Xteam Software International Limited
(Stock Code: 8178)

Major Shareholder:

• Mr. Ma Gary Ming Fai - 30.97% interest
• Mr. Ren Yi - 15.00% interest

Company Subsidiary:

• Xteam HK(100%): Distribution of computer software in Hong Kong
• Xteam China (100%): Sales of computer software ad provision of related product development services in the PRC.

The principal business of the Group is the provision of the Chinese Linux operating system with kernel rewritten to cater Chinese users and software based on the Linux operating platform for various hardware appliances including servers and PCs and the PRC. Is also provides technical support and after-sales services to its customers.

The management of the Group is one of the early movers in the development of Linux operating system in the PRC. The Directors are of the view that since the Group's Chinese Linux operating system is based on kernel rewritten specifically for a Chinese language platform, is provides a more efficient operating system for Chinese users than most its international counterparts, the kernel of whose operating systems in Chinese version are not rewritten to cater for Chinese users,

The Group's major target market segment is server for the Internet and the Intranet environment, its major products for server include;

• XteamServer 3.0 i-Class, a Linux operating system for servers specially designed for Internet services and the target clients are Internet data centres, e-commerce companies and SMEs;
• LogAnalyzer, a daily analysis system which provides charting to users to monitor comprehensive Web server operational status, which targets e-commerce companies and SMEs.

The Group's major products for PCs comprise Linux workstation including XteamLinux software for PC, which targets at different levels of individual users. Currently, the Group's most updated desktop version of XteamLinux product for retail market and OEM market are XteamLinux 4.0 and XteamLinux 3.0 OEM respectively.

According to IDC, the turnover of the PRC software market, comprising application solutions software, system infrastructure software and application development tools, will increase from approximately US$1,282.2 million in 2000 to approximately US$6,507.4 million in 2005, illustrating a CAGR of approximately 38.4%. in particular, the turnover of system infrastructure software market in the PRC will increase from approximately US$460.3 million in 2000 to approximately US$2,368.9 million in 2005, representing CAGR of approximately 38.8%.

According to IDC, the worldwide Linux client operating environment ("COE") and server operating environments ("SOE") operating systems and subsystems market grew at 15.5% form approximately US$69.6 million in 1999 to approximately US$80.4 million in 2000. Considering the merits of the Linux operating system in the Internet computing environment, the Directors envisage that there is huge market potential for Linux and related applications, in particular, for use in the Internet computing environment.

The Directors believe that the Group has the following competitive advantages:

• Being one of the pioneers in the development of the Chinese Linux operating system in the PRC, Mr. Ren has contributed his expertise to the Group, which gained a strong foothold in the Chinese Linux operating system market with brand awareness from its target customers.
• XteamLinux software was recognized as one of the "Best 10 brand names in "The Survey of electronic products competitiveness in the PRC in Year 2000" jointly conducted by China Chamber of Electronic Commerce.
• The Directors believe that the Group's technical know-how in the Chinese Linux technology still remains in the forefront.
• The bundling of its products with the hardware and software vendors' and distributors products helps the Group strengthen its sales.

• The Group has a history of loss and may incur loss in the future.
• The Group has a limited operating history and the feasibility of its business model is not proven.
• The Group may not be able to implement the business Plan Successfully.
• The Group may not be able to collect its accounts receivable from certain customers
• The Group may face fierce competition from other Linux operating system and software developers of other operating platforms.

In order to capital on the enormous market potential in the Internet industry and the server market, the Group intends to put more efforts in developing and creating new features and in the enhancement of its server applications software in respect thereof, in particular, for Internet service providers, Internet data centres and e-commerce companies.

The Directors also plan to increase the Group's clientele in more sectors, both horizontally and vertically. For horizontal market, the Group plans to develop and create new features in the Group's products for Internet data centres, Internet service providers, and other e-commerce companies. For vertical markets, the Group plans to expand into post office, government, education, security, bank and insurance sectors. As at the Latest Practicable Date, the Group has not yet commenced any negotiation with any of the potential customers in those sectors.

The Directors intend to expand the Group's geographical sales coverage to promote its products in Shanghai, the PRC. As such, the Group intends t set up an office in Shanghai during the period from the Latest Practicable Date to 31st March 2002.

In order to encourage more people to use the Group's server products, the Group plans to set up Limux Training and Certificate Program in Beijing, the PRC which will provide training with certification issued by the Group in respect of XteamServer products for network administration and system installation. The Directors intend to provide the Linux Training and Certificate Program with a size of about 30 persons each class.

The net proceeds from the Placing, after deducting the related expenses, are estimated to amount to approximately HK$12.5 million (based on the offer price HK$0.32 per share). The Group at present intends to apply the net proceeds as follows: