and the Shares are listed on GEM
“Completion”	completion of the Transactions in accordance with the terms
	thereof
“Completion Date”	date of Completion
“Conditions”	conditions precedent to the Completion
“Connected Persons”	has the meaning as ascribed in the GEM Listing Rules
“Consideration”	HK$305,130,367.558, the total consideration payable in respect of
	the Assets under the Asset Transfer Agreement

DEFINITIONS

“Consideration Shares” 28,208,938 new Shares to be allotted and issued to the Vendor at the Issue Price, credited as fully paid, to satisfy part of the Consideration
“Conversion Notice” a notice of conversion in the form (for the time being current) set out in the Deed Poll
“Conversion Price” initial conversion price of HK$0.991 per Conversion Share “Conversion Price II” initial conversion price of HK$1.0759 per Conversion Share II “Conversion Rights” the rights of the Bondholder to convert the principal amount outstanding under the Convertible Bonds registered in its name into Shares subject to the provisions of the Deed Poll and the terms and conditions of the Convertible Bonds
“Conversion Rights II” the rights of the Bondholder II to convert the principal amount outstanding under the Convertible Bonds II registered in its name into Shares subject to the provisions of Deed Poll II and the terms and conditions of the Convertible Bonds II
“Conversion Shares” 279,692,542 new Shares to be allotted and issued to the Vendor upon exercise of the conversion rights attaching to the Convertible Bonds in full
“Conversion Shares II” 69,709,080 new Shares to be allotted and issued to the Vendor upon exercise of the conversion rights attaching to the Convertible Bonds II in full
“Convertible Bonds” the convertible bonds in the principal amount of HK$277,175,310 to be issued by the Company in favour of the Vendor to satisfy part of the Consideration
“Convertible Bonds II” the convertible bonds in the principal amount of HK$75,000,000 which may be issued by the Company in favour of the Vendor to settle the Success Payment
“CSLA” the organization known as China Sports Lottery Administration or any successor to CSLA from time to time
“CSLA Projects” any projects which affords a reasonable opportunity to grant a licence to use the Software and associated services as envisaged by the Software Licence Agreement initially by CSLA

	DEFINITIONS
“CSLA Software”	the Software for CSLA Projects
“CWL”	the organization known as China Welfare Lottery Issuance or any
	successor to the CWL from time to time
“CWL Projects”	any projects which affords a reasonable opportunity to grant a
	licence to use the Software and associated services as envisaged
	by the Software Licence Agreement initially by CWL
“CWL Software”	the Software for CWL Projects
“Deed Poll”	the deed poll regarding the terms of the Convertible Bonds to be
	executed by the Company
“Deed Poll II”	the deed poll regarding the terms of the Convertible Bonds II to be
	executed by the Company
“Director(s)”	director(s) of the Company from time to time
“Disposal”	offer, lend, pledge, sell, contract to sell, sell any option or contract
	to purchase, purchase any option or contract to sell, grant any
	option, right or warrant to purchase, or otherwise transfer or
	dispose of (either conditionally or unconditionally, or directly
	or indirectly, or otherwise) any of the Shares, or any interests
	in the Shares beneficially owned or held or enter into any swap,
	derivatives or similar agreement that transfers, in whole or in part,
	the economic consequences of ownership of such Shares
“EGM”	an extraordinary general meeting of the Company to be convened
	and held to approve the Asset Transfer Agreement and the
	Transactions; the change of name of the Company and the
	appointment of an executive Director
“Enlarged Group”	the Group immediately upon Completion
“Existing Shareholders’ Competitors” any person concerned in any business carrying on business which
	is competitive or likely to be competitive with businesses carried
	on by Melco LV, Firich or LottVision
“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, and Global Crossing

	DEFINITIONS
“Firich CB”	the convertible bonds in the principal amount of HK$175,188,566
	issued by the Company on 30 September 2008 and registered
	in the name of Global Crossing as part of the Power Way
	Restructuring, which convertible bonds shall have the same terms
	and conditions as the Power Way CB
“Firich Undertaking”	an undertaking letter to be given by Firich in favour of the Vendor
	and Melco LV
“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
“Global Crossing”	Global Crossing Holdings Limited, a company incorporated in
	Samoa, which is a wholly-owned subsidiary of Firich Enterprises
	Co., Ltd. (a company incorporated in Taiwan the issued shares of
	which are listed on the Taiwan Gre Tai Securities Market) and an
	existing shareholder of Power Way
“Group”	the Company and its subsidiaries
“Hong Kong”	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
“Interest Record Date”	fifteenth day before the due date of the payment of interest
“Intralot”	Intralot S.A. Integrated Lottery Systems and Services, a public
	listed company on the Athens Exchange S.A.
“Intralot’s Competitors”	any person concerned in any business carrying on business which
	is competitive or likely to be competitive with businesses carried
	on by Intralot
“Issue Price”	the initial issue price of HK$0.991 per Consideration Share
“KTeMS”	KTeMS Co., Ltd., a company incorporated in Korea with limited
	liability

DEFINITIONS

“Last Trading Day” 5 September 2008, being the last trading day immediately before the publication of the Announcement
“Latest Practicable Date” 7 November 2008, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular
“Long Stop Date” 90 days from the date of the Asset Transfer Agreement
“LottVision” LottVision Limited, an existing shareholder of Power Way, a company incorporated in Bermuda and the issued shares of which are listed on the Singapore Exchange Limited
“LottVision CB” the convertible bonds in the principal amount of HK$50,000,000 issued by the Company and registered in the name of LottVision by virtue of the distribution advancement made on 12 August 2008 by Power Way to LottVision incidental to the Power Way Restructuring and the convertible bonds in the principal amount of HK$25,411,203 issued by the Company and registered in the name of LottVision on 30 September 2008 as part of the Power Way Restructuring, which convertible bonds shall have the same terms and conditions as the Power Way CB
“LottVision Undertaking” an undertaking letter to be given by LottVision in favour of the Vendor and Melco LV
“Maturity Date” five years from the date of issue of the Convertible Bonds and the Convertible Bonds II (as the case may be)
“Melco” Melco International together with Melco LV
“Melco International” 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, a company incorporated in the BVI, which is a wholly owned subsidiary of Melco and the holding company of Power Way
“Melco LV CB” the convertible bonds in the principal amount of HK$356,200,231 issued by the Company on 30 September 2008 and registered in the name of Melco LV as part of the Power Way Restructuring, which convertible bonds shall have the same terms and conditions as the Power Way CB

DEFINITIONS

“Melco LV Undertaking”

an undertaking letter to be entered into between Melco LV, the Vendor and Melco International

“MLV Interests” in respect of a person, that person’s direct and indirect holdings of (a) Shares, and (b) convertible bonds and other securities convertible or exchangeable into Shares in which case that person’s MLV Interests shall include the number of Shares which are the subject of the convertible bonds or other securities convertible or exchangeable into Shares
“Nanum Lotto” Nanum Lotto Inc., a company incorporated in Korea with limited liability and is engaged in holding and/or operating and/or investing in the lottery businesses within the Asian region
“Oasis Rich” Oasis Rich International Ltd., a company incorporated in the Republic of Mauritius with limited liability and a non-wholly owned subsidiary of the Company
“Potential Wu Sheng Transfer” the potential partial transfer of the Vendor’s current original equipment manufacturing (“OEM”) business and potential new OEM business to Wu Sheng provided that Wu Sheng fulfils the required quality standards, has the manufacturing capacity, is competitive with respect to pricing, and meets such other criteria as the Vendor believes relevant
“Power Way” Power Way Group Limited, a company incorporated in the BVI and a substantial shareholder of the Company prior to the Power Way Restructuring
“Power Way CB” the convertible bonds in the principal amount of HK$556,800,000 issued by the Company on 13 December 2007 and registered in the name as Power Way
“Power Way Restructuring” the restructuring of the interests of Power Way in the Company by the transfer or distribution to its shareholders, namely Melco LV, Global Crossing and LottVision, of all the Shares and Power Way CB held by Power Way such that Melco LV is the owner of 42,265,024 Shares and the Melco LV CB, Global Crossing is the owner of 20,787,042 Shares and the Firich CB and LottVision is the owner of 8,947,934 Shares and the LottVision CB
“Power Way Undertaking” an undertaking letter to be entered into between Power Way and the Vendor
“party(ies) acting in concert”
has the meaning ascribed thereto in the Takeovers Code

DEFINITIONS

“PRC” the People’s Republic of China, which, for the purpose of this circular, shall exclude Hong Kong, Macau Special Administrative Region and Taiwan

“Project”

any CSLA Project or CWL Project

“Relevant Event” occurs when there is a Change of Control

“Relevant Event Redemption Date” 60th day after the expiry of 30 days following the occurrence of a Relevant Event, or if later, 30 days following the date upon which notice thereof is given to the Bondholders by the Company in accordance with the terms and conditions of the Convertible Bonds

“Relevant Indebtedness” any indebtedness for or in respect of:

(a) moneys borrowed;
(b) any acceptance credit (including any dematerialised equivalent);
(c) any bond, note, debenture, loan stock or other similar instrument (including any equity-linked instrument);
(d) any redeemable preference shares;
(e) any agreement treated as a finance or capital lease in accordance with generally accepted accounting principles in the jurisdiction of incorporation of the Company or its Subsidiary (as the case may be);
(f) receivables sold or discounted (other than any receivables to the extent they are sold on a fully non-recourse basis);
(g) the acquisition cost of any asset or service to the extent payable after its acquisition or possession by the party liable where the advance or deferred payment:
(i) is arranged primarily as a method of raising finance or financing the acquisition of that asset or the construction of that asset; or
(ii) involves a period of more than six months before or after the date of acquisition or supply;
(h) any derivative transaction protecting against or benefiting from fluctuations in any rate or price (and, except for nonpayment of an amount, the then mark to market value of the derivative transaction will be used to calculate its amount);
(i) any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing;

DEFINITIONS

(j) any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; or
(k) any guarantee, indemnity or similar assurance against financial loss of any Person in respect of any item referred to in the above paragraphs
“RMB” Renminbi, the lawful currency of the PRC

“Security” a first priority fixed pledge/charge/mortgage, governed by the laws of Korea, granted by the Company or its Subsidiary which is the direct holder of the entire issued capital of KTeMS in favour of the security trustee for the benefit of the Bondholder(s), over 50% of the entire issued share capital of KTeMS including any future dividends and any other cash receivables arising therefrom to secure the payment obligations and the performance of all of the obligations of the Company under the Convertible Bonds and the Deed Poll

“Security II” a first ranking assignment by way of security and floating charge, governed by the laws of Hong Kong, the PRC or such other jurisdiction as determined by the Bondholders, granted by the Company and its relevant Subsidiaries in favour of the security trustee for the benefit of the Bondholders, over all rights and gross income (net of direct costs and direct taxes related to the projects to be deducted in a manner as agreed between the Company and the Bondholders) of the Company or its Subsidiaries arising from any sublicence agreement, services agreement, project agreement or otherwise arising from any or all projects to secure the payment obligations and the performance of all of the obligations of the Company under the Convertible Bonds and the Deed Poll
“Security Interest”
any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to create any mortgage, pledge, security interest, lien, charge, easement or encumbrance of any kind)
“Shareholder(s)”
shareholders of the Company
“Shares”
ordinary shares of HK$0.01 each in the issued share capital of the Company

DEFINITIONS

“Software”

the most current version of:

(i) Chinese version of LOTOS Central system comprising of the following specific components: – LOTOS O/S Operating System; – LOTOS Gameware comprising
- numerical games management system (NGMS)
- • Keno games management system (KGMS) • pool (score) games management system (SGMS)
- • Bingo games management system (BGMS) • instant ticket games management system (IGMS)
Monitor Games Management System (MGMS)
• video games management system (VGMS) • Fixed Odds Sports Betting Module (FlexBet)
– LOTOS Sales Plus suite of applications – LOTO Value Plus suite of applications – LOTOS Integrity – LOTOS Horizon; and I Gate connectivity and access system

(ii) CORONIS family terminal application software

“Software Licence Agreement” the licence agreement to be executed by the Vendor and the Company on Completion pursuant to which the Vendor grants to the Company the exclusive licence right to use and sublicence the Software in connection with the CSLA Projects and the nonexclusive licence right to use and sublicense the Software in connection with the CWL Projects

“SFC” Securities and Futures Commission

“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

DEFINITIONS

“Subsidiary(ies)”	with respect to the Company, any corporation, association or
	other business entity of which more than 50 per cent. of the
	voting power of the outstanding issued share capital is owned or
	controlled, directly or indirectly, by the Company and one or more
	other Subsidiaries of the Company and any corporation or other
	business entity which at any time has its accounts consolidated
	with those of the Company or which, under the Cayman law or
	regulations or international financial accounting standards from
	time to time, should have its accounts consolidated with those of
	the Company
“Success Payment”	HK$75,000,000, the entitlement of the Vendor upon obtaining two
	agreements in connection with the CSLA Projects and/or CWL
	Projects in the PRC from the Company to be satisfied by way of
	the Convertible Bonds II
“Takeovers Code”	the Hong Kong Code on Takeovers and Mergers
“Transactions”	the transactions contemplated under the Asset Transfer Agreement
	including but not limited to the Software Licence Agreement
“Vendor”	Intralot International Limited, a company incorporated in Cyprus
	and is the wholly owned subsidiary of Intralot
“Vendor Group”	Vendor and its subsidiaries
“Wu Sheng”	Wu Sheng Computer Technology (Shanghai) Co., Ltd, a wholly-
	owned foreign enterprise established in Shanghai, PRC by Oasis
	Rich
“€”	Euro, the lawful currency of the European Monetary Union
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“%”	per cent.

LETTER FROM THE BOARD

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Melco LottVentures Limited 新濠環彩有限公司

(Incorporated in the Cayman Islands with limited liability) website: http://www.melcolottventures.com.hk

(Stock Code: 8198)

Executive Directors:

Mr. Chan Sek Keung, Ringo Mr. Ko Chun Fung, Henry

Independent non-executive Directors:

Mr. David Tsoi Mr. Pang Hing Chung, Alfred Mr. So Lie Mo, Raymond

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

Head office and principal place of business in Hong Kong: 31st Floor, The Centrium 60 Wyndham Street Central Hong Kong

11 November 2008

To the Shareholders,

Dear Sir/Madam,

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

(2) PROPOSED APPOINTMENT OF EXECUTIVE DIRECTOR;

(3) PROPOSED CHANGE OF NAME OF THE COMPANY;

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

On 28 September 2008, the Board announced that on 7 September 2008, the Company entered into the Asset Transfer Agreement with the Vendor, pursuant to which the Company has conditionally agreed to acquire the Assets at the Consideration of HK$305,130,367.558.

LETTER FROM THE BOARD

The Consideration will be satisfied by the Company as to (i) HK$27,955,057.558 by allotting and issuing 28,208,938 Consideration Shares credited as fully paid at the Issue Price of HK$0.991 per Consideration Share and (ii) HK$277,175,310 by issuing the Convertible Bonds in the aggregate principal amount of HK$277,175,310 to the Vendor on Completion.

The Vendor is a wholly-owned subsidiary of Intralot which is a public listed company on the Athens Exchange S.A., engaging in the supply of integrated gaming and transaction processing systems, innovative game content and sports betting management to state licensed lottery organizations worldwide.

After Completion, the Vendor shall provide reasonable assistance to the Company to secure two agreements in connection with CSLA Projects and CWL Projects in the PRC. Upon obtaining such agreements, the Vendor shall be entitled to the Success Payment of a total sum of HK$75,000,000 from the Company to be satisfied by way of the Convertible Bonds II.

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

The Company will seek the approval of its Shareholders at the EGM to be convened and held by the Company to approve the Asset Transfer Agreement and the Transactions (including but not limited to the issues of the Convertible Bonds and the Convertible Bonds II and the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II). As (i) Power Way will be involved in the Power Way Restructuring and (ii) each of the Power Way Undertaking, Melco LV Undertaking, Firich Undertaking and LottVision Undertaking has to be duly executed, which is one of the Conditions, each of Power Way and its shareholders, namely, Melco LV, Global Crossing and LottVision is considered to have a material interest in the Acquisition which is different from other Shareholders. To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiry, save for Power Way, Melco LV, Global Crossing and LottVision, no Shareholder has a material interest in the Acquisition which is different from other Shareholders, and accordingly Power Way, Melco LV, Global Crossing and LottVision and any of their respective associates are required to abstain from voting at the EGM, which will be taken by way of poll.

The purpose of this circular is to provide you with, amongst other things, (i) further details of the Acquisition and other disclosures in connection with the Acquisition as required pursuant to the GEM Listing Rules; (ii) information on the Assets; (iii) the unaudited pro forma financial information on the Enlarged Group; (iv) valuation report of the Software licence; (v) the proposed appointment of executive Director; (vi) the proposed change of name of the Company; and (vii) a notice of the EGM for the purpose of approving, the Asset Transfer Agreement and the Transactions (including but not limited to the entering into of the Software Licence Agreement, the issues of the Convertible Bonds and the Convertible Bonds II and the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II), the proposed appointment of executive Director; and the proposed change of the name of the Company.

LETTER FROM THE BOARD

(1) VERY SUBSTANTIAL ACQUISITION

THE ASSET TRANSFER AGREEMENT

Date of the Asset Transfer Agreement

7 September 2008 (as amended by a supplemental agreement dated 26 September 2008)

Parties to the Asset Transfer Agreement

(a) The Company (as purchaser); and
(b) The Vendor (as vendor)

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, as at the date of the Asset Transfer Agreement, each of the Vendor, its ultimate holding company and substantial shareholders of its ultimate holding company, is an Independent Third Party. As at the Latest Practicable Date, the Vendor held 19,424,000 Shares, representing approximately 4.12% of the issued share capital of the Company. Save for entering into of the Asset Transfer Agreement and both the Group and Intralot, the ultimate holding company of the Vendor, being substantial shareholders of Nanum Lotto following the completion of the Group’s acquisition of KTeMS on 17 September 2008, the Vendor and its associates do not have any business relationship with the Group and did not have any transaction with the Group in the past 24 months immediately preceding the date of the Asset Transfer Agreement.

Assets to be acquired

(a) (i) perpetual, exclusive license right, terminable only in extraordinary circumstances (as described in the section headed “Software Licence Agreement” below in this circular) to use and sublicense the Software (including any updates released by the Vendor) in connection with CSLA Projects in the PRC commencing from the Completion Date. While the term of the licence is perpetual, the exclusivity arrangement is for an initial period of three years. This exclusivity arrangement may be indefinitely extended in blocks of two years upon satisfaction of certain conditions (as described in the section headed “Software Licence Agreement” below in this circular); and
(ii) perpetual, non-exclusive license right, terminable only in extraordinary circumstances (as described in the section headed “Software Licence Agreement” below in this circular) to use and sublicense the Software (including any updates released by the Vendor) in connection with CWL Projects in the PRC commencing from the Completion Date,

valued in the aggregate at HK$255,130,367.558; and

(b) HK$50,000,000 cash.

LETTER FROM THE BOARD

Success Payment

After Completion, the Vendor shall provide reasonable assistance to the Company to secure two service agreements in connection with CSLA Projects and CWL Projects in the PRC. Upon the Company obtaining such agreements, the Vendor shall be entitled to the Success Payment of a total sum of HK$75,000,000 from the Company.

Consideration and payment terms

The total Consideration of HK$305,130,367.558 was on normal commercial terms and arrived at after arms’ length negotiations between the parties to the Asset Transfer Agreement. HK$50,000,000 of the Consideration is on a dollar-for-dollar basis for the HK$50,000,000 cash whereas the balance of HK$255,130,367.558 is for the perpetual license right to use and sublicense the Software, representing a discount of approximately 29.29% to the value of the Software licence of HK$360,800,000 as stated in the valuation report by Vigers Appraisal & Consulting Limited, an independent valuer of the Company, as contained in Appendix I to this circular. On the other hand, the Success Payment of HK$75,000,000 is an incentive payment to the Vendor should it be able to secure two service agreements in connection with CSLA Projects and CWL Projects for the Company.

The Consideration and the Success Payment were determined with reference to, among other things,

(i) the historical growth and prospects of the lottery market of the PRC. According to the Company’s 2007 annual report, lottery sales in PRC grew 15-fold from 1997 to 2006, to reach RMB82 billion and in 2007, total lottery sales reached RMB100 billion, a year-on-year growth of 22%;
(ii) the intangible value of the cooperation with Intralot, being an international leading provider of integrated gaming systems, as a strategic Shareholder upon Completion and the Company can benefit from Intralot’s extensive know-how, advanced product development standards and substantial experience in operating lottery games;
(iii) the immediate access to the leading complete technology solution, including but not limited to a readily available and extensive game library allowing instant offer of new lottery games to the market;
(iv) the payment mechanism of the Success Payment giving significant incentive for the Vendor to assist the Company to obtain new projects;
(v) the potential competition to the Group if the license rights to use and sublicense the CSLA Software were granted to other lottery service providers in the market;
(vi) the fact that the Software is not a newly developed lottery software and in fact the Software has been developed by Intralot throughout the years in various languages so that the Company has made references to previous transactions (“ Comparable Transactions ”) of Intralot regarding similar versions of the Software in different languages with various independent lottery operators worldwide since 2002. The Consideration for the perpetual

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licence right of the Software and the Success Payment were arrived at after arm’s length negotiation between the parties by referencing to the Comparable Transactions taking into various considerations including but not limited to, scale of operations, amount of support and extent of services given by Intralot along with the sale of the licence right of the Software, potential of the relevant lottery markets and terms of exclusivity of the Comparable Transactions; and

(vii) the internally estimated revenue to be generated from two Projects is expected to be more than the amount of the Success Payment.

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$305,130,367.558 will be settled in the following manner:

(a) as to HK$27,955,057.558 to be satisfied by the allotment and issue of the Consideration Shares credited as fully paid at the Issue Price to the Vendor on Completion; and
(b) as to HK$277,175,310 to be satisfied by the issue of the Convertible Bonds to the Vendor on Completion.

The Success Payment shall be paid by way of the Convertible Bonds II issued by the Company in the following manner:

(a) 30% of the total Success Payment shall be paid when the first Project is procured and the agreement with respect thereto executed; and
(b) the remaining 70% shall be paid when the second Project is procured and the agreement with respect thereto executed.

Consideration Shares

The 28,208,938 Consideration Shares represent (i) approximately 5.99% of the existing issued share capital of the Company; (ii) approximately 5.65% of the issued share capital of the Company as enlarged by allotment and issue of the Consideration Shares; (iii) approximately 3.62% of the issued share capital of the Company as enlarged by the allotments and issues of both the Consideration Shares and the Conversion Shares; (iv) approximately 3.32% of the issued share capital of the Company as enlarged by the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II, assuming, for illustration purpose only, full conversions of the Convertible Bonds and the Convertible Bonds II and the Conversion Shares and the Conversion Shares II were to be issued at the Conversion Price and the Conversion Price II respectively (as the case may be); and (v) approximately 1.81% of the issued share capital of the Company as enlarged by the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II, assuming, for illustration purpose only, full conversions of the Convertible Bonds and the Convertible Bonds II and the Conversion Shares and the Conversion Shares II were to be issued at the Conversion Price and the Conversion Price II respectively (as the case may be) and each of the Melco LV CB, Firich CB and the LottVision CB has been converted into Shares in full.

LETTER FROM THE BOARD

The Issue Price of HK$0.991 per Consideration Share is equivalent to the Conversion Price and represents:

(a) a premium of approximately 27.05% over the closing price of HK$0.78 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a premium of approximately 25.13% over the average closing prices of HK$0.792 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 premium of approximately 28.04% over the average closing price of HK$0.774 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day; and
(d) a premium of approximately 281.15% over the closing price of HK$0.26 per Share as quoted on the Stock Exchange on 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 Completion Date. The Consideration Shares, when, allotted and issued, will rank pari passu in all respects with the then Shares in issue on their date of allotment and issue.

Applications for Listing

Application will be made by the Company to the GEM Listing Committee for the listing of, and permission to deal in, the Consideration Shares.

Convertible Bonds

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

Issuer	the Company
Initial subscriber	the Vendor
Amount	HK$277,175,310
Bonds issue price	100 % of the principal amount of the Convertible Bonds
Coupon	0.1% interest, payable semi-annually in arrears
Security	secured by the Security and Security II
	For Security: the acquisition cost of the Company for the entire
	issued share capital of KTeMS is US$12 million (equivalent to
	approximately HK$93.6 million). Therefore, 50% of the entire
	issued share capital of KTeMS equals approximately HK$46.8

LETTER FROM THE BOARD

million. However, the amount of any future dividends and any other cash receivables arising therefrom are not available at present.

For Security II: the amount of all rights and gross income of the Company or its Subsidiaries arising from any sublicence agreement, services agreement, project agreement or otherwise arising from any or all projects are also not available at present.

The Directors believe that the security arrangement can align the interests of the Company and the Vendor since it will provide incentive to Intralot or the Vendor to assist the Company to secure Projects as it will in turn secure the value of security of the Convertible Bonds. It is due to the fact that the income stream represents cash, so the more it is, the more the financial resources of the Company will have, and the less the chance that the Company will default and have to deliver the Vendor the security. It is very unlikely that the Company has to default on the Convertible Bonds if the Security II carries a very high value.

Maturity Date

Issue of the Convertible Bonds

Conversion Price

5 years from the date of issue of the Convertible Bonds

on Completion

initial conversion price of HK$0.991 per Conversion Share but subject to standard adjustments clauses, including but not limited to, consolidation or subdivision of Shares, capitalization of profits or reserves, capital distribution, 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$0.991 per Conversion Share is equivalent to the Issue Price and represents:

(a) a premium of approximately 27.05% over the closing price of HK$0.78 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a premium of approximately 25.13% over the average closing price of HK$0.792 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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(c) a premium of approximately 28.04% over the average closing price of HK$0.774 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day; and
(d) a premium of approximately 281.15% over the closing price of HK$0.26 per Shares as quoted on the Stock Exchange on the Latest Practicable Date.

Conversion period

the Convertible Bonds may be converted at any time from the date of issue of the Convertible Bonds up to and including the close of business on the day immediately prior to the Maturity Date 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 all Shares in issue at the date of allotment and issue of such Conversion Shares.

Limitation on conversion

No conversion of the Convertible Bonds shall be made, if immediately upon such conversion,

(1) the Bondholder together with parties acting in concert with it (within the meaning of the Code) control 30% (or such other percentage as stated in the Code in effect from time to time) or more of the voting rights in the Company so that it shall trigger a mandatory offer obligation under Rule 26 of the Code on the part of the Bondholder which exercised the Conversion Rights; and/or
(2) the public float of the Shares falls below 25% (being the current minimum public float of the Company or any given percentage as required by the GEM Listing Rules) of the issued shares of the Company. As the Company is required to maintain the minimum public float of the Shares, the Company will not issue any Conversion Shares if upon such issuance, the minimum public float requirement of the Company cannot be maintained.

The Convertible Bonds not so converted will be redeemed at maturity at 100% of the principal amount of the unconverted Convertible Bonds plus accrued interest.

Redemption

Unless previously redeemed, converted or purchased and cancelled, the Company will redeem each Convertible Bond at 100% of its principal amount on the Maturity Date.

LETTER FROM THE BOARD

Following the occurrence of a Relevant Event, each Bondholder will have the right at such holder’s option, to require the Company to redeem all or only some of that holder’s Convertible Bonds on the Redemption Date at 100% of their principal amount together with any outstanding interest.

Transferability

Listing

Voting

Events of default

The Bondholder(s) shall be permitted at any time to assign or transfer the Convertible Bonds, or part of the Convertible Bonds to any transferee as nominated by the Bondholder(s) provided that any such assignment or transfer shall be made in whole or in part (in whole multiples of HK$1,000,000) of its outstanding principal amount. A Bondholder may not require the transfer of the Bonds to be registered (i) after a Conversion Notice has been delivered with respect to a Convertible Bond or (ii) during the period of 7 business days ending on (and including) any Interest Record Date.

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 Conversion Shares on the GEM.

Holder(s) of the Convertible Bonds shall not be entitled to attend or vote at any general meetings of the Company by reason only of it being the holder of the Convertible Bonds.

Events of default shall include the following:

(i) a default is made in the payment of principal or interest in respect of any of the Convertible Bonds and such default continues for a period of seven days in the case of principal or 14 days in the case of interest;
(ii) appointment of receivership, declaration of insolvency or a winding up order made against the Company;
(iii) the Group as a whole ceases to carry on its ordinary course of business;
(iv) material change in the business nature of the Group from the business nature as of the issue date of the Convertible Bonds;
(v) material adverse change in the financial condition of the Company as determined by the Bondholders;

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(vi) any material default made by the Company in the performance or observance of any undertaking, warranty or representation given by it under the conditions of the Convertible Bond or the Deed Poll (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 Deed Poll 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.

Further to case (1) under the paragraph headed “Limitation on conversion” above, there may be scenario that a Shareholder owns or controls 20% or more of the voting rights of the Company and the Bondholder shall control 20% or more of the voting rights in the Company so that they will presumably be parties acting in concert under the Code for the purpose of restriction on conversion of the Convertible Bonds as stated above or the relevant parties will need to comply with the relevant provisions of the Code.

For illustration purpose only, the 279,692,542 Conversion Shares to be issued under the Convertible Bonds represents (i) approximately 59.35% of the existing issued share capital of the Company; (ii) approximately 37.25% 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; (iii) approximately 35.90% of the issued share capital of the Company as enlarged by the allotments and issues 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; (iv) approximately 32.95% of the issued share capital of the Company as enlarged by the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II, assuming full conversions of the Convertible Bonds and the Convertible Bonds II and the Conversion Shares and the Conversion Shares II were to be issued at the Conversion Price and the Conversion Price II respectively (as the case may be); and (v) approximately 17.90% of the issued share capital of the Company as enlarged by the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II, assuming full conversions of the Convertible Bonds and the Convertible Bonds II and the Conversion Shares and the Conversion Shares II were to be issued at the Conversion Price and the Conversion Price II respectively (as the case may be) and each of the Melco LV CB, Firich CB and the LottVision CB are converted into Shares in full.

LETTER FROM THE BOARD

If at any time on or after the date of the Asset Transfer Agreement and pending Completion, the Company consolidates, sub-divides or reorganises its share capital, declares any distribution, makes any issue by way of capitalisation or rights to holders of its ordinary Shares, makes any further issue of shares or rights to subscribe for Shares (or similar) or performs any other act which has the effect of diluting the economic or percentage interest represented by the Consideration Shares or the Conversion Shares as at the date of the Asset Transfer Agreement, during or by reference to any period before the allotment of the Consideration Shares, the number of the Consideration Shares or the Issue Price will be adjusted as the accountants (jointly approved by the Company and the Vendor) for the time being (acting as experts and not as arbitrators) consider to be fair and reasonable and such adjustments shall, in the absence of manifest error be final and binding on the parties thereto.

