Dadi International Group Limited — Proxy Solicitation & Information Statement 2006

Dec 22, 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Milkyway Image Holdings Limited (the “Company”), you should at once hand this circular to the purchaser or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8130)

(1) PROPOSED SHARE CONSOLIDATION AND (2) PROPOSED PLACING OF CONVERTIBLE BONDS

Placing Agent

A notice convening the extraordinary general meeting (“EGM”) to be held at 2nd Floor, 77 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on Wednesday, 10 January 2007 is set out on pages 18 to 20 of this circular and has been posted on the GEM website. A form of proxy for use at the EGM is enclosed. Whether or not you intend to attend and vote at the EGM, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Secretaries Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event no later than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

This circular, for which the directors of the Company collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited for the purpose of giving information with regard to the Company. The directors of the Company, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief (i) the information contained in this circular is accurate and complete in all material respects and not misleading; (ii) there are no other matters the omission of which would make any statement in this circular misleading; and (iii) all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable. This circular will remain on the “Latest Company Announcements” page on the GEM website at http://www.hkgem.com for at least 7 days from the date of its posting.

• For identification purpose only

22 December 2006

CHARACTERISTICS OF THE GEM OF THE STOCK EXCHANGE

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

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

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

– i –

CONTENTS

		Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
EXPECTED TIMETABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		5
LETTER FROM THE BOARD
1.	INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2.	PROPOSED SHARE CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
3.	PROPOSED PLACING OF CONVERTIBLE BONDS . . . . . . . . . . . . . . . . . . . . .	10
4.	CHANGES OF SHAREHOLDING STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . .	15
5.	FUND RAISING ACTIVITIES DURING
	THE PAST TWELVE MONTHS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
6.	ADJUSTMENTS IN RELATION TO THE OPTIONS . . . . . . . . . . . . . . . . . . . . .	15
7.	GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
8.	EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
9.	PROCEDURE BY WHICH A POLL MAY BE DEMANDED . . . . . . . . . . . . . . .	17
10.	RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
NOTICE OF EXTRAORDINARY GENERAL MEETING . . . . . . . . . . . . . . . . . . .		18

– ii –

DEFINITIONS

In this circular, unless the context requires otherwise, the expressions as stated below will have the following meanings:

• “Announcement”

the announcement of the Company dated 5 December 2006 in respect of, among other things, the proposed Share Consolidation and the proposed Bond Placing

• “associates”

• has the meaning ascribed to it under the GEM Listing Rules

• “Board”

the board of Directors

• “Bonds” Tranche 1 Bonds and Tranche 2 Bonds

• “Bondholder(s)” the holder(s) of the Bonds from time to time

• “Bond Instrument”

• the instrument to be executed by the Company by way of a deed poll constituting the Bonds

• “Bond Placement Agreement” the conditional placing agreement entered into between the Company and the Placing Agent dated 5 December 2006 in respect of the placing of the Bonds in two tranches

• “Bond Placing”

placing by the Company, through the Placing Agent, of Bonds of an aggregate principal amount up to HK$20,000,000 under the Bond Placement Agreement

• “CCASS”

• the Central Clearing and Settlement System established and operated by HKSCC

• “Company”

• Milkyway Image Holdings Limited, a company incorporated in the Cayman Islands with limited liability whose issued Shares are listed on GEM

• “connected person(s)”

• has the meaning ascribed to it under the GEM Listing Rules

• “Consolidated Share(s)”

• consolidated ordinary share(s) of HK$0.10 each in the issued and unissued share capital of the Company upon completion of the Share Consolidation

• “Conversion Price”

HK$0.025 per Existing Share (equivalent to HK$0.25 per Consolidated Share) which will be adjusted from time to time in accordance with the terms and conditions of the Bond Instrument

– 1 –

DEFINITIONS

“Conversion Share(s)” new Share(s) falling to be allotted and issued at the Conversion Price upon exercise of the conversion rights attached to the Bonds “Directors” the directors of the Company

“EGM” the extraordinary general meeting of the Company to be convened and held on Wednesday, 10 January 2007 to consider and, if thought fit, to approve the Share Consolidation and the grant of Specific Mandate to issue the Conversion Shares upon exercise of the conversion rights attached to Tranche 1 Bonds and Tranche 2 Bonds

• “Existing Share(s)” existing ordinary share(s) of HK$0.01 each in the issued and unissued share capital of the Company, before the implementation of the Share Consolidation

• “GEM” the Growth Enterprise Market of the Stock Exchange

• “GEM Listing Rules” the Rules Governing the Listing of Securities on GEM

• “Group” the Company and its subsidiaries

• “HKSCC” Hong Kong Securities Clearing Company Limited

• “Hong Kong” the Hong Kong Special Administrative Region of the PRC

• “Issue Price”

