our businessesbusiness and operating strategies;

our network expansion and capital expenditure plans;

our operations and business prospects;

the expected benefit of any acquisitions or other strategic transactions;

our financial condition and results of operations;

the expected impact of new services on our business, financial condition and results of operations;

the future prospects of and our ability to integrate the acquired businesses;business;

the industry regulatory environment as well as the industry outlook generally; and

future developments in the telecommunications industry in China.

any changes in the regulatory policies of the Ministry of Information Industry and other relevant government authorities relating to, among other matters:

the effects of competition on the demand for and price of our services;

any potential restructuring or consolidation of the PRC telecommunication industry;

the development of new technologies and applications or services affecting the PRC telecommunication industry and our current and future businesses;business;

changes in political, economic, legal and social conditions in China, including the Chinese government’s specific policies with respect to foreign investment in and entry by foreign companies into China’s telecommunications industry, economic growth, inflation, foreign exchange and the availability of credit; and

changes in population growth and gross domestic product, or GDP, growth and the impact of those changes on the demand for our services.

we face indirect competition in our local wireline telephone services from China’s two mobile telephone services providers, China Mobile Communications Corporation, or China Mobile, and China United Telecommunications Corporation, or China Unicom, and have begun to face direct competition from China Railway Communication Co., Ltd., or China Railcom, and China Network Communications Group Corporation, or China Netcom Group;

we face increasingly intense competition in our long distance telephone services from other providers of long distance services using public switched telephone networks, including China Unicom, China Railcom and China Netcom Group, and other providers of long distance services using the voice-over-Internet-protocol, or VoIP, technology, including China Mobile, China Unicom, China Netcom Group and China Railcom;

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Moreover, as a result of China’s accession to the World Trade Organization, or the WTO, and the adoption of the Regulations on the Administration of Foreign-Invested Telecommunications Enterprises in January 2002, which implement China’s commitments to the WTO, the Chinese government has agreed to gradually liberalize the various segments and regions of the telecommunications market in China to foreign operators. See “Item 4. Information on the Company — B. Business Overview — Regulatory and Related Matters — Licensing.”Licensing”. Both the percentage of ownership of Sino-foreign joint ventures offering telecommunications services in China and the regions where those joint ventures are permitted to offer telecommunications services might be increased over the next several years.gradually until December 11, 2007. These and other potential new entrants into the Chinese telecommunications market may further increase the competitive pressure we face.

Our ability to compete effectively may be constrained by a number of factors. For example, under the Chinese government’s policy of promoting competition in the telecommunications industry, certainsome competitors of ours, such as China Unicom and China Railcom, continue to enjoy certain preferential treatment from the Chinese government. As a result, ourOur competitors who enjoy this preferential treatment may be able to provide more competitive services than ours.

In addition, weWe are not yetcurrently permitted to provide mobile communications services. We, throughThrough China Telecom Group, we are however, actively seeking the issuance of a license forto provide mobile communications services in the PRC, inPRC. In particular, thewe are seeking a third generation mobile telecommunications technology, or 3G, license. In 2004, China Telecom Group conducted testing for CDMA 2000 and W-CDMA technologies in Guangzhou in Guangdong province and Shanghai Municipality. In 2006, China Telecom Group conducted testing for TD-SCDMA technology in Baoding, Hebei province. China Telecom Group did not use any of our Company’s resources to conduct such testing. We can provide no assurance as to whether any of such new technologies will be adopted by the PRC government in the future. In addition, we cannot assure you whether our Company couldwould receive any benefit from such testing, or be granted any license to provide mobile telecommunications service based on such new technologies. Moreover, even if we receive the necessary license and commence providing mobile communications services, we will compete with other telecommunications providers not only in our traditional wireline services, but also in mobile telecommunications services. We cannot assure you that we can compete effectively in the mobile telecommunications services industry due to different regulatory requirements in such industry and our limited experience in mobile telecommunications operations. In addition, the cost of implementing new technologies,or responding to technological changes, including, among others, 3G, may also be significant. In particular, in order for us to effectively respond to technological changes, we may be required to make substantial capital expenditures insignificant, and there is no assurance that the future.services based on such technologies could receive market acceptance.

Due toUnder the increasingly competitive environment, our customers may choose to use other providers’ services. Increased competition from other telecommunicationtelecommunications services providers may force us to lower our tariffs to the extent permitted under relevant laws and regulations, may reduce or reverse the growth of our customer base and may reduce usage of our networks. Any of these developments could materially adversely affect the growth of our business growth and our results of operations.

