CORPORATE GOVERNANCE PRACTICES

The board considers that good corporate governance of the Company is central to safeguarding the interests of the shareholders and enhancing the performance of the Group. The board is committed to maintaining and ensuring high standards of corporate governance. The Company has applied the principles and complied with all the applicable code provisions ("Code Provisions") of the Code on Corporate Governance Practices ("Code") as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ("Listing Rules") for the year ended 31 December 2007, except for the deviation from provision A.2.1 of the Code in respect of segregation of the roles of chairman and chief executive officer, the reason for the deviation is shown on page 28 of the 2007 annual report. The board will continuously review and improve the corporate governance practices and standards of the Company to ensure that business activities and decision making processes are regulated in a proper and prudent manner.

ENHANCEMENT ON THE COMPANY'S CORPORATE GOVERNANCE IN 2007

With a view to further improve the Company's corporate governance practices, the following actions were taken in 2007:

• the Group has developed a new Business Code of Conduct for employees in order to further strengthen its business ethical practices;
• the Company has exceeded the Code Provisions that copies of the Annual Report, Notice of Meeting and the related documents were sent to the shareholders at least 35 days prior to the Annual General Meeting (statutory requirement: 21 days);
• the Company proposed certain amendments to the Bye-Laws of the Company in order to bring the Bye-Laws in line with the laws of Bermuda, the Listing Rules and the Code. Furthermore, certain amendments were proposed to modernize the Bye-Laws in line with current market practice. All the proposed amendments were approved by the shareholders at the Special General Meeting held on 25 January 2008.

BOARD OF DIRECTORS

The board of directors of the Company comprises:

Mr. CHAN Chun Hoo, Thomas (Chairman and Executive Director)
Mr. CHENG Bing Kin, Alain (Executive Director)
Mr. IP Shu Wing, Charles (Non-executive Director)
Mr. LEE Peng Fei, Allen (Independent Non-executive Director)
Mr. LO Kai Yiu, Anthony (Independent Non-executive Director)
Mr. TO Shu Sing, Sidney (Executive Director)
Mr. TSIM Tak Lung (Deputy Chairman and Non-executive Director)
Mr. YU Hon To, David (Independent Non-executive Director)

The board comprises three executive directors (one of whom is the Chairman) and five non-executive directors. Of the five non-executive directors, three are independent non-executive directors. In addition, two of the independent non-executive directors possess appropriate professional accounting qualifications and financial management expertise. Biographies of the board of directors of the Company are shown on pages 7 to 8 of the 2007 annual report and are also maintained on the Company's website.

The principal focus of the board is on the overall strategic development of the Group. The board also monitors the financial performance and the internal controls of the Group's business operations. With a wide range of expertise and a balance of skills, the non-executive directors bring independent judgment on issues of strategic direction, development, performance and risk management through their contribution at board meetings and committee work.

The independent non-executive directors also serve the important function of ensuring and monitoring the basis for an effective corporate governance framework. The board considers that each independent non-executive director is independent in character and judgment and that they all meet the specific independence criteria as required by the Listing Rules. The Company has received from each independent non-executive director an annual confirmation of his independence pursuant to Rule 3.13 of Chapter 3 of the Listing Rules and the Company considers such directors to be independent. The independent non-executive directors are explicitly identified in all corporate communications.

The Chairman and chief executive officer of the Company is Mr. Chan Chun Hoo, Thomas. This deviates from provision A.2.1 of the Code which stipulates that the roles of chairman and chief executive officer should be separate and should not be performed by the same individual.

Mr. Chan Chun Hoo, Thomas focuses on Group strategy and is responsible for chairing and managing the efficient operation of the board and ensuring that all key issues are considered by the board in a timely manner; whereas responsibilities for running of the business operations of the Group are delegated to different designated senior executives. The board considers that this structure will not impair the balance of power and authority between the board and the management of the business of the Group given that there is a strong and independent nonexecutive directorship element on the board and a clear division of responsibility in running the business of the Group. The board believes that the structure outlined above is beneficial to the Company and its business.

Each of the non-executive directors of the Company has entered into a service contract with the Company for a term of three years. However, such term is subject to his re-appointment by the Company at general meeting upon retirement by rotation pursuant to the Bye-laws of the Company. In accordance with the relevant provisions in the Bye-laws of the Company, the appointment of directors is considered by the board and the newly appointed directors are required to stand for election by shareholders at the first annual general meeting following their appointment. In additional, the Company obtained shareholders' approval at the special general meeting held in January 2008 to amend the Bye-laws to comply with the requirement that each director, including the chairman of the board and/or the managing director, shall be subject to retirement by rotation at least once every three years.