• the issue price of the Bonds, which shall be 91% of the principal amount of the Bonds

• “Last Trading Day” 1 December 2006, being the last trading day of the Existing Shares prior to the date of the Bond Placement Agreement and the date of the Announcement

• “Latest Practicable Date” 20 December 2006, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular

• “Options” share options issued by the Company under the Share Option Scheme

• “Placing Agent/Kingston Securities”

• Kingston Securities Limited, a licensed corporation to carry on business in Type 1 (dealing in securities) regulated activity under the Securities and Futures Ordinance, Cap. 571 of Laws of Hong Kong

– 2 –

DEFINITIONS

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

• “Registrar” Secretaries Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, the branch share registrar and transfer office of the Company in Hong Kong

• “Share(s)” Existing Share(s) and/or Consolidated Share(s), as the case may be

• “Share Consolidation” the proposed consolidation of every ten (10) issued and unissued Existing Shares of HK$0.01 each in the capital of the Company into one (1) Consolidated Share of HK$0.10 each

• “Share Option Scheme” share option scheme adopted by the Company on 2 August 2002

• “Share Placing” placing by the company, through the Placing Agent, of 161,000,000 new Existing Shares, the details of which are set out in the Company’s announcement dated 28 November 2006

• “Shareholders” holders of Existing Shares or Consolidated Shares, as the case may be

• “Specific Mandate” the specific mandate to be given to the Directors to issue the Conversion Shares to be sought at the EGM in relation to the Bonds

• “Stock Exchange”

• The Stock Exchange of Hong Kong Limited

• “Subscribers”

• subscribers to be procured by the Placing Agent for the Bonds, who will be independent institutional or private investors not connected with, the directors, chief executive, management shareholders and substantial shareholders of the Company or its subsidiaries or any of their respective associates

• “Tranche 1 Bonds”

the convertible bonds of up to an aggregate principal amount of HK$10,000,000 due on the date falling on the third anniversary from the issue date whose completion of placing shall take place within three business days after fulfillment of the relevant conditions as stated under the sub-section headed “Conditions of the Bond Placing” in this circular

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DEFINITIONS

“Tranche 2 Bonds” the convertible bonds of up to an aggregate principal amount of HK$10,000,000 due on the date falling on the third anniversary from the issue date whose completion of placing shall take place within three business days after fulfillment of the relevant conditions as stated under the sub-section headed “Conditions of the Bond Placing” in this circular on or before the 90th day after completion of the placing of Tranche 1 Bonds “HK$” Hong Kong dollars “%” per cent.

– 4 –

EXPECTED TIMETABLE

Set out below is an indicative timetable for the implementation of the Share Consolidation. The timetable is subject to the results of the EGM and other changes in accordance with any agreement to be made between the Company and the Placing Agent. The Company will notify the Shareholders of any changes to the expected timetable by way of announcement(s) as and when appropriate.

Latest time for lodging the form of proxy for the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11:00 a.m. Monday, 8 January 2007 EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11:00 a.m. Wednesday, 10 January 2007 Announcement of results of the EGM to be published on GEM website . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 11 January 2007 Effective date of the Share Consolidation . . . . . . . . . . . . . . . . . Thursday, 11 January 2007 Original counter for trading in Existing Shares in board lots of 10,000 Existing Shares (in the form of existing share certificates in blue) temporarily closes . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. Thursday, 11 January 2007

Temporary counter for trading in Consolidated Shares in board lots of 1,000 Consolidated Shares (in the form of existing share certificates in blue) opens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. Thursday, 11 January 2007 First day for free exchange of existing share certificates in blue for new share certificates in pink . . . . . . . . . . . . . . . . Thursday, 11 January 2007 First day of operation of odd lots trading facility . . . . . . . . . . . . Thursday, 11 January 2007 Original counter for trading in Consolidated Shares in board lots of 10,000 Consolidated Shares (in the form of new share certificates in pink) reopens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. Thursday, 25 January 2007 Parallel trading in Consolidated Shares (in the forms of both existing and new share certificates) commences . . . . . . . . . . . . . 9:30 a.m. Thursday, 25 January 2007 Temporary counter for trading in Consolidated Shares in board lots of 1,000 Consolidated Shares (in the form of existing share certificates in blue) closes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. Thursday, 15 February 2007 Parallel trading in Consolidated Shares (in the forms of both existing and new share certificates) ends . . . . . . . . . . . . . . . . . 4:00 p.m. Thursday, 15 February 2007 Last day of operation of odd lots trading facility . . . . . . . . . . . Thursday, 15 February 2007 Latest time for free exchange of share certificates . . 4:00 p.m. Thursday, 22 February 2007