In view of the extent of the dilution effect of the Convertible Bonds and the Convertible Bonds II, the Company will disclose by way of an announcement all relevant details of the conversions of the Convertible Bonds and the Convertible Bonds II in the following manner:

(i) the Company will make a monthly announcement (the “ Monthly Announcement ”) on or before the tenth business day following the end of each calendar month and will include the following details in a table form:
a. whether there is any conversion of the Convertible Bonds and/or the Convertible Bonds II during the previous calendar month. If there is a conversion, details thereof including the conversion date, number of the Conversion Shares and the Conversion Shares II issued and the Conversion Price and Conversion Price II for each conversion. If there is no conversion during the previous calendar month, a negative statement to that effect;
b. the amount of outstanding Convertible Bonds and Convertible Bonds II after the conversion, if any;
c. the total number of new Shares issued pursuant to other transactions during the previous calendar month, including the new Shares issued pursuant to exercise of options under any share option scheme(s) of the Company; and
d. the total issued share capital of the Company as at the commencement and the last day of the previous calendar months;
(ii) in addition to the Monthly Announcement, if the cumulative amount of the Conversion Shares and the Conversion Shares II issued pursuant to the conversion of the Convertible Bonds and the Convertible Bonds II reaches 5% of the issued share capital of the Company as disclosed in the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Convertible Bonds and the Convertible Bonds II (as the case may be) (and thereafter in a multiple of such 5% threshold), the Company will make an announcement including details as stated in (i) above for the period commencing from the date of the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Convertible Bonds and the Convertible Bonds II (as the case may be) up to the date on which the total amount of the Conversion Shares and the Conversion Shares II issued pursuant to the conversion amounted to 5% of the issued share capital of the

LETTER FROM THE BOARD

Company as disclosed in the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Convertible Bonds and the Convertible Bonds II (as the case may be); and

(iii) if the Company forms the view that any issue of the Conversion Shares and the Conversion Shares II will trigger the disclosure requirements under GEM Listing Rule 17.10(1), then the Company will make such disclosures regardless of the issue of any announcements in relation to the Convertible Bonds and the Convertible Bonds II as mentioned in (i) and (ii) above.

Conditions precedent for the Asset Transfer Agreement

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 Asset Transfer Agreement and the Transactions, including but not limited to, the entering into of the Software Licence Agreement, the allotment and issue of the Consideration Shares, the issue of the Convertible Bonds and Convertible Bonds II, the granting of the Security and Security II and the appointment of nominees of the Vendor as Directors having been approved by the Shareholders at the EGM in accordance with the requirements of the GEM Listing Rules and applicable corporate law;
(b) the GEM Listing Committee of the Stock Exchange granting an approval for the listing of, and permission to deal in, all the Consideration Shares, the Conversion Shares and the Conversion Shares II;
(c) the continuous listing of the Shares on the GEM Board of the Stock Exchange save for any temporary suspension of trading arising out of or in connection with the Transactions or any temporary suspension of trading imposed by the GEM Listing Rules arising out of or in connection with the normal and usual course of business of the Company;
(d) the warranties given by the Company in the Asset Transfer Agreement remaining true and accurate and not misleading at Completion as if repeated at all times between the date of the Asset Transfer Agreement and as at Completion and there having been compliance in all respects with the covenants and obligations on the part of the Company contained in the Asset Transfer Agreement which are to be complied with at or prior to the time of Completion;
(e) all licences, permissions, authorisations, approvals, consents and waivers required to be obtained on part of the Vendor from third parties (including governmental, regulatory or other official authorities) in respect of the Asset Transfer Agreement and the Transactions (including in particular for transferring the Assets) having been obtained by the Vendor and shall remain in full force and effect;
(f) all licences, permissions, authorisations, approvals, consents and waivers required to be obtained on part of the Company from third parties (including governmental, regulatory or other official authorities) in respect of the Asset Transfer Agreement and the Transactions

LETTER FROM THE BOARD

(including in particular for the allotment and issue of the Consideration Shares, the issue of the Convertible Bonds and the Convertible Bonds II, the allotment and issue of the Conversion Shares and the Conversion Shares II) having been obtained by the Company and shall remain in full force and effect;

(g) there not having occurred any event or series of events since the date of the Asset Transfer Agreement which, individually or collectively, would have a material adverse effect on the condition (financial or otherwise), prospects, business, operations, earnings, or properties of the Group, taken as a whole, whether or not arising from transactions in the ordinary course of business or which would materially affect the Company’s ability to perform its obligations under the Asset Transfer Agreement or the Transactions;
(h) the Vendor notifying the Company not later than 30 days after the date of the Asset Transfer Agreement that it is satisfied with the results of the due diligence review on the legal, financial, contractual, taxation and trading position of the companies within the Group and Power Way;
(i) the Company notifying the Vendor not later than 30 days after the date of the Asset Transfer Agreement that it is satisfied with the results of the due diligence review on the title of the Assets and the functionality of the CSLA Software and CWL Software as described in the Software Licence Agreement;
(j) no indication being given by the Stock Exchange that the Transactions will be treated as a “reverse takeover” under the GEM Listing Rules;
(k) each of the Power Way Undertaking, Melco LV Undertaking, Firich Undertaking and LottVision Undertaking having been duly executed and delivered to the Vendor and remaining binding and in full force and effect; and
(l) the warranties given by the Vendor in the Asset Transfer Agreement remaining true and accurate and not misleading at Completion as if repeated at all times between the date of the Asset Transfer Agreement and as at Completion and there having been compliance in all respects with the covenants and obligations on the part of the Vendor contained in the Asset Transfer Agreement which are to be complied with at or prior to the time of Completion,

provided that the Vendor may waive any of Conditions (c), (d), (f), (g), (h) and (k) above (either in whole or in part) at any time by notice in writing to the Company and the Company may waive any of Conditions (i) and (l) above (either in whole or in part) at any time by notice to the Vendor.

As at the Latest Practicable Date, conditions (h), (i) and (j) have been satisfied.

Power Way Restructuring

In the Asset Transfer Agreement, both the Company and the Vendor acknowledge that the transfer of the Assets by the Vendor to the Company has been agreed on the expectation that the Power Way Restructuring shall be completed within 6 months of the date of the Asset Transfer Agreement and in the

LETTER FROM THE BOARD

event that the Power Way Restructuring fails to complete within the above mentioned time period or fails to be implemented in the manner as described in the Asset Transfer Agreement, the following shall occur:

(a) the exclusive nature of the licence to use the CSLA Software shall be suspended until the Power Way Restructuring has been completed in the manner as described in the Asset Transfer Agreement;
(b) the undertakings and covenants given by the Vendor as mentioned in the first paragraph under the section headed “Non-Competition” below in this circular shall be suspended and of no force or effect until the Power Way Restructuring has been completed; and
(c) the Vendor’s obligations to discuss and negotiate in good faith with the Company concerning the Potential Wu Sheng Transfer shall be suspended and of no force and effect until the Power Way Restructuring has been completed.

Power Way is owned as to approximately 58.70% by Melco LV, as to approximately 12.43% by LottVision and as to approximately 28.87% by Global Crossing. Melco LV is wholly-owned by Melco (stock code: 200). LottVision is a listed company in Singapore Exchange Limited. Global Crossing is wholly owned by Firich Enterprise Co. Ltd. which is listed on Taiwan Gre Tai Securities Market.

The instrument constituting the Power Way CB provides that such Power Way CB is transferable. The Company considers that Melco LV, Global Crossing and LottVision are the defacto beneficial owners of the Power Way CB and the fact that the distribution of the Power Way CB to its shareholders in proportion to their respective effective interests in Power Way pursuant to the Power Way Restructuring, as advised by the legal adviser to the Company, shall not constitute a breach of the terms of the Power Way CB.

Save for the fact that Firich Enterprise Co., Ltd. has formed a joint venture with Intralot and an independent third party in Taiwan for a welfare lottery project and does contract manufacturing for the Vendor, Power Way, Melco, Melco LV, LottVision, Global Crossing and their respective substantial shareholders are not connected to the Vendor or parties acting in concert with the Vendor.

The Vendor has entered into the Asset Transfer Agreement to contribute the Assets in consideration of a strategic stake based on its own financial and strategic considerations. These strategic considerations would be based on an understanding of the Company, its strengths and weaknesses, its potential in the region, its shareholders and their support for the Company, the Vendor’s own standing within the Company vis a vis other Shareholders. Given that the Power Way Restructuring forms a part of this understanding, it is related to the overall Asset Transfer Agreement and the terms thereof.

As at the Latest Practicable Date, the Power Way Restructuring has been completed and Power Way has distributed and transferred to all its shareholders of all the Shares and Power Way CB held by it. Accordingly, Melco LV is the owner of 51,977,024 Shares, which include 42,265,024 Shares from the Power Way Restructuring in addition to 99,712 shares Melco LV had bought from the open market, and the Melco LV CB, LottVision is the owner of 8,947,934 Shares and the LottVision CB and Global Crossing (a shareholder of Power Way and a wholly-owned subsidiary of Firich Enterprise Co., Ltd.) is the owner of 20,787,042 Shares and the Firich CB. Further, with reference to the announcement of the

LETTER FROM THE BOARD

Company dated 18 October 2007, HK$18 million out of the total amount of HK$556.8 million of the Power Way CB has been held escrow as security for a profit guarantee given by Firich Enterprise Co., Ltd. in favour of the Group. Global Crossing has deposited the HK$18 million worth of the Firich CB to the escrow agent of the Company to secure the profit guarantee immediate upon completion of the Power Way Restructuring. The Company considered that as long as the Board’s consent has been obtained and Global Crossing has deposited the HK$18 million worth of the Firich CB to the escrow agent of the Company to secure the profit guarantee, it shall not be deemed as a breach of the terms of the HK$18 million worth of Power Way CB.

Lock Up Undertaking

The Vendor undertakes to the Company that:

(a) it will not, in respect of the Consideration Shares, for a period of six months from Completion, offer, lend, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of (either conditionally or unconditionally, or directly or indirectly, or otherwise) any of the Consideration Shares, or any interests in such Consideration Shares beneficially owned or held by it or enter into any swap, derivatives or similar agreement that transfers, in whole or in part, the economic consequences of ownership of such Consideration Shares; and
(b) in relation to any disposal after such lock up period, reasonable steps will be taken by the Vendor to ensure that the disposal will not create a false or disorderly market for the Shares.

For the avoidance of doubt, the Vendor shall at all times be entitled to all the rights attaching to the Consideration Shares and the Conversion Shares including, without limitation, all dividends and other distributions in respect of the Consideration Shares and the Conversion Shares and may exercise all voting and other rights which they may have in respect of the Consideration Shares and the Conversion Shares.

Non-Competition

The Vendor undertakes and covenants that for so long as the exclusive nature of the CSLA Software licence is in force and not suspended in accordance with the Asset Transfer Agreement and/or the terms of the Software Licence Agreement, it shall not and shall procure all of its subsidiaries not to be, directly or indirectly, concerned in any business carrying on business in the PRC which is competitive or likely to be competitive with the lottery and betting businesses carried on from time to time during the exclusivity term (please refer to the section headed “Software Licence Agreement” below in this circular) of the CSLA Software licence by the Group in the PRC in relation to CSLA Projects, except for (a) management and consulting services and maintenance and support services in relation to lottery and betting businesses; and (b) any business that the Vendor may be concerned in which is existing or which the Vendor is required to undertake as at the time the exclusive nature of such licence ceases to be suspended in accordance with the terms of the Asset Transfer Agreement and/or the terms of the Software Licence Agreement.

LETTER FROM THE BOARD

The Company shall use its best endeavours to procure each of Power Way, Melco LV, Firich and LottVision to provide a written undertaking to the Vendor that it shall not, for so long as it remains a member of the Company and/or a member of the Group and during the exclusivity term of the CSLA Software licence (whether such exclusivity is suspended or not in accordance with the terms of the Asset Transfer Agreement and/or the terms of the Software Licence Agreement), directly or indirectly, be concerned in any business carrying on business in the PRC which is competitive or likely to be competitive with the lottery and betting businesses carried on by the Group in the PRC.

The Vendor further undertakes and covenants not to offer, sell, transfer or dispose of (either conditionally or unconditionally, or directly or indirectly, or otherwise) any of the Consideration Shares or the Conversion Shares to any Existing Shareholders’ Competitors.

The Company shall use its best endeavours to procure each of Power Way, Melco LV, Firich and LottVision to provide written undertakings to the Vendor that it or he (as the case may be) shall not, directly or indirectly, offer, sell, transfer or dispose of (either conditionally or unconditionally, or directly or indirectly, or otherwise) any Shares or shares in any companies of the Group held by them to any of Intralot’s Competitors.

Subject to any restrictions binding on it, the Vendor shall discuss and negotiate in good faith with the Company concerning the Potential Wu Sheng Transfer.

Completion

Completion of the Acquisition will take place on the third Business Days after the date on which the last of the Conditions are satisfied or, where permitted, waived or on such other date as the Vendor and the Company may agree.

Corporate Governance

The Company represents, warrants and undertakes that after Completion:

(a) the Vendor shall be entitled to nominate one Director to the Board;
(b) the Company shall establish a nomination committee in accordance with the GEM Listing Rules whose membership shall include the Director(s) nominated by the Vendor;
(c) the Company shall establish the senior management position of chief operating officer and the Vendor shall be entitled to nominate the person holding such position;
(d) the Vendor and Melco LV shall be entitled to jointly nominate the chief financial officer of the Company; and
(e) to recognise the Vendor’s substantial investment in the Company and the use of its software, the company name and logo of the Company shall be changed within 6 months after Completion to a name mutually acceptable to the Vendor and Melco LV.

LETTER FROM THE BOARD

The Vendor’s rights as stated in paragraphs (a) to (e) shall terminate when its MLV Interests represents less than 7.5% of the Company’s total issued share capital, provided however that if the Vendor’s MLV Interests fall below such percentage, the Vendor shall have 21 days to rectify the situation and failing such rectification, its rights under paragraphs (a) to (e) above shall terminate after expiry of the foregoing rectification period.

The holding company of the Vendor, i.e. Intralot, has profound knowledge and experience in the lottery industry and a Director or senior management to be nominated by the Vendor will enable the Board and the Company to leverage on Intralot’s expertise to explore business opportunities in lottery industry. Further, the Vendor is only entitled to nominate a candidate, the Board and the Shareholders have to approve the appointment of the candidate nominated by the Vendor as a Director. The Board also has the intention to maintain cooperation with the Vendor as the Company needs to rely on the expertise of and assistance from the Vendor to secure Projects. The Board believes that the foregoing will result in better understanding between the Company and the Vendor and will give the Vendor more confidence to cooperate with the Company in the future to win more Projects. As a result, the Directors consider that the Vendor’s rights as stated in paragraphs (a) to (e) above are fair and reasonable to other Shareholders.

Post-Completion Commitment

Pursuant to the Asset Transfer Agreement, after Completion, the Vendor shall provide reasonable assistance to the Company to secure two service agreements in connection with CSLA Projects and CWL Projects in the PRC. Upon the Company obtaining such agreements, the Vendor shall be entitled to the Success Payment of a total sum of HK$75,000,000 from the Company.

(a) 30% of the total success payment shall be paid when the first project is procured and the agreement with respect thereto executed; and
(b) the remaining 70% shall be paid when the second project is procured and the agreement with respect thereto executed.

Unless otherwise agreed by the parties, the above Success Payment shall be paid by way of the Convertible Bonds II issued by the Company at the conversion price of HK$1.0759 per Conversion Share II. Payment of the Success Payment due shall be made by the Company to the Vendor within 7 Business Days of each project being procured and the agreement with respect thereto being executed.

If two Projects are not secured, the Vendor will not be entitled to the Success Payment. In addition, the Vendor has an implied opportunity cost due to the exclusivity arrangements for the CSLA market. To prevent losing access to half of the lottery market in the PRC (CSLA and CWL are the only two lottery providers in the PRC and CSLA presently has a larger market share) it is expected that every effort will be made to secure Projects by the Vendor. In effect the Success Payment along with the exclusivity arrangement is a mechanism devised to align interests of both the Company and the Vendor and incentivise them to work together and secure Projects.

With the acquisition of the licence, the Company is adding a new line of business to its existing lottery operations. The Company recognises that it will require the assistance from the Vendor initially as it builds up its own expertise in securing contracts under this new line of business. Accordingly, it

LETTER FROM THE BOARD

has devised the Success Payment as a mechanism to incentivise the Vendor to work with and support the Company in securing Projects. Both parties will be keen to work together as each can expect some benefit from securing Projects i.e. Company will be keen to start utilizing the Software, while Vendor will be keen to receive its Success Payment. The Company expects that it will build up its own business development abilities with regard to the the Software during the course of working with Vendor for the first two Projects, and will be able to secure service agreements on its own thereafter. Accordingly, it does not consider the need to provide such incentive after the first two service agreements.

The Success Payment will only be paid once for the first two Projects but not on a recurring basis for any extension of the exclusivity period of the CSLA Projects.

For the avoidance of doubt, the Success Payment will not be payable in respect of up to four trials or demonstration Projects. CSLA or CWL authorities may demand a trial or demonstration project to assess the work and operations of software in a practical but small scale environment before making decision on the choice of software. Such a trial or demonstration project does not justify the Success Payment which should be for projects of commercial scale. In order to ensure that all parties take a considered decision before opting to incur time expense and effort of a trial or demonstration project, an initial cap of four trials or demonstration projects has been mutually agreed as the number for which there will be no Success Payment.

Currently, there is no agreement relating to the CSLA Projects and CWL Projects under negotiation.

The principal terms of the Convertible Bonds II are finalized on 6 November 2008 and are summarized as follows:

Issuer the Company Initial subscriber the Vendor Amount HK$75,000,000 Bonds issue price 100 % of the principal amount of the Convertible Bonds II Coupon 0.1% interest, payable semi-annually in arrears

Negative pledge

so long as any of the Convertible Bonds II remains outstanding and to the extent the Convertible Bonds II are held by the Vendor, any of its wholly owned subsidiaries, its holding companies and/ or the wholly owned subsidiaries of such holding companies (the “Intralot Group”), without the consent of the Intralot Group, the Company will not, and will procure that none of its Subsidiaries shall, create or have outstanding any Security Interest upon, or with respect to, any of its or its Subsidiary’s (as the case may be) present or future business, undertakings, assets or revenues (including any uncalled capital) to secure any Relevant

LETTER FROM THE BOARD

Indebtedness, provided that nothing in this clause shall prohibit or restrict the Company, or any of its Subsidiaries, from creating or permitting to have outstanding:

(a) any Security Interest if it, before or at the same time and, in any other case, promptly, takes any and all action necessary to ensure that:
(i) all amounts payable by it under the Convertible Bonds II are secured by Security Interests equally and rateably with the Relevant Indebtedness to the satisfaction of the Intralot Group; or
(ii) such other Security Interest or other arrangement (whether or not it includes the giving of a Security Interest) is provided as is approved in writing by the Intralot Group; and
(b) the Security Interest granted to secure the Convertible Bonds and/or the Firich CB, the LottVision CB, the Melco LV CB and any indebtedness of the Company which is outstanding and disclosed to the Intralot Group on the date of issue of the Convertible Bonds II in writing.

Maturity Date 5 years from the date of issue of the Convertible Bonds II. Issue of the Convertible the Convertible Bonds II will be issued at two tranches: Bonds II

(a) the first tranche of an amount equivalent to 30% of the total Success Payment, being HK$22,500,000, shall be issued when the first Project is procured and the agreement with respect thereto executed; and
(b) the second tranche of an amount equivalent to 70% of the total success payment, being HK$52,500,000 shall be issued when the second Project is procured and the agreement with respect thereto executed.

Conversion Price II initial conversion price of HK$1.0759 per Conversion Share II but subject to standard adjustments clauses, including but not limited to, consolidation or subdivision of Shares, capitalization of profits or reserves, capital distribution, 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.

LETTER FROM THE BOARD

The Conversion Price II of HK$1.0759 per Conversion Share II represents:

(a) a premium of approximately 37.94% over the closing price of HK$0.78 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a premium of approximately 35.85% over the average closing price of HK$0.792 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 premium of approximately 39.01% over the average closing price of HK$0.774 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day; and
(d) a premium of approximately 313.81% over the closing price of HK$0.26 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

Conversion period

the Convertible Bonds II may be converted at any time from the date of issue of the Convertible Bonds II up to and including the close of business on the day immediately prior to the Maturity Date subject to the limitation on conversion set out below.

Ranking of the Conversion Shares II

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

Limitation on conversion

No conversion of the Convertible Bonds II shall be made, if immediately upon such conversion,

(1) the Bondholder II together with parties acting in concert with it (within the meaning of the Code) control 30% (or such other percentage as stated in the Code in effect from time to time) or more of the voting rights in the Company so that it shall trigger a mandatory offer obligation under Rule 26 of the Code on the part of the Bondholder II which exercised the Conversion Rights II; and/or
(2) the public float of the Shares falls below 25% (being the current minimum public float of the Company or any given percentage as required by the GEM Listing Rules) of the issued shares of the Company. As the Company is required to maintain the minimum public float of the Shares, the

LETTER FROM THE BOARD

Company will not issue any Conversion Shares II if upon such issuance, the minimum public float requirement of the Company cannot be maintained.

The Convertible Bonds II not so converted will be redeemed at maturity at 100% of the principal amount of the unconverted Convertible Bonds II plus accrued interest.

Redemption

Unless previously redeemed, converted or purchased and cancelled, the Company will redeem each Convertible Bond II at 100% of its principal amount on the Maturity Date.

Following the occurrence of a Relevant Event, each Bondholder II will have the right at such holder’s option, to require the Company to redeem all or only some of that holder’s Convertible Bonds II on the Redemption Date at 100% of their principal amount together with any outstanding interest.

Transferability

Listing

Voting

Events of default

The Bondholder(s) II shall be permitted at any time to assign or transfer the Convertible Bonds II, or part of the Convertible Bonds II to any transferee as nominated by the Bondholder(s) II provided that any such assignment or transfer shall be made in whole or in part (in whole multiples of HK$1,000,000) of its outstanding principal amount. A Bondholder II may not require the transfer of the Convertible Bonds II to be registered (i) after a Conversion Notice has been delivered with respect to a Convertible Bond II or (ii) during the period of 7 business days ending on (and including) any Interest Record Date.

No application will be made by the Company to the GEM Listing Committee for the listing of the Convertible Bonds II. Application will be made by the Company to the GEM Listing Committee for the listing of, and permission to deal in, the Conversion Shares II on the GEM.

Bondholder(s) II shall not be entitled to attend or vote at any general meetings of the Company by reason only of it being the holder of the Bondholder II.

Events of default shall include the following:

(i) a default is made in the payment of principal or interest in respect of any of the Convertible Bonds II and such default continues for a period of seven days in the case of principal or 14 days in the case of interest;

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(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 from the business nature as of the issue date of the Convertible Bonds II;
(v) material adverse change in the financial condition of the Company as determined by the Bondholders II;
(vi) any material default made by the Company in the performance or observance of any undertaking, warranty or representation given by it under the conditions of the Convertible Bond II or the Deed Poll II (other than the covenant to pay the principal and interest in respect of the Convertible Bonds II) 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 II 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 Deed Poll II or any Convertible Bonds II, or due to no fault on the part of any Bondholder II 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 II shall be governed by and construed in accordance with the laws of Hong Kong.

Further to case (1) under the paragraph headed “Limitation on conversion” above, there may be scenario that a Shareholder owns or controls 20% or more of the voting rights of the Company and the Bondholder II shall control 20% or more of the voting rights in the Company so that they will presumably be parties acting in concert under the Code for the purpose of restriction on conversion of the Convertible Bonds II as stated above or the relevant parties will need to comply with the relevant provisions of the Code.

For illustration purpose only, the 69,709,080 Conversion Shares II to be issued under the Convertible Bonds II represents (i) approximately 14.79% of the existing issued share capital of the Company; (ii) approximately 12.89% of the issued share capital of the Company as enlarged by the allotment and issue of the Conversion Shares II, assuming full conversion of the Convertible Bonds II and

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the Conversion Shares II were to be issued at the Conversion Price II; (iii) approximately 8.21% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares, the Conversion Shares and the Conversion Shares II, assuming full conversion of the Convertible Bonds and Convertible Bonds II and the Conversion Shares and Conversion Shares II were to be issued at the Conversion Price II; and (iv) approximately 4.46% of the issued share capital of the Company as enlarged by the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II, assuming, for illustration purpose only, full conversions of the Convertible Bonds and the Convertible Bonds II and the Conversion Shares and the Conversion Shares II were to be issued at the Conversion Price and the Conversion Price II respectively (as the case may be) and each of the Melco LV CB, Firich CB and the LottVision CB are converted into Shares in full.

Intralot has a long standing experience in the development and support of integrated gaming and transaction processing systems, while its footprint straddles five continents, with presence in 45 countries. Thus it has significant amount of in-house expertise in not only providing services but also vital business development activities that are necessary to secure projects. For example, Intralot has the distinction of having secured over 60% of projects it bid for between year 2005 and 2008 for which is an impressive achievement in this highly competitive field. The Company has secured the Software in order to gain access to a new and important line of business within the lottery industry, and it will take some time before it can build up the in-house expertise necessary to effectively market and promote the Software and thus secure Projects. Accordingly, Intralot has been given an incentive of the Success Payment to provide the Company with access to the considerable business development expertise built up by Intralot over the years and to work hand in hand and provide all the services required by the Company in its business development activities with the objective of securing projects. Accordingly, the Success Payment is a mechanism devised to align the interests of the Company and the Vendor during the initial stage of the Company’s entry into this new and important line of business within the lottery industry.

The Board considers that the commitment to pay the HK$75 million should two service agreements in connection with the CSLA Projects and the CWL Projects are secured is fair and reasonable because:

this arrangement has been negotiated at arms’ length between unrelated parties;
this is the amount both parties agreed upon as being commensurate to the important assistance that Vendor will provide to the Company to secure the Projects;
the Success Payment provide significant incentive for Intralot to assist the Company to obtain Projects;
the internally estimated revenue to be generated from two Projects will be larger than the Success Payment in the amount of HK$75 million; and
the conversion price of HK$1.0759 for the Convertible Bonds II represents significant premium to the prevailing market price of the Shares.

LETTER FROM THE BOARD

Balance Of Interests in the Company

The Vendor, Melco LV and Melco International have agreed to maintain at all times after Completion (i) the Vendor’s MLV Interests shall be no more than 10.30% lower than that of Melco LV’s MLV Interests but in any case not exceeding Melco LV’s MLV Interests; and (ii) the Vendor’s direct and indirect holdings of Shares shall be no more than 2.85% lower than that of Melco LV’s direct and indirect holdings of Shares but in any case not exceeding Melco LV’s direct and indirect holdings of Shares (the “Balance of Interests”), provided however that in calculating the Vendor’s and Melco LV’s MLV Interests and Shares:

(a) the Vendor’s interests in the Convertible Bonds II and the Shares which may be acquired under such bonds shall not be counted and shall be disregarded;
(b) if the Vendor or Melco LV has voluntarily disposed of MLV Interests after Completion (whether through the disposal of the Shares (such as Consideration Shares or Conversion Shares), convertible bonds (such as the Convertible Bonds, the Convertible Bonds II and/ or the Melco LV CB) or otherwise, or as a result of a pledge of MLV Interests specifically permitted in Melco LV Undertaking, as the case may be), then the MLV Interests so disposed of shall be added back to and be counted in that party’s MLV Interests and Shares;
(c) if any holder of MLV Interests wishes to sell MLV Interests and is either subject to a right of first refusal which requires that holder to make an offer to both the Vendor and Melco LV or it otherwise offers its MLV Interests to both the Vendor and Melco LV, and if one of the Vendor or Melco LV decides not to exercise such right or acquire such MLV Interests prorata based on their respective MLV Interests, then the number of MLV Interests so purchased by the Vendor or Melco LV (as the case may be) shall not be counted in that party’s MLV Interests and Shares and shall be disregarded;
(d) if the Company requires further contribution of capital by the Shareholders and the Vendor and Melco LV are given the opportunity to contribute based on their respective pro-rata MLV Interests, and if one of the Vendor or Melco LV fails to make their pro-rata contribution to the Company, then the MLV Interests so acquired by the Vendor or Melco LV (as the case may be) shall not be counted in that party’s MLV Interests and Shares and shall be disregarded; and
(e) if the Vendor or Melco LV acquires MLV Interests in accordance with its rights of first refusal under the Melco LV Undertaking or the Power Way Undertaking, the MLV Interests so acquired shall not be counted in that party’s MLV Interests and shall be disregarded.

The Company considers that it is to its benefit to have this arrangement for the Balance Of Interests in the Company because it considers that it is in the interest of the Company to have two important but not controlling Shareholders so that they can be drawn on for their respective expertise and experiences.

LETTER FROM THE BOARD

INFORMATION ON THE VENDOR

The Vendor is a wholly-owned subsidiary of Intralot, a public listed company on the Athens Exchange, engaging in the supply of integrated gaming and transaction processing systems, innovative game content and sports betting management to state licensed gaming organizations worldwide. Based on its extensive know how, advanced product development standards and substantial experience in operating lottery games, the Vendor offers custom-made integrated solutions, which ensure maximum efficiency and absolute security. Its games library includes more than 400 types of games: numerical lotteries, television lottery games, sports lotteries, fixed odds betting, instant lotteries, pari-mutuel, video lottery and monitor games. With presence in 45 countries, with approximately 4,400 people and revenues of €835.5 million for 2007, the Vendor has established its presence on all 5 continents.

INFORMATION ON THE SOFTWARE

The Software is the most current version of:

(i) Chinese version of LOTOS Central system comprising of the following specific components:
LOTOS O/S Operating System;
LOTOS Gameware comprising
- numerical games management system (NGMS)
- Keno games management system (KGMS)
- pool (score) games management system (SGMS)
- Bingo games management system (BGMS)
- instant ticket games management system (IGMS)
- Monitor Games Management System (MGMS)
- video games management system (VGMS)
- Fixed Odds Sports Betting Module (FlexBet)
LOTOS Sales Plus suite of applications
LOTO Value Plus suite of applications
LOTOS Integrity
LOTOS Horizon; and
I Gate connectivity and access system
(ii) CORONIS family terminal application software

The operating system platform offers a fully integrated gaming environment that can be adapted to any terminal over any communication network. The Vendor and third party terminals are fully supported, including clerk-operated terminals, self-service terminals, mobile or portable terminals, vending machines, automatic-teller-machines and cash registers. All other sales channels are also supported, such as the internet, mobile and fixed telephony, interactive voice response, call centres and interactive television.