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We will continue to be controlled by China Telecom Group, which could cause us to take actions that may conflict with the best interests of our other shareholders.

China Telecom Group, a wholly state-owned enterprise, currently owns approximately 70.89% of our outstanding shareshares as of June 8, 2006.15, 2007. Accordingly, subject to our Articles of Association and applicable laws and

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regulations, China Telecom Group, as our controlling shareholder, will continue to be able to exercise significant influence over our management and policies by:

The interests of China Telecom Group as our controlling shareholder could conflict with our interests or the interests of our other shareholders. As a result, China Telecom Group may take actions with respect to our businessesbusiness that may not be in our or our other shareholders’shareholders��� best interests.

The letter of undertakings provided to us by China Telecom Group contains vague terms that may not be implemented as we expect.

China Telecom Group has provided us a letter of undertakings, under which it has undertaken to support us in our existing operations and future development in the following specific areas:

The currenttelecommunications services terms of the letter of undertakings do not obligate China Telecom Group to provide any financial support to us. The letter of undertakings may not be implemented as we expect due to the vagueness of its terms. Other than the letter of undertakings, we have not entered into any agreement with China Telecom Group to provide for potential allocation of business opportunities between China Telecom Group and us outside our service regions.

We face uncertainties associated with the process to implement our strategy to transform from a traditional basic network operator into a modern integrated information services provider.

Our business strategy will focusis focused on transforming from a traditional basic network operator into a modern integrated information services provider. As part of the strategy, we plan to continue pursuing the operation ofa license to provide mobile business proactivelytelecommunications services and seek to work with IT service providersprovide integrated information services to offer differentiated total solutions to enterpriseour customers. We will also exploitpursue the development potential of rural telephony, value-added services, leased line and other services.

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In addition, we have been actively participating in testing some new telecommunications technologies. In July 2005,2006, the Ministry of Information Industry requested China Telecom Group to conductcontinue the testing for PC – Phone VoIP in Shenzhen in Guangdong province and Shangrao in Jiangxi province. Our CompanyWe performed suchthis testing on behalf of China Telecom Group.

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However, we cannot assure you that the implementation of our new business strategy will not be delayed, or that the strategy will ever be successfully implemented. In particular, if any new technologies are adopted in the PRC telecommunications industry, we cannot assure you that we will be granted licenselicenses from national or local governments to provide services based on such new technologies. We also cannot assure you that we can develop the necessary technology to support our new businesses.services. Even if our initiatives of transformation can be implemented, we cannot assure you that these initiatives will allow us to increase revenues from our existing service offerings or from new communications services. The success of new service development depends on many factors, including, but not limited to, receipt of necessary government approval, properaccurate identification of customer needs, successful development of technology, the ability to manage cost and expenses, timely completion and introduction of new services, differentiation from offerings of competitors and market acceptance. The uncertainties associated with these factors could materially adversely affect our future business and results of operation.

We depend on China Telecom Group and its other subsidiaries to provide certain services and facilities for which we currently have limited alternative sources of supply.

In addition to being our controlling shareholder, China Telecom Group, by itself and through its other subsidiaries, also provides us with services and facilities necessary for our business activities, including, but not limited to:

The interests of China Telecom Group and its other subsidiaries as providers of these services and facilities may conflict with our interests. We currently have limited alternative sources of supply for these services. Therefore, we have limited leverage in negotiating with China Telecom Group and its other subsidiaries over the terms for the provision of these services. Termination or adverse changes of the terms for the provisions of these services could materially and adversely affect our business, results of operations and financial condition. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions” for a detailed description of the services provided by China Telecom Group and its other subsidiaries.

Since our services require interconnection with networks of other operators, disruption in interconnections with those networks could have a material adverse effect on our business and results of operations.

Under the relevant telecommunications regulations, telecommunications operators are required to interconnect with networks of other operators. We have entered into interconnection arrangements with other telecommunications operators. Any disruption of our interconnection with the networks of those operators could have a material adverse effect on our business and results of operations. In particular, as a result of the restructuring of China’s wireline telecommunications sector, most wireline telecommunications assets except for the nationwide inter-provincial optic fibers, including the last-mile access network, formerly owned by China Telecom Group in ten northern provinces in China were allocated to China Netcom Group. AsBecause we and China Telecom Group have limited local access facilities in those ten provinces, we will need to interconnect, indirectly through China Telecom Group, with

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China Netcom Group in order to provide end-to-end services to our customers with operations in the ten northern provinces. Any interruption in our interconnection with China Netcom Group could have a material adverse effect on our business and results of operations.