– 5 –

LETTER FROM THE BOARD

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8130)

Executive Directors: Mr. Law Sau Yiu, Dennis (Chairman) Ms. Teng Chia Lin, Chialina Ms. Chan Dao Ho

Independent Non-Executive Directors: Mr. Lung Hak Kau Ms. Wai Lai Yung Ms. Tsang Kei Ling

Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Head office and principal place of business: 1st Floor, 77 Hung To Road Kwun Tong Kowloon Hong Kong 22 December 2006

To the Shareholders

Dear Sir/Madam,

(1) PROPOSED SHARE CONSOLIDATION AND

(2) PROPOSED PLACING OF CONVERTIBLE BONDS

1. INTRODUCTION

On 6 December 2006, the Company announced that the Board proposed, after completion of the Share Placing, to implement (i) the Share Consolidation under which every ten (10) issued and unissued Existing Shares of HK$0.01 each in the share capital of the Company will be consolidated into one (1) Consolidated Share of HK$0.10 each and (ii) the Bond Placing under which the Company will place, through the Placing Agent, two tranches of zero coupon convertible bonds up to an aggregate principal amount of HK$20 million where Tranche 1 Bonds of an aggregate principal amount of HK$10 million will be placed on a fully underwritten basis and Tranche 2 Bonds of an aggregate principal amount of HK$10 million will be placed on a best effort basis.

* For identification purpose only

– 6 –

LETTER FROM THE BOARD

The Company is pleased to announce that the Share Placing was completed on 14 December 2006.

The purpose of this circular is to provide you with, among other things, information as regards the Share Consolidation and the Bond Placement Agreement together with a notice convening the EGM.

2. PROPOSED SHARE CONSOLIDATION

The Board proposes that every ten (10) issued and unissued Existing Shares of HK$0.01 each in the share capital of the Company be consolidated into one (1) Consolidated Share of HK$0.10. As at the Latest Practicable Date, there were 966,000,000 Existing Shares of HK$0.01 each in issue which are fully paid or credited as fully paid. Assuming no further Shares will be issued from the Latest Practicable Date up to the date of the EGM, there will be 96,600,000 Consolidated Shares of HK$0.10 each in issue which are fully paid or credited as fully paid following the Share Consolidation. The authorised share capital of the Company will remain at HK$100,000,000 divided into 1,000,000,000 Consolidated Shares of HK$0.10 each.

As at the Latest Practicable Date, save for 64,400,000 Options eligible for exercise to subscribe for up to an aggregate of 64,400,000 Existing Shares, there are no other outstanding options, warrants or securities convertible or exchangeable into Shares.

Conditions of the Share Consolidation

The implementation of the Share Consolidation is conditional upon:

• (i) the passing of the ordinary resolution by the Shareholders at the EGM to approve the Share Consolidation; and

• (ii) the GEM Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Consolidated Shares in issue upon the Share Consolidation becoming effective and any Consolidated Shares which may be issued upon exercise of the Options.

Subject to the fulfillment of the conditions of the Share Consolidation, the effective date of the Share Consolidation is expected to be on Thursday, 11 January 2007, being the business day immediately after the date of the EGM.

Effects of the Share Consolidation

As at the Latest Practicable Date, Existing Shares are traded in board lots of 10,000 Existing Shares. Following the Share Consolidation, there will be no change to the existing board lot size for share trading. The Consolidated Shares will continue to be traded in board lots of 10,000 Consolidated Shares.

– 7 –

LETTER FROM THE BOARD

Assuming the Share Consolidation becoming effective and based on the adjusted closing price of HK$0.19 per Consolidated Share on the Latest Practicable Date, the value of each board lot of 10,000 Consolidated Shares, would be HK$1,900.

Other than the expenses, including professional fees and printing charges, to be incurred by the Company in relation to the Share Consolidation, the implementation thereof will not, by itself, affect the underlying assets, business operations, management or financial position of the Group nor would it affect the interests and rights or the respective shareholdings in the Company of the Shareholders as a whole.

Status of the Consolidated Shares

The Consolidated Shares will rank pari passu in all respects with each other and the Share Consolidation will not result in any change in the respective rights of the Shareholders. Fractional Consolidated Shares will not be issued by the Company to Shareholders. Any fractional entitlement to the Consolidated Shares will be aggregated, sold and retained for the benefit of the Company. In order to alleviate the difficulties arising from the existence of odd lots of Consolidated Shares, the Company has appointed an agent to arrange for matching services regarding the sale and purchase of odd lots of Consolidated Shares from Thursday, 11 January 2007 to Thursday, 15 February 2007 (both days inclusive). Shareholders should note that matching of the sale and purchase of odd lots of Consolidated Shares is not guaranteed. Further details including contact information of the agent providing the odd lots matching services and its arrangement are set out under the section headed “Arrangement for odd lot trading” below.