All directors are regularly updated on governance and regulatory matters. There is an established procedure for directors to obtain independent professional advice at the expense of the Company in the furtherance of their duties. The Company has also arranged appropriate director and officer liability insurance cover in respect of any potential legal actions that might be taken against its directors.

The board meets regularly throughout the year to review the overall strategy and to monitor the operation as well as the financial performance of the Group. Senior executives are from time to time invited to attend board meetings to make presentations or answer the board's enquiries. The Chairman focuses on Group strategy and is responsible for chairing and managing the efficient operation of the board and ensuring that all key issues are considered by the board in a timely manner. Notice of at least 14 days has been given to all directors for all regular board meetings and the directors can include matters for discussion in the agenda whenever they consider appropriate and necessary. Agenda and accompanying board papers in respect of regular board meetings are dispatched in full to all directors within a reasonable time before the meeting. Directors have to declare their direct or indirect interests, if any, in any proposals or transactions to be considered by the board at board meetings and abstain from voting as appropriate.

Draft minutes of all board meetings are circulated to directors for comment within a reasonable time prior to confirmation. Minutes of board meetings and meetings of board committees are kept by duly appointed secretaries of the respective meetings; all directors have access to board papers and related materials, and are provided with adequate information in a timely manner; this enables the board to make informed decision on matters placed before it.

The board held seven meetings in 2007 and the overall attendance rate of directors at board meetings was 97%. Details of directors' attendance at the board, board committees and general meetings held in 2007 are set out in the following table.

The directors acknowledge their responsibility for preparing the financial statements of the Company for the year ended 31 December 2007. The statement of the auditors of the Company about their reporting responsibilities on the financial statements is set out in the auditors' report on pages 39 to 40 of the 2007 annual report.

BOARD COMMITTEES

As an integral part of good corporate governance, the board has established the Audit Committee and Compensation Committee to oversee particular aspects of the Company's affairs. Each of these Committees comprises a majority of independent non-executive directors with defined respective written terms of reference.

Audit Committee

The Audit Committee was established in 1999 and its current members include:

LO Kai Yiu, Anthony – Committee Chairman (Independent)
LEE Peng Fei, Allen (Independent)
TSIM Tak Lung
YU Hon To, David (Independent)

The majority of the Audit Committee members are independent non-executive directors. The board considers that each Audit Committee member has broad commercial experience and there is a suitable mix of expertise in business, accounting and financial management on the Audit Committee. The composition and members of the Audit Committee exceeds the requirements under Rule 3.21 of the Listing Rules which requires a minimum of three members and at least one of whom is an independent non-executive director with appropriate professional qualifications or accounting or related financial management expertise. The written terms of reference which describe the authority and duties of the Audit Committee were adopted in 1999 and subsequently revised in 2005 to conform to the provisions of the Code, a copy of which is posted on the Company's website.

The Audit Committee meets at least twice a year to review the reporting of financial and other information to shareholders, the system of internal controls, risk management and the effectiveness and objectivity of the audit process. The Audit Committee also provides an important link between the board and the Company's external auditors in matters coming within the scope of its terms of reference and keeps under review the independence and objectivity of the external auditors.

The Audit Committee has reviewed with the management the accounting principles and practices adopted by the Group and discussed internal controls and financial reporting matters including a review of the financial statements for the year ended 31 December 2007.

At the meeting held on 10 March 2008, the Audit Committee reviewed this report, the Directors' Report and financial statements for the year ended 31 December 2007 together with the annual results announcement, with a recommendation to the board of directors for approval.

Compensation Committee

The Compensation Committee was established in early 2004 and its current members include:

TSIM Tak Lung – Committee Chairman
LEE Peng Fei, Allen (Independent)
LO Kai Yiu, Anthony (Independent)

The majority of the Compensation Committee members are independent non-executive directors. The Compensation Committee advises the board on the Group's overall policy and structure for the remuneration of directors and senior management. The terms of reference of the Compensation Committee were adopted in 2004 and subsequently revised in 2005 to conform to the provisions of the Code, a copy of which is posted on the Company's website.

The Compensation Committee meets to determine the policy for the remuneration of directors and assess the performance of executive directors and members of senior management.