The operating system platform presents a technologically superior solution by comparison to its competition and is designed on an open multiple tier architecture ensuring extensive interconnectivity with third-party systems as well as expandability, reliability and operational safety. Furthermore, the operating system platform includes middleware that supports the connection of the platform to all external systems

LETTER FROM THE BOARD

and networks. It also has lottery games processing system, which provides an integrated and flexible environment that enables the operation and support of any type and variation of over 400 lottery games.

SOFTWARE LICENCE AGREEMENT

Pursuant to the terms of the Asset Transfer Agreement, the Vendor and the Company will enter into the Software Licence Agreement at Completion. The salient terms of the Software Licence Agreement are summarized as follows:

Subject matter:

The Vendor agreed to grant to the Company:

(a) royalty-bearing, non-transferable, non-assignable, exclusive licence to use and sublicense the Software and the documentation of the Software to the Company’s customers in connection with CSLA Projects; and
(b) a royalty-bearing, non-transferable, non-assignable, nonexclusive, licence to use and sublicense the Software and the documentation of the Software to the Company’s customers in connection with CWL Projects.

Terms:

the CSLA Software: Perpetual license right commencing from the Completion Date until terminated by either party to the Software Licence Agreement in writing (the perpetual licence right can only be terminated under extraordinary circumstances, such as material breach of obligations, liquidation and winding up as outlined in the Software Licence Agreement). The exclusive nature of the license shall be for an initial period of 3 years commencing from the Completion Date. If during the initial 3-year exclusivity period no less than 2 Projects are awarded to the Company, the exclusivity period shall be extended 2 years from the end of the 3-year initial exclusivity period. If during any extended 2-year exclusivity period no less than 2 Projects are awarded to the Company, the exclusivity period shall be extended by a further period of 2 years from the end of any such extended exclusivity period. Notwithstanding the foregoing or anything in the Software Licence Agreement in the event that the Power Way Restructuring fails to complete within 6 months of the date of the Asset Transfer Agreement or fails to be implemented in accordance with the Asset Transfer Agreement, the exclusive nature of the licence to use the Software shall be suspended and such licence and the Software Licence Agreement shall be construed in all respects as a non-exclusive licence until the Power Way Restructuring has been completed in accordance to the Asset Transfer Agreement (“ Suspension Period ”). For the avoidance of doubt, the exclusivity period shall not be extended by any Suspension Period and the Vendor shall be entitled to continue any licences granted

LETTER FROM THE BOARD

to other parties during the Suspension Period after the expiry of the Suspension Period.

the CWL Software: non-exclusive perpetual license right commencing from the Completion Date until terminated by either party to the Software Licence Agreement in writing (the perpetual licence right can only be terminated under extraordinary circumstances, such as material breach of obligations, liquidation and winding up as outlined in the Software Licence Agreement).

It is common practice of multinational companies to grant right and exclusivity for certain markets based on, amongst other things, geographical and industry sector. In the present case, the Company has been able to secure exclusivity for a certain market sector i.e. CSLA Projects. The Company expects to gain success in the CSLA market by utilising the competitive advantages brought by its exclusive rights in CSLA Projects, the Company’s track record, credibility and experience gained in the CSLA Projects will facilitate its business development in the CWL market and will give it competitive advantage over competitors without obtaining exclusivity in the CWL Projects.

Territory:

Licence fee:

the PRC

The Company shall pay the Vendor a one-off fixed licence fee of HK$255,130,367.558 as set out in the Asset Transfer Agreement for the right to use the Software licence and sublicence of the Software. In the event of termination of the agreement, if the Group has on-going projects and has sublicensed the Software Licence to any customers, the Company shall pay additional licence fees for the continuation of such sublicence with the customers after termination of the licence of the Software. The additional fees for each project as agreed by the parties with regards to the amount of royalties for the grant of a license to the use of the software by a potential customer for any period which extends beyond the terms of the Software Licence Agreement. At present moment, parties thereto have not determined the additional fees since it is a remote possibility with many permutations and combinations. The Vendor is not required to perform any additional service to be entitled to the additional licence fees and such additional fees are irrelevant to the licence fees paid by the Company to the Vendor. Additional licence fees are only payable when the Software Licence is terminated and the Group has sublicensed the Software Licence to any customers. The Company is required to pay additional licence fees for the continuation of such sublicence with the customers.

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Projects:

The Vendor shall provide reasonable assistance to the Company to secure agreements in connection with CSLA Projects and CWL Projects in the PRC.

Protective covenant:

The Company covenants that during the term of the Software Licence Agreement, it shall not and shall procure its affiliate shall not market, sell, licence or otherwise grant any licence to use any software which is similar or competitive to, or likely to be competitive to the Software to either the CSLA or the CWL or their respective successor entities.

The Vendor covenants that during the exclusivity terms:

(a) it shall not and shall procure that any such affiliate shall not market, sell, licence or otherwise grant any licence to use the Software, or any software which is similar or competitive to, or likely to be competitive to the Software to either the CSLA or any successor entity; and
(b) it shall grant to the Company a right of first refusal to participate in one CWL Project which is identified by the Vendor and in which the Vendor intends to participate.

Pursuant to the Asset Transfer Agreement, the Vendor agrees to grant the Company the licence to use the Software and to sublicense the Software upon certain conditions. If those conditions are satisfied, the Software licence will be granted by the Vendor to the Company pursuant to the Software Licence Agreement. The Software Licence Agreement is a completion document that perfects the grant of the Software licence by the Vendor to the Company. Given that the Vendor warrants in the Software Licence Agreement that Intralot is the sole legal and beneficial owner of all rights, title and interest in the Software, the Board is advised by its legal adviser that upon due execution of the Software Licence Agreement, the exclusive licence right to use and sublicense the Software in connection with the CSLA Projects and the non-exclusive licence right to use and sublicense the Software in connection with the CWL Projects will be legally granted to the Company. With reference to the legal opinion provided by the PRC legal adviser of the Company, there would not be any other legal requirement for the use and sublicense of the Software in connection with the CSLA Projects and CWL Projects in the PRC when the Vendor obtains the software registration certificate of the Software from Ministry of Industry and Information Technology of the PRC.

LETTER FROM THE BOARD

The licence of the Software is perpetual and for use throughout the PRC (i.e. both CSLA Projects and CWL Projects). In addition, there are exclusivity arrangements for CSLA Projects. The Company has the right to use the licence after the exclusivity arrangements have ended. Accordingly, the exclusivity arrangement will continue to be extended as long as the Projects are secured. On the other hand, if for a certain period, the Projects are not secured and the exclusivity ends, the Company still retains the right to use the licence.

INFORMATION ON THE LOTTERY MARKET IN THE PRC

Lotteries in the PRC are highly regulated and totally directed by the Ministry of Finance under two different administrations – the CWL and the CSLA. Both bodies aim to raise funds for the public agenda. The CWL was established in 1987, and was commissioned to raise fund for social welfare purposes. The CSLA was established in 1995, and was commissioned to raise funds for sports development, including financing the construction of sports stadiums for mass public, as well as funding the salaries of national sports teams.

With reference to a recent research report from an independent European securities house, in 2007, the CWL recorded about RMB63 billion in lottery receipts, accounting for about 63% market share; while the CSLA recorded about RMB36 billion in lottery sales receipts, accounting for about 37% market share.

Both CWL and CSLA market lotteries throughout the PRC, and the lottery playing public may choose to patronise either one based on their personal preference for the lottery products offered for sale by the CWL and CSLA.

UNDERTAKINGS

Power Way and each of its shareholders, including Melco, Global Crossing (together with its ultimate beneficial owner, Firich Enterprises Co. Ltd.) and LottVision have agreed to enter into their respective undertakings in favour of the Vendor, i.e. Power Way Undertaking, Melco LV Undertaking, Firich Undertaking and LottVision Undertaking. Each of the undertakings contains the following major terms:

save for the Power Way Restructuring, each of Power Way, Melco LV, Firich and LottVision shall not, in respect of any Shares held by them as at the date of their respectively undertakings, for a period of 6 months from Completion, effect disposal of any Shares beneficially owned or held by them respectively;
each of Power Way, Melco LV, Firich and LottVision shall not, directly or indirectly, offer, sell transfer or dispose of (either conditionally or unconditionally, or directly or indirectly, or otherwise) any of their respective Shares or shares in the Company or any of its Subsidiaries held by them to Intralot’s Competitors;
save the Power Way Restructuring, Power Way, Firich and LottVision shall grant the Vendor and Melco LV first right of refusal in respect of the MLV Interests held by them respectively if any of them wishes to dispose of their respective MLV Interests;

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each of Power Way, Melco LV, Firich and LottVision shall not and shall procure all of their respective subsidiaries not to, for so long as they remains a member of the Company and/or a member of any Subsidiary and/or a member of Power Way and during the exclusivity term of the CSLA Software licence, directly or indirectly, be concerned in the lottery and betting businesses as is or may be carried on by the Company or its Subsidiaries in the PRC; and
each of Power Way, Melco LV, Firich and LottVision undertakes that, without the prior written consent of Intralot, it shall not give consent to any amendment to the terms of their respective convertible bonds nor give consent to any indebtedness owed to Power Way, Melco LV, Firich or LottVision to be converted or reorganised into MLV Interests.

Pursuant to the Melco LV Undertaking, the Vendor also undertakes to Melco LV that it shall grant first right of refusal to Melco LV in respect of the MLV Interests held by them respectively of it wishes to dispose of its MLV Interests.

Each parties to the Melco LV Undertaking undertakes to the other party that: (i) it shall not (and it shall procure that its subsidiaries shall not) take any action (or avoid taking any action) which would, or is likely to, cause the Balance Of Interests to be breached; and (ii) it shall not acquire or offer to acquire, or cause another person to acquire or to offer to acquire, any direct or indirect interest in any MLV Interests or other securities or assets of the Company or any other member of the Group or do or omit to do any act as a result of which it or any person acting in concert with it may acquire any direct or indirect interest in any MLV Interests or other securities or assets of the Company or any other member of the Group. For the avoidance of doubt, the foregoing applies to any exercise of Melco’s conversion rights under the Melco LV CB and any exercise of Vendor’s conversion rights under the Convertible Bonds. Furthermore, each party to the Melco LV Undertaking undertakes to the other party that if one party (the “First Party”) nominates (or has appointed) a candidate to be a Director then it shall support the nomination or appointment of a candidate of the other party (the “Second Party”) to be a Director so that each of the First Party and the Second Party will have the same number of candidates appointed to the Board. Each party will also support the other party’s nominations to the offices and positions set out in the section headed “Corporate Governance” in this circular.

As at the Latest Practicable Date, none of the Power Way Undertaking, Melco LV Undertaking, Firich Undertaking and LottVision Undertaking have been executed.

REASONS FOR AND BENEFITS OF THE ACQUISITION

The Group had, toward the end of 2007, acquired certain Subsidiaries which are engaged in various lottery-related businesses and ventures in the PRC and Asian countries, and in the manufacturing of point of sale and lottery terminals for the sports and welfare lottery businesses in the PRC. Other Subsidiaries are engaged in the business of network system integration. These include provision of network infrastructure solutions, including network infrastructure, network management services and network software, in the PRC and Hong Kong. It is the intension of the Group to keep its existing business in network system integration.

LETTER FROM THE BOARD

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

the intangible value of the cooperation with the Vendor, being an international leading provider of integrated gaming systems, as a strategic Shareholder upon Completion;
the growth prospects and earnings capability which may be brought to the Group upon the Acquisition, including the potential revenue generated from CSLA projects and/or CWL projects; and
the immediate access to the leading complete technology solution, including but not limited to a readily available and extensive game library allowing instant offer of new lottery games to the market.

Interim report of the Company shows profit of approximately HK$8.43 million for the network system integration but loss of approximately HK$38.64 million for the lottery business, of which approximately HK$28.64 million was from non-cash payments, i.e. by excluding the non-cash payments, the lottery business incurred loss of approximately HK$10.3 million.

The Board considers that the network system integration business is a relatively mature industry and competition in the network system integration is extremely keen as the Group needs to compete with both local and international system integration companies which are mostly also network hardware/ software manufacturers. Growth is both slow and difficult.

BUSINESS PROSPECTS

For the purpose of enhancing the long-term growth potential of the Group, the Company identified lottery business as a diversification business for the Company in October 2007. Growth potential and profitability return to Shareholders are the main considerations of the Company. Given that it is always difficult to start a new business the Company is prepared to bear the losses in the short term. Furthermore, the losses are derived from the Company’s existing businesses of venue management consultancy, scratch and retail terminal distribution, and terminal manufacturing. The loss on lottery business as shown in the 2008 interim report was due to the fact that the Company’s lottery business was still in the investment stage. However, the Company takes the view that lottery industry in the PRC has great potential and will generate great return in the long run. The new investment also provides access to a new source of revenues, i.e. from provision of software systems and technical services. The acquisition of the Software is in line with the Company’s business plan to fetch the business opportunities in the PRC lottery industry.

Finally, partnering with Intralot is another step forward in the chosen direction to add technical and international expertise to its existing operations in the PRC. Having Intralot (an experienced lottery operator in several jurisdictions and rank number 2 in the lottery industry by revenues in 2007) as a Shareholder will provide access to world class lottery industry expertise not only related to the software licence but also all aspects of the Company’s lottery business.

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

LETTER FROM THE BOARD

EFFECT ON SHAREHOLDING STRUCTURE AFTER COMPLETION

The existing shareholding structure of the Company and, for illustration purpose only, the shareholding structure of the Company upon the allotments and issues of the Consideration Shares, the Conversion Shares and Conversion Shares II under different scenarios are as follows:

Shareholders Mr. Chan Sek Keung, Ringo_(Note 1) Melco LV LottVision Global Crossing Toprich Company Limited (Note 4)_ The Vendor Public Shareholders Total	As at the Latest Practicable Date No. of Shares % 75,176,000 15.95 51,977,024 11.03 8,947,934 1.90 20,787,042 4.41 9,712,000 2.06 19,424,000 4.12 285,197,495 60.53 471,221,495 100.00	Upon allotment and issue of the Consideration Shares only No. of Shares % 75,176,000 15.05 51,977,024 10.41 8,947,934 1.79 20,787,042 4.16 9,712,000 1.94 47,632,938 9.54 285,197,495 57.11 499,430,433 100.00	Upon allotment and issue of the Consideration Shares, and partial conversions of the Convertible Bonds and Melco LV CB (Note 2) No. of Shares % 75,176,000 14.60 57,462,636 11.16 8,947,934 1.74 20,787,042 4.04 9,712,000 1.89 57,462,636 11.16 285,197,495 55.41 514,745,743 100.00	Upon allotment and issue of the Consideration Shares and the Conversion Shares upon full conversion of the Convertible Bonds (Note 3) No. of Shares % 75,176,000 9.65 51,977,024 6.67 8,947,934 1.15 20,787,042 2.67 9,712,000 1.25 327,325,480 42.01 285,197,495 36.60 779,122,975 100.00	Upon allotment and issue of the Consideration Shares, the Conversion Shares and Conversion Shares II upon full conversion of the Convertible Bonds and Convertible Bonds II (Note 3) No. of Shares % 75,176,000 8.86 51,977,024 6.12 8,947,934 1.05 20,787,042 2.45 9,712,000 1.14 397,034,560 46.77 285,197,495 33.61 848,832,055 100.00	Upon allotment and issue of the Consideration Shares, the Conversion Shares and Conversion Shares II upon full conversion of the Convertible Bonds and Convertible Bonds II and the conversion in full of the Melco LV CB, Firich CB and LottVision CB (Note 3) No. of Shares % 75,176,000 4.81 471,036,119 30.14 55,314,055 3.54 226,891,237 14.52 9,712,000 0.62 397,034,560 25.41 327,550,436 20.96 1,562,714,407 100.00	Upon allotment and issue of the Consideration Shares, the Conversion Shares and Conversion Shares II upon full conversion of the Convertible Bonds and Convertible Bonds II and the conversion in full of the Melco LV CB, Firich CB and LottVision CB (Note 3) No. of Shares % 75,176,000 4.81 471,036,119 30.14 55,314,055 3.54 226,891,237 14.52 9,712,000 0.62 397,034,560 25.41 327,550,436 20.96 1,562,714,407 100.00
							100.00

Notes:

Mr. Chan Sek Keung, Ringo, chairman and executive Director, 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 18,776,000 Shares held by him personally.
This column shows the case of maximum conversions of the Convertible Bonds and Melco LV CB to maintain (i) the Balance Of Interests by keeping the same percentage of voting rights for Melco LV and the Vendor; and (ii) the aggregate voting rights of the Vendor, Melco LV, LottVision, Global Crossing and Toprich Company Limited remaining below 30% (as regards to the paragraph headed “Limitation on conversion” under the section headed “Convertible Bonds” in this circular. However, there may be a scenario that if any one of Melco LV, LottVision, Global Crossing and Toprich Company Limited controls 20% of the voting rights of the Company and the Vendor controls 20% or more of the voting rights of the Company, they will presumably be parties acting in concert) while assuming there is no conversion for the Firich CB and the LottVision CB.
These columns show the maximum dilution effects from the various convertible bonds of the Company assuming no any limitation for conversions. Given the conversion terms of the various convertible bonds, these scenarios would not happen and are shown for illustration purpose only.
Toprich Company Limited is a fellow subsidiary of Global Crossing and are wholly owned subsidiary of Firich Enterprises Co. Ltd.

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE ACQUISITION

The Consideration is in the amount of HK$305,130,367.558, which shall be satisfied by the Company as to (i) HK$27,955,057.558 by allotting and issuing 28,208,938 Consideration Shares credited as fully paid at the Issue Price of HK$0.991 per Consideration Share and (ii) HK$277,175,310 by issuing the Convertible Bonds in the aggregate principal amount of HK$277,175,310 to the Vendor on Completion.

Assets

The unaudited consolidated total assets of the Group as at 30 June 2008 was approximately HK$1,226,213,000. As set out in Appendix III to this circular, assuming Completion has taken place on 30 June 2008, the unaudited pro forma consolidated total assets of the Enlarged Group would have been increased to approximately HK$1,533,597,000.

Liabilities

The unaudited consolidated total liabilities of the Group as at 30 June 2008 was approximately HK$654,950,000. As set out in Appendix III to this circular, assuming Completion has taken place on 30 June 2008, the unaudited pro forma consolidate total liabilities of the Enlarged Group would have been increased to approximately HK$799,620,000.

Earnings

The audited consolidated net loss of the Group for the year ended 31 December 2007 was approximately HK$416,381,000. Following the Completion and according to the unaudited pro forma consolidated income statement of the Enlarged Group for the year ended 31 December 2007 as if the Completion had taken place on 1 January 2007, the pro forma consolidated net loss of the Enlarged Group would have been increased to approximately HK$436,604,000 due to the imputed interest expenses of HK$19,946,000 and coupon interest expenses of HK$277,000 respectively arising from the Convertible Bonds.

Gearing ratio

As at 30 June 2008, the non-current liabilities of the Group was approximately HK$399,540,000 and the Group’s gearing ratio calculated as percentage of non-current liabilities over shareholders’ equity was approximately 79.54%. As set out in Appendix III to this circular, assuming Completion has taken place on 30 June 2008, the pro forma non-current liabilities of the Enlarged Group would become approximately HK$542,210,000 and the gearing ratio would increase to approximately 81.53%.

In view of the income potential and the prospect of the lottery market, the Directors consider the Acquisition to be in the interests of the Company and the Shareholders as a whole.

LETTER FROM THE BOARD

RISK FACTORS

Potential risk factors which are faced by the Group are as follows:

The Group’s revenue generated from the use of the Software relies on the CSLA Projects and CWL Projects only. There is little diversification of the sources of income. Moreover, given the highly regulated nature of the lottery market in the PRC, the number of Projects available for the Group to bid for depends on the Projects offered by the government authorities.
The Group largely relies on the Vendor in maintaining and customizing the Software, as only the Vendor has the relevant personnel and expertise in these respects.
The Group may not be able to protect the intellectual property rights of the Software from being infringed given the ground realities of operating in the PRC. Though the Group will use its best endeavours to protect the Software, there is no assurance that the Software’s intellectual property rights will never be infringed. The Group’s competitive edge in bidding for the CSLA Projects and CWL Projects may be materially and adversely affected. Also, the Vendor may claim against the Group for failing to protect the Software, which may constitute a breach under the Software Licence Agreement.
There may be future uncertainties on the growth potential of the lottery business in the PRC, as the PRC Government may impose new laws and regulations in restricting the development of such businesses. The Group is exposed to the economic risks of the PRC, as the PRC is the only place which the Group can use the Software. The lottery business of the Group may be adversely affected if the economic development in the PRC slows down.
The Software may lose its competitive edge over time. As the software industry is famous for its rapid development, it is possible that other lottery manufacturers are able to develop a newer, better and more powerful software than the one which will be granted to the Group under the Software Licence Agreement.
The exclusivity arrangements for the CSLA Projects may end, if the Group is unable to obtain the required number of projects within the specified period. The Group may face extra competition for the CSLA Projects in future if such exclusivity is lost since the Software may be used by the competitors of the Group.

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. The Company intends to maintain its existing businesses after the Completion.

LETTER FROM THE BOARD

The Company will seek the approval of its Shareholders at the EGM to be convened and held by the Company to approve the Asset Transfer Agreement and the Transactions (including but not limited to the entering into of the Software License Agreement, the issues of the Convertible Bonds and the Convertible Bonds II and the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II). As Power Way is involved in the Power Way Restructuring and each of the Power Way Undertaking, Melco LV Undertaking, Firich Undertaking and LottVision Undertaking being executed, which is one of the Conditions, each of Power Way and its shareholders namely, Melco LV, Global Crossing and LottVision is considered to have a material interest in the Acquisition which is different from other Shareholders. As at the Latest Practicable Date and upon completion of the Power Way Restructuring on 15 October 2008, (i) Power Way was not interested in any Shares; (ii) Melco LV and its associates were interested in as to 51,977,024 Shares, representing approximately 11.03% of the issued share capital of the Company; (iii) LottVision and its associates were interested in as to 8,947,934 Shares, representing approximately 1.90% of the issued share capital of the Company; and (iv) Global Crossing and its associates were interested in as to 20,787,042 Shares, representing approximately 4.41% of the issued share capital of the Company. As at the Latest Practicable Date, the Vendor held 19,424,000 Shares, representing approximately 4.12% of the issued share capital of the Company. To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiry, save for the Vendor, Melco LV, Global Crossing and LottVision, no Shareholder has a material interest in the Acquisition which is different from other Shareholders, and accordingly the Vendor, Melco LV, Global Crossing and LottVision and their respective associates are required to abstain from voting at the EGM, which will be taken by way of poll.

Shareholders and potential investors should note that the Acquisition, which is subject to various conditions as stated in the section headed “Conditions precedent for the Asset Transfer Agreement”, may or may not complete. Shareholders and potential investors are reminded to exercise caution when dealing in the securities of the Company.

(2) PROPOSED APPOINTMENT OF EXECUTIVE DIRECTOR

Pursuant to the Asset Transfer Agreement, a resolution for the appointment of Mr. Christos Moumouris, a nominee of the Vendor, as an executive Director will be proposed in the EGM. Such appointment will only take effect after Completion. Disclosure required under the GEM Listing Rules pursuant to such appointment is set out below.

Mr. Christos Moumouris (“Mr. Moumouris”)

Mr. Moumouris, aged 40, graduated from the University of Westminster in London, England with a BEng Honours in Electronic Engineering. In 1992 he was awarded an MEng in Electronic Engineering from the Eindhoven University of Technology in the Netherlands.

Mr. Moumouris was previously a research engineer for the Philips Research Laboratories in the Netherlands, and a product manager for intellectual technology products for Hitachi in Greece. Mr. Moumouris had worked for the IT Products and Systems Solutions divisions of Hitachi Europe Ltd (England), initially as Regional Marketing & Sales Manager for the South East Mediterranean and Middle East region and later as Strategy & Business Development Manager for Europe and the Middle East.

LETTER FROM THE BOARD

Mr. Moumouris is currently the sales director of Intralot S.A. He has set-up and is managing the company’s international sales department and was heavily involved in securing the Intralot projects in The Netherlands, The Philippines, Taiwan, Malaysia, South Korea, New Zealand, Australia, Israel, Nigeria and South Africa. He has participated as a member in the project implementation steering and executive committees for the Intralot projects in Malaysia and South Africa. He has served or is serving as a non executive director in the boards of Intralot Korea, Intralot Netherlands, Intralot South Africa, Gidani (the South Africa National Lottery Operator) and Nqoba Gaming. Since 2008 he is the chief executive officer of Intralot Asia Pacific.

Mr. Moumouris did not hold any directorships in any listed companies in the past three years. Apart from the proposed appointment of being an executive Director, Mr. Moumouris does not hold any other position with the Company or any of its Subsidiaries. As at the Latest Practicable Date, Mr. Moumouris is not connected with any Directors, senior management, management, substantial or controlling shareholders of the Company and does not have any interest in the shares or underlying shares of the Company within the meaning of Part XV of the SFO as at the Latest Practicable Date.

The proposed appointment of Mr. Moumouris as the executive Director will only take effect after Completion. Mr. Moumouris has not been entered into any service contract with the Company and has no fixed term of service with the Company. Mr. Moumouris is entitled to terminate his appointment at any time by giving the Company notice in writing. His appointment is subject to normal retirement and reelection by the Shareholders at the annual general meeting of the Company. The emolument in connection with Mr. Moumouris’ position as the executive Director will be determined by the Board with reference to his duties and level of responsibilities, the remuneration policy of the Company and the prevailing market conditions. Further announcement will be made by the Company when Mr. Moumouris’ remuneration is determined.

Save as disclosed herein, the Board and Mr. Moumouris confirm that there is no information relating to the appointment of Mr. Moumouris that is required to be disclosed pursuant to rule 17.50(2)(h) to (v) of the GEM Listing Rules nor are there any other matters that need to be brought to the attention of the Shareholders.

(3) PROPOSED CHANGE OF NAME OF THE COMPANY

The Board, with the consent of the Vendor, proposes to change the English name of the Company from “Melco LottVentures Limited” to “MelcoLot Limited” and carrying the existing Chinese name “新濠環彩有限公司”. To be effective, the proposed change of name of the Company is subject to (i) the passing of a special resolution by the Shareholders at the EGM in accordance with the Articles; (ii) the Completion; and (iii) the approval of the Registrar of Companies in the Cayman Islands. The change of name of the Company shall take effect from the date on which the new name of the Company be entered by the Registrar of Companies in the Cayman Islands into the register of companies in place of the existing name. Thereafter, the Company will carry out the necessary filing procedures with the Registrar of Companies in Hong Kong.

LETTER FROM THE BOARD

Reasons for the change of name of the Company

Pursuant to the Asset Transfer Agreement, the Company and the Vendor have agreed that the name and logo of the Company shall be changed within 6 months after completion of the Acquisition to a name mutually acceptable to the Vendor and the Company.

The proposed change of name of the Company is to reflect its expansion and development of the scope of business in lottery industry. The Board believes that the proposed new name of the Company will provide a better identification of the Company’s current and future business activities, which the Board considers is in the interests of the Company and its Shareholders as a whole.

Share Certificates

The proposed change of name of the Company will not affect any of the rights of the Shareholders. The share certificates bearing the Company’s existing name will continue to be evidence of title to the Shares and will continue to be valid for trading, settlement, delivery and registration for the same number of Shares under the new Company name. There will be no arrangement for free exchange of the existing share certificates of the Company for the new share certificates bearing the new name. Upon the change of name of the Company becoming effective, new share certificates shall be issued thereafter under the new name of the Company and the securities of the Company will be traded under the new name of the Company. The Company will make further announcement as and when appropriate on the results of the EGM, the completion of the Acquisition, the effective date of the change of the name of the Company and the new stock short name of the Company.

EGM

The EGM will be convened and held at 31/F, The Centrium, 60 Wyndham Street, Central, Hong Kong on Thursday, 4 December 2008 at 3:30 p.m. to consider and, if thought fit, to approve, among other things, the Asset Transfer Agreement and the Transactions (including but not limited to the entering into of the Software License Agreement; the issues of the Convertible Bonds and the Convertible Bonds II; and the allotments and issues of the Consideration Shares, the Conversion Shares and the Conversion Shares II); the proposed appointment of executive Director; and the proposed change of name of the Company.

A notice convening the EGM is set out on pages 170 to 172 of this circular and a proxy form for use at the EGM is enclosed with this circular. Whether or not you intend to attend the EGM, 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, Wanchai, 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.

LETTER FROM THE BOARD

PROCEDURES FOR DEMANDING A POLL BY THE SHAREHOLDERS

Article 66 of the Articles sets out the procedures by which Shareholders 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:

by the Chairman of such meeting; or
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
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 representing not less than one-tenth of the total voting rights of all members having the right to vote at the meeting; or
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.

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 consider that the Acquisition is in the interests of the Company and the Shareholders as a whole and the terms of the Asset Transfer Agreement are on normal commercial terms and fair and reasonable. The Directors also consider that the proposed appointment of executive Director and the proposed change of name of the Company are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend that Shareholders vote in favour of the ordinary resolutions to be proposed at the EGM to approve the proposed Acquisition, the Asset Transfer Agreement and the Transactions and the proposed appointment of executive Director. The Directors further recommend that Shareholders vote in favour of the special resolution to be proposed at the EGM to approve the proposed change of name of the Company.

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

Melco LottVentures Limited Chan Sek Keung, Ringo

Chairman

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

Vigers Appraisal and Consulting Limited

International Assets Appraisal Consultants

10th Floor, The Grande Building 398 Kwun Tong Road Kowloon Hong Kong

==> picture [73 x 73] intentionally omitted <==

Date: 16 October 2008

The Directors Melco LottVentures Ltd. 31/F, The Centrium, 60 Wyndham Street, Central, Hong Kong.

Dear Sirs/Madams,

Valuation of INTRALOT’s software licence

In accordance with the instruction from Melco LottVentures Ltd., we have carried out a valuation of the INTRALOT’s software licence (the “Software Licence”) as at 10 October 2008 (the “Valuation Date”). The Software is a system platform including middleware that primary supports the sales of lottery and gaming operation. The purpose of this report is to provide an independent opinion on the market value of the Software Licence as at the Valuation Date. We understand this valuation is required for purpose of transfer.

Based on our investigation, analysis and appraisal method employed as set out in this report, it is our opinion that, as of the Valuation Date, the value of the Software Licence can be reasonably and approximately stated as Hong Kong Dollar Three Hundred Sixty Million Eight Hundred Thousand (HKD360,800,000) only.

The opinion of value was based on generally accepted appraisal procedures and practices that rely extensively on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained.

In accordance with our standard practice, this report is for the use of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of the contents of this report.

We hereby certify that we have neither present nor prospective interests in the assets or the value reported.