Reasons for the Share Consolidation

Taking into account that the Share Consolidation will increase the nominal value of the Existing Shares and their trading price per board lot, and hence reducing the overall transaction and handling costs for dealings in the Consolidated Shares, and for the compliance with the requirements under Rule 17.76 of the GEM Listing Rules, the Directors are of the view that the Share Consolidation is in the interests of the Company and the Shareholders as a whole.

Application for listing of the Consolidated Shares

Application has been made to the Stock Exchange for the listing of, and permission to deal in, the Consolidated Shares in issue upon the Share Consolidation becoming effective and any Consolidated Shares which may be issued upon exercise of the Options.

Subject to the granting of the listing of, and permission to deal in, the Consolidated Shares on GEM, the Consolidated Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Consolidated Shares on GEM or, under contingent situation, such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required

– 8 –

LETTER FROM THE BOARD

to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

Arrangement for odd lot trading

In order to facilitate the trading of odd lots (if any) of the Consolidated Shares arising from the Share Consolidation, the Company has appointed Kingston Securities to match the purchase and sale of odd lots of the Consolidated Shares at the relevant market price per Consolidated Share for the period from Thursday, 11 January 2007 to Thursday, 15 February 2007 (both days inclusive). Holders of odd lots of the Consolidated Shares who wish to take advantage of this facility either to dispose of their odd lots of the Consolidated Shares or top up to a full board lot may, directly or through their brokers, contact Ms. Rosita Kiu (Tel.: 2298-6215 and Fax: 2295-0682) of Kingston Securities during this period. Holders of odd lots of the Consolidated Shares should note that successful matching of the sale and purchase of odd lots of the Consolidated Shares is not guaranteed. Any Shareholder, who is in any doubt about the odd lot facility, is recommended to consult his/her/its own professional advisers.

Trading arrangement for the Consolidated Shares

Subject to the Share Consolidation becoming effective, the arrangements proposed for dealings in the Consolidated Shares are expected to be as follows:

• (i) from 9:30 a.m. on Thursday, 11 January 2007, the original counter for trading in the Existing Shares in board lots of 10,000 Existing Shares will be temporarily closed and a temporary counter for trading in the Consolidated Shares in board lots of 1,000 Consolidated Shares with existing share certificates which are blue in color will be set up;

• (ii) with effect from 9:30 a.m. on Thursday, 25 January 2007, the original counter for trading in the Consolidated Shares will be re-opened for trading Consolidated Shares in board lots of 10,000 Consolidated Shares with new share certificates which are pink in color;

• (iii) during the period from 9:30 a.m. on Thursday, 25 January 2007 to 4:00 p.m. on Thursday, 15 February 2007 (both days inclusive), there will be parallel trading at the above two counters; and

• (iv) the temporary counter for trading in the Consolidated Shares in board lots of 1,000 Consolidated Shares will be removed after the close of trading at 4:00 p.m. on Thursday, 15 February 2007. Thereafter, trading will only be in board lots of 10,000 Consolidated Shares with new share certificates and the existing share certificates for the Existing Shares will cease to be marketable and valid for trading and settlement purposes. However, such certificates will remain valid and effective as documents of title on the basis of ten Existing Shares for one Consolidated Share.

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LETTER FROM THE BOARD

Exchange of certificates for Consolidated Shares

Subject to the Share Consolidation becoming effective, which is expected to be on Thursday, 11 January 2007, being the business day immediately after the date of the EGM, Shareholders may on or after Thursday, 11 January 2007 and until 4:00 p.m. on Thursday, 22 February 2007 (both days inclusive), deliver their existing share certificates in blue for the Existing Shares to the Registrar for exchange for share certificates in pink for the Consolidated Shares free of charge at the expense of the Company.

Shareholders should note that after the prescribed time for free exchange of share certificates, a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) will be payable by the Shareholders to the Registrar for each new share certificate to be issued.

It is expected that new share certificates for the Consolidated Shares will be available for collection on or after the tenth business day from the date of submission of the certificates for the Existing Shares to the Registrar. Unless otherwise instructed, new share certificates for the Consolidated Shares will be issued in board lots of 10,000 Consolidated Shares.

With effect from Friday, 16 February 2007, trading will only be in Consolidated Shares which share certificates will be issued in pink. Existing share certificates in blue for the Existing Shares will cease to be marketable and valid for trading and settlement purposes, but will remain valid and effective as documents of title.