Remuneration Policy for Non-executive Directors and Executive Directors

The Compensation Committee is charged with the duties to advise the board on the Group's overall policy and structure for the remuneration of directors and senior management. The Compensation Committee also makes recommendations to the board from time to time on the remuneration of the non-executive directors. Pursuant to the terms of reference of the Compensation Committee, the compensation of non-executive directors, including the Compensation Committee members, shall be reviewed by executive directors initially, and the executive directors should communicate their findings to the Compensation Committee. The Compensation Committee will then consider and make recommendations to the full board for final approval. The Compensation Committee is also responsible for determining the remuneration for executive directors and the Chairman of the board. In carrying out its functions and responsibilities, the Compensation Committee takes into consideration factors such as salaries paid by comparable companies, time commitment and responsibilities of the directors and the desirability of performance-based remuneration. The Compensation Committee ensures that no director or any of his associate is involved in deciding his own remuneration.

Details of the directors' fee and other emoluments of the directors of the Company are set out in note 12(a) to the financial statements.

Group Compensation Policy

It is the Company's policy to ensure that compensation is appropriate and aligns with the corporate goals, objectives and performance. The current group compensation policy is illustrated below:

Objectives

• to provide an equitable and competitive compensation package so as to attract and retain the best available human resources to serve corporate needs;

• to provide a package of compensation to the employees that is competitive in the industry and takes account of general market condition;

• to reward employees for good individual and corporate performance; and

• to encourage future employee contributions to achieve overall corporate goals.

Components

The compensation package for each employee is structured in a way to attract and retain the best talents available, and will contain a combination or modification of some or all of the following three main components:

Chief Executive Officer and Top Paid Employees

The following table summarizes compensation information for the Chief Executive Officer and the four most highly compensated executive officers, excluding directors, of the Group for the year ended 31 December 2007:

DIRECTORS' SECURITIES TRANSACTIONS

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers ("Model Code") as set out in Appendix 10 of the Listing Rules for securities transactions by directors of the Company in 2004. All the members of the board have confirmed, following specific enquiry by the Company, that they have complied with the required standard as set out in the Model Code throughout the year ended 31 December 2007. The Model Code also applies to other specified senior management of the Group.

DIRECTORS' INTEREST

Details of directors' interests in the securities of the Company are set out in pages 21 to 23 of the 2007 annual report.

INTERNAL CONTROLS

The board has overall responsibility for maintaining an adequate system of internal controls of the Company and for reviewing its effectiveness. The board is committed to implementing an effective and sound internal control system to safeguard the interest of shareholders and the Company's assets. The board has conducted an annual review of the system of internal controls which covered all relevant financial, operational, compliance controls and risk management functions within an established framework.

The internal control process is accomplished by the board, management and other designated personnel, and designed to provide reasonable assurance regarding the achievement of objectives.

The Group's internal control system is designed in consideration of the nature of business as well as the organization structure. The system is designed to manage rather than eliminate the risk of failure in operational systems and to provide reasonable, but not absolute, assurance against material misstatement or loss. The system is designed further to safeguard the Group's assets, maintain appropriate accounting records and financial reporting, maintain efficiency of operations and ensure compliance with applicable laws and regulations.

Independent consultants were hired since 2005 to perform a review on the system of internal controls of the Group. The principal purpose of the review was to obtain sufficient knowledge of the control environment to understand the attitude of management and the governing body, awareness and actions concerning the factors of the control environment. The approach adopted for the assessment is based on those set by the COSO (the Committee of Sponsoring Organisations of the Treadway Commission), a globally recognised framework which categorizes internal controls into the following five components as the basis of reviewing its effectiveness:

Control Effectiveness

The consultants update the board periodically on the progress of their review on the internal controls of the Group. The consultants submitted to the board a testing and monitoring report for the year ended 31 December 2007. The consultants reported that no material control failings, weaknesses or significant areas of concern were identified during their review. The directors are satisfied with the effectiveness of the Group's internal controls and consider that key areas of the Group's system of internal controls are reasonably implemented, which provide prevention of material misstatement or loss, safeguard the Group's assets, maintain appropriate accounting records and financial reporting, efficiency of operations and ensure compliance with the Listing Rules and all other applicable laws and regulations. The Company will continue to engage external independent professionals to review its system of internal controls annually and further enhance its internal controls as appropriate.

There is currently no internal audit function within the Group. The directors have reviewed the need for an internal audit function and are of the view that in light of the size, nature and complexity of the business of the Group, it would be more cost effective to appoint external independent professionals to perform internal audit functions for the Group as the need arises. Nevertheless, the directors will continue to review at least annually the need for an internal audit function.