	Yours faithfully,
For and on behalf of
VIGERS APPRAISAL & CONSULTING LTD.
Raymond Ho Kai Kwong	Favian Kam Man Yin
Registered Professional Surveyor	Chartered Financial Analyst
MRICS, MHKIS, MSc (e-com)	CFA, MBA
Deputy Managing Director	Director

Note: Raymond K. K. Ho, Chartered Surveyor, MRICS, MHKIS has seventeen years experience in undertaking valuation of properties, intangible and business in Hong Kong, Macau and the PRC and has extensive experience in business valuation in the Greater China region since 1993. Favian M. Y. Kam, CFA, MBA, has over nine years experience in business, intangible and financial assets valuation.

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

1. INTRODUCTION

1.1 Purpose

We have been appointed by Melco LottVentures Ltd. to appraise the Intralots’ software licence (the “Software Licence”) as at 10 Oct 2008 (the “Valuation Date”). The Software is a fully integrated, comprehensive gaming and transaction processing system for lotteries, fixed odds betting and video lottery terminal, along with terminal application software and monitor games. It can be adapted to existing terminal over any communication network and is licensed for use in the PRC in China Welfare Lottery (“CWL”) and China Sports Lottery (“CSLA”) projects on an infinitive basis. The purpose of this report is to provide an independent opinion on the market value of the Software Licence for the purposes of acquisition by MLV from Intralot.

1.2 Scope of Work

The value of the Software is estimated by Relief from Royal Method. The evaluation will compare the royalty rate observed in the market and to determine an appropriate royalty rate for the Software. We have also conducted research on the market coverage, spending level on lottery and allocation of proceeds that prevailing in relation to the use of the license in order to conclude appropriate royalty rate. The valuation has assumed the Software will be used in the PRC in CWL and CSLA projects. However, we have not investigated on the legality of the license nor the legal requirement for the Software to be applied in the PRC.

1.3 Basis of Value

Our appraisal has been carried out on a market value basis. Market Value is defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

1.4 Date of Value

The date of the valuation is 10 October 2008.

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

2. BACKGROUND

2.1 Lotos Software

The system has been fully developed in house and provides total control over product lifecycle with flexibility and ability to tailor installation to the local market thanks to its open architecture and modular design. The key features are as follows:

Can be adapted to any terminal over any communication network.
Supports all other sales channels such as internet, mobile and fixed telephony, IVR, call centres, and iTV.
The LOTOS o/s system platform includes middleware that supports connection to all external networks and systems, and it supports open communication open connection technologies (Web Services, APIs etc.), open communication protocols, (TCP/IP, HTTP etc.) as well as open data transfer technologies (XML).

Suite of applications

Game ware

All games (over 400) are parametrically supported and require no system changes. Existing games can be easily modified and new games can be easily added. Current game categories are:

Numerical games (Lotto, Power ball etc). Full flexibility to participate in the games e.g. predefined or variable systems, full systems, group participation
Keno games
Pool games. Supports all variations of Toto games (e.g. 13 games Toto, 14 games Toto), with range of advanced forms of participation i.e. full, predefined or variable systems, bi-variable systems, derivative systems, standard column systems, group pay slips etc.
Bingo. Supported in pre printed and electronic form
Fixed Odds Betting. Over 2500 betting types.
Scratch card. Includes all required management and monitoring procedures.
Electronic scratch card. Special software enables feature rich content, and can overcome bandwidth limitations
VLT

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

Lotos Sales Plus

Players club (management of membership cards, game participation, info services, promotions etc)
Advanced promotional activities for games or even value added services

Lotos Value Plus

Financial management of players, retailers, and value added services
Real time data on game sales, cancellations, retailer details etc
Data analysis capabilities (statistics, patterns, fraud detection, player behaviour etc).

LOTOS INTEGRITY

Standardised encryption algorithms
Full scale fraud detection processes and technologies
Authentication procedures through passwords, physical terminal access, smart cards etc
Technical monitoring of transaction processing systems
Standard user rights, and networks access management

LOTOS Horizon: Management – Transmission of Multimedia Content to POS

Enables broadcasting of high quality audio visual content of games, information, promotions, live sports event coverage etc

CORONIS Horizon supports content presentations from a single TV screen to multiple TV screens, up to 64, and any other display device like Players Advertisement Displays, LED scrolling display, customer display etc. CORONIS Horizon supports high resolution TV screens connected to any terminal of the CORONIS family, via the CORONIS Horizon Multimedia Controller (CHMC) – a very compact, high performance, state-of-the-art controller, supporting MPEG-1/2/4 video, MPEG audio (MPEG-1 Layers I, II, III), multi-channel audio (Dolby Digital) and multi-layer graphics. CHMCs connect to TV screens via baseband signals (RGB, S-video, composite video) offering crystal clear picture quality.

APPENDIX I

VALUATION REPORT OF THE SOFTWARE LICENCE

I-Gate

Middleware developed on N-Tier architecture standards. It enables functions and interfaces to be distributed among multiple servers, thus ensuring a balanced load sharing and maximum availability. I-Gate supports both vertical and horizontal expansion while it constitutes a single, flexible environment with the following advantages:

Business integration of the LOTOST O/S solution and its applications with third-party information systems operating within the Lottery.
Interfacing of the LOTOST O/S solution and its applications with external business partner systems (business partner integration).
Business process management.
Data interfacing and transformation for the LOTOST O/S solution and its applications.
Interface with multiple, diverse data sources.
Interface with access networks and diverse alternative sales networks (network connectivity).
Interfacing with third party terminals.

U-PLAY

Ability to expand network by installing third party terminals; or
Ability to offer our games using the networks and terminals of third organisation
Designed based on JAV POS standards used by major terminal manufacturers globally

Central System Functionality

Easy and rapid creation and activation of new games and services
Real time management of fullest range of parameters
Each game is a separate entity, and a change in one game does not affect other games
Same principle for hardware and software components, a change in one component does not affect normal operation of system
New games can be created by changing parameters

APPENDIX I

VALUATION REPORT OF THE SOFTWARE LICENCE

New games with different philosophy can be created and introduced due to modular design of applications, and design of core platform with slots, so that any new fully set games can be added (plug and play)
Hot plug and play features, so no need for down time to the system
Every component of data centres has redundant devices with automatic transition to redundant parts.
247365 operations. Total load of system can be transferred from components to their counterparts, e.g. server to back up server without affecting operations. Thus no scheduled down time required for upgrades, modifications, changes in game parameters etc.
Flexible Networking over any standard network protocol
Multilayered Security Modularly structured over a layered security approach that does not constrain the choice of security policies.
Scalability. Ability to horizontally and vertically expand.
Multi-Jurisdiction & Multi-Hosting. LOTOST O/S Platform can host completely separate business environments and thus create and support independent business niches. This allows the operator to handle several geographical jurisdictions (e.g. different countries, regions, etc.) or host many different businesses/commercial operations (e.g. different lotteries sharing the same system, ticket and event reservations and ticket issuance, etc.) either seamlessly, or totally independently in the same system.

Advantage of the system

Its system has never been found in default with regards to incorrect results, loss of integrity, breaching or infringing the legal regulations in any of its worldwide installations.
US Multi State Lottery Association (MUSL) found the system so robust and diverse that they changed the next generation of standards inspired by LOTOS fault tolerant design, robust network design and use of network security equipment
Intralot also assisted MUSL in developing an on-line, automatic, electronic balancing system

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

2.2 China Lottery Market

In China, lottery turnover is mainly contributed by the sales of lottery under the control of China Welfare Lottery and China Sport Lottery Association. In 2005, total lottery turnover was USD 8.8 billion and increase to USD 10.5 billion in 2006. Total lottery in 2007 had increased by 39%, or USD 14.6 billion in dollar amount, witnessed a strong growth potential in China’s lottery market. In terms of the market penetration, the lottery turnover in 2005 was 0.39% of GDP and was approximately same as United States (0.43%) and United Kingdom (0.38%). In 2007, the penetration rate climbed to 0.43%. China lottery has various types on market participants. The lottery ticket will be distributed by sales agents and the sales agent should bear with the operating cost in return for a commission. The selling process is aid with the system provided. System providers provide the hardware and the software, such as the terminal, network system and platform, in return for a commission on the turnover, generally takes 1%-2% of the lottery sales. The system providers will responsible for the hardware and third party software cost, maintain cost and managing the system. Lottery business in China offers different types of gaming such as traditional lottery, video lottery terminals and instant lottery.

3. INFORMATION AND FACTORS CONSIDERED

Our valuation requires consideration of all relevant factors affecting the operation of the underlying business and the ability to generate future investment returns. The factors considered in the valuation included, but were not limited to, the following:

The nature of the Software, functionality available in the transaction, application in the China’s lottery market and limitation.
China government policy in relation to the approval of the use of lottery system.
Market information of the China lottery market in relation to the composition of lottery sales, spending, GDP, growth potential and margins of the industrial participants.
Other market information on the lottery market in other regions for comparison purpose.
Information in relation to the royalty rate of the similar type of assets or rights.
Market required return in similar operation.

We have reviewed the information required and make discussions with the management, which is considered sufficient for the issue of the valuation report of the type in question and we believe no material factor has been intentionally omitted or withheld from the given information in order to reach an informed view.

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

4. VALUATION

4.1 Valuation Theory

In arriving at our opinion of value, we have made reference to three generally accepted approaches to value, namely; the Market Approach, the Cost Approach and the Income Approach.

Market Approach considers similar transaction on intangible asset as at the Valuation Date with appropriate adjustment. However, the prerequisite of this approach is a high degree of similarity of the comparables as the subject being apprised. If an intangible asset is part of the consideration of a transaction or acquisition, the real value of an intangible asset may not be compared directly. If the underlying asset is to be transferred separately and similar transaction can be observed in the market, then market approach can be appropriately applied.

Cost Approach considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation as condition or obsolescence present, whether arising from physical, functional or economic causes.

Income Approach is the conversion of expected periodic benefits of ownership into an indication of value. It is based on the principle that an informed buyer would pay no more for asset than an amount equal to the present worth of anticipated future benefits from the same or equivalent asset with similar risk.

Determination of the Valuation Approach

In this valuation, Relief from royalty method will be considered in this valuation given that the royalty rate of similar license in relation to the lottery and gaming can be observed. The relief from royalty method estimates the value of an intangible asset with reference to the actual market transactions on comparable or guideline intangible assets. The general method in the valuation of intangible assets is the capitalized royalty income method.. In the capitalized royalty method, the intangible is valued by reference to the amount of royalty income it could generate if it was licensed, in an arm’s-length transaction, to a third party. To apply this method, a sample of guideline, arm’s-length royalty or license agreements are analyzed. The license agreements selected should represent transactions that reflect similar risk and return investment characteristics that make the sample comparable to the subject intangible. The risk and return investment characteristics may include industry conditions, the ability to generate an expected level of economic earnings for the owner or licensee, the life of the intangible, geographical coverage of the intangible, the life cycle of the intangible, etc. Based on an assessment of the risk and return investment factors of the subject intangible as compared to the comparables, an expected royalty rate is estimated for the subject intangible.

APPENDIX I

VALUATION REPORT OF THE SOFTWARE LICENCE

Licence Fee on Software

A royalty rate can be considered as the payment of a bundle of rights which granted by the licensor to use its intellectual properties. These intellectual properties can be technology, production know-how, marketing-related intellectual properties such as licenses, management skill or distribution channels. There are numerous forms of royalty rate arrangement, which can be an up-front fee payment in a lump sum or in installments, a running fee which is based on a percentage of revenue, net income or number of units sold, etc. The licensee receives the economic benefits contributed by these intellectual properties at the cost of royalty rate. Thus, the royalty rate is an appropriate one if the sum of economic benefits in future due to the license worth more than the royalty rate to be paid out.

Having said the above, it is reasonable to observe a higher royalty rate in industries where license involved complex technologies and inaccessible know-how which provides competitive advantages in the existing market. Second, licenses covered wider geographical area usually associates with higher royalty rate because of better efficiency, higher market coverage and recognition and hence the associated royalty income. Third, a longer agreement period could results a higher up-front fee as a lump sum of payment but has less impact on the running fee.

We have conducted research of the royalty rate observed in the lottery and gaming industry. The samples are collected from public source of information such as the filling of listed companies and the subject of the transaction are licenses to use the software system or platform in related to gaming and lottery. The reference date of these samples represent the date of the transaction being disclosed to public. As compared to the subject, which is also the system or platform for the licensee to use in the PRC gaming and lottery market, these references represent a strong similarity to the subject being evaluated. Our search suggests the market royalty rate ranging from 5% to 40% of the revenue. Licenses which license out by well known brands may enjoy high royalty rate. Licenses which cover general use of technology and would have a lower royalty rate level such as 5%.

Reference	Licensor	Licensee	Royalty Rate	Remarks	Source
Date
February	BINGO	ADVANCED	15% on gross	A proprietary electronic	Form 10-K
1998	TECHNOLOGIES	GAMING	revenue, plus up	bingo system designed to	ADVANCED
	CORP	TECHNOLOGY	front fee USD	increase bingo revenue	GAMING
		INC	1.5 million	at bingo halls, reduce	TECHNOLOGY
				administration costs and	INC, 04/15/1998,
				increase the excitement of	US
				play and the opportunity for
				bingo players to win.
March 1996	ALPHACOM	EUROASIAN	10% of net	Internet gaming software	Form S-1 A00
	DATA SECURITY	E-CASINOS	win/loss, plus	integrated with the Alpha	VENTURETECH
	SERVICES INC	INC	upfront fee	Guard computer security	INC, 09/12/1996,
			USD 250,000	application; virtual	US
				gambling casinos over the
				Internet.

APPENDIX I

VALUATION REPORT OF THE SOFTWARE LICENCE

Reference	Licensor	Licensee	Royalty Rate	Remarks	Source
Date
Dec 1997	BORDER	COEUR	5% of gross	Supply the Power Bingo	Calgary Herald
	CAPITAL CORP	D’ALENE	revenues.	software to run a national	SECTION:
		INDIAN		lottery in 37 states in the	MONEY; Pg. D6,
		BAND		U.S.	12/21/1997
April 2007	CRYPTOLOGIC	WPT	20%-22% of	Operate an online poker	Form 8-K WPT
		ENTERPRISES	net revenues	room and online casino.	ENTERPRISES
		INC, WPT			INC, 04/25/2007
		ENTERPRISES,			USA, (Nasdaq:
		MALTA			WPTE)
Feb 2000	ICRYSTAL INC	Various licensees	40% of net	Java based and supply its	Licensing
			gaming revenues	licensees with proprietary	Economics
				e-commerce and credit	Review,
				card processing, real time	02/01/2000 USA
				encrypted protocols, industry
				hardware infrastructure,
				communications software,
				which facilitated the use of
				real time banking for the
				casino clients.
Feb 2000	ONLINE	INTERCAPITAL	33%-40% of	Sell and lease the Products	Form 10KSB40
	GAMING	GLOBAL FUND,	purchase price.	to all Internet Gaming	TOTALENT
	SYSTEMS, LTD.	LTD.		Venues worldwide,	ERTAIN
				licenses casino gaming and	MENTINC:
				sportsbook software and	Exhibit 10.9,
				the electronic commerce	03/30/2000
				(e-cash) and transaction	US
				processing software.
Apr 2001	ON-POINT	NTERLOTT	2%-7% on gross	Right to market the on-line	Proxy ON POINT
	TECHNOLOGY	TECHNOLOGIES	profit	technology and would be the	TECHNOLOGY
	SYSTEMS INC	INC		exclusive manufacturer of	SYSTEMS INC:
				products incorporating the	Amendment No.
				on-line technology.	2, 04/18/2001
					Nevada, US
May 2000	PREDICT IT INC	PREDICT IT	10% of gross	Software and technology on	Form SB2 A00
		CHINA, LLC	revenues	gaming.	PREDICT IT
					INC: Exhibit 10,
					05/16/2000
					US

APPENDIX I

VALUATION REPORT OF THE SOFTWARE LICENCE

Reference	Licensor	Licensee	Royalty Rate	Remarks	Source
Date
Nov 2006	RNG GAMING	GOLDEN	15% of the	Software for the purpose of	Source: Form 8-K
	LTD.	PALACE	Rake, plus USD	displaying, managing and	ZONE4PLAYINC:
		LIMITED	100,000 up front	operating Online Gaming.	EXHIBIT 10.1,
			fee.		11/06/2006
					Nevada, US
Nov 2001	SOFTEC	BF	12.5%-20%	License the Software	Form 20-F
	SYSTEMS	INTERNATIONAL		and make use of Softec’s	WORLD
	CARIBBEAN INC	GAMINGANTIGUA		computer hardware in	GAMING PLC:
		INC		order to operate an Internet	Exhibit 4.9,
				gaming site.	11/01/2001 UK

Source: RoyaltySource Intellectual Property Database

In considering the Licenses, we noted the following features:

The Licenses mainly applies to a platform and software on lottery sales;
The Software which the Licenses applied is international recognized in terms of standard, functionality and technology involved;
The Software under the Licenses will be applied in the PRC market and can be considered as a license provides wide market coverage;
Very limited number of competitors currently participate in the lottery system service in China;
The Software provides high degree of compatibility to existing platform in China which suggests less or minimal cost would be incurred on the use of the Software;
The Software is designed to provide higher degree of system integration and data analysis capability in the lottery and gaming operation;
The Software involved competitive technology and provide the option of electronic payment;
The Software has a strong exposure in United States.

Having considered the above factors and compared with the observed market royalty rate, we considered a royalty rate of 10% would be appropriate for the evaluation of the Software value.

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

4.2 Market approach

4.2.1 Methodology

Under royalty method, the values of the License can be determined by the capitalization of the hypothetical royalty income if the owner was to license out the Software to third party. The royal income is the hypothetical royalty payment to the licensor, not the Company. The hypothetical income is the royalty payment on licensing out the intangible which the licensor, not the Company, that might be received. In particular, the hypothetical royalty income will be multiply the capitalization factor to conclude the value of the License. The Capitalization factor shall reflect the market required return on similar assets as well as the future growth prospect. Possible tax on royalty income will be considered so to infer the after tax royalty income to the license owner. The hypothetical royalty payment determined here refers to the methodology in arriving the cash flow if license out the intangible only, not the real cash flow to the licensee.

We have considered the following factors, but not limited to, in the estimation of the hypothetical royalty income to Licensor: (1) the market size of lottery turnover in China; (2) estimated market share with reference to the number of market participants in the market; (3) commission rate for system provider that prevailing in the market; (4) the market royalty rate; and (5) the profit tax rate in the PRC. Thus our estimates deducted from (1) to (4) represent the hypothetical royalty payment to the licensor. In the relief from royalty method, the hypothetical after tax royalty income to an intangible is defined as:

After tax royalty income = Revenue x Royalty rate x (1- Tax rate)

Since the license will be applied in the PRC and hence we made reference to China’s profit tax in determine the after tax royalty income.

4.2.2 Assumptions

Assumptions considered to have significant sensitivity effects in this valuation were evaluated and validated in order to provide a more accurate and reasonable basis for arriving at our assessed value. Based on our experience in valuing businesses of similar nature, we consider the assumptions made in this valuation report to be reasonable.

There will be no material adverse change in the political, legal, fiscal or economic condition and related policy on lottery and gaming operation in the PRC.
The Software will be able to apply in the PRC and provide reasonable extend of service on the lottery and gaming business. The Software will meet the necessary requirement in providing service to the welfare and sport lottery in the PRC. The Software will also obtain the approval from the PRC Government and related parties on the implement of the Software as their service provider.

VALUATION REPORT OF THE SOFTWARE LICENCE

APPENDIX I

The Company will reasonably utilize the function and feature provided by the Software as other similar operators. The Software provider maintain its key management, competent personnel, technical staff to support its ongoing operation, market position and competitive advantage in the valuation period.
The Software has been assumed an infinite life for the use of license. This is due to the Company has the right to continuously renew the license.
It is assumed that the Software will apply to the welfare and sport lottery operation in China progressively and average an average commission rate of 1.5% on the lottery ticket being sold under the Software.
Based on the information available to us, we estimate a 10% royalty rate for the use of the license. The estimation of royalty rate has considered the competitive advantage of the Software against the feature of similar system we observed.
The profit tax rate in the PRC is assumed to be 25%, which is the unified tax rate that currently prevailing.

We also assumed the reasonableness of information provided and relied to a considerable extent on such information in arriving at our opinion of value.

4.2.3 Determination of Capitalization Rate

After the estimation of royalty income, the value of the License can be estimated by multiply the signal period of hypothetical royalty income with the capitalization factor. The capitalization factor shall be deducted from the reciprocal of the capitalization rate. The capitalization rate can be estimated by the difference between the appropriate discount rate and the expected long-term growth rate in royalty income. The result of the capitalization is the market value of the Software based on the capitalized royalty income method.

The discount rate can be made reference to market required return on similar asset, for example, return of equity in similar industry. Capital Asset Pricing Model generally provides good reference on the ROE and we have considered the CAPM to investigate the required return, the estimation process considered: (1) the yields of the Hong Kong Exchange Fund Notes; (2) The market premium in the Hong Kong stock market of and required return of lottery and gaming companies. Since the required rate of return on equity estimated by CAPM explains a portion of the total risk, the systematic risk, of an equity investment. We have considered appropriate adjustments to be made on the unsystematic risk, such as the uncertainty on the PRC policy, the uncertainty on applying the Software License in China’s lottery market. Having considered the above factors, we have assumed a discount rate of 14.4% would be appropriate. In considering the future growth potential on the lottery market in China, we have assumed a growth rate of 3% in long run.

4.2.4 Opinion of Value

Based on the results from the above analysis, the value of the Subject can be reasonable and approximately stated as Hong Kong Dollar Three Hundred Sixty Million Eight Hundred Thousand (HKD360,800,000) only.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

1. SUMMARY OF FINANCIAL INFORMATION

A summary of the published results and the assets and liabilities of the Company for the last three financial years ended 31 December 2007 and for the six months ended 30 June 2008, as extracted from the financial statements, is set out below.

Results

Turnover Cost of sales and services Gross profit Other income Employee benefits costs Depreciation and amortisation Impairment loss on goodwill Impairment loss on intangible assets Share of profits/(losses) of jointly controlled entities Other expenses Finance costs (Loss)/Profit before taxation Taxation (Loss)/Profit for the period (Loss)/Profit attributable to: Equity holders of the Company Minority interest (Loss) Earnings per share – Basic (cents) – Diluted (cents)	For the six months ended 30 June (unaudited) 2008 2007 *HK$’000* HK$’000 235,222 195,167 (172,891) (159,825) 62,331 35,342 4,251 87 (32,984) (11,401) (29,289) (2,269) – – – – (1,152) – (44,539) (15,543) (20,951) (2,557) (62,333) 3,659 (1,618) – (63,951) 3,659 (55,596) 3,659 (8,355) – (63,951) 3,659 (12.79) 1.26 N/A 1.25	For the year ended 31 December 2007 (audited) 2007 2006 2005 HK$’000 HK$’000 HK$’000 361,936 326,611 368,250 (282,323) (268,055) (310,684) 79,613 58,556 57,566 812 639 1,615 (24,470) (20,575) (17,817) (7,331) (4,647) (4,431) (416,000) – – (1,001) – – 691 – _ (39,559) (23,812) (32,151) (7,460) (4,104) (2,707) (414,705) 6,057 2,075 (1,676) (956) (632) (416,381) 5,101 1,443 (415,448) 5,101 1,443 (933) – – (416,381) 5,101 1,443 (139.02) 1.76 0.50 N/A N/A N/A

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

2. FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2007

Consolidated Income Statement

For the year ended 31 December 2007

Notes Turnover 7 Cost of sales and services Gross profit Other income Employee benefits costs 9 Depreciation and amortisation Impairment loss on goodwill 19 Impairment loss on intangible assets Share of profits of jointly controlled entities Other operating expenses Finance costs 10 (Loss)/profit before taxation 11 Income tax expenses 14 (Loss)/profit for the year Attributable to: Equity holders of the Company Minority interests (Loss)/earnings per share – Basic 16	2007 HK$’000 361,936 (282,323) 79,613 812 (24,470) (7,331) (416,000) (1,001) 691 (39,559) (7,460) (414,705) (1,676) (416,381) (415,448) (933) (416,381) HK(139.02) cents	2006 HK$’000 326,611 (268,055) 58,556 639 (20,575) (4,647) – – – (23,812) (4,104) 6,057 (956) 5,101 5,101 – 5,101 HK1.76 cents

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Balance Sheet

As at 31 December 2007

Notes Non-current assets Property, plant and equipment 18 Goodwill 19 Intangible assets 20 Interests in jointly controlled entities 22 Loan receivable 23 Current assets Inventories 24 Trade and other receivables 25 Amount due from a jointly controlled entity 26 Amount due from a shareholder of a jointly controlled entity 27 Pledged bank deposits 28 Cash and cash equivalents 29 Current liabilities Trade and other payables 30 Tax payable 31 Amount due to a jointly controlled entity 26 Bank borrowings 32 Other loans 33 Net current assets Total assets less current liabilities	2007 HK$’000 32,051 485,026 194,711 97,633 396 809,817 12,057 159,861 1,431 30,348 12,424 143,816 359,937 81,774 2,163 2,140 45,712 31,565 163,354 196,583 1,006,400	2007 HK$’000 32,051 485,026 194,711 97,633 396 809,817 12,057 159,861 1,431 30,348 12,424 143,816 359,937 81,774 2,163 2,140 45,712 31,565 163,354 196,583 1,006,400	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

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Notes Non-current liabilities Other loans 33 Convertible bonds 34 Net assets Capital and reserves Share capital 35 Reserves 36 Total equity attributable to equity holders of the Company Minority interests Total equity	2007 HK$’000 5,600 380,030 385,630 620,770 4,322 539,756 544,078 76,692 620,770	2007 HK$’000 5,600 380,030 385,630 620,770 4,322 539,756 544,078 76,692 620,770	2006 HK$’000
			5,573 –
			5,573 65,213 2,900 62,313 65,213 – 65,213

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Balance Sheet

As at 31 December 2007

Notes Non-current assets Investments in subsidiaries 21 Current assets Trade and other receivables 25 Current liabilities Trade and other payables 30 Net current assets Total assets less current liabilities Non-current liability Convertible bonds 34 Net assets Capital and reserves Share capital 35 Reserves 36 Total equity	2007 HK$’000 1,163,314 166,369 11,160 155,209 1,318,523 380,030 938,493 4,322 934,171 938,493	2006 HK$’000 –
		59,325 9,923
		49,402
		49,402 –
		49,402

		2,900 46,502
		49,402

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Statement of Changes in Equity

For the year ended 31 December 2007

Share capital HK$’000 At 1 January 2006 2,900 Exchange differences on translation of foreign operations – Profit for the year – Total recognised income and expenses for the year – Recognition of equity settled share-based payments – At 31 December 2006 and 1 January 2007 2,900 Exchange differences on translation of foreign operations – Loss for the year – Total recognised income and expenses for the year – Recognition of equity settled share-based payments – Exercise of share options, net of expenses 122 Recognition of equity component of convertible bonds – Issue of new shares 580 Transaction costs attributable to issue of new shares – Shares issued on acquisition of subsidiaries_(note 39) 720 Minority interests arising from acquisition of interests in subsidiaries (note 39)_ – At 31 December 2007 4,322	Share premium HK$’000 55,824 – – – – 55,824 – – – – 4,305 – 103,555 (2,464) 172,800 – 334,020	Share-based payments reserve HK$’000 587 – – – 56 643 – – – 157 (441) – – – – – 359	Statutory surplus reserve fund HK$’000 1,505 – – – – 1,505 – – – – – – – – – – 1,505	Enterprise expansion fund HK$’000 502 – – – – 502 – – – – – – – – – – 502	Convertible bonds equity reserve HK$’000 – – – – – – – – – – – 611,692 – – – – 611,692	Retained Attributable profits/ to equity Exchange (Accumulated holders of reserve losses) the Company HK$’000 HK$’000 HK$’000 566 (2,458) 59,426 630 – 630 – 5,101 5,101 630 5,101 5,731 – – 56 1,196 2,643 65,213 3,287 – 3,287 – (415,448) (415,448) 3,287 (415,448) (412,161) – – 157 – – 3,986 – – 611,692 – – 104,135 – – (2,464) – – 173,520 – – – 4,483 (412,805) 544,078	Minority interests HK$’000 – – – – – – – (933) (933) – – – – – – 77,625 76,692	Total HK$’000 59,426 630 5,101
								5,731 56
								65,213 3,287 (416,381)
								(413,094) 157 3,986 611,692 104,135 (2,464) 173,520 77,625
								620,770

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31 December 2007

Note OPERATING ACTIVITIES (Loss)/profit before taxation Adjustments for: Interest income Interest expenses Depreciation and amortisation Loss on disposal of property, plant and equipment Write-off of property, plant and equipment Impairment loss on goodwill Impairment loss on intangible assets 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-based payments expenses Share of profits of jointly controlled entities Operating cash flows before movements in working capital Increase in inventories Increase in trade and other receivables Decrease in amount due from a shareholder of a jointly controlled entity Increase in amount due to a jointly controlled entity (Decrease)/Increase in trade and other payables Cash (used in)/generated from operations PRC enterprise income tax paid	2007 HK$’000 (414,705) (601) 7,460 7,331 2 – 416,000 1,001 854 6,829 – 157 (691) 23,637 (7,309) (10,178) 1,995 2,140 (16,018) (5,733) (1,061)	2006 HK$’000 6,057 (227) 4,104 4,647 – 15 – – 551 391 (1,444) 56 – 14,150 (333) (18,035) – – 10,732 6,514 (232)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Note NET CASH (USED IN)/GENERATED FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Interest received Acquisition of subsidiaries 39 Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Capital expenditure on intangible assets Increase in pledged bank deposits NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Interest paid Net borrowings raised from banks Net borrowings raised from other loans Exercise of share options Net proceeds from issue of new shares NET CASH GENERATED FROM FINANCING ACTIVITIES NET INCREASE 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 29	2007 HK$’000 (6,794) 601 11,391 (3,303) 70 (3,342) (7,411) (1,994) (5,532) (4,131) 7,749 3,986 101,671 103,743 94,955 47,276 1,585 143,816	2006 HK$’000 6,282 227 – (841) – (2,802) (442) (3,858) (4,104) 7,224 29,416 – – 32,536 34,960 11,414 902 47,276

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31 December 2007

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 functional currency of the Company.

The Company is an investment holding company. The principal activities of its subsidiaries are (i) the provision of network system integration, including provision of network infrastructure services, network professional services, and sales of proprietary network software; and (ii) the provision of lottery business management services in the People’s Republic of China (the “PRC”).

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has applied, for the first time, the following new standards amendment and interpretations (“new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), which are effective for the Group’s financial year beginning on 1 January 2007.