3. PROPOSED PLACING OF CONVERTIBLE BONDS

The Bond Placement Agreement dated 5 December 2006

Pursuant to the Bond Placement Agreement, the Company has appointed the Placing Agent to procure the Subscribers for the Bonds to be issued in two tranches up to an aggregate principal amount of HK$20 million where Tranche 1 Bonds of an aggregate principal amount of HK$10 million will be placed on a fully underwritten basis and Tranche 2 Bonds of an aggregate principal amount of HK$10 million will be placed on a best effort basis.

Placing Agent

The Placing Agent and its ultimate beneficial owners are independent of, and not connected with, the directors, chief executive, management shareholders and substantial shareholders of the Company or its subsidiaries or any of their respective associates. The Placing Agent will receive a commission equal to 2.5% of the Issue Price of the Bonds to be placed by it.

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LETTER FROM THE BOARD

The Subscribers

The Subscribers in respect of each of Tranche 1 Bonds and Tranche 2 Bonds will be not less than six investors who are independent of, and not connected with, the directors, chief executive, management shareholders and substantial shareholders of the Company or its subsidiaries or any of their respective associates. Given the option of the Company to redeem the Bonds in cash upon conversion, the Directors do not expect any of the Subscribers will become a substantial Shareholder upon exercise of the their conversion rights under the Bonds.

Issue Price

The Issue Price of the Tranche 1 Bonds is HK$9.1 million and the maximum Issue Price of the Tranche 2 Bonds is HK$9.1 million. The Issue Price above represents 91% of the aggregate principal amount of the Bonds. The effective interest rate to be paid by the Company on the Bonds is approximately 3.19% per annum.

Principal terms of the Bonds

The principal terms of the Bonds are summarised below:

Amount of issue

Tranche 1 Bonds: up to an aggregate principal amount of HK$10,000,000.

Tranche 2 Bonds: up to an aggregate principal amount of HK$10,000,000.

Minimum subscription

Subscription of the Bonds must be for a minimum of HK$100,000 or integral multiples thereof.

Conversion Price

HK$0.025 (equivalent to HK$0.25 upon Share Consolidation becoming effective) per Conversion Share, which represents:

• (i) a premium of approximately 8.70% over the closing price per Existing Share of HK$0.023 as quoted on the Stock Exchange on the Last Trading Day; and

• (ii) a premium of approximately 4.17% over the average of the closing prices per Existing Share of approximately HK$0.024 for the last 5 trading days up to and including the Last Trading Day;

• (iii) a discount of approximately 10.07% to the average of the closing prices per Existing Share of approximately HK$0.0278 for the last 10 trading days up to and including the Last Trading Day; and

• (iv) a premium of approximately 31.58% over the closing price per Existing Share of HK$0.019 as quoted on the Stock Exchange on the Latest Practicable Date.

– 11 –

LETTER FROM THE BOARD

The Conversion Price is subject to adjustments, including consolidation or subdivision of Shares, which may or may not occur.

Interest

The Bonds bear no interest on the principal amount.

Maturity date

The maturity of the Bonds will be the date immediately following thirty-six months after the date of issue of the Bonds. Any unredeemed and unconverted Bonds will be redeemed at 100% of the outstanding principal amount in cash.

Terms of conversion

The Bondholders shall have the right at any time after the date of issue of the Bonds to convert any outstanding amount of the Bonds at the unit of HK$100,000 into the Conversion Shares at the Conversion Price.

Conversion Shares

Based on the Conversion Price of HK$0.025 (equivalent to HK$0.25 upon Share Consolidation becoming effective), a maximum number of 400,000,000 Existing Shares (equivalent to 40,000,000 Consolidated Shares upon Share Consolidation becoming effective) will be allotted and issued upon exercise of the conversion rights attached to Tranche 1 Bonds in full, which represent approximately 41.41% of the existing issued share capital of the Company and approximately 29.28% of the issued share capital of the Company as enlarged by such Conversion Shares. Based on the Conversion Price of HK$0.025 (equivalent to HK$0.25 upon Share Consolidation becoming effective) and assuming all the Tranche 1 Bonds are converted into 400,000,000 Existing Shares (equivalent to 40,000,000 Consolidated Shares upon Share Consolidation becoming effective), a total number of 400,000,000 Existing Shares (equivalent to 40,000,000 Consolidated Shares upon Share Consolidation becoming effective) will be allotted and issued upon exercise of the conversion rights attached to Tranche 2 Bonds in full, which represent approximately 29.28% of the issued share capital of the Company as enlarged by such Conversion Shares under Tranche 1 Bonds and approximately 22.65% of the issued share capital of the Company as enlarged by such Conversion Shares under Tranche 1 Bonds and Tranche 2 Bonds.

The Conversion Shares will rank pari passu in all respects with the Shares in issue as at the date of the registration of Shares issued upon conversion of the Bonds.