Auditors' Remuneration

For the year ended 31 December 2007, the auditors of the Company provided audit services to the Company and the remuneration paid by the Company to the auditors for the performance of audit services was HK$2,150,000. The Group also incurred approximately HK$4,480,000 for the non-audit services provided by the auditors in respect of the spin-off and listing of Playmates Toys Limited and the capital reorganisation of the Company. In order to maintain their independence, the auditors will not be employed for non-audit work unless prior approval is obtained from the Audit Committee.

INVESTOR RELATIONSHIP AND COMMUNICATION

The Company endeavours to continue maintaining a high level of transparency in communicating with shareholders and the investment community at large. Briefings and meetings with institutional investors and analysts are conducted regularly. The Company is committed to continue to maintain an open and effective investor communication policy and to update investors on relevant information in its business in a timely manner, subject to relevant regulatory requirements.

The Company is aware of its obligations under the Listing Rules that information which is expected to be price-sensitive should be announced immediately it is the subject of a decision. The Company takes extreme precautionary measures in the handling of price-sensitive information and has in place a Memorandum on Disclosure of Price Sensitive Information (which includes the Guide on Disclosure of Price-sensitive Information issued by the Stock Exchange in 2002) for its senior management and other staff member who is in a position to have access to price-sensitive information. Members of the board and other relevant senior management who have access to price-sensitive information are bound by the Model Code for securities transaction of the Company's securities and that of any related companies.

In order to ensure effective, clear and accurate communications with the investors and analysts, all corporate communications are arranged and handled by the executive directors and designated person according to established practices and procedures of the Company.

The Company has announced its annual and interim results and sent relevant financial statements to shareholders in a timely manner during the year under review, which is well before the time limits set out in the Listing Rules. Separate resolutions are proposed at the general meetings on each substantially separate issue, including the election of individual directors. In addition, procedures for demanding a poll are included in the circular to shareholders dispatched together with the annual report.

The annual general meeting may provide an opportunity for communication between the board and the shareholders of the Company. The Company regards the annual general meeting as an important event in which the Chairman and all directors will make an effort to attend.

The Company has also maintained this website which enables shareholders, investors and the general public to have access to the information of the Company on a timely basis. Financial information and all shareholder corporate communications of the Company are made available on this website and updated regularly.

SHAREHOLDERS' RIGHTS

Pursuant to the Bye-laws of the Company, shareholders holding at the date of deposit of the requisition not less than 10% of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the board or the secretary of the Company, to require a special general meeting to be called by the board for the transaction of any business specified in such requisition.

In order to enhance minority shareholders' rights, all resolutions put to votes by shareholders at annual general meetings and special general meetings were passed by poll since 2004. The poll results will be published in the website of the Company and that of the Stock Exchange on the same date of the meetings.

BUSINESS ETHICS

The Company is committed to a high standard of business ethics and integrity.

During the year the Group has developed a new Code of Business Conduct for employees in order to further strengthen its business ethical practices. This Code of Business Conduct sets out specific principles, policies and practices covering key ethics issues and identifies the risk areas that the employees may encounter in performing their duties. The Company expects that its business partners would act ethically and in a manner consistent with this Code.

The Group has also developed a Code of Business Conduct for its manufacturing vendors and suppliers. All the vendors and suppliers of the Group are required to maintain a safe and healthy workplace, fair and ethical employment practice and ensure that proper environmental protection measures are in place. The Group also closely monitors its operations so that the relevant codes of conduct stipulated by our major licensors and customers are strictly followed by our manufacturing vendors and suppliers.

The Company has a worldwide reputation in the toy industry for product quality and safety. Children's health, safety and well being are our primary concern and the Company is committed to observing all relevant safety and product quality rules.

SOCIAL RESPONSIBILITY

The Group has joined other leading companies in the toy industry to develop a common standard of business conduct for the toy manufacturing community to promote a safe and healthy workplace, fair and ethical employment practice, and proper environmental protection measures.

The Group makes regular contributions in terms of financial and other supports to various charitable organizations. Employees are encouraged to have direct and active involvement in fundraising activities for the needs of the community.

FAMILY MEMBERS AND CLOSE PERSONAL RELATIONSHIPS

The board recognises that talents, relevant experience and skills are the most important considerations in executive officers and staff selection. It is the Group's policy that job positions are filled by suitably qualified candidates selected through internal promotions or from the open market on the merits of qualification, experience, skills and achievements. No employee is hired on account of family or close personal connection to any board member.