HKAS 1 (Amendment) Capital Disclosures HKFRS 7 Financial Instruments: Disclosures HK(IFRIC) – Int 8 Scope of HKFRS 2 HK(IFRIC) – Int 9 Reassessment of Embedded Derivatives

The adoption of the new HKFRSs had no material effect on how the results and financial position for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has not early applied the following new HKFRSs that have been issued but not yet effective.

HKAS 1 (Revised) Presentation of Financial Statements[1] 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] HK(IFRIC) – Int 13 Customer Loyalty Programmes[4] HK(IFRIC) – Int 14 HKAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction[3]

1 Effective for annual periods beginning on or after 1 January 2009 2 Effective for annual periods beginning on or after 1 March 2007 3 Effective for annual periods beginning on or after 1 January 2008
4

Effective for annual periods beginning on or after 1 July 2008

The directors of the Company anticipate that the application of these standards or interpretations will have no material impact on the results and the financial position of the Group.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 (“HKASs”) and Interpretations issued by the HKICPA, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. A summary of the significant accounting policies adopted by the Group is set out below.

b) Basis of Preparation of the Financial Statements

The consolidated financial statements for the year comprise the Company and its subsidiaries.

The measurement basis used in the preparation of the financial statements is historical cost basis, except for certain financial instruments, which are measured at fair value.

The preparation of financial statements in conformity to HKFRSs requires management to make judgements, estimates and assumptions that affect the application to 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 the management of the Group 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 intragroup 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 cost less impairment losses.

Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 the 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 the Group’s share of the profit or loss and of changes in equity of the jointly controlled entities, less any identified impairment loss. When the Group’s share of losses of a jointly controlled entity equals or exceeds its interest in that jointly controlled entity (which includes any longterm interest that, in substance, from part of the Group’s net investment in the jointly controlled entity), the 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 the 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 the 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 the 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 the income statement.

When a group entity transacts with a jointly controlled entity of the Group, unrealised profits or losses are eliminated to the extent of the 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.

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 to 5 years after taking into account of their estimated residual value, if any, of 5% on cost, 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 its residual value, if any, are reviewed annually.

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(h)). Other development expenditure is recognised as an expense in the year in which it is incurred.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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(h)). Expenditure on internally generated goodwill and brands is recognised as an expense in the year 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. All intangible assets of the Group and the Company with finite useful lives are amortised from the date they are available for use and their estimated useful lives are not more than five 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) Goodwill

Goodwill arising on an acquisition of a business or jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the relevant subsidiary at the date of acquisition. Such goodwill is carried at cost less any accumulated impairment losses.

Capitalised goodwill arising on an acquisition of a subsidiary is presented separately in the consolidated balance sheet.

For the purposes of impairment testing, goodwill arising from an acquisition is allocated to each of the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a financial year, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the consolidated income statement. An impairment loss for goodwill is not reversed in subsequent periods.

If the potential benefit of the acquired subsidiaries’ income tax loss carry-forwards or other deferred tax assets did not satisfy the criteria for recognition when a business combination is initially accounted for but is subsequently realised, the amount is recognised as income in accordance with HKAS 12 “Income Taxes”. In addition, the carrying amount of goodwill is reduced to the amount that would have been recognised if the deferred tax asset had been recognised as an identifiable asset from the acquisition date. The amount for the reduction in the carrying amount of the goodwill is recognised as an expense immediately.

On subsequent disposal of a subsidiary, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

h) 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;
intangible assets;
investments in subsidiaries; and
interests in jointly controlled entities.

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 pre-tax 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 cashgenerating unit).

Recognition of impairment losses

An impairment loss is recognised in the 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.

Reversal 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.

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 the income statement in the year which the reversal is recognised.

i) 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 costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

j)

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(h)), except where the receivables are interestfree 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(h)).

k)

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.

l) 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.

m) 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.

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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 recoverable, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

n) 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 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 nonoccurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

o) 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.

i) 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.
ii) Revenue from the provision of network infrastructure services and network professional services are recognised when the services are rendered.
iii) Service fee income from management of electronic gaming machine lounges is recognised on an accrual basis in accordance with the contractual terms of the respective service agreements.

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

iv) Commission income from agency service on sale of gaming products is recognised when the service is rendered.
v) 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.

p) 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 the income statement, 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 HK$ at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items are translated into HK$ 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.

q) 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 leases.

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

r) 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.

s) 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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 applied to option 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.

t) 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;
v) the party is a close family member of a party referred to in note 3(t)(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.

u) 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 purpose of these financial statements.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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.

v)

Financial Instruments

Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in the consolidated income statement.

Financial assets

Financial assets are classified into one of the three categories, including financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Financial assets at fair value through profit or loss

The Group’s financial assets at fair value through profit or loss comprised financial assets held for trading. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in the consolidated income statement in the period in which they arise.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including bank balances, trade and other receivables, amounts due from a jointly controlled entity and a shareholder of a jointly controlled entity) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in the consolidated income statement when there is objective evidence that the asset is impaired, and is measured as the difference between the assets’ carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated or not classified as any of the other categories. For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, they are measured at cost less any identified impairment losses at each balance sheet date subsequent to initial recognition. An impairment loss is recognised in the consolidated income statement when there is an objective evidence that the asset is impaired. The amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses will not reverse in subsequent periods.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Financial liabilities

Financial liabilities including trade and other payables, amount due to a jointly controlled entity, bank borrowings and other loans are subsequently measured at amortised cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Convertible bonds

Convertible bonds issued by the Group that contain both the liability and conversion option components are classified separately into respective items on initial recognition. Conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instruments is classified as an equity instrument.

On initial recognition, the fair value of the liability component is determined using the prevailing market interest of similar non-convertible debts. The difference between the gross proceeds of the issue of the convertible loan notes and the fair value assigned to the liability component, representing the conversion option for the holder to convert the loan notes into equity, is included in equity (convertible loan notes equity reserve).

In subsequent periods, the liability component of the convertible bonds is carried at amortised cost using the effective interest method. The equity component, representing the option to convert the liability component into ordinary shares of the Company, will remain in convertible bonds equity reserve until the embedded option is exercised in which case the balance stated in convertible bonds equity reserve will be transferred to share premium. Where the option remains unexercised at the expiry date, the balance stated in convertible bonds equity reserve will be released to the retained profits. No gain or loss is recognised in the income statement upon conversion or expiration of the option.

Transaction costs that relate to the issue of the convertible loan notes are allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are charged directly to equity. Transaction costs relating to be liability component are included in the carrying amount of the liability portion and amortised over the period of the convertible loan notes using the effective interest method.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Embedded derivatives

Derivatives embedded in non-derivative host contracts are separated from the relevant host contracts and deemed as held-for-trading when the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contracts, and the combined contracts are not measured at fair value through profit or loss.

Financial guarantee contracts

A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. A financial guarantee contract issued by the company and not designed as at fair value through profit or loss is recognised initially at its fair value less transaction costs that are directly attributable to the issue of the financial guarantee contract. Subsequent to initial recognition, the company measures the financial guarantee contract at the higher of: (i) the amount determined in accordance with HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets”; and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18 “Revenue”.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Company or Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised directly in equity is recognised in the consolidated income statement.

For financial liabilities, they are removed from the Company’s or Group’s balance sheet (i.e. when the obligation specified in the relevant contract is discharged, cancelled or expired). The difference between the carrying amount of the financial liability derecognised and the consideration received or receivable is recognised in the consolidated income statement.

Impairment losses (other than goodwill and intangible assets with indefinite useful lives - see the accounting policies in respect of goodwill and intangible assets above)

At each balance sheet date, the Company and Group review the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as an income immediately.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 Property, Plant and Equipment

In determining whether an asset is impaired or the event previously causing the impairment no longer exists, the 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. The 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 the 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.

b) Useful Lives of Property, Plant and Equipment

In accordance with HKAS 16, the Group estimates the useful lives of property, plant and equipment in order to determine the amount of depreciation expenses to be recorded. The useful lives are estimated at the time the asset is acquired based on historical experience, the expected usage, wear and tear of the assets, as well as technical obsolescence arising from changes in the market demands or service output of the assets. The Group also performs annual reviews on whether the assumptions made on useful lives continue to be valid.

c) Estimated Impairment of Intangible Assets and Goodwill

The Group performs annual tests on whether there has been impairment of intangible assets and goodwill in accordance with the accounting policy stated in note 3(h). The recoverable amounts of cash generating units are determined based on value in-use calculations. These calculations require the use of estimates and assumptions made by management on the future operation of the business, pre-tax discount rates, and other assumptions underlying the value-in-use calculations.

d) Amortisation of Intangible Assets

Intangible assets are amortised on a straight-line basis over their estimated useful lives. The determination of the useful lives involves management’s estimation. The Group re-assesses the useful life of the intangible assets and if the expectation differs from the original estimate, such a difference may impact the amortisation in the year and the estimate will be changed in the future period.

e) Estimated Impairment of Interests 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 the 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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

f) Impairment of Trade and Other Receivables

Note 3 (j) describes that trade and other 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 Group’s majority of working capital is devoted to trade and other receivables. In determining whether impairment on trade and other receivables occurred, the Group takes into consideration the ageing status and the likelihood of collection. An impairment loss on trade and other receivables is recognised when they are unlikely to be collected. The measurement of impairment loss requires the Group to estimate the future cash flows expected to be collected. In this regard, the management of the Group are satisfied that this risk is minimal and adequate impairment has been made in the financial statements in light of the past repayment historical records of the Group’s customers and the current economic environment.

5. CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year.

The capital structure of the Group consists of (i) debts, comprising trade and other payables, amount due to a jointly controlled entity, bank borrowings, other loans and convertible bonds less cash and cash equivalents; and ii) equity attributable to equity holders of the Company, comprising issued share capital, reserves and retained earnings.

The details of the net debt to equity ratio of the Group is as follows:

Notes Current liabilities Trade and other payables 30 Amount due to a jointly controlled entity 26 Bank borrowings 32 Other loans 33 Non-current liabilities Other loans 33 Convertible bonds 34 Total debt Less: Cash and cash equivalents 29 Net debt Total equity Net debt to equity ratio	2007 HK$’000 81,774 2,140 45,712 31,565 161,191 5,600 380,030 385,630 546,821 143,816 403,005 544,078 74%	2006 HK$’000 54,721 – 49,843 23,843
		128,407
		5,573 –
		5,573
		133,980 47,276
		86,704

		65,213

		133%

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

6. 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, other loans and convertible bonds. 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 incurs some of expenditures in Renminbi (“RMB”). 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 PRC government. 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$ may have positive or negative impact on the results of operations of the Group.

The Group currently does not have a foreign currency hedging policy. However, the management of the Group monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:

	Liabilities	Liabilities	Assets
	2007	2006	2007	2006
	HK$’000	HK$’000	HK$’000	HK$’000
RMB	198,162	40,108	290,918	68,223

Sensitivity analysis

The Group is mainly exposed to RMB. The following table details the Group’s sensitivity to a 5% increase and decrease in HK$ against the relevant foreign currency. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rate. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 5% change in foreign currency rate. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in profit and other equity where HK$ strengthen 5% against the relevant currency. For a 5% weakening of HK$ against the relevant currency, there would be an equal and opposite impact on the profit and other equity below would be negative.

Profit Other equity	RMB currency impact 2007 2006 HK$’000 HK$’000 4,638 1,406 – –	RMB currency impact 2007 2006 HK$’000 HK$’000 4,638 1,406 – –

		–

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 2007 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated balance sheet and the amount of contingent liabilities in relation to financial guarantee issued by the Group as disclosed in note 43. 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.

The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

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 mainly bank borrowings with fixed and floating interest rates. Therefore, any future variations in interest rate will not have a significant impact on the results of the Group.

Sensitivity Analysis

In managing interest rate risks that the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer term, however, changes in interest rates would have an impact on consolidated earnings.

At 31 December 2007, it is estimated that a general increase of one percentage point in interest rates would increase the Group’s loss before taxation by approximately HK$276,000 (2006: decrease profit by approximately HK$247,000) so far as the effect on interest-bearing financial instruments is concerned.

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 management of the Group 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 adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short or longer term.

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The following liquidity and interest risk tables set out the weighted average effective interest rate and the remaining contractual maturities at the balance sheet date of the Group’s and the Company’s financial liabilities based on contractual undiscounted cash flows (including interest payments computed using contractual rates, or, if floating, based on rates current at the balance sheet date) and the earliest date the Group and the Company required to pay:

Weighted average effective interest rate The Group Trade and other payables Amount due to a jointly controlled entity Bank borrowings 7.161% Other loans 7.375% Convertible bonds 10.06% The Company Trade and other payables Convertible bonds 10.06%	Within 1 year or on demand HK$’000 81,774 2,140 45,712 31,565 – 161,191 11,160 – 11,160	More than 1 year but less than 2 years HK$’000 – – – 6,013 – 6,013 – – –	2007 More than Total 2 years but contractual less than undiscounted 5 years cash flow HK$’000 HK$’000 – 81,774 – 2,140 – 45,712 – 37,578 606,800 606,800 606,800 774,004 – 11,160 606,800 606,800 606,800 617,960	Weighted average Carrying effective amount interest rate HK$’000 81,774 2,140 45,712 6.967% 37,165 8.795% 380,030 546,821 11,160 380,030 391,190	Within 1 year or on demand HK$’000 54,721 – 49,843 23,843 – 128,407 9,923 – 9,923	More than 1 year but less than 2 years HK$’000 – – – 6,063 – 6,063 – – –	2006 More than Total 2 years but contractual less than undiscounted 5 years cash flow HK$’000 HK$’000 – 54,721 – – – 49,843 – 29,906 – – – 134,470 – 9,923 – – – 9,923	Carrying amount HK$’000 54,721 – 49,843 29,416 –
								133,980

								9,923 –
								9,923

e) Fair Values of Financial Instruments

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 liabilities recorded at amortised cost in the financial statements approximate to their fair values.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

7. TURNOVER

An analysis of the Group’s turnover for the year is as follows:

Network system integration Network infrastructure service Network professional services Sales of network software Lottery business management services Service fee income from management of electronic gaming machine lounges Commission income	2007 HK$’000 299,124 58,781 3,740 361,645 161 130 291 361,936	2006 HK$’000 286,398 38,008 2,205
		326,611
		– –
		–
		326,611

8. 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:

a) Network system integration; and
b) Lottery business management services

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

An analysis by business segments is as follows:

Network system integration Lottery business management services Other income Share of profits of jointly controlled entities Lottery business management services Impairment loss on goodwill Lottery business management services Impairment loss on intangible assets Network system integration Unallocated corporate expenses Finance costs (Loss)/profit before taxation Income tax expenses (Loss)/profit for the year	Revenue 2007 2006 HK$’000 HK$’000 361,645 326,611 291 – 361,936 326,611	Results 2007 2006 HK$’000 HK$’000 12,890 9,864 (4,247) – 8,643 9,864 812 639 691 – (416,000) – (1,001) – (390) (342) (7,460) (4,104) (414,705) 6,057 (1,676) (956) (416,381) 5,101

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

BALANCE SHEET Assets Segment assets Network system integration Lottery business management services Interests in jointly controlled entities Lottery business management services Unallocated corporate assets Total assets Liabilities Segment liabilities Network system integration Lottery business management services Unallocated corporate liabilities Total liabilities OTHER INFORMATION Capital expenditure Network system integration Lottery business management services Depreciation and amortisation Network system integration Lottery business management services Impairment loss on goodwill Lottery business management service Impairment loss on intangible assets Network system integration Impairment loss on trade and retention money receivables Network system integration	2007 HK$’000 278,933 97,633 793,188 – 1,169,754 139,949 29,005 380,030 548,984 5,283 1,362 6,645 4,785 2,546 7,331 416,000 1,001 6,829	2006 HK$’000 139,162 – – 61,579
		200,741

		54,722 – 80,806
		135,528

		3,643 –
		3,643

		4,647 –
		4,647

		–

		–

		391

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Geographical segments

The Group’s operations are located in the PRC and Hong Kong (“HK”). An analysis of the Group’s geographical segment information is as follows:

PRC, other than HK HK	Revenue 2007 2006 HK$’000 HK$’000 340,553 305,263 21,383 21,348 361,936 326,611	Revenue 2007 2006 HK$’000 HK$’000 340,553 305,263 21,383 21,348 361,936 326,611
		326,611

An analysis of the carrying amount of segment assets and capital expenditure by the geographical area in which the assets are located is as follows:

PRC, other than HK HK	Carrying amount of segment assets 2007 2006 HK$’000 HK$’000 1,093,223 191,104 76,531 9,637 1,169,754 200,741	Capital expenditure incurred during the year 2007 2006 HK$’000 HK$’000 6,518 3,630 127 13 6,645 3,643	Capital expenditure incurred during the year 2007 2006 HK$’000 HK$’000 6,518 3,630 127 13 6,645 3,643
			3,643

9. EMPLOYEE BENEFITS COSTS

Directors’ emoluments_(note 12)_ Other staff retirement benefits scheme contributions Salaries wages and other benefits Share-based payments expenses Less: Staff costs capitalised in software product development costs 10. FINANCE COSTS Interest expenses on bank borrowings wholly repayable within five years Interest expenses on other loans wholly repayable within five years Effective interest expenses on convertible bonds	2007 HK$’000 1,958 2,917 22,431 157 (2,993) 24,470 2007 HK$’000 3,054 2,478 1,928 7,460	2006 HK$’000 1,545 3,030 18,376 56 (2,432)
		20,575

		2006 HK$’000 3,127 977 –
		4,104

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

11. (LOSS)/PROFIT BEFORE TAXATION

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

	2007	2006
	HK$’000	HK$’000
Amortisation of intangible assets	5,410	2,689
Auditor’s remuneration	990	470
Cost of inventories	282,323	268,055
Depreciation of property, plant and equipment	1,921	1,958
Impairment loss on goodwill	416,000	–
Impairment loss on intangible assets	1,001	–
Impairment loss on inventories	854	551
Impairment loss on trade and retention money receivables	6,829	391
Loss on disposal of property, plant and equipment	2	–
Write off of property, plant and equipment	–	15
Operating lease rentals in respect of minimum lease payments
of land and buildings	2,929	2,096
Research and development costs	361	329
Exchange loss/(gain)	50	(351)
Bank interest income	(523)	(227)
Other interest income	(78)	–
Reversal of impairment loss on trade and retention money receivables
recognised in prior years	–	(1,444)

12. DIRECTORS’ EMOLUMENTS

Chan Sek Keung, Ringo HK$’000 note 1 Fees – Other emoluments Salaries and other benefits 1,599 Contributions to retirement benefits schemes 12 Share-based payments expenses 1 Total emoluments 1,612	Year ended 31 December 2007 Pang Alasdair Kwan Hing So Gordon Kit Tong, Chung, David Yu Chan Tze Lie Mo Nagle Clara Ho Kevin Alfred Tsoi Zhonghou Ngon Raymond HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 note 3, 8 note 3, 8 note 3, 9 note 4 note 4 note 4, 7 note 4, 5 note 4, 6 – – – 120 120 6 41 39 – – – – – – – – – – – – – – – – – – – 1 19 – – – – – – 121 139 6 41 39	Total HK$’000 326 1,599 12 21
		1,958

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Year ended 31 December 2006

Pang Chan Sek Alasdair Kwan Hing Keung, Gordon Kit Tong, Chung, Ringo Nagle Clara Ho Kevin Alfred HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 note 1 note 3, 8 note 3, 8 note 3, 9 note 4 Fees – – – – 120 Other emoluments Salaries and other benefits 1,191 – – – – Contributions to retirement benefits schemes 12 – – – – Share-based payments expenses 9 3 3 3 6 Total emoluments 1,212 3 3 3 126 Note 1: Chairman and executive director Note 2: Executive director Note 3: Non-executive director Note 4: Independent non-executive director Note 5: Appointed on 1 May 2007 and resigned on 5 September 2007 Note 6: Appointed on 5 September 2007 Note 7: Resigned on 1 February 2007 Note 8: Resigned on 13 April 2007 Note 9: Resigned on 26 August 2007	David Yu Tsoi Zhonghou HK$’000 HK$’000 note 4 note 4, 7 120 72 – – – – 6 – 126 72	Total HK$’000 312 1,191 12 30
		1,545

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.

13. FIVE HIGHEST PAID EMPLOYEES

The aggregate emoluments of the five highest paid individuals included one (2006: one) executive director of the Company, whose emoluments are included in note 12 above. The aggregate emoluments of the remaining four (2006: four) highest paid individuals are as follows:

Basic salaries and allowances Retirement benefits scheme contributions Share-based payments expenses	2007 HK$’000 2,393 72 59 2,524	2006 HK$’000 1,972 106 13
		2,091

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

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

14. INCOME TAX EXPENSES

a) Income tax in the consolidated income statement represents:

Current tax – Provision for PRC enterprise income tax Provision for the year_(note 31) Deferred taxation Origination and reversal of temporary differences(note 38)_	2007 HK$’000 1,676 – 1,676	2006 HK$’000 956 –
		956

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 2007 and 2006.

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

Certain subsidiaries of the Group operating in the PRC are eligible for certain tax holidays and concessions and were exempted from PRC income tax.

On 16 March 2007, the People’s Republic of China promulgated the Law of the People’s Republic of China on Enterprise Income Tax (the “New Law”) by Order No.63 of the President of the People’s Republic of China. On 6 December 2007, the State Council of the PRC issued Implementation Regulations of the New Law. The New Law and Implementation Regulations will change the tax rate from 33% to 25% for certain subsidiaries of the Group from 1 January 2008. The Group has unutilised tax losses available for offset against future profits; therefore, there is no impact on the deferred tax balance of the Group.

b) Reconciliation between tax expense and accounting (loss)/profit at applicable tax rates:

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

(Loss)/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 temporary timing differences Income tax expenses	2007 HK$’000 (414,705) 72,421 (113,267) 39,032 (14) 221 (69) (1,676)	2006 HK$’000 6,057

		(1,403) (35,907) 37,599 (1,321) 187 (111)
		(956)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

15. (LOSS)/PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The consolidated (loss)/profit attributable to equity holders of the Company included a loss of HK$1,935,000 (2006: profit of HK$389,000) which has been dealt with in the financial statements of the Company.

16. (LOSS)/EARNINGS PER SHARE

a) Basic (loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the loss attributable to equity holders of the Company of approximately HK$415,448,000 (2006: profit of HK$5,101,000) and the weighted average of 298,846,213 (2006: 289,944,745) ordinary shares in issue during the year.

b) Diluted (loss)/earnings per share

No diluted loss per share is presented during the year ended 31 December 2007 as the exercises of the potential dilutive ordinary shares would result in a reduction in loss per share.

The diluted earnings per share during the year ended 31 December 2006 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 year ended 31 December 2006.

17. DIVIDENDS

No dividend was paid or proposed during the years ended 31 December 2006 and 2007.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

18. PROPERTY, PLANT AND EQUIPMENT

The Group

Cost At 1 January 2006 Exchange differences Additions Write off At 31 December 2006 and 1 January 2007 Exchange differences Additions Disposal Acquisition of subsidiaries (note 39) At 31 December 2007 Accumulated depreciation At 1 January 2006 Exchange differences Charge for the year Written back on write off At 31 December 2006 and 1 January 2007 Exchange differences Charge for the year Written back on disposal At 31 December 2007 Net book value At 31 December 2007 At 31 December 2006	Lottery terminals HK$’000 – – – – – 386 – – 9,942 10,328 – – – – – 4 95 – 99 10,229 –	Machinery and equipment HK$’000 9,572 98 261 (338) 9,593 531 1,563 (483) 1,476 12,680 8,505 92 705 (335) 8,967 484 628 (450) 9,629 3,051 626	Furniture, fixtures and office equipment HK$’000 1,915 21 102 (179) 1,859 723 852 (107) 16,151 19,478 1,755 19 127 (179) 1,722 117 358 (107) 2,090 17,388 137	Motor vehicles HK$’000 894 7 256 – 1,157 61 – – – 1,218 504 6 221 – 731 43 90 – 864 354 426	Tools HK$’000 6,232 75 222 (23) 6,506 425 888 (591) 47 7,275 4,707 62 905 (11) 5,663 385 750 (552) 6,246 1,029 843	Total HK$’000 18,613 201 841 (540) 19,115 2,126 3,303 (1,181) 27,616 50,979 15,471 179 1,958 (525) 17,083 1,033 1,921 (1,109) 18,928 32,051 2,032

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

19. GOODWILL

The Group Cost At 1 January 2006, 31 December 2006 and 1 January 2007 Acquisition of subsidiaries_(note 39) At 31 December 2007 Accumulated impairment loss At 1 January 2006, 31 December 2006 and 1 January 2007 Impairment loss At 31 December 2007 Carrying amount At 31 December 2007 At 31 December 2006 _Notes:	HK$’000 – 901,026
	901,026
	– 416,000
	416,000
	485,026

	–

a) During the year, the Group has acquired 80% equity interest in PAL Development Limited (“PAL”) and 60% equity interest in Oasis Rich International Limited (“Oasis”) for a consideration of approximately HK$1,163,314,000 and incurred a goodwill of approximately HK$901,026,000, as further detailed in note 39.
b) Impairment tests for cash-generating units containing goodwill

As explained in note 8, the Group uses business segments as its primary segment for reporting segment information. For the purpose of impairment testing, goodwill with indefinite useful lives has been allocated to the cash generating unit (“CGU”) of lottery business management services only.

During the year, the Group performed an impairment review for goodwill with reference to the valuation carried out by Vigers Appraisal & Consulting Limited, independent qualified professional valuers not connected with the Group. The valuation is based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by the management of the Group covering a five-year period and extrapolated cash flows for the following further five-year period. Cash flows beyond the fiveyear period are extrapolated using the estimated rates stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

Key assumptions used for value-in-use calculations:

	2007	2006
	%	%
Gross margin	52	–
Growth rate	5	–
Discount rate	14	–

The management of the Group determined the budgeted gross margin based on past performance and its expectation for market development. The weighted average growth rate used is consistent with the forecasts in the relevant industry. The discount rate used reflects specific risks relating to the relevant segment. The recoverable amount of the CGU based on value-in-use calculations is less than its carrying amount, accordingly, an impairment loss of HK$416,000,000 of CGU of lottery business management services was recognised during the year.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

20. INTANGIBLE ASSETS

The Group

Software product development costs HK$’000 Cost At 1 January 2006 15,502 Exchange differences 136 Additions 2,802 At 31 December 2006 and 1 January 2007 18,440 Exchange differences 991 Additions 3,342 Acquisition of subsidiaries_(note 39)_ – At 31 December 2007 22,773 Accumulated amortisation At 1 January 2006 7,975 Exchange differences 23 Charge for the year 2,689 At 31 December 2006 and 1 January 2007 10,687 Exchange differences 382 Charge for the year 3,102 Impairment loss 1,001 At 31 December 2007 15,172 Carrying amount At 31 December 2007 7,601 At 31 December 2006 7,753	License rights HK$’000 – – – – – – 164,166 164,166 – – – – – 2,036 – 2,036 162,130 –	Technology know-how HK$’000 – – – – – – 25,252 25,252 – – – – – 272 – 272 24,980 –	Total HK$’000 15,502 136 2,802
			18,440 991 3,342 189,418
			212,191
			7,975 23 2,689
			10,687 382 5,410 1,001
			17,480
			194,711

			7,753

Notes:

a) Software product development costs are internally generated. All of the Group’s license rights and technology know-how were acquired as part of a business combination during the year, as further detailed in note 39.
b) All the above intangible assets have definite useful lives and are amortised on a straight-line basis over their estimated useful lives not more than five years. The amortisation charge for the year is included in depreciation and amortisation in the consolidated income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

21. INVESTMENTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Provision for impairment loss Amount due from a subsidiary_(note a)_	The Company 2007 2006 HK$’000 HK$’000 1,163 10 (1,163) (10) – – 1,163,314 – 1,163,314 –

Notes:

a) During the year, the Company provided a loan of approximately HK$1,163,314,000 to a wholly-owned indirectly subsidiary, Rising Move International Limited, for its acquisition of 80% equity interest in PAL and 60% equity interest in Oasis, as further detailed in note 39, for a consideration of approximately HK$1,163,314,000. The loan is interest-free, unsecured and settlement is neither planned nor likely to occur in the foreseeable future.
b) As at 31 December 2007, the details of the Company’s principal subsidiaries are as follows:

	Place of
	incorporation/	Nominal value	Equity	interests
	establishment	of issued	held by the Group
Name of subsidiary	and operations	registered capital	Direct	Indirect	Principal activities
Wafer Systems Holdings Limited	HK	HK$10,000	100%	–	Investment holding
北京威發新世紀信息技術	PRC for a term	USD1,500,000	–	100%	Operation of businesses in
有限公司	of 15 years				network system integration
(“Beijing Wafer New Century	commencing
Information Technology	12 January 2001#
Co., Ltd”.)
上海滬威網絡系統有限公司	PRC for a term	USD210,000	–	100%	Operation of businesses in
(“Wafer Network Systems	of 15 years				network system integration
(Shanghai) Co., Ltd”.)	commencing
	28 July 1999#
Wafer Systems (China) Limited	HK	HK$10,000	–	100%	Operation of businesses in
					network system integration
威發（西安）軟件有限公司	PRC for a term	USD600,950	–	100%	Research and development
(“Wafer (Xi’an) Software	of 15 years
Co., Ltd.”)	commencing
	26 July 2001#
Wafer Systems (Hong Kong)	HK	HK$10,000	–	100%	Operation of businesses in
Limited					network system integration

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

	Place of
	incorporation/	Nominal value	Equity	interests
	establishment	of issued	held by the Group
Name of subsidiary	and operations	registered capital	Direct	Indirect	Principal activities
Rising Move International	BVI	USD1	–	100%	Investment holding
Limited
Precious Success Holding	BVI	USD1	–	100%	Investment holding
Limited
PAL Development Limited	HK	HK$250,000,000	–	80%	Investment holding
Global Score Asia Limited	BVI	USD20,000	–	100%	Investment holding
Trade Express Services Inc.	BVI	USD20,000	–	80%	Investment holding
寶加（北京）信息技術有限公司	PRC for a term	HK$36,000,000	–	100%	Management of electronic
	of 12 years				gaming machine lounges
	commencing
	13 December 2006#
北京華盈風彩科技有限公司	PRC for a term	RMB10,000,000	–	100%	Management of electronic
	of 12 years				gaming machine lounges
	commencing
	13 March 2007##
山東省開創紀元電子商務信息	PRC##	RMB2,667,000	–	60%	Agency service for sale of
有限公司					gaming products
Oasis Rich International	Republic of	USD700,000	–	60%	Investment holding
Limited	Mauritius
伍盛計算機科技上海有限公司	PRC for a term	USD70,000	–	100%	Not commenced business
	of 30 years
	commencing on
	17 April 2007#

# These are wholly-owned foreign enterprises established in the PRC.

## These are private limited liability companies 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.

100

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

22. INTERESTS IN JOINTLY CONTROLLED ENTITIES

Unlisted investments in jointly controlled entities, at cost Share of post-acquisition profits	The Group 2007 2006 HK$’000 HK$’000 96,942 – 691 – 97,633 –	The Group 2007 2006 HK$’000 HK$’000 96,942 – 691 – 97,633 –
		–

Notes:

a) As at 31 December 2007, the details of the jointly controlled entities are as follows:

	Place of
	incorporation/	Nominal value	Equity	interests
Name of jointly	establishment	of paid up issued/	held by the Group
controlled entity	and operations	registered capital	Direct	Indirect	Principal activities
PALTECH Company Limited	HK	HK$10,000	–	60%	Research and development
(“PALTECH”)
Beijing Telenet Information	PRC for a term	RMB10,000,000	–	51%	Distribution of point of sale
Technology Limited	of 30 years				system and operation of
(“BTI”)(note b)	commencing from				betting hall
北京電信達信息技術	10 August 2006#
有限公司

# This is a wholly-owned foreign enterprise established in the PRC.
b) The unlisted investments in jointly controlled entities were acquired as part of a business combination during the year, as further detailed in note 39. Included in the cost of investment in jointly controlled entities is a goodwill of a jointly controlled entity, BTI, acquired by the Group’s subsidiary PAL in previous year. The movement of the goodwill is set out below:

At 1 January 2006, 31 December 2006 and 1 January 2007 Goodwill of BTI 31 December 2007_(note e)_	HK$’000 – 70,413
	70,413

c) The Group indirectly owns 60% equity interest in PALTECH. Pursuant to certain terms and conditions given in a shareholder agreement, the financial and operating policies of PALTECH require approval from 75% of equity holders, as such, it is accounted for as a jointly controlled entity of the Group.
d) The Group indirectly owns 51% equity interest in BTI. Pursuant to a shareholder agreement between the shareholders of BTI, BTI is jointly controlled with other significant equity holders. Therefore, BTI is classified as a jointly controlled entity of the Group.