Voting

The Bondholders will not be entitled to attend or vote at any meetings of the Company by reason only of being the Bondholders.

– 12 –

LETTER FROM THE BOARD

Transferability

The Bonds may be transferred or assigned to any third party with prior written consent of the Company. Save with the consent of the Stock Exchange, none of the Bonds may be transferred to a connected person of the Company. The Company shall give notice to the Stock Exchange for any transfer of the Bonds and shall state whether any connected person of the Company is involved.

Early redemption

At the request of the Company, the Bonds may be early redeemed at an amount equal to 105% of the principal amount of the Bonds.

Conditions of the Bond Placing

The issue of Tranche 1 Bonds is conditional, among other matters, upon (i) the GEM Listing Committee of the Stock Exchange granting approval for the listing of and permission to deal in the Conversion Shares which may be allotted and issued by the Company upon the exercise of the conversion rights attaching to the Tranche 1 Bonds; and (ii) the Shareholders passing at the EGM the ordinary resolutions approving the allotment and issue of up to 400,000,000 Existing Shares (or 40,000,000 Consolidated Shares upon Share Consolidation becoming effective) upon exercise of the conversion rights attaching to the Tranche 1 Bonds.

The issue of Tranche 2 Bonds is conditional, among other matters, upon (i) the GEM Listing Committee of the Stock Exchange granting approval for the listing of and permission to deal in the Conversion Shares which may be allotted and issued by the Company upon the exercise of the conversion rights attaching to the Tranche 2 Bonds; and (ii) the Shareholders passing at the EGM the ordinary resolutions approving the allotment and issue of up to 400,000,000 Existing Shares (or 40,000,000 Consolidated Shares upon Share Consolidation becoming effective) upon exercise of the conversion rights attached to Tranche 2 Bonds.

If any of the conditions above have not been fulfilled on or before 28 February 2007 (in respect of Tranche 1 Bonds) or the 90th day after completion of the placing of Tranche 1 Bonds (in respect of Tranche 2 Bonds) or such later date as the Company and the Placing Agent may agree, the obligations of the Placing Agent under the Bond Placement Agreement shall then cease and terminate.

Completion

Completion of the placing of Tranche 1 Bonds will take place within three business days after fulfillment of the relevant conditions stated above.

Pursuant to the Bond Placement Agreement, the Placing Agent shall by the end of the 90th day after completion of the placing of Tranche 1 Bonds procure Subscribers, on a best effort basis, to subscribe for the Tranche 2 Bonds, up to a maximum principal

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LETTER FROM THE BOARD

amount of HK$10,000,000. Completion of the placing of Tranche 2 Bonds shall take place within three business days after fulfillment of the relevant conditions stated above on or before the 90th day after completion of the placing of Tranche l Bonds.

Reasons for the Bond Placing

In view of the good stock market sentiment for fund raising, the Directors consider that it is in the interest of the Company and its Shareholders to raise additional fund for the future development of the Group. The Directors consider various ways of fund raising including Shares placement and the Bond Placing. Notwithstanding that the Company would be able to raise approximately HK$3 million from the Share Placing, the Directors consider that the Bond Placing is an appropriate means of raising additional capital for the Company since it may not have an immediate dilution effect on the shareholding of the existing Shareholders of the Company and the Bonds do not impose additional interest burden on the Group. Save and except the Share Option Scheme and the Bond Instrument, the Company has no outstanding option or any right granted to call for the issue of the Shares.

The Directors consider that the terms of the Bond Placement Agreement, which were arrived at after arm’s length negotiations between the Company and the Placing Agent, are fair and reasonable and are in the interests of the Company and its Shareholders as a whole. As at the Latest Practicable Date, save for the Bond Placing, the Company has no current intention to conduct further fund raising activities.

Use of Proceeds

The gross proceeds and the net proceeds from the issue of the Bonds will be in maximum approximately HK$18.2 million and HK$17.6 million respectively which will be used as general working capital of the Group.

Application for Listing

No application will be made for listing of, or permission to deal in, the Bonds on the Stock Exchange or any other stock exchange. An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Conversion Shares to be issued upon exercise of conversion rights attached to the Bonds.

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LETTER FROM THE BOARD

4. CHANGES OF SHAREHOLDING STRUCTURE

The shareholding structure of the Company as at the Latest Practicable Date and immediately after completion of Share Consolidation and conversion of Tranche 1 Bonds and Tranche 2 Bonds in full, assuming Share Consolidation becoming effective, are set out below:

Shareholder Right Opportune Limited (Note) Subscribers for Tranche 1 Bonds Subscribers for Tranche 2 Bonds Other public Shareholders Total	As at the Latest Practicable Date No. of Existing Shares Approximate percentage 373,760,000 38.69% – – – – 592,240,000 61.31% 966,000,000 100%	Immediately after completion of Share Consolidation and conversion of Tranche 1 Bonds in full but before conversion of Tranche 2 Bonds No. of Consolidated Shares Approximate percentage 37,376,000 27.36% 40,000,000 29.28% – – 59,224,000 43.36% 136,600,000 100%	Immediately after completion of Share Consolidation and conversion of Tranche 1 Bonds and Tranche 2 Bonds in full No. of Consolidated Shares Approximate percentage 37,376,000 21.16% 40,000,000 22.65% 40,000,000 22.65% 59,224,000 33.54% 176,600,000 100%	Immediately after completion of Share Consolidation and conversion of Tranche 1 Bonds and Tranche 2 Bonds in full No. of Consolidated Shares Approximate percentage 37,376,000 21.16% 40,000,000 22.65% 40,000,000 22.65% 59,224,000 33.54% 176,600,000 100%
				100%

Note: The entire issued share capital of Right Opportune Limited is beneficially owned by Mr Law Sau Yiu, Dennis, an executive Director and the chairman of the Company.

5. FUND RAISING ACTIVITIES DURING THE PAST TWELVE MONTHS

The Company had completed the Share Placing on 14 December 2006 and raised net proceeds of approximately HK$3.42 million. The Company intended to use such net proceeds as general working capital of the Group and such net proceeds had not been utilised yet as at the Latest Practicable Date. Save as disclosed above, the Company had not conducted any fund raising activities in the 12 months immediately preceding the Latest Practicable Date.

6. ADJUSTMENTS IN RELATION TO THE OPTIONS

Up to the Latest Practicable Date, 64,400,000 Options have been granted by the Company under the Share Option Scheme entitling the holders thereof to subscribe for up to an aggregate of 64,400,000 Existing Shares (equivalent to 6,440,000 Consolidated Shares).

The Share Consolidation may cause adjustments to the subscription price and the number of Shares to be issued under the Options. As to the adjustments to the subscription price and the number of Shares to be issued in respect of the Options, the

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LETTER FROM THE BOARD

Company will instruct its auditors to review and certify the basis of such adjustments pursuant to the Share Option Scheme and in accordance with Rule 23.03(13) of the GEM Listing Rules and the supplementary guidance issued by the Stock Exchange as soon as possible. The Company will inform the holders of the Options of the adjustment accordingly.

7. GENERAL

The Group is principally engaged in the provision of film production services, production of television movies, investment in film productions and worldwide film distribution.

The issue of the Bonds does not require approval from any Cayman Islands authority and any alteration of the Bond Instrument shall be subject to the approval of the Stock Exchange except that such alteration takes effect automatically under the terms and conditions of the Bond Instrument. The Conversion Shares falling to be allotted and issued upon exercise of the conversion rights attached to the Bonds will be issued under the Specific Mandate to be sought at the EGM.

Announcement will be made by the Company upon completion of placing of the Tranche 1 Bonds and Tranche 2 Bonds.

The Share Consolidation and the Specific Mandate are conditional upon the passing of the relevant resolutions by the Shareholders at the EGM.

8. EGM

A notice convening the EGM to be held at 2nd Floor, 77 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on Wednesday, 10 January 2007 at which ordinary resolutions shall be proposed to approve the Share Consolidation and the Specific Mandate, the notice of which is set out on pages 18 to 20 of this circular.

A form of proxy for use at the EGM is enclosed. If you do not intend to attend the EGM, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

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LETTER FROM THE BOARD

9. PROCEDURE BY WHICH A POLL MAY BE DEMANDED

Articles 66 and 67 of the articles of association of the Company set out the procedures under which a poll may be demanded. At any general meeting, a resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

• (a) by the chairman of such meeting; or

• (b) by at least three members present in person or in the case of a member being a corporation by its duly authorized representative or by proxy for the time being entitled to vote at the meeting; or

• (c) by a member or members present in person or in the case of a member being a corporation by its duly authorized representative or by proxy and representing not less than one-tenth of the total voting rights of all members having the right to vote at the meeting; or

• (d) by a member or members present in person or in the case of a member being a corporation by its duly authorized 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 authorized representative shall be deemed to be the same as a demand by a member.

Unless a poll is duly demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect made in the minute book of the Company, shall be conclusive evidence of the facts without proof of the number or proportion of the votes recorded for or against the resolution.

10. RECOMMENDATION

The Directors consider that the Share Consolidation and the Bond Placing are in the interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions relating thereto as set out in the notice of the EGM.