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APPENDIX II

e) During the year, the Group performed an impairment review for goodwill with reference to the valuation carried out by Vigers Appraisal & Consulting Limited, independent qualified professional valuers not connected with the Group. The valuation is based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by the management of the Group covering a five-year period and extrapolated cash flows for the following further five-year period. Cash flows beyond the fiveyear period are extrapolated using the estimated rates stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

Key assumptions used for value-in-use calculations:

	2007	2006
	%	%
Gross margin	45	–
Growth rate	6	–
Discount rate	14	–

The management of the Group determined the budgeted gross margin based on past performance and its expectation for market development. The weighted average growth rate used is consistent with the relevant industry. The discount rate used reflects specific risks relating to the relevant segment. The recoverable amount of the CGU based on value-in-use calculations is higher than its carrying amount, accordingly, no impairment loss was recognised during the year.

f) The summarised financial information in respect of the Group’s jointly controlled entities which are accounted for using equity method of accounting is as follows:

Non-current assets Current assets Current liabilities Non-current liabilities Income Expense	The Group 2007 2006 HK$’000 HK$’000 16,188 – 55,128 – (43,342) – – – 2007 2006 HK$’000 HK$’000 6,002 – (5,311) –	The Group 2007 2006 HK$’000 HK$’000 16,188 – 55,128 – (43,342) – – – 2007 2006 HK$’000 HK$’000 6,002 – (5,311) –

		2006 HK$’000 – –

23. LOAN RECEIVABLE

The loan is interest-free, unsecured and repayable in February 2009. In the opinion of the management of the Group, the carrying amount of loan receivable approximates its fair value.

24. INVENTORIES

	The Group
	2007	2006
	HK$’000	HK$’000
Merchandise	12,057	5,602

102

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

25. TRADE AND OTHER RECEIVABLES

Note Amount due from a subsidiary (a) Trade receivables (b), (c) Retention money receivables (d) Other receivables Prepaid maintenance charges (e) Prepayment and deposits	The Group 2007 2006 HK$’000 HK$’000 – – 102,441 113,079 11,596 10,696 30,020 7,458 17 1,832 15,787 – 159,861 133,065	The Company 2007 2006 HK$’000 HK$’000 166,207 59,213 – – – – – 112 – – 162 – 166,369 59,325	The Company 2007 2006 HK$’000 HK$’000 166,207 59,213 – – – – – 112 – – 162 – 166,369 59,325
			59,325

Notes:

a) The amount due from a subsidiary is interest-free, unsecured and repayable on demand.

b) An ageing analysis of trade receivables at the balance sheet date is as follows:

Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 365 days Over 365 days Less: Impairment loss	The Group 2007 2006 HK$’000 HK$’000 25,539 40,652 25,444 38,100 24,067 17,285 20,409 15,909 17,544 4,224 113,003 116,170 (10,562) (3,091) 102,441 113,079	The Group 2007 2006 HK$’000 HK$’000 25,539 40,652 25,444 38,100 24,067 17,285 20,409 15,909 17,544 4,224 113,003 116,170 (10,562) (3,091) 102,441 113,079
		116,170 (3,091)
		113,079

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.

c) Impairment of trade receivables

Impairment losses in respect of trade debtors are recorded using an allowance account unless the management of the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is made against trade receivables directly (see note (3h)).

103

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APPENDIX II

The movement in the allowance for doubtful debts during the year, including both specific and collective loss components, is as follows:

At 1 January Impairment loss recognised during the year Reversal of impairment loss recognised in prior years Exchange differences At 31 December	The Group 2007 2006 HK$’000 HK$’000 3,091 2,986 6,829 391 – (1,444) 642 1,158 10,562 3,091	The Group 2007 2006 HK$’000 HK$’000 3,091 2,986 6,829 391 – (1,444) 642 1,158 10,562 3,091
		3,091

Trade receivables are collectively considered to be impaired in accordance with their ageing.

The ageing analysis of trade receivables that are past due but not impaired:

			The Group
			2007	2006
			HK$’000	HK$’000
Over	90	days	62,020	37,418

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the management of the Group believes that no impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral over these balances.

d) Retention money receivable represents the progress payments receivable on the contract works of network infrastructure with age over 180 days.
e) Prepaid maintenance charges which are expected to be expensed within twelve months after the balance sheet date is classified under current assets as it is expected to be realised in the Group’s normal operating cycle.
f) The carrying amounts of trade and other receivables approximate their fair value.

26. AMOUNT DUE FROM/(TO) A JOINTLY CONTROLLED ENTITY

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

27. AMOUNT DUE FROM A SHAREHOLDER OF A JOINTLY CONTROLLED ENTITY

The amount is interest-bearing at 5% per annum, unsecured and repayable in February 2008.

28. PLEDGED BANK DEPOSITS

The deposits have been pledged to secure the banking facilities extended to the Group. Deposits amounting to HK$12,424,000 (2006: HK$5,013,000) carrying at prevailing market interest rate. The management of the Group considers that the carrying amount of deposits approximates their fair value. The pledged bank deposits will be released upon the settlement of the relevant bank borrowings.

104

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APPENDIX II

29. CASH AND CASH EQUIVALENTS

Deposits with banks Cash at bank and in hand Cash and cash equivalents in the consolidated balance sheet and consolidated cash flow statement	The Group 2007 2006 HK$’000 HK$’000 60,000 5,155 83,816 42,121 143,816 47,276	The Group 2007 2006 HK$’000 HK$’000 60,000 5,155 83,816 42,121 143,816 47,276
		47,276

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 management of the Group considers that the carrying amounts of cash and cash equivalents approximate their fair value.

30. TRADE AND OTHER PAYABLES

Note Amounts due to subsidiaries (a) Trade payables (b) Other payables	The Group 2007 2006 HK$’000 HK$’000 – – 33,097 43,480 48,677 11,241 81,774 54,721	The Company 2007 2006 HK$’000 HK$’000 10,266 9,923 – – 894 – 11,160 9,923	The Company 2007 2006 HK$’000 HK$’000 10,266 9,923 – – 894 – 11,160 9,923
			9,923

a) The amounts due to subsidiaries are interest-free, unsecured and repayable on demand.

b) An ageing analysis of trade payables at the balance sheet date is as follows:

Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 365 days Over 365 days 31. TAX PAYABLE PRC enterprise income tax At 1 January Provision for the year_(note 14(a))_ PRC enterprise income tax paid At 31 December	The Group 2007 2006 HK$’000 HK$’000 22,659 11,996 6,320 26,637 1,404 3,024 919 949 1,795 874 33,097 43,480 The Group 2007 2006 HK$’000 HK$’000 1,548 824 1,676 956 (1,061) (232) 2,163 1,548	The Group 2007 2006 HK$’000 HK$’000 22,659 11,996 6,320 26,637 1,404 3,024 919 949 1,795 874 33,097 43,480 The Group 2007 2006 HK$’000 HK$’000 1,548 824 1,676 956 (1,061) (232) 2,163 1,548
		1,548

105

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

32. BANK BORROWINGS

Short-term bank loan repayable within one year Trust receipts and import loans Analysed by: – Secured – Unsecured	The Group 2007 2006 HK$’000 HK$’000 16,050 14,563 29,662 35,280 45,712 49,843 23,058 6,208 22,654 43,635 45,712 49,843	The Group 2007 2006 HK$’000 HK$’000 16,050 14,563 29,662 35,280 45,712 49,843 23,058 6,208 22,654 43,635 45,712 49,843
		49,843

		6,208 43,635
		49,843

Short-term bank loan is arranged at fixed interest rate of 6.732% (2006: 6.138%) per annum.

Trust receipts and import loans are arranged at prevailing market rates ranging from 6.93% to 8.25% (2006: 7.34% to 8.25%).

The management of the Group considers that the carrying amounts of bank borrowings approximate their fair value.

33. OTHER LOANS

Current portion repayable within one year Non-current portion repayable after one year but within two years	The Group 2007 2006 HK$’000 HK$’000 31,565 23,843 5,600 5,573 37,165 29,416	The Group 2007 2006 HK$’000 HK$’000 31,565 23,843 5,600 5,573 37,165 29,416
		29,416

Other loans represent advances from a financial institution which is related to a major supplier of the Group. The amounts are unsecured, interest-bearing at rates ranging from 6.69% to 8.06% (2006: 8.05% to 9.54%) and have fixed terms of repayment.

34. CONVERTIBLE BONDS

On 13 December 2007, the Company issued convertible bonds (the “Bonds”) with face value of HK$606,800,000 as part of the consideration of the acquisition of PAL and Oasis, as further detailed in note 39(a). The Bonds are recognised in these financial statements at fair value of approximately HK$989,794,000 at the date of completion of the acquisition of PAL and Oasis in accordance with HKFRS 3 “Business Combinations”. The Bonds are interestbearing at 0.1% per annum payable semi-annually in arrears and are redeemable within five years (“Conversion Period”) from the date of issue of the Bonds.

The Bonds can be converted into ordinary shares of the Company of HK$0.01 each at any time during the Conversion Period at a fixed conversion price of HK$0.85.

The fair values of the liability component and the equity conversion component were determined at issuance of the Bonds. The fair value of the liability component, included in long-term borrowings, was calculated at effective interest rate of 10.06% per annum.

During the year, no Bonds were converted into the ordinary shares of the Company.

106

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The Bonds recognised in the balance sheet are calculated as follows:

			The Group and the Company	The Group and the Company
			2007	2006
			HK$’000	HK$’000
	Face value of the Bonds issued on 13 December 2007		606,800	–
	Increase in face value to fair value		382,994	–
	Fair value of the Bonds		989,794	–
	Equity component		(611,692)	–
	Liability component on initial recognition at 13 December 2007		378,102	–
	Accrued interest capitalised		1,928	–
	Liability component at 31 December 2007		380,030	–

35.	SHARE CAPITAL
		Number of shares		Amount
		Notes		HK$’000
	Ordinary shares of HK$0.01 each
	Authorised:
	At 1 January 2006, 31 December 2006 and 1 January 2007		500,000,000	5,000
	Increase in share capital on 5 December 2007	(a)	1,500,000,000	15,000
	At 31 December 2007		2,000,000,000	20,000

	Issued and fully paid:
	At 1 January 2006, 31 December 2006 and 1 January 2007		289,944,745	2,900
	Shares issued on acquisition of subsidiaries	(b)	72,000,000	720
	Issue of new shares	(c)	58,000,000	580
	Exercise of share options		12,253,750	122
	At 31 December 2007		432,198,495	4,322

Notes:

a) By a special resolution passed at an extraordinary general meeting of the Company held on 5 December 2007, the authorised share capital of the Company was increased from 500 million to 2,000 million ordinary shares of HK$0.01 each.
b) On 13 December 2007, the Company issued and allotted 72,000,000 ordinary shares of the Company of HK$0.01 each at the issue price of HK$0.85 each as part of the consideration for the acquisition of PAL and Oasis, as further detailed in note 39(a). These shares rank pari passu in all respects with other shares in issue.
c) On 19 December 2007, the Company issued and allotted 58,000,000 ordinary shares of the Company of HK$0.01 each at the issue price of HK$1.8 each to certain subscribers, pursuant to the subscription agreement entered into between the Company and the subscribers. These shares rank pari passu in all respects with other shares in issue. The details of the above transaction refer to the Company’s announcement dated 31 October 2007.

107

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

36. RESERVES

a) The Group

Share premium_(note i) Share-based payments reserve Statutory surplus reserve(note ii) Enterprise expansion fund(note iii) Convertible bonds equity reserve Exchange reserve(note iv)_ (Accumulated losses)/Retained earnings	2007 HK$’000 334,020 359 1,505 502 611,692 4,483 (412,805) 539,756	2006 HK$’000 55,824 643 1,505 502 – 1,196 2,643
		62,313

Details of the movements in the above reserves during the year are set out in the consolidated statement of changes in equity on page 42.

Notes:

i) Share premium

The share premium account of the Group represents the excess of proceeds received over the nominal value of the Company’s shares issued, less amounts attributable to the capitalisation issue and share issue expenses.

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 the paid-in capital, provided that the remaining balance after the capitalisation is not less than 25% of the registered capital.

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) 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(p).

108

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

b) The Company

At 1 January 2006 Profit for the year Recognition of equity settled share-based payments At 31 December 2006 and 1 January 2007 Loss for the year Recognition of equity settled share-based payments Exercise of share options, net of expenses Recognition of equity component of convertible bonds Issue of new shares Transaction costs attributable to issue of new shares Shares issued on acquisition of subsidiaries_(note 39)_ At 31 December 2007	Convertible Share-based bonds Share payments equity Accumulated premium reserve reserve losses HK$’000 HK$’000 HK$’000 HK$’000 note 36(a)(i) 55,824 587 – (10,354) – – – 389 – 56 – – 55,824 643 – (9,965) – – – (1,935) – 157 – – 4,305 (441) – – – – 611,692 – 103,555 – – – (2,464) – – – 172,800 – – – 334,020 359 611,692 (11,900)	Total HK$’000 46,057 389 56 46,502 (1,935) 157 3,864 611,692 103,555 (2,464) 172,800 934,171

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 2007, the aggregate amount of the Company’s reserves available for distribution to shareholders was approximately HK$322,120,000 (2006: HK$45,859,000) 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$334,020,000 (2006: HK$55,824,000) less accumulated losses of approximately HK$11,900,000 (2006: HK$9,965,000), 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.

109

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

37. 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 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:

Exercise Outstanding Type of Date of Exercisable price at participants grant period per share 1/1/2006 HK$ Directors 30/4/2002 17/11/2002 to 0.55 3,750,000 (note 2) 29/4/2012 Others 30/4/2002 17/11/2002 to 0.55 5,005,000 (note 2) 29/4/2012 8,755,000		Number of share options	Number of share options
		Outstanding Forfeited at during 31/12/2006 the year and 1/1/2007 – 3,750,000 (445,000) 4,560,000 (445,000) 8,310,000	Exercised during the year (750,000) (3,613,000) (4,363,000)	Forfeited Outstanding during at the year 31/12/2007 – 3,000,000 (10,000) 937,000 (10,000) 3,937,000
					3,937,000

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.

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.

110

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

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 2007 Number of share options	Year ended 31 December 2007 Number of share options	Year ended 31 December 2007 Number of share options	Year ended 31 December 2007 Number of share options
Outstanding at 1/1/2007 3,825,000 – – 2,025,000 1,961,000 135,000 1,458,000 315,000 – – 300,000 10,019,000	Granted during the year – 750,000 1,150,000 – – – – – 6,230,000 3,668,000 – 11,798,000	Exercised during the year (2,625,000) – – (2,009,000) (1,926,000) (130,000) (1,045,500) (155,250) – – – (7,890,750)	Forfeited Outstanding during at the year 31/12/2007 – 1,200,000 – 750,000 – 1,150,000 – 16,000 (10,000) 25,000 (5,000) – (10,000) 402,500 (47,000) 112,750 – 6,230,000 – 3,668,000 – 300,000 (72,000) 13,854,250 1,627,250
				13,854,250

				1,627,250

111

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

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

			7,577,250

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 HKFRS 2 “Share-based Payment” 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.

Note 3: These grants under the post-IPO share option scheme are exercisable for a period not later 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.

Note 4: These grants under the post-IPO share option scheme are exercisable for a period not later than 2 years from the date of grant, within which there is a total vesting period of one year, starting from the first anniversary of the grant date at stepped annual increments of 50% of the total options granted.

112

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

These fair values were calculated using the Block-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	12/1/2007	7/12/2007
Closing share price
immediately before
date of grant	HK$0.138	HK$0.142	HK$0.165	HK$0.124	HK$0.088	HK$2.60
Exercise price	HK$0.138	HK$0.142	HK$0.165	HK$0.124	HK$0.088	HK$2.72
Expected volatility	89.07%	69.88%	62.76%	59.19%	64.16%	125.92%
Expected options life	5 years	5 years	5 years	5 years	5 years	1.25 years
Risk-free interest rate	3.087%	3.183%	2.65%	2.98%	3.81%	2.59%
Expected dividend yield	N/A	N/A	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$157,000 for the year ended 31 December 2007 (2006: HK$56,000) in relation to share options granted by the Company.

38. DEFERRED TAXATION

At the balance sheet date, the Group has unutilised tax losses of approximately HK$27,787,000 (2006: HK$9,333,000) available for offset against future profits. No deferred tax asset has been recognised in respect of the unutilised tax losses due to the unpredictability of future profit streams. These tax losses may be carried forward indefinitely.

113

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

39. ACQUISITION OF SUBSIDIARIES

On 13 December 2007, the Group acquired 80% equity interest in PAL and 60% equity interest in Oasis for a consideration of approximately HK$1,163,314,000. The acquisition has been accounted for using the purchase method of accounting. The amount of goodwill arising from the acquisition was approximately HK$901,026,000.

The net assets acquired in the above transaction and the goodwill arising therefrom are as follows:

PAL	Oasis	Total
Fair value adjustment HK$’000 – 86,251 – – – – – – – – 86,251	Fair value adjustment HK$’000 – 49,676 – – – – – – – – 49,676	Fair value adjustment HK$’000 – 135,927 – – – – – – – – 135,927	Acquiree’s fair value recognised on acquisition HK$’000 27,616 189,418 96,942 396 23,447 11,391 1,431 32,343 (31,022) (12,049)
			339,913 (77,625)
			262,288 901,026
			1,163,314

114

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Consideration is satisfied by: Issue of convertible bonds Face value of convertible bonds Increase in face value to fair value Fair value of convertible bonds_(note 39(a)) Issue of new shares Shares issued at issue price Increase in fair value Fair value of share consideration(note 39(a))_ Total purchase consideration Net cash inflow arising from acquisition Cash and cash equivalents acquired	HK$’000 606,800 382,994
	989,794
	61,200 112,320
	173,520
	1,163,314

	11,391

Notes:

a) The consideration for the acquisition of PAL and Oasis includes the convertible bonds of the Company with face value of HK$606,800,000 (note 34) and the 72,000,000 ordinary shares of the Company of HK$0.01 each at an issue price of HK$0.85 each (note 35(b)). The fair value of the convertible bonds and the ordinary shares of the Company, determined using the published price available at the date of acquisition, were approximately HK$989,794,000 and HK$173,520,000 respectively.
b) PAL and Oasis contributed a loss of approximately HK$3,283,000 to the Group’s results for the period between the date of acquisition and the balance sheet date.

If the acquisition had been completed on 1 January 2007, total revenue for the year would have been increased by approximately HK$4,017,000 and loss for the year would have been increased by approximately HK$33,957,000. The pro-forma information is for illustrative purposes only and is not necessarily and indication of revenue and results of operations of the Group that actually would have been achieved had the acquisition been completed on 1 January 2007, nor is it intended to be projection of future results.

40. COMMITMENTS

(a) Operating lease commitments

At the balance sheet date, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year In the second to fifth year inclusive	The Group 2007 2006 HK$’000 HK$’000 6,093 2,366 5,995 989 12,088 3,355	The Group 2007 2006 HK$’000 HK$’000 6,093 2,366 5,995 989 12,088 3,355
		3,355

115

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Operating lease payments represent the rental payable by the Group for certain buildings. The lease payments are fixed for an average of 1.8 years (2006:1.5 years) and no arrangements have been entered into for contingent rental payments.

The Company had no operating lease commitments at the balance sheet date.

b) Capital commitments

At the balance sheet date, the capital commitments contracted but not provided for in the financial statements are as follows:

Capital contribution on – investment in a subsidiary – acquisition of intangible assets	The Group 2007 2006 HK$’000 HK$’000 2,675 – 1,070 – 3,745 –	The Group 2007 2006 HK$’000 HK$’000 2,675 – 1,070 – 3,745 –
		–

The Company had no capital commitments at the balance sheet date.

41. 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 contributions are matched by employees.
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.

42. PLEDGE OF ASSETS

At 31 December 2007, the following assets were pledged to banks to secure the general banking facilities granted to the Group:

Pledged bank deposits_(note 28)_ Trade receivables	2007 HK$’000 12,424 – 12,424	2006 HK$’000 5,013 6,920
		11,933

43. FINANCIAL GUARANTEE ISSUED

During the year ended 31 December 2007, the Company had given corporate guarantee to certain banks in respect of banking facilities of approximately HK$77,472,000 (2006: HK$50,400,000) granted to certain subsidiaries of the Group. The maximum liability of the Company under the guarantee issued represented the banking facilities granted to these subsidiaries of totalling approximately HK$39,000,000 (2006: HK$45,000,000). In the opinion of the management of the Group, it was not probable that a claim would be made against the Company under the guarantee issued; therefore, financial guarantee liabilities have not been recognised in the financial statements for the years ended 31 December 2006 and 2007.

116

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

44. RELATED PARTY TRANSACTIONS

Saved as disclosed elsewhere in the financial statements, the Group and the Company had the following transactions with related parties during the year:

a) Compensation of key management personnel

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

Short-term benefits Post-employment benefits Share-based payments	2007 HK$’000 3,417 72 52 3,541	2006 HK$’000 2,730 79 19
		2,828

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.

45. MAJOR NON-CASH TRANSACTIONS

The consideration for the acquisition of PAL and Oasis comprises the shares and the Bonds of the Company, as further detailed in note 39.

46. POST BALANCE SHEET EVENTS

a) On 9 January 2008, Wu Sheng Computer Technology (Shanghai) Co., Limited (“Wu Sheng”), an indirect subsidiary of the Group, entered into (i) a purchase agreement with Firich Enterprise Co., Ltd (“Firich”) to purchase the materials and unfinished parts for manufacture of point-on-sale and lottery vending terminals from Firich at the maximum amounts of approximately HK$265,000,000, HK$275,000,000 and HK$350,000,000 for the three years ending 31 December 2008, 2009 and 2010 respectively; and (ii) a sale agreement for sale of point-on-sale and lottery vending terminals to Firich at the maximum amounts of approximately HK$115,000,000, HK$200,000,000 and HK$260,000,000 for the three years ending 31 December 2008, 2009 and 2010 respectively. Firich is a shareholder of the substantial shareholder, Power Way Group Limited, of the Company. The details of the above transaction refer to the Company’s announcement dated 9 January 2008.
b) On 26 March 2008, the Company changed its name from Wafer Systems Limited to “Melco LottVentures Limited”. The details refer to the Company’s announcement dated 26 March 2008.
c) On 28 February 2008, Gain Advance Group Limited, a wholly owned subsidiary incorporated by the Group in 2008, entered into an agreement with Ho Sung Nam (“Mr. Ho”), who is a shareholder of KTeMS Co., Ltd (“KTeMS”) and director of the Group’s jointly controlled entity, and certain independent third parties for the acquisition of the entire issued share capital of KTeMS, which was incorporated in Korea with limited liability, for a consideration of US$12,000,000 (equivalent to approximately HK$93,600,000) and the acquisition of the debts due from KTeMS of approximately HK$78,720,000. The acquisition consideration of US$12,000,000 is satisfied by (i) cash of US$3,500,000 (equivalent to approximately HK$27,300,000); (ii) the Company’s new shares of US$6,500,000 (equivalent to approximately HK$50,700,000); and (iii) the reassignment of loans due from Mr. Ho to the Group and LottVision Limited (“LottVision”) of approximately HK$7,400,000 and HK$8,200,000 respectively. LottVision is a shareholder of the substantial shareholder, Power Way Group Limited, of the Company. The details of the above transaction refer to the Company’s announcement dated 6 March 2008.

117

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

3. INTERIM RESULT FOR THE SIX MONTHS ENDED 30 JUNE 2008

Condensed Consolidated Income Statement (Unaudited)

Note Turnover 2 Cost of sales and services Gross profit Other income Employee expense Depreciation and amortisation Share of losses of jointly controlled entities Other expenses Finance costs 3 (Loss)/Profit before taxation 4 Taxation 5 (Loss)/Profit for the period (Loss)/Profit attributable to: Equity holders of the Company Minority interest (Loss) Earnings per share – Basic (cents) 6 – Diluted (cents) 6	For the three months ended 30 June 2008 2007 HK$’000 HK$’000 152,893 144,615 (112,514) (123,766) 40,379 20,849 3,644 56 (21,171) (5,835) (14,652) (1,192) (1,524) – (24,388) (7,906) (9,875) (1,355) (27,587) 4,617 (1,618) – (29,205) 4,617 (26,874) 4,617 (2,331) – (29,205) 4,617 (6.17) 1.59 N/A 1.57	For the six months ended 30 June 2008 2007 HK$’000 HK$’000 235,222 195,167 (172,891) (159,825) 62,331 35,342 4,251 87 (32,984) (11,401) (29,289) (2,269) (1,152) – (44,539) (15,543) (20,951) (2,557) (62,333) 3,659 (1,618) – (63,951) 3,659 (55,596) 3,659 (8,355) – (63,951) 3,659 (12.79) 1.26 N/A 1.25

118

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Condensed Consolidated Balance Sheet (Unaudited)

Note
Non-current assets
Property, plant and equipment
7
Goodwill
Intangible assets
8
Interest in jointly controlled entities
Loan receivable
Current assets
Inventories
Trade and other receivables
9
Amounts due from jointly
controlled entities
Amount due from a shareholder
of a jointly controlled entity
Pledged bank deposits
Cash and cash equivalents
Current liabilities
Trade and other payables
10
Tax payable
Amount due to a jointly controlled entity
Amounts due to related companies
Bank borrowings
Other loans
Net current assets
Total assets less current liabilities
Non-current liabilities
Other loans
Convertible bonds
Net assets
Capital and reserves
Share capital
11
Reserves
Total equity attributable to
equity holders of the Company
Minority interest
Total equity

(Unaudited)
(Audited)
As at
As at
30 June
31 December
2008
2007
HK$’000
HK$’000
31,114
32,051
485,079
485,026
171,064
194,711
96,481
97,633
–
396
783,738
809,817
69,217
12,057
231,201
159,861
22,346
1,431
31,263
30,348
11,731
12,424
76,717
143,816
442,475
359,937
107,441
81,774
2,798
2,163
–
2,140
59,602
–
32,299
45,712
53,270
31,565
255,410
163,354
187,065
196,583
970,803
1,006,400
961
5,600
398,579
380,030
571,263
620,770
4,355
4,322
497,965
539,756
502,320
544,078
68,943
76,692
571,263
620,770

119

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Condensed Consolidated Statement of Changes in Equity (Unaudited)

Share capital HK$’000 As at 1 January 2007 2,900 Recognition of equity settled share-based payments – Exercise of share options, net of expenses 16 Exchange difference on translation of foreign operations – Profit for the six months ended 30 June 2007 – As at 30 June 2007 2,916 As at 1 January 2008 4,322 Recognition of equity settled share-based payments – Exercise of share options, net of expenses 33 Exchange difference on translation of foreign operations – Loss for the six months ended 30 June 2008 – Minority interests arising from acquisition of interests in subsidiaries – As at 30 June 2008 4,355	Share premium HK$’000 55,824 – 308 – – 56,132 334,020 – 820 – – – 334,840	Share- based payments reserve HK$’000 643 89 (114) – – 618 359 10,720 (92) – – – 10,987	Statutory Convertible surplus Enterprise bonds reserves expansion equity fund fund reserve HK$’000 HK$’000 HK$’000 1,505 502 – – – – – – – – – – – – – 1,505 502 – 1,505 502 611,692 – – – – – – – – – – – – – – – 1,505 502 611,692	Attributable Retained to equity profits/ holders Exchange (Accumulated of the reserve losses) Company HK$’000 HK$’000 HK$’000 1,196 2,643 65,213 – – 89 – – 210 834 – 834 – 3,659 3,659 2,030 6,302 70,005 4,483 (412,805) 544,078 – – 10,720 – – 761 2,357 – 2,357 – (55,596) (55,596) – – – 6,840 (468,401) 502,320	Minority interests HK$’000 – – – – – – 76,692 – – 79 (8,355) 527 68,943	Total HK$’000 65,213 89 210 834 3,659
						70,005

						620,770 10,720 761 2,436 (63,951) 527
						571,263

120

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Condensed Consolidated Cash Flow Statement (Unaudited)

	Six months		Six months
	ended 30 June	ended 30 June
	2008		2007
	HK$’000		HK$’000
Net cash (used in)/generated from operating activities	(70,376)		1,120
Net cash generated from/(used in) investing activities	224		(2,886)
Net cash generated from/(used in) financing activities	2,012		(11,976)
Net decrease in cash and cash equivalents	(68,140)		(13,742)
Cash and cash equivalents at the beginning of period	143,816		47,276
Effect of foreign exchange rate changes	1,041		–
Cash and cash equivalents at the end of period	76,717		33,534

Analysis of the balances of cash and cash equivalents
Cash and cash equivalents	76,717		33,534

121

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Unaudited Condensed Consolidated Financial Statements

(1) BASIS OF PRESENTATION

The condensed consolidated 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 2007.