By Order of the Board Milkyway Image Holdings Limited Law Sau Yiu, Dennis Chairman

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NOTICE OF EXTRAORDINARY GENERAL MEETING

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(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8130)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (“ Meeting ”) of Milkyway Image Holdings Limited (the “ Company ”) will be held at 2nd Floor, No. 77 Hung To Road, Kwun Tong, Kowloon, Hong Kong at 11:00 a.m. on Wednesday, 10 January 2007 to consider as special business and, if thought fit, to pass the following resolutions as ordinary resolutions:

1. “ THAT subject to and conditional upon the granting by the Listing Committee of The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) of the listing of, and permission to deal in, the ordinary shares of the Company consolidated in the manner as set out in paragraph (a) of this resolution below:

2. (a) every ten (10) issued and unissued ordinary shares of HK$0.01 each (each an “ Existing Share ”) in the capital of the Company be consolidated into one (1) share of HK$0.10 (each a “ Consolidated Share ”), such Consolidated Shares shall rank pari passu in all respects with each other and have the rights and privileges and be subject to the restrictions in respect of ordinary shares contained in the articles of association of the Company;

3. (b) all fractions of the Consolidated Shares to which holders of issued shares of HK$0.10 each in the capital of the Company would otherwise be entitled, if any, shall be aggregated, sold and retained for the benefit of the Company; and

4. (c) the directors of the Company ( the “ Directors ”) be and are generally authorised to do all such acts and things and execute all such documents, including under the seal of the Company, where applicable, as they consider necessary or expedient to give effect to the foregoing arrangements.”

5. “ THAT subject to and conditional upon (a) the granting by the Stock Exchange of the listing of, and permission to deal in, the Conversion Shares (as defined below); and (b) the Company obtaining all consents and approvals (if required) from the Stock Exchange for the issue of the Tranche 1 Bonds (as defined below),

6. (a) the issue of up to 400,000,000 Existing Shares of HK$0.01 (or 40,000,000 Consolidated Shares of HK$0.10 each upon the share consolidation becoming effective)(the “ Tranche 1 Conversion Shares ”) each in the share capital of the Company upon exercise of the conversion rights attaching to

* For identification purpose only

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NOTICE OF EXTRAORDINARY GENERAL MEETING

the first tranche of convertible bonds due on the date falling on the third anniversary from the issue (the “ Tranche 1 Bonds ”) up to an aggregate principal amount of HK$10,000,000 be and is hereby approved and the Directors be and are hereby authorised to allot and issue the Tranche 1 Conversion Shares pursuant to and in accordance with the instrument to be executed by the Company by way of a deed poll constituting the Tranche 1 Bonds; and

• (b) the Directors be and are hereby authorised to do all such acts and things as they consider necessary or expedient in connection with the issue of the Tranche 1 Conversion Shares upon exercise of the conversion rights attaching to the Tranche 1 Bonds.”

• “ THAT subject to and conditional upon (a) the granting by the Stock Exchange of the listing of, and permission to deal in, the Conversion Shares (as defined below); and (b) the Company obtaining all consents and approvals (if required) from the Stock Exchange for the issue of the Tranche 2 Bonds (as defined below),

• (a) the issue of up to 400,000,000 Existing Shares of HK$0.01 (or 40,000,000 Consolidated Shares of HK$0.10 each upon the share consolidation becoming effective)(the “ Tranche 2 Conversion Shares ”) each in the share capital of the Company upon exercise of the conversion rights attaching to the second tranche of convertible bonds due on the date falling on the third anniversary from the issue (the “ Tranche 2 Bonds ”) up to an aggregate principal amount of HK$10,000,000 be and is hereby approved and the Directors be and are hereby authorised to allot and issue the Tranche 2 Conversion Shares pursuant to and in accordance with the instrument to be executed by the Company by way of a deed poll constituting the Tranche 2 Bonds; and

• (b) the Directors be and are hereby authorised to do all such acts and things as they consider necessary or expedient in connection with the issue of the Tranche 2 Conversion Shares upon exercise of the conversion rights attaching to the Tranche 2 Bonds.”

By order of the board of directors MILKYWAY IMAGE HOLDINGS LIMITED Law Sau Yiu, Dennis Chairman

Hong Kong, 22 December 2006

Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Head office and principal place of business in Hong Kong: 1st Floor, 77 Hung To Road Kwun Tong Kowloon Hong Kong

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

1. A member of the Company entitled to attend and vote at the Meeting is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a member of the Company.

2. To be valid, a form of proxy in the prescribed form 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, Secretaries Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time fixed for holding the Meeting or any adjournment thereof.

3. Completion and delivery of the form of proxy will not preclude a member from attending and voting in person at the Meeting if the member so desires and in such event, the instrument appointing a proxy shall be deemed to be revoked.

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