The condensed consolidated 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 follow:

			(Unaudited)	(Unaudited)				(Unaudited)
		For the six months		ended	30 June	2008	For the six months ended 30		June 2007
			Lottery
		Network	business				Network
		system management					system
	integration		services	Corporate		Total	integration	Corporate	Total
		HK$’000	HK$’000	HK$’000		HK$’000	HK$’000	HK$’000	HK$’000
Turnover		194,032	41,190		–	235,222	195,167	–	195,167
Operating cost*		(183,804)	(52,300)	(14,310)		(250,414)	(186,753)	(16)	(186,769)
Operating profit/(loss) before
depreciation and amortisation		10,228	(11,110)	(14,310)		(15,192)	8,414	(16)	8,398
Depreciation and amortisation		(1,795)	(27,494)		–	(29,289)	(2,269)	–	(2,269)
Result		8,433	(38,604)	(14,310)		(44,481)	6,145	(16)	6,129
Other income						4,251			87
Share of losses of jointly
controlled entities			(1,152)			(1,152)			–
Finance costs						(20,951)			(2,557)
(Loss)/Profit before taxation						(62,333)			3,659
Taxation						(1,618)			–
(Loss)/Profit for the period						(63,951)			3,659
* Operating cost included
the non cash item:
Share-based payments		1,669	832		8,219	10,720	89	–	89

122

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

b. Geographical segment

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

Hong Kong PRC	(Unaudited) For the six months ended 30 June 2008 2007 HK$’000 HK$’000 9,201 9,386 226,021 185,781 235,222 195,167	(Unaudited) For the six months ended 30 June 2008 2007 HK$’000 HK$’000 9,201 9,386 226,021 185,781 235,222 195,167
		195,167

(3) FINANCE COSTS

Interest expenses on bank borrowings Interest expenses on other loans Effective interest expenses on convertible bonds	For the three months ended 30 June 2008 2007 HK$’000 HK$’000 650 835 360 520 8,865 – 9,875 1,355	For the six months ended 30 June 2008 2007 HK$’000 HK$’000 1,591 1,409 811 1,148 18,549 – 20,951 2,557	For the six months ended 30 June 2008 2007 HK$’000 HK$’000 1,591 1,409 811 1,148 18,549 – 20,951 2,557
			2,557

(4) (LOSS)/PROFIT BEFORE TAXATION

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

	For the three months	For the three months	For the six months	For the six months
	ended 30 June		ended 30 June
	2008	2007	2008	2007
	HK$’000	HK$’000	HK$’000	HK$’000
Amortisation of intangible assets	12,891	740	25,910	1,390
Depreciation of property, plant and equipment	1,761	452	3,379	879
Staff costs (including directors’ remuneration)
Salary and wages	11,637	5,774	22,264	11,312
Share-based payments	9,534	61	10,720	89
and after crediting:
Bank interest income	237	56	585	87
Other interest income	712	–	971	–
Other services income	2,695	–	2,695	–

(5) TAXATION

No provision for Hong Kong profits tax has been made as the Group had no assessable profit for the six months ended 30 June 2008 and its corresponding period in 2007.

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

123

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Certain subsidiaries of the Group operating in the PRC are eligible for certain tax holidays and concessions and were exempted from PRC income tax.

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

(6) (LOSS)/EARNINGS PER SHARE

The calculation of basic loss per share for the three months and the six months ended 30 June 2008 is based on the unaudited loss attributable to equity holders of the Company of approximately HK$26,874,000 (2007: profit HK$4,617,000) and approximately HK$55,596,000 (2007: profit HK$3,659,000) respectively and on the weighted average number of approximately 434,724,000 (2007: 290,378,000) shares in issue during the period.

Diluted loss per share has not been presented for the three months and six months ended 30 June 2008 since the effect is anti-dilutive.

(7) PROPERTY, PLANT AND EQUIPMENT

Movements in property, plant and equipment were:

Furniture, Machinery fixtures Lottery and and office terminals equipment equipment HK$’000 HK$’000 HK$’000 Cost At 1 January 2008 10,328 12,680 19,478 Additions – 1,368 798 Exchange differences 420 351 390 Disposals – (647) (1,402) Acquisition of subsidiary – – 1,092 At 30 June 2008 10,748 13,752 20,356 Accumulated depreciation At 1 January 2008 99 9,629 2,090 Charged for the period 1,103 754 1,112 Exchange differences 50 203 76 Written back on disposals – (131) (152) At 30 June 2008 1,252 10,455 3,126 Net book value At 30 June 2008 9,496 3,297 17,230 At 31 December 2007 10,229 3,051 17,388	Motor vehicle HK$’000 1,218 – 20 – – 1,238 864 110 16 – 990 248 354	Tools HK$’000 7,275 89 139 – – 7,503 6,246 300 114 – 6,660 843 1,029	Total HK$’000 50,979 2,255 1,320 (2,049) 1,092 53,597 18,928 3,379 459 (283) 22,483 31,114 32,051

124

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(8) INTANGIBLE ASSETS

Movements in intangible assets were:

Software product development cost HK$’000 Cost At 1 January 2008 22,773 Additions 1,729 Exchange differences 377 At 30 June 2008 24,879 Accumulated depreciation At 1 January 2008 15,172 Charged for the period 1,088 Exchange differences 180 At 30 June 2008 16,440 Net book value At 30 June 2008 8,439 At 31 December 2007 7,601	License Technologies rights know-how HK$’000 HK$’000 164,166 25,252 – – 360 – 164,526 25,252 2,036 272 21,667 3,155 23 – 23,726 3,427 140,800 21,825 162,130 24,980	Total HK$’000 212,191 1,729 737
		214,657
		17,480 25,910 203
		43,593
		171,064

		194,711

(9) TRADE AND OTHER RECEIVABLES

Trade receivables Retention money receivables Other receivables Prepaid maintenance charges Prepayment and deposits	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 155,334 102,441 6,062 11,596 38,690 30,020 – 17 31,115 15,787 231,201 159,861	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 155,334 102,441 6,062 11,596 38,690 30,020 – 17 31,115 15,787 231,201 159,861
		159,861

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

125

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The following is an ageing 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	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 110,577 50,983 24,471 24,067 18,302 20,409 13,719 17,544 167,069 113,003 (11,735) (10,562) 155,334 102,441	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 110,577 50,983 24,471 24,067 18,302 20,409 13,719 17,544 167,069 113,003 (11,735) (10,562) 155,334 102,441
		113,003 (10,562)
		102,441

(10) TRADE AND OTHER PAYABLES Trade payables Other payables	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 62,220 33,097 45,221 48,677 107,441 81,774	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 62,220 33,097 45,221 48,677 107,441 81,774
		81,774

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

Age 0 to 90 days 91 to 180 days over 180 days	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 59,244 28,979 1,224 1,404 1,752 2,714 62,220 33,097	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 59,244 28,979 1,224 1,404 1,752 2,714 62,220 33,097
		33,097

126

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(11) SHARE CAPITAL

Authorised – ordinary shares of HK$0.01 each – at 1 January 2008 and 30 June 2008 Issued and fully paid – at 1 January 2008 – Exercise of share options – at 30 June 2008	Number of shares ’000 2,000,000 432,198 3,281 435,479	Nominal value HK$’000 20,000

		4,322 33
		4,355

(12) SHARE-BASED PAYMENTS

The Group has two share option schemes for certain directors, advisors 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-half to four years
Contractual Life	10 years from date of grant	2 to 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

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	2008 Number of Weighted share average options exercise price ’000 HK$ 17,791 0.910 30,000 0.890 (515) 0.354 (3,280) 0.233 43,996 0.953 6,728 1.237	2007 Number of Weighted share average 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

Options granted during the six months ended 30 June 2008 were 30,000,000 shares (2007: 6,980,000 shares).

127

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(13) OPERATING LEASE COMMITMENTS

a. Operating lease commitments

As at 30 June 2008, the Group had operating lease commitments of approximately HK$14,314,000 (31 December 2007: HK$12,088,000), out of which approximately HK$7,238,000 was payable within 1 year (31 December 2007: HK$6,093,000).

These operating lease commitments were related to premises on rental by the Group.

b. Capital commitments

As the balance sheet date, the capital commitments contracted but not provided for in financial statements are as follows:

Capital contribution on – investment in a subsidiary – acquisition of intangible assets	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 – 2,675 – 1,070 – 3,745	As at 30 June 31 December 2008 2007 HK$’000 HK$’000 – 2,675 – 1,070 – 3,745
		3,745

(14) RELATED PARTY TRANSACTIONS

The following is a summary of significant related transactions carried out in the normal course of the Group’s business during the period:

	(Unaudited)
	Six months ended
	30 June
	2008	2007
	HK$’000	HK$’000
Sales of goods to jointly controlled entity	23,118	–
Purchases of materials and unfinished parts
from related company	59,003	–
Reimbursement of office and administrative
expenses to related company	352	–

128

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

4. MANAGEMENT DISCUSSION AND ANALYSIS

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.

129

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

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.

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.

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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 and short-term bank loans.

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.

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.

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.

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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.

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).

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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.

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

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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 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:

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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.

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.

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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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 year ended 31 December 2007

Significant Events and Developments

2007 marked the foray of Melco LottVentures Limited (“the Group”) into the lucrative and fastgrowing lottery market in Asia. This move also consolidated our close relationship with Melco International Development Limited (“Melco”), one of the biggest gaming conglomerates listed on the Main Board of the Hong Kong Stock Exchange and founder of the NASDAQ-listed Melco PBL Entertainment (Macau) Limited which holds one of the six gaming licenses in Macau.

During the Review Period, the Group acquired an 80% interest in PAL Development Limited (“PAL”) which was previously jointly owned by Melco and Singapore listed LottVision Limited (“LottVision”) as well as a 60% interest in Oasis Rich International Limited (“Oasis”). which was previously owned by Taiwan listed Firich Enterprises Co., Limited (“Firich”). PAL is engaged in various lottery-related businesses and ventures in China. Wu Sheng Computer Technology (Shanghai) Co. Ltd., a wholly owned subsidiary of Oasis, is a Shanghai-based manufacturer of lottery vending terminals and point of sales (POS) systems.

The acquisition was satisfied by the issuance of 72 million new shares and HK$606.8 million worth of convertible bonds to Power Way Group Limited, a consortium led by Melco and is owned as to 54.8% by Melco, 26.9% by Firich and 18.3% by LottVision.

The Group has also recently forayed into the Korean lottery market through a series of loan and equity swaps. On 6 March 2008, it was announced that the Group will acquire the entire issued share capital of a Korean company, KTeMS Co., Ltd (“KTeMS”), at an aggregate consideration of US$12 million (equivalent to approximately HK$93.6 million). The transaction is subject to indepth due diligence.

KTeMS has a 14% equity interest in Nanum Lotto Co., Ltd (“Nanum Lotto”) which has an exclusive national license to operate off-line lotto games in South Korea. Nanum Lotto is a consortium formed by renowned international and Korean partners. This recent foray into the Korean lotto market marks our first move to expand our lottery business beyond China. Our ultimate goal is to build a company with lottery operations across Asia.

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As regards financing, on 19 December 2007, the Group completed a placement of 58 million new shares to international institutional investors and successfully raised net proceeds of approximately HK$104.1 million. The successful fund-raising provides us with the necessary working capital to expand our lottery business in Asia.

In January 2008, the Group proposed to change its name to “Melco LottVentures Limited 新濠環彩有限公司” to highlight its new principal business focus on lottery-related ventures as well as its close relationship with Melco. Backed by the strong gaming expertise and financial strength of the Melco Group, the Group is confident that our experienced international management team will be able to make Melco LottVentures one of the top lottery operators in Asia.

Outlook

The lottery industry in China is going through an industry revolution at the moment. We have already seen substantial growth in lottery sales over the last two years due primarily to the introduction of new games such as scratch cards. Going forward, the proposed introduction of fixed odds sports betting and interactive mobile gaming will no doubt spur further growth.

We are confident that the new lottery business will bring about a transformational change to the Group’s earnings profile as well as its growth potential.

Financial Review

For the year under review, the Group was engaged in two main business streams, namely (i) network system integration and (ii) lottery business management services.

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FINANCIAL INFORMATION OF THE GROUP

The segmental information shown in Note 8 to the financial statements is reproduced below with some minor re-arrangements:

Segment Result: Network system integration Segment Result: Lottery business management services Group’s operating results Other income Share of profits of jointly controlled entities Impairment loss on goodwill Impairment loss on intangible assets Unallocated corporate expenses Finance costs (Loss)/profit before taxation Income tax expenses (Loss)/profit for the year Minority interests (Loss)/profit for the year attributable to equity holders of the Company	Year ended 31-Dec-07 HK$’000 12,890 (4,247) 8,643 812 691 (416,000) (1,001) (390) (7,460) (414,705) (1,676) (416,381) 933 (415,448)	Year ended 31-Dec-06 HK$’000 9,864 – 9,864 639 – – – (342) (4,104) 6,057 (956) 5,101 – 5,101

Consolidated loss attributable to equity holders of the Company amounted to approximately HK$415.4 million for the Review Period (2006: net profit of approximately HK$5.1 million). The loss was primarily due to the following non-cash items:

(i) A deemed non-cash expense on convertible bonds amounting to HK$1.9 million; and
(ii) An impairment loss on goodwill of HK$416.0 million

Should these non-cash expenses be excluded, the Group would have recorded a consolidated operating EBITDA of approximately HK$17.1 million for the year, an increase of 15.5% over the previous year (2006: HK$14.8 million).

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Network System Integration Business

This segment generated revenue of approximately HK$361.6 million (2006: HK$326.6 million), an increase of 10.7% over the previous year. A breakdown of the sales by main business segments is set out as follows:

	Year ended	Year ended
	31-Dec-2007	31-Dec-2006
	HK$’000	HK$’000
Network infrastructure service	299,124	286,398
Network professional services	58,781	38,008
Sales of Network software	3,740	2,205
Total	361,645	326,611

Contribution from Network System Integration increased from approximately HK$9.9 million to approximately HK$12.9 million, an increase of 30.3% over the previous year.

Lottery Business Management Services

The Group’s lottery business is conducted via 80%-owned PAL Development Limited (“PAL”). Its business comprises the following:–

1) Provision of venue management services to over 500 venues for Sports Lottery in 7 provinces in China.
2) Wholesales distribution of scratch cards for both Sports Lottery and Welfare Lottery in China.
3) Provision of technological solutions for Interactive Lottery Games on Mobile Phones.

For the year ended 31 December 2007, losses from this segment amounted to approximately HK$4.2 million (2006: Nil). Such losses were primarily due to the infrastructure and expansion costs incurred at the early stage of development. As PAL is still in its early investment phase, contribution to the Group’s profitability was negligible in 2007.

Other Income

During the Review Period, other income amounted to HK$812,000 (2006: HK$639,000), the bulk of which was attributable to bank interests which amounted to HK$523,000 (2006: HK$227,000).

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Share of profits of jointly controlled entities

During the Review Period, the share of profits of jointly controlled entities amounted to HK$691,000 (2006: Nil). These are made up of the following:

Year ended	Year ended
31-Dec-07	31-Dec-06
HK$’000	HK$’000

Share of profit of Beijing Telenet Information Technology Limited (“BTI”)(1) Share of loss of PALTECH Company Limited (“PALTECH”)(2)	747 (56) 691	– –
		–

(1) Share of profit of BTI

BTI is a jointly controlled entity owned as to 51% by PAL. BTI is engaged in the distribution of lottery vending terminals in 22 provinces in China. It is the largest authorized lottery vending terminal supplier approved by Sports Lottery.

During the Review Period, operational profit attributable to the Group amounted to approximately HK$747,000 (2006: Nil).

(2) Share of loss of PALTECH

PALTECH is a jointly controlled entity owned as to 60% by PAL. PALTECH is principally engaged in the development 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.

During the Review Period, operational loss attributable to the Group amounted to approximately HK$56,000 (2006: Nil).

Loss on Goodwill Impairment

A loss on goodwill impairment amounting to HK$416 million was recorded during the Review Period. This is a non-cash item resulting from the difference between the fair value of the convertible bonds and shares issued at the date of the acquisition of the new businesses and the value of these businesses as estimated by an independent valuers as at 31 December 2007.

Unallocated Corporate Expenses

During the Review Period, unallocated corporate expenses amounted to HK$390,000 (2006: HK$342,000).

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Finance Costs

During the Review Period, finance costs amounted to approximately HK$7.5 million (2006: HK$4.1 million). The increase was primarily attributable to the deemed interest expense on the liability component of convertible bonds issued as part of the consideration on the acquisition of PAL and Oasis amounting to approximately HK$1.9 million in order to comply with HKAS 32. It should be noted that this deemed interest expense is notional and of a non-cash nature.

Liquidity, Financial Resources and Capital Structure

The Group’s financial and liquidity position remained healthy. As at 31 December 2007, the Group had net current assets of approximately HK$196.6 million, a 222.6% increase over last year end of HK$61.0 million. The current ratio increased from 1.47 to 2.20. Net current assets included bank balances and cash of approximately HK$143.8 million (2006: HK$47.3 million), bank borrowings of approximately HK$45.7 million (2006: HK$49.8 million) and current portion of other loans of approximately HK$31.6 million (2006: HK$23.8 million). The increase in bank and cash during the year was mainly due to the net proceeds raised from the issue of new shares in December 2007.

Non-current portion of other loans at year end amounted to approximately HK$5.6 million (2006: HK$5.6 million).

As at 31 December 2007, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

As at 31 December 2007, the total number of issued ordinary shares of the Group was 432,198,495 of HK$0.01 each (2006: 289,944,745 of HK$0.01 each). The increase in issued shares was due to the allotment of 72,000,000 consideration shares for the acquisition of the new businesses, 58,000,000 subscription share referred to above, as well as the exercise of share options.

Order Book and Prospects of New Business

As at 31 December 2007, the Group had contracts on hand for sales amounting to approximately HK$38.3 million (2006: HK$20.2 million) which would be booked as revenue upon delivery and implementation.

Significant Investment Held

The Group did not hold any significant investment at the beginning of the Review Period. Acquisitions during the Review Period are detailed below under the heading “Acquisitions, disposals and significant investments”.

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Segmental Information

The segmental information of the Group is covered in note 8 to the financial statements.

Charges on Group Assets

As at 31 December 2007, the Group had a pledged bank deposit of approximately HK$12.4 million (2006: HK$5.0 million) for securing certain banking facilities. No trade receivable was pledged for securing banking facilities as at 31 December 2007 (2006: HK$6.9 million). Save as disclosed above, the Group did not have any significant charges on assets.

Gearing Ratio

As at 31 December 2007, the gearing ratio, expressed as total liabilities over total assets, dropped to approximately 0.47 times from approximately 0.68 times as at 31 December 2006.

Foreign Exchange Exposure

Acquisitions, Disposals and Significant Investment

During the Review Period, the Group had completed the following acquisition:

On 13 December 2007, Rising Move International Limited, a wholly-owned subsidiary of the Group, entered into the agreement with Power Way Group Limited to purchase the 80% of the issued share capital of PAL Development Limited and 60% of the issued share capital of Oasis in a very substantial acquisition. The acquisition was at the consideration of HK$668 million, with approximately HK$61.2 million for the consideration shares and approximately HK$606.8 million being the Convertible bonds. The details please refer to the Circular of the Company dated 19 November 2007.

Future Plans for Investments or Capital Assets and Sources of Funding

Other from abovementioned, there are no immediate plans for any significant investments in capital assets. However, the Group will continuously identify investment opportunities which add to the synergetic well being of the Group in the lottery business management sector, to be financed from internal funds or by the bringing in of strategic business partners.

Employee Information

As at 31 December 2007, the Group had 350 employees comprising 27 employees based in Hong Kong and 323 employees based in mainland China. Total employee expense, excluding for directors, was approximately HK$25.5 million (2006: HK$21.5 million) during the Review Period. The Group continues to provide remuneration package to employees according to market practices

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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.

Contingent Liabilities

As at 31 December 2007, the Company has issued corporate guarantees to banks in respect of their general banking facilities totaling HK$77,472,000 (2006: HK$50,400,000) granted to the wholly owned subsidiaries of the Company.

As at 30 June 2008

Liquidity, Financial Resources and Capital Structure

The Group had total cash and bank deposits of HK$76.7 million as at 30 June 2008 (31 December 2007: 143.8 million). The Group had no bank overdraft as at 30 June 2008 (31 December 2007: Nil).

The Group remained healthy in the financial and liquidity position during the Review Period. As at 30 June 2008, the Group recorded net current assets of approximately HK$187.1 million as compared with approximately HK$196.6 million as at 31 December 2007. The current ratio decreased to approximately 1.73 from 2.20 as at 31 December 2007.

Non-current portion of other loan as at 30 June 2008 amounted to approximately HK$1.0 million (31 December 2007: HK$5.6 million).

As at 30 June 2008, 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 during the Review Period.

Segmental Information

The segmental information of the Group is covered in the Financial Review and in note 2 to the unaudited Condensed Consolidated Financial Statements.

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Employee Information

As at 30 June 2008, the Group had 361 employees (2007: 167 employees) comprising 31 employees (2007: 20 employees) based in Hong Kong and 330 employees (2007: 147 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 2008, the Group had a pledged bank deposit of approximately HK$11.7 million for securing certain banking facilities (31 December 2007: HK$12.4 million).

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

Gearing Ratio

As at 30 June 2008, the gearing ratio, expressed as total liabilities over total assets, increased to approximately 0.53 from approximately 0.47 as at 31 December 2007.

Foreign Exchange Exposure

Order Book & Prospects for New Business

As at 30 June 2008, the Group had contracts on hand for sales amounting to approximately HK$63.0 million (2007: HK$38.3 million) which would be booked as revenue upon delivery and implementation. These contracts on hand were all from the SI Business which are mostly of project type of business, and can have different completion cycles from contract signing.

Contingent Liabilities

As at 30 June 2008, the Company has given corporate guarantees totaling approximately HK$56.5 million (31 December 2007: HK$77.5 million) to secure various credit facilities granted to its wholly-owned subsidiaries.

Future plans for Investments or Capital Assets and Sources of Funding

As published in the announcement of the Company dated 6 March 2008, the Group had conditionally agreed to acquire, inter alias, the entire issued share capital of KTeMS Company Limited as part of the Company’s plan to expand its business geographically within Asia. The proposed acquisition was approved by shareholders of the Company at its extraordinary general meeting held on 15 April 2008. Completion of the acquisition is expected to take place during the

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third quarter of 2008. Agreement has been reached with Power Way Group Limited, a substantial shareholder of the Company, to make a shareholder’s loan of HK$80 million to the Company for the financing of the project.

Save as disclosed above and the continuous search for expansion, the Group does not have any immediate plan for any significant investments, acquisitions of capital assets or additional sources of funding.

INDEBTEDNESS STATEMENT

As at the close of business on 30 September 2008, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had total outstanding borrowings of approximately HK$565.6 million, comprising unsecured bank loans of approximately HK$33.0 million, convertible bonds liability of approximately HK$407.9 million, unsecured other short term loans with an aggregate carrying value of approximately HK$44.1 million, and other unsecured noncurrent loans (repayable more than one year but less than 2 years) with an aggregate carrying value of approximately HK$80.6 million.

The Group’s bank deposits of approximately HK$11.3 million are pledged to a bank for guarantees of the same amount given by the bank. Other secured bank loans are secured by corporate guarantees given by the Company.

Upon Completion of the Acquisition, the Company will further issue Convertible Bonds in the aggregate principal amount of HK$277,175,310 to the Vendor. Details of the Convertible Bonds are set out in this circular. The Convertible Bonds may be converted into ordinary shares of the Company at an initial convertible price of HK$0.991 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 in arrears on the outstanding principal amount of the Convertible Bonds. The Convertible Bonds are secured by i) the acquisition cost of the Company for the entire issued share capital of KTeMS amounted to US$12 million (equivalent to approximately HK$93.6 million). Therefore, 50% of the entire issued share capital of KTeMS equals approximately HK$46.8 million. However, the amount of any future dividends and any other cash receivables arising therefrom are not available at present; and ii) the amount of all rights and gross income of the Company or its subsidiaries arising from any sublicence agreement, services agreement, project agreement or otherwise arising from any or all projects that are also not available at present.

Save as disclosed above or as otherwise mentioned herein and apart from the intra-group liabilities and normal trade payables arising in the ordinary course of business, at the close of business on 30 September 2008, the Group did not have any other outstanding indebtedness, loan capital, bank overdrafts and liabilities under acceptances (other than normal trade bills) or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase or finance lease commitments, guarantees or contingent liabilities.

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WORKING CAPITAL

The Directors are of the opinion that taking into account of the Group’s internal resources, the presently available banking and other facilities and in the absence of unforeseen circumstances, the Group will have sufficient working capital for a period of twelve months from the date of this circular.

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APPENDIX III

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE GROUP

The following is the illustrative and unaudited pro forma financial information of the Group which has been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the proposed acquisition of (a) (i) exclusive license right to use and sublicense of the CSLA Software, including any updates of the CSLA Software to be released by the Vendor. Exclusivity period of the license is for an initial period of 3 years commencing from the Completion Date, and such exclusivity period shall be conditionally extended by 2 years from the end of any such extended exclusivity period in the People’s Republic of China (the “PRC”); (ii) non-exclusivity license right to the use and sublicense the CWL Software released by the Vendor commencing from the Completion Date in the PRC (collectively the “Licenses”); and (b) cash of HK$50 million (together with the Licenses collectively referred to as the “Assets”) by the Company (the “Acquisition”) as if the Acquisition had been taken place on 30 June 2008 for the preparation of unaudited pro forma consolidated balance sheet; and at the beginning of the year ended 31 December 2007 for the preparation of the unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement.

The unaudited pro forma consolidated balance sheet of the Group is based on the unaudited consolidated balance sheet of the Group as at 30 June 2008 as set out in Appendix II to this circular, and adjusted to reflect the effect of the said Acquisition. The unaudited pro forma consolidated income statement and cash flow statement of the Group are prepared based on the audited consolidated income statement and cash flow statement of the Group as set out in Appendix II to this circular, as if the Acquisition had been completed on 1 January 2007, and adjusted to reflect the effect of the said Acquisition.

As the unaudited pro forma financial information of the Group was prepared for illustrative purpose only and because of its hypothetical nature, it may not give a true picture of the financial position, results of operation or cash flows of the Group had the Acquisition been completed as at the respective dates to which it is made up to or at any future date.

147

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(I) Unaudited pro forma consolidated balance sheet

Non-current assets Property, plant and equipment Goodwill Intangible assets Interests in jointly controlled entities Current assets Inventories Trade and other receivables Amount due from a jointly controlled entity Amount due from a shareholder of jointly controlled entity Pledged bank deposits Cash and cash equivalents Current liabilities Trade and other payables Tax payable Amount due to a jointly controlled entity Amount due to a related company Bank borrowings Other loans Net current assets Total assets less current liabilities Non-current liabilities Other loans Convertible bonds Net assets	Unaudited consolidated balance sheet of the Group as at Pro forma 30 June 2008 adjustments HK$’000 HK$’000 Notes 31,114 485,079 171,064 257,384 5 96,481 783,738 69,217 231,201 22,346 31,263 11,731 76,717 50,000 5 442,475 (107,441) (2,000) 5 (2,798) – (59,602) (32,299) (53,270) (255,410) 187,065 970,803 (961) (398,579) (142,670) 1&3 571,263	Unaudited pro forma consolidated balance sheet of the Group HK$’000 31,114 485,079 428,448 96,481 1,041,122 69,217 231,201 22,346 31,263 11,731 126,717 492,475 (109,441) (2,798) – (59,602) (32,299) (53,270) (257,410) 235,065 1,276,187 (961) (541,249) 733,977

148

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Capital and reserves Share capital Reserves Share premium Share-based payment reserve Statutory surplus reserve fund Enterprise expansion fund Convertible bonds equity reserve Exchange reserve Accumulated losses Minority interests Total equity	Unaudited consolidated balance sheet of the Group as at Pro forma 30 June 2008 adjustments HK$’000 HK$’000 Notes 4,355 282 1&2 334,840 27,927 1&2 10,987 1,505 502 611,692 134,505 1&3 6,840 (468,401) 502,320 68,943 571,263	Unaudited pro forma consolidated balance sheet of the Group HK$’000 4,637 362,767 10,987 1,505 502 746,197 6,840 (468,401) 665,034 68,943 733,977

149

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(II) Unaudited pro forma consolidated income statement

Turnover Cost of sale and services Other income Employee benefits cost Depreciation and amortisation Impairment loss on goodwill Impairment loss on intangible assets Share of profits of jointly controlled entities Other expenses Finance costs Loss before taxation Taxation Loss for the year Attributable to: Equity holders of the Company Minority interests	Audited consolidated income statement of the Group for the year ended 31 December Pro forma 2007 adjustments Note HK$’000 HK$’000 361,936 (282,323) 79,613 812 (24,470) (7,331) (416,000) (1,001) 691 (39,559) (7,460) (19,946) 4 (277) 4 (414,705) (1,676) (416,381) (415,448) (20,223) 4 (933) (416,381)	Unaudited pro forma consolidated income statement of the Group HK$’000 361,936 (282,323) 79,613 812 (24,470) (7,331) (416,000) (1,001) 691 (39,559) (27,683) (434,928) (1,676) (436,604) (435,671) (933) (436,604)

150

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(III) Unaudited pro forma consolidated cash flow statement

Cash flow from operating activities Loss before taxation Adjustments for: Interest income Interest expenses Depreciation and amortisation Loss on write off of property, plant and equipment Impairment loss on goodwill Impairment loss on intangible assets Impairment loss on inventory Impairment loss on trade and retention money receivable Share-based payment expenses Share of profits of jointly controlled entities Operating cash flows before movements in working capital Increase in inventories Increase in trade and other receivables Decrease in amount due from a shareholder of a jointly controlled entity Increase in amount due to a jointly controlled entity Decrease in trade and other payables Cash used in operations PRC enterprise income tax paid Net cash used in operating activities	Audited consolidated cash flow statement of the Group for the year ended 31 December Pro forma 2007 adjustments HK$’000 HK$’000 Note (414,705) (20,223) 4 (601) 7,460 19,946 4 277 4 7,331 2 416,000 1,001 854 6,829 157 (691) 23,637 (7,309) (10,178) 1,995 2,140 (16,018) (5,733) (1,061) (6,794)	Unaudited pro forma consolidated cash flow statement of the Group HK$’000 (434,928) (601) 27,683 7,331 2 416,000 1,001 854 6,829 157 (691) 23,637 (7,309) (10,178) 1,995 2,140 (16,018) (5,733) (1,061) (6,794)

151

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Investing activities Interest received Acquisition of subsidiaries Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Capital expenditure on intangible assets Increase in pledged bank deposits Arising from acquisition of the Assets Net cash (used in)/generated from investing activities Financing activities Interest paid Net borrowings raised from banks Net borrowings raised from other loans Exercise of share options Net proceeds from issue of new shares Net cash generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents as 1 January Effect of foreign exchange rate changes Cash and cash equivalents as 31 December	Audited consolidated cash flow statement of the Group for the year ended 31 December Pro forma 2007 adjustments HK$’000 HK$’000 Notes 601 11,391 (3,303) 70 (3,342) (7,411) – 50,000 5 (1,994) (5,532) (277) 4 (4,131) 7,749 3,986 101,671 103,743 94,955 47,276 1,585 143,816	Unaudited pro forma consolidated cash flow statement of the Group HK$’000 601 11,391 (3,303) 70 (3,342) (7,411) 50,000 48,006 (5,809) (4,131) 7,749 3,986 101,671 103,466 144,678 47,276 1,585 193,539

152

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

On 7 September 2008, the Company entered into the Asset Transfer Agreement (as amended by a supplemental agreement dated 26 September 2008) with the Vendor, pursuant to which the Company has conditionally agreed to acquire the Assets. The total consideration for the Acquisition pursuant to the Asset Transfer Agreement is approximately HK$305,130,000 based on the Company’s share price of HK$0.991 at the agreement date, whereas the total consideration of the Acquisition payable by the Group is approximately of HK$305,384,000 based on the market price of Company’s shares as at 30 June 2008, which is to be satisfied in the following manner:

Issue of Consideration Shares (including a share premium of HK$27,927,000_(note 2)) # Issue of Convertible Bonds *_ Total consideration of the Acquisition as at 30 June 2008	HK$’000 28,209 277,175
	305,384

The fair value of the Consideration Shares is equal to the market price of the Consideration Shares as at 30 June 2008 times the number of shares (being 28,208,938) issued.
The valuation of the Convertible Bonds was carried out by Vigers Appraisal & Consulting Limited, an independent valuer (the “Valuer”). The basis of the valuation is detailed in notes 3 and 4 below.
The adjustment is to reflect issue of Consideration Shares by the Company for the Acquisition as follow:

Share capital Issue of Consideration Shares (being 28,208,938 shares of HK$0.01 each) Premium on share issue Issue of 28,208,938 shares (@HK$0.99 each) (note 1)	HK$’000 282 27,927
	28,209

The adjustment represents the liability and equity components of the Convertible Bonds with principal amount of approximately HK$277,175,000 issued for the Acquisition as if they had been issued on 30 June 2008 for the purpose of preparing the unaudited pro forma consolidated balance sheet. By using the discounted cash flow method, an amount of approximately HK$142,670,000 was allocated to the liability component and the residual amount of HK$134,505,000 was allocated to the equity component. In the opinion of the directors, no deferred tax will arise from the above initial recognition of the Convertible Bonds.
For the purpose of preparing the unaudited pro forma consolidated income statement and cash flow statement, the adjustment of approximately of HK$20,223,000 represents the imputed interest expense for the year ended 31 December 2007 on the Convertible Bonds, based on an effective interest rate of 14.35% per annum as if they had been issued on 1 January 2007. The above interest expense includes the coupon interest of HK$277,000 which should be paid out. The basis of determining the effective interest rate of 14.35% per annum was made by the Valuer with reference to the Group’s financial information. The Valuer has considered the credit worthiness of the Company to determine the effective interest rate. This adjustment will have continuing impact on the consolidated income statement and the actual amount will vary according to the timing of the whole or any part of the Convertible Bonds being converted when they are issued.

153

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The adjustment represents the Assets to be acquired which included cash of HK$50,000,000 and intangible assets of HK$257,384,000. The value of the intangible assets represents the total consideration of HK$305,384,000 plus professional fees directly attributable to the Acquisition of HK$2,000,000 less cash of HK$50,000,000 to be acquired. In the opinion of the directors, the intangible assets, representing the Licenses, have indefinite useful lives and accordingly they are not amortised but are tested for impairment annually whenever there is an indication that they may be impaired.
On Completion, the total consideration payable by the Group and the Assets to be acquired will have to be reassessed. As a result of the reassessment, the total consideration payable by the Group and the value of the Assets to be acquired may be different from those presented above.

154

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

B. ACCOUNTANTS’ REPORT ON PRO FORMA FINANCIAL INFORMATION OF THE GROUP

Shu Lun Pan Horwath Hong Kong CPA Limited 香港立信浩華會計師事務所有限公司 20th Floor, Central Plaza 18 Harbour Road Wanchai, Hong Kong Telephone : (852) 2526 2191 Facsimile : (852) 2810 0502 [email protected] www.horwath.com.hk

11 November 2008

The Board of Directors Melco LottVentures Limited 31/F, The Centrium 60 Wyndham Street Central, Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of Melco LottVentures Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) as set out on pages 147 to 154 under the heading of “Unaudited Pro Forma Financial Information of the Group” in Appendix III to the Company’s circular (the “Circular”) dated 11 November 2008, which has been prepared by the directors of the Company, solely for illustrative purposes only, to provide information about how the Acquisition (as defined in the Circular), might have affected the financial information of the Group. The basis of preparation of the Unaudited Pro Forma Financial Information is set out on pages 147 to 154 of 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 of the Rules Governing the Listing of Securities on Growth Enterprise 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(7) 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 owed to those to whom those reports were addressed by us at the dates of their issue.

155

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 Engagements (“HKSIR”) 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 the source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement does 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 stated 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 purpose only, based on the judgments and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of :

the financial position of the Group had the Acquisition actually occurred as at the date indicated therein or at any future dates; or
the results and cash flows of the Group had the Acquisition actually occurred as at the date indicated therein or for any future periods.

156

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

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 stated 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, For and on behalf of

Shu Lun Pan Horwath Hong Kong CPA Limited

Certified Public Accountants Hong Kong

Chan Kam Wing, Clement

Director Practising Certificate number P02038

157

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particular given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:

(a) the information contained in this circular is accurate and complete in all material respect and is not misleading;
(b) there are no matters the omission of which would make any statement in this circular misleading; and
(c) 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.

2. SHARE CAPITAL

Number of shares
Authorised
Ordinary shares of HK$0.01 each
– as at the Latest Practicable Date
2,000,000,000
Issued and fully paid
– as at the Latest Practicable Date
471,221,495
– Consideration Shares to be alloted and issued
28,208,938
– Conversion Shares to be alloted and
issued upon full conversion of the Convertible Bonds
279,692,542
– Conversion Shares II to be alloted and issued upon
full conversion of the Convertible Bonds II
69,709,080
Total
848,832,055

Nominal value
HK$
20,000,000
4,712,214.95
282,089.38
2,796,925.42
697,090.80

8,488,320.55

158

GENERAL INFORMATION

APPENDIX IV

3. DISCLOSURE OF INTERESTS

(a) Interests of Directors

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

(i) Long positions in shares of the Company:

			Approximate
		Number of	percentage
	Nature of	Shares	of Shares
Name of Director	Interests	Interested	Interested
			(Note 1)
Mr. Chan Sek Keung, Ringo	Personal	18,776,000	3.98%
	Corporate	56,400,000	11.97%
	(Note 2)
Mr. David Tsoi	Personal	413,500	0.09%
Mr. Pang Hing Chung, Alfred	Personal	1,500,000	0.32%

Notes:

(1) As at the Latest Practicable Date, the total number of issued shares of the Company was 471,221,495.
(2) Mr. Chan Sek Keung, Ringo 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.

159

GENERAL INFORMATION

APPENDIX IV

(ii) Long positions in the 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	share option	share	share option		of the
		option	outstanding	option	outstanding		Company’s
		outstanding	as at Latest	outstanding	as at Latest		issued
Name of	Date of	as at	Practicable	as at	Practicable	Aggregate	share
Director	grant	1.1.2008	Date	1.1.2008	Date	interests	capital
Mr. Chan Sek	30.4.2002	3,000,000	3,000,000	–	–
Keung, Ringo	(note 3)
(notes 1 & 2)	20.2.2003	–	–	1,200,000	1,200,000
	(note 4)					4,200,000	0.89%
Mr. Ko Chun
Fung, Henry	31.3.2008	–	–	–	4,354,000	4,354,000	0.92%
(notes 1 & 2)	(note 7)
Mr. David Tsoi	12.1.2007	–	–	750,000	562,500
(notes 1 & 2)	(note 5)
	7.12.2007	–	–	200,000	200,000
	(note 6)					762,500	0.16%
Mr. Pang Hing
Chung, Alfred	7.12.2007	–	–	200,000	200,000	200,000	0.04%
(notes 1 & 2)	(note 6)
Mr. So Lie Mo,
Raymond	7.12.2007	–	–	750,000	750,000	750,000	0.16%
(notes 1 & 2)	(note 6)

Notes:

(1) Each of the above Directors is the beneficial owner of the share options granted to him.
(2) Each of the Directors’ interests represents his 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 the 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) Options granted on 30 April 2002 were exercisable during the period from 17 November 2002 to 29 April 2012 at the exercise price of HK$0.55 per share.
(4) Options granted on 20 February 2003 were exercisable during the period from 20 February 2004 to 19 February 2013 at the exercise price of HK$0.138 per share.
(5) Options granted on 12 January 2007 were exercisable during the period from 12 January 2008 to 11 January 2017 at the exercise price of HK$0.088 per share.

160

APPENDIX IV

GENERAL INFORMATION

(6) Options granted on 7 December 2007 were exercisable during the period from 7 June 2008 to 6 December 2009 at the exercise price of HK$2.72 per share.
(7) Options granted on 31 March 2008 were exercisable during the period from 1 October 2008 to 31 March 2018 at the exercise price of HK$0.89 per share.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO), which requires, (i) notification to the Company and the Stock Exchange pursuant to the provisions of Divisions 7 and 8 of Part XV of the SFO, including interests or short positions which they are deemed or taken to have under such provisions of the SFO; or (ii) pursuant to section 352 of the SFO, to be entered in the register therein; (iii) or pursuant to the rules 5.46 to 5.67 of the GEM Listing Rules relating to securities transactions by Directors, notification to the Company and the Stock Exchange.

(b) Interests of substantial Shareholders

So far as it is known to the Directors, as at the Latest Practicable Date, the following persons (not being Directors or chief executive of the Company) had, or are deemed to have, interests or short positions in the Shares or underlying Shares which would require disclosure to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO and section 336 of the SFO or, who are or are expected to be, 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 shares of the Company

			Number of
		Number of	underlying	Approximate
Name of		Shares	Shares	shareholding
shareholder	Capacity	interested	interested	percentage
				(Note 1)
Melco LV	Beneficial owner	51,977,024	419,059,095	99.96%
			(Note 5)
Melco Leisure and	Interest through	51,977,024	419,059,095	99.96%
Entertainment	controlled	(Note 2)	(Note 2)
Group Limited	corporations
(“Melco Leisure”)

161

APPENDIX IV

GENERAL INFORMATION

			Number of
		Number of	underlying	Approximate
Name of		Shares	Shares	shareholding
shareholder	Capacity	interested	interested	percentage
				(Note 1)
Melco International	Interest through	51,977,024	419,059,095	99.96%
	controlled	(Note 3)	(Note 3)
	corporations
Mr. Ho, Lawrence	Interest through	51,977,024	419,059,095	99.96%
Yau Lung (“Mr. Ho”)	controlled	(Note 4)	(Note 4)
	corporations
	Beneficial owner	–	4,354,000	0.92%
			(Note 6)
the Vendor	Beneficial owner	47,632,938	349,401,622	84.26%
(Note 7)		(Note 7)	(Note 7)
Intralot	Interest through a	47,632,938	349,401,622	84.26%
(Note 7)	controlled	(Note 7)	(Note 7)
	corporation
Global Crossing	Beneficial owner	20,787,042	206,104,195	48.15%
(Note 8)			(Note 5)
Toprich Company Limited	Beneficial owner	9,712,000	–	2.06%
(“Toprich”)(Note 8)
Firich Enterprises	Interest through	30,499,042	206,104,195	50.21%
Co., Ltd.	controlled		(Note 5)
(Note 8)	corporations
LottVision	Beneficial owner	8,947,934	46,366,121	11.74%
			(Note 5)
Mr. Ng Lai Yick	Beneficial owner	3,134,744	–	0.67%
(Note 9)	Interest through	36,900,000	–	7.83%
	a controlled
	corporation
North 22 Nominees	Beneficial owner	36,900,000	–	7.83%
Limited_(Note 9)_
Legg Mason, Inc.	Interest through	27,304,000	–	5.79%
	controlled
	corporations

162

GENERAL INFORMATION

APPENDIX IV

Notes:

(1) As at the Latest Practicable Date, the total number of issued shares of the Company was 471,221,495.
(2) Melco Leisure is deemed to be interested in the 51,977,024 Shares and the underlying 419,059,095 Shares from convertible bonds in the Company as described in (5) below by virtue of its controlling interests in its wholly-owned subsidiary, Melco LottVentures Holdings Limited.
(3) Melco International is deemed to be interested in the 51,977,024 Shares and the underlying 419,059,095 Shares from convertible bonds in the Company as described in (5) below by virtue of its controlling interests in its wholly-owned subsidiary, Melco Leisure.
(4) Mr. Ho is deemed to be interested in the 51,977,024 Shares and the underlying 419,059,095 Shares from convertible bonds in the Company as described in (5) below by virtue of his controlling interests in Melco, which are held by his controlled corporations.
(5) Convertible bonds in the principal amount of HK$606,800,000 carrying the rights to subscribe for Shares at an initial conversion price of HK$0.85 per Share was issued by the Company to Power Way on 13 December 2007 to satisfy part of the consideration for the acquisition of the entire issued share capital of Precious Success Holdings Limited and 60% of the entire issued share capital of Oasis Rich. Under the agreement dated 8 October 2007 entered into among the Company, Rising Move (a wholly-owned subsidiary of the Company), Power Way, LottVision, Melco International and Firich Enterprises Co., Ltd. If Power Way exercises the conversion rights attaching to the said convertible bonds in full at the initial conversion price, a total of 713,882,352 Shares will be issued to Power Way. However, no conversion of the convertible bonds shall be made, if immediately upon such conversion, (1) Power Way and its parties acting in concert (as defined under the Takeovers 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) Power Way and its parties acting in concert (as defined under the Takeovers 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.

These convertible Bonds in the principal sum HK$606,800,000 had been, as at the Latest Practicable Date, distributed to the shareholders of Power Way as to Melco LV HK$356,200,231, Global Crossing HK$175,188,566 and LottVision HK$75,411,203. With LottVision transferring HK$36,000,000 to three independent third parties. It held the balance of the convertible bonds in the principal amount of HK$39,411,203.

(6) Mr. Ho is an advisor of the Company and the Group without receiving any compensation. He was granted the share options in recognition of his contributions in the past and for the future for the benefits of the Company and the Group.
(7) Pursuant to the Assets Transfer Agreement, the Company has agreed to acquire the Assets at the Consideration of HK$305,130,367.558, as disclosed in the announcement of the Company on 28 September 2008. The Consideration will be satisfied by the Company by allotting and issuing 28,208,938 Shares and issuing the Convertible Bonds in the principal amount of HK$277,175,310 which is convertible into 279,692,542 new Shares at the Conversion Prince I of HK$0.991 per Share. In addition, upon obtaining two agreements in connection with the CSLA Projects and/or CWL Projects in the PRC, the Company shall pay the Success Payment to the Vendor. The Success Payment will be satisfied by way of the Convertible Bonds II, which are convertible into 69,709,080 new Shares in the Company at the Conversion Price II of HK$1.0759. Intralot is therefore deemed interested in the Shares and underlining Shares held by the Vendor, a wholly owned subsidiary of Intralot.
(8) Firich Enterprises Co., Ltd. is deemed to be interested in the 30,499,042 Shares and the underlying 206,104,195 Shares from convertible bonds in the Company as described in (5) above by virtue of its controlling interests in its wholly-owned subsidiary, Global Crossing and Toprich.

163

GENERAL INFORMATION

APPENDIX IV

(9) 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 the 3,134,744 Shares held by him personally.

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 the Latest Practicable Date.

Save as disclosed above, as at the Latest Practicable Date, the Directors were not aware of any other person (other than the Directors and chief executive of the Company) who had, or was deemed to have, interests or short positions in the Shares or underlying Shares which would fall to be discloseable to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO and section 336 of the SFO, or who are 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 Enlarged Group.

4. LITIGATION

As at the Latest Practicable Date, none of the members of the Enlarged Group is engaged in any litigation, 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.

5. MATERIAL CHANGES

As at the Latest Practicable Date, the Directors were not aware of any material adverse changes in the financial or trading position of the Group since 31 December 2007, the date to which the latest published audited financial statements of the Group were made up.

6. SERVICE CONTRACTS

The Company entered into a service contract with Mr. Chan Sek Keung, Ringo as executive Director, for a term of three years from 1 January 2006, subject to retirement by rotation as required in accordance with the Articles.

The Company entered into a service contract with Mr. Ko Chun Fung, Henry as executive Director, for an unspecified term from 7 January 2008 subject to retirement by rotation as required in accordance with the Articles.

Mr. Pang Hing Chung, Alfred, Mr. David Tsoi and Mr. So Lie Mo, Raymond, independent nonexecutive Directors, were each appointed for a term of two years, with effect from 1 April 2008, 1 April 2008 and 5 September 2007, respectively. All three appointments are subject to retirement by rotation as required in accordance with the Articles.

164

GENERAL INFORMATION

APPENDIX IV

7. MATERIAL CONTRACTS

The following agreements, being contracts not entered into in the ordinary course of business, have been entered into by the 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 Assets Transfer Agreement
(ii) an agreement dated 8 October 2007 entered into among the Company, Rising Move International Ltd., a wholly own subsidiary of the Company as purchasers, and Power Way as vendor and other several companies as the vendor guarantors for the purchase of certain shares in corporations in the lottery business at a total consideration of HK$668,000,000. Please refer to the Company’s announcement dated 18 October 2007 for further details.
(iii) 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;
(iv) 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;
(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;
(vi) 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;
(vii) a sale and purchase agreement dated 8 October 2007 and entered into among the Rising Move International Limited as the purchaser, Power Way Group Limited as the vendor, the vendor guarantors and the Company for the sale and purchase of the sale shares; and
(viii) a purchase agreement and a supply agreement dated 9 January 2008 signed between Wu Sheng Computer Technology (Shanghai) Co., Ltd., an indirect non-wholly owned subsidiary of the Company incorporated in the PRC and Firich Enterprises Co., Ltd. a connected party for the purchase and sale of parts and machinery for the manufacturing of lottery terminals, etc. for a term of three years. These agreements constitute continuing connected transactions under the GEM Listing Rules. Please refer to the Company’s announcement dated 9 January 2008 for further details.

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GENERAL INFORMATION

APPENDIX IV

(ix) an agreements dated 28 February 2008 and entered into between Gain Advance Group Limited., a wholly owned subsidiary of the Company, as purchaser and the then shareholders of KTeMS as vendor and Mr. Nam Ho Sung as guarantor in relation to the sale and purchase of the entire issued share capital of KTeMS at a consideration of US$12 million.
(x) two agreements both dated 28 February 2008 and entered into between Gain Advance Group Limited, a wholly owned subsidiary of the Company, as purchaser, PAL Development Ltd., a non wholly owned subsidiary of the Company, as vendor in relation to the acquisition of certain loans due from KTeMS and Mr. Nam Ho Sung to PAL Development Ltd. for the consideration of HK$31,960,000 and HK$7,400,000 respectively.
(xi) two agreements both dated 28 February 2008 and entered into between Gain Advance Group Limited, a wholly owned subsidiary of the Company, as purchaser, LottVision as vendor in relation to the acquisition of certain loans due from KTeMS and Mr. Nam Ho Sung to Lottivision for the consideration of HK$31,200,000 and HK$8,160,000, respectively.
(xii) a loan agreement dated 12 March 2008 signed between the Company, as lender, and PAL Development Ltd., a non-wholly own subsidiary of the Company, as borrower, for a HK$96.8 million, 5% interest bearing, term loan of two years.
(xiii) a loan agreement dated 14 July 2008 signed between the Company and Power Way, for a HK$80.0 million, 5% interest bearing, term loan of two years advanced by Power Way to the Company.

8. COMPETING INTEREST

As at the Latest Practicable Date, none of the Directors, management shareholders (as defined in the GEM Listing Rules) or substantial Shareholder or any of their respective associates has an interest in a business which competes or may compete with any business of the Group or has any other conflict of interest which any such person has or may have with the Group.

9. QUALIFICATIONS AND CONSENTS OF EXPERTS

The following is the qualification of the experts who have given their reports, opinions or advice which are contained in this circular:

Name

Qualification

Shu Lun Pan Horwath Certified Public Accountant Hong Kong CPA Limited (“SLP Horwath”)

Vigers Appraisal & Consulting Independent valuer Limited (“Vigers”)

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GENERAL INFORMATION

APPENDIX IV

(i) Each of SLP Horwath and Vigers did 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 as at the Latest Practicable Date.
(ii) Each of SLP Horwath and Vigers 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.
(iii) As at the Latest Practicable Date, each of SLP Horwath and Vigers did not have any direct or indirect interest in any assets which have been, since 31 December 2007 (being the date to which the latest published audited consolidated financial statements of the Company were made up), acquired or disposed of by or leased to, or proposed to be acquired or disposed of by or leased to, any member of the Enlarged Group.

10. AUDIT COMMITTEE

The audit committee of the Company comprises Mr. David Tsoi, Mr. Pang Hing Chung, Alfred and Mr. So Lie Mo, Raymond, all being independent non-executive Directors. The audit committee reviews and provides supervision over the financial reporting process and internal control of the Group.

Mr. David Tsoi, aged 61, was appointed as an independent non-executive director of the Company since October 2001. A Certified Public Accountant by profession Mr. Tsoi currently practises as Director of Alliott, Tsoi CPA Limited. He is a Fellow Member of the Chartered Association of Certified Accountants, the Hong Kong Institute of Certified Public Accountants and an Associate Member of the Association of Certified General Accountants of Canada and Institute of Chartered Accountants of England & Wales. He is also a Fellow Member of the Hong Kong Institute of Directors. Mr. Tsoi holds a Master’s degree in Business Administration from the University of East Asia, Macau. Mr. Tsoi is an independent non-executive director of Enviro Energy International Holdings Ltd. which shares are quoted on the GEM Board of the Stock Exchange of Hong Kong Ltd. (Stock Code: 8182). Mr. Tsoi is also an independent non-executive directors of China South Locomative & Rolling Stock Corporation Ltd. which Shares are quoted on the Stock Exchange of Hong Kong Ltd. (Stock Code: 1766).

Mr. Pang Hing Chung, Alfred, aged 47, was appointed as an independent non-executive Director of the Company in March 1999. Mr. Pang is a Managing Director and Vice Chairman of the Investment Banking Division of BOC International. Mr. Pang holds a Bachelor of Arts degree in economics from Cornell University and also an MBA degree from the Stanford Graduate School of Business.

Mr. So Lie Mo, Raymond, aged 59, was appointed as an independent non-executive director of the Company since September 2007. Mr. So is a director of Spectrum Asia Pacific Limited which principally provides consulting services in business strategy, alliance and merger and acquisition. Mr. So is an all round businessman with a wealth of experience and contacts in the information technology (“IT”) industry in Asia and particularly in greater China. Mr. So holds a bachelor degree in business administration from The Chinese University of Hong Kong.

167

GENERAL INFORMATION

APPENDIX IV

11. MISCELLANEOUS

The registered office of the Company is at 4th Floor, Scotia Centre, P.O. Box 2804, George Town, Grand Town, Grand Cayman KY1-1112, Cayman Islands, British West Indies.
The head office and principal place of business of the Company is at 31st Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong.
The principal share and convertible bonds registrar and transfer office of the Company is Butterfield Fund Services (Cayman) Limited at Butterfield House, 68 Fort Street, P.O. Box 705, George Town, Grand Cayman KY1-1107, Cayman Islands.
The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited at 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
The company secretary of the Company is Mr. Pang Kin Man, Edmond, who is a Fellow Member of the Institute of Chartered Secretaries and Administrators of UK and Hong Kong Institute of Chartered Secretaries. He is also a Fellow Member of the Hong Kong Institute of Directors.
The qualified accountant of the Company is Mr. Lau Kwok Wing, who is a fellow member of the Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants.
The compliance officer of the Company is Mr. Ko Chun Fung, Henry, executive Director.
The English text of this circular shall prevail over the Chinese text in case of any inconsistency.

12. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on any weekday (public holidays excepted) at the office of the Company at 31st Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong from the date of this circular up to and including the date of EGM:

(i) the Articles;
(ii) the annual reports of the Company for the three financial years ended 31 December 2006 and 2007;
(iii) the interim report of the Company for the six months ended 30 June 2008;
(iv) the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to this circular;

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GENERAL INFORMATION

APPENDIX IV

(v) the material contracts referred to under “MATERIAL CONTRACTS” in Appendix IV to this circular;
(vi) the letter of consents from SLP Horwath and Vigers referred to under “QUALIFICATIONS AND CONSENTS OF EXPERTS” in Appendix IV to this circular;
(vii) the working capital comfort letter as provided by SLP Horwath to the Board pursuant to the requirements of rule 19.66(4) of the GEM Listing Rules;
(viii) the valuation report of Software licence as set out in Appendix I to this circular; and
(ix) a copy of each of the circulars of the Company issued pursuant to the requirements set out in Chapters 19 and/or 20 of the GEM Listing Rules since 31 December 2007 (being the date to which the latest published audited consolidated financial statements of the Company were made up).

169

NOTICE OF EGM

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

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Melco LottVentures Limited 新濠環彩有限公司

(Incorporated in the Cayman Islands with limited liability)

website: http://www.melcolottventures.com.hk

(Stock Code: 8198)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “ EGM ”) of Melco LottVentures Limited (the “ Company ”) will be held at 31/F, The Centrium, 60 Wyndham Street, Central, Hong Kong on Thursday, 4 December 2008 at 3:30 p.m. for the purpose of considering and, if thought fit, passing with or without amendments, the following resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT
(i) the asset transfer agreement dated 7 September 2008 and a supplemental agreement dated 26 September 2008 (the “ Agreement ”) and both entered into between Intralot International Limited, as transferor (the “ Transferor ”) and the Company as transferee in relation to the sale and purchase (the “ Acquisition ”) of the Assets (as defined in the circular of the Company dated 11 November 2008) at the consideration of HK$305,130,367.558, 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;
(ii) the allotment and issue of an aggregate of 28,208,938 new ordinary shares (the “ Consideration Shares ”) of HK$0.01 each (the “ Shares ”) in the share capital of the Company credited as fully paid at an issue price of HK$0.991 per Consideration Share to the Transferor pursuant to the Agreement be and is hereby approved;
(iii) the issue of the convertible bonds (the “ Convertible Bonds ”) in the principal amount of HK$277,175,310 to be issued by the Company to the Transferor in accordance with the terms and conditions of the Agreement and the transactions contemplated therein be and is hereby approved;

170

NOTICE OF EGM

(iv) the issue of the convertible bonds (the “ Convertible Bonds II ”) in the principal amount of HK$75,000,000 to be issued by the Company to the Transferor in accordance with the terms and conditions of the Agreement and the transactions contemplated therein be and is hereby approved; and
(v) any one or more directors (the “ Directors ”) of the Company be and is/are hereby authorised to do all such acts and things and execute all such documents which he/ she/they consider necessary, desirable or expedient to give effect to the Agreement and transactions contemplated thereunder, including but not limited to the entering into of the software licence agreement; the issue of Convertible Bonds and the Convertible Bonds II; the allotment and issue of 28,208,938 Consideration Shares, the allotment and issue of 279,692,542 Shares (the “ Conversion Shares ”) of which may fall to be issued upon the exercise of the conversion rights attached to the Convertible Bonds; the allotment and issue of 69,709,080 Shares (the “ Conversion Shares II ”) of which may fall to be issued upon the exercise of the conversion rights attached to the Convertible Bonds II.”
“ THAT subject to the ordinary resolution no. 1 above being duly passed, the unconditional specific mandate granted to the Directors to exercise the powers of the Company to allot, issue and deal with the Consideration Shares, the Conversion Shares and Conversion Shares II be and is hereby approved.”
“ THAT the appointment of Mr. Christos Moumouris as an executive Director, which will only take effect after completion of the agreement, be and is hereby approved.”

SPECIAL RESOLUTION

“ THAT subject to the completion of the Agreement and the approval of the Registrar of Companies in the Cayman Islands, the name of the Company be changed from “Melco LottVentures Limited” to “MelcoLot Limited” and carrying the existing Chinese name “新濠環彩有限公司” be and is hereby approved. The Directors be and are hereby authorised generally to do such acts and things and execute all documents or make such arrangements as they may consider necessary or expedient to effect the change of name.”

By order of the board of Melco LottVentures Limited Pang Kin Man, Edmond Company Secretary

Hong Kong, 11 November 2008

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NOTICE OF EGM

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 Rooms 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.

As at the date of this notice, the Board consists of two executive Directors, namely Mr. CHAN Sek Keung, Ringo and Mr. KO Chun Fung, Henry, and three independent non-executive Directors, namely Mr. David TSOI, Mr. PANG Hing Chung, Alfred and Mr. SO Lie Mo, Raymond.

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

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AI assistant

Crypto Flow Technology Limited — Proxy Solicitation & Information Statement 2008

51323_rns_2008-11-10_17cf3097-8b60-41f3-a89d-80905bbb6b88.pdf

Melco LottVentures Limited 新濠環彩有限公司

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

(2) PROPOSED APPOINTMENT OF EXECUTIVE DIRECTOR;

(3) PROPOSED CHANGE OF NAME OF THE COMPANY;

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

CHARACTERISTICS OF GEM

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Melco LottVentures Limited 新濠環彩有限公司

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

(2) PROPOSED APPOINTMENT OF EXECUTIVE DIRECTOR;

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(1) VERY SUBSTANTIAL ACQUISITION

THE ASSET TRANSFER AGREEMENT

Date of the Asset Transfer Agreement

Parties to the Asset Transfer Agreement

Assets to be acquired

LETTER FROM THE BOARD

Success Payment

Consideration and payment terms

Consideration Shares

LETTER FROM THE BOARD

Applications for Listing

Convertible Bonds

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Redemption

LETTER FROM THE BOARD

Listing

Voting

Events of default

LETTER FROM THE BOARD

Governing Law

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions precedent for the Asset Transfer Agreement

Power Way Restructuring

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Lock Up Undertaking

Non-Competition

LETTER FROM THE BOARD

Completion

Corporate Governance

LETTER FROM THE BOARD

Post-Completion Commitment

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Ranking of the Conversion Shares II

Limitation on conversion

LETTER FROM THE BOARD

Redemption

Listing

Voting

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Balance Of Interests in the Company

LETTER FROM THE BOARD

INFORMATION ON THE VENDOR

INFORMATION ON THE SOFTWARE

LETTER FROM THE BOARD

Crypto Flow Technology Limited Proxy Solicitation & Information Statement 2008