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We may be unable to obtain sufficient financing to fund our capital requirements, which could limit our growth potential and future prospects.

We believe that cash from operations, together with any necessary borrowings, will provide sufficient financial resources to meet our projected capital and other expenditure requirements. We may require additional funds to the extent we have underestimated our capital requirements or overestimated our future cash from operations. In addition, a significant feature of our business strategy is to explore opportunities to transform from a traditional basic network operator into a modern integrated information services provider, which may require additional capital resources. The cost of implementing new technologies, upgrading our networks or expanding capacity may also be significant. In particular, in order for us to effectively respond to technological changes, including 3G-based technologies, and more intensive competition, we may be required to make substantial capital expenditures in the future. It is uncertain when the Ministry of Information Industry may issue 3G licenses, how many 3G licenses the Ministry of Information Industry may issue, which 3G-based technology standard or standards will be adopted and whether we will be issued a 3G license. In the event that we are granted a 3G license by the Ministry of Information Industry, we may be required to make substantial capital expenditures in order to effectively respond to the 3G-based technologies and such capital expenditures’ requirements could have a material adverse effect on our business, financial condition and results of operations.

Financing may not be available to us on acceptable terms or at all. In addition, any future issuance of equity securities, including securities convertible or exchangeable into or that represent the right to receive equity securities, may require approval from the relevant government authorities. Our ability to obtain additional financing will depend on a number of factors, including:

We cannot assure you that we can obtain sufficient financing at commercially reasonable terms or at all. If adequate capital is not available, our growth potential and future prospects could be adversely affected.

If we are not able to respond successfully to technological or industry developments, our business may be adversely affected.

The telecommunications market is characterized by rapid advancements in technology, evolving industry standards and changes in customer needs. We cannot assure you that we will be successful in responding to these developments. In addition, new services or technologies, such as 3G, may render our existing services or technologies less competitive. In the event we do take measures to respond to technological developments and changes in industry standard changes,standards, the integration of new technology or industry standards or the upgrading of our networks may require substantial time, effort and capital investment. We cannot assure you that we will succeed in integrating these new technologies and industry standards or adapting our network systemand systems in a timely and cost-effective manner, or at all. Our inability to respond successfully to technological or industry developments may adversely affect our businesses,business, results of operations and competitiveness.

We face a number of risks relating to our Internet-related businesses.services.

We currently provide a range of Internet-related services, including dial-up and broadband Internet access and Internet-related applications. We face a number of risks in providing these services.

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Our network may be vulnerable to unauthorized access, computer viruses and other disruptive problems. We cannot assure you that the security measures we have implemented will not be circumvented or otherwise fail to protect the integrity of our network. Unauthorized access could jeopardize the security of confidential information stored in our customers’ computer systems. Eliminating computer viruses and other security problems may also require interruptions, delays or suspension of our services, cause us to incur costs and divert management attention.

In addition, because we provide connections to the Internet and host websites for customers and develop Internet content and applications, we may be perceived as being associated with the content carried over our network or displayed on websites that we host. We cannot and do not screen all of this content and may face litigation claims due to a perceived association with this content. These types of claims have been brought against other providers of online services in the past andpast. Regardless of the merits of the lawsuits, these types of claims can be costly to defend, regardless of the merits of the lawsuitdivert management resources and attention, and may damage our reputation.

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Our Personal Handyphone System businessservice may lose its competitiveness due to price fluctuation of mobile services and difficulties on further development of its technologies.

We currently provide Personal Handyphone System, or PHS, services in our service regions. PHS is a telecommunications technology that allows us to offer to our customers wireless local access services with mobility within an area with the same area code. Our ability to realize acceptable returns from our investment in PHS technology will depend on continued customer adoption of this technology. However, this market may not continue to develop. If China Mobile or China Unicom reducescontinues to reduce the tariffs for mobile telecommunications services, our existing and potential PHS customers may choose to use these services instead of our PHS services to take advantage of the less geographically restricted service scope and other features of mobile technology, or we may have to further reduce our PHS tariff. Our PHS is also facing difficulties in improving its technology. If we cannot improve technologies to support PHS’ future development and customers’ needs,As a result, our PHS business willservice may be materially and adversely affected.

If the new applications adopted by us do not perform as expected, or if we are unable to deliver commercially viable services based on these applications, our revenue and profitability may not grow as we expect.

We are pursuing a number of new growth opportunities in the broader telecommunications industry, including advanced data and broadband information and application services. These opportunities relate to new services for which there are no established markets in China. Our ability to deploy and deliver these new services depends, in many instances, on the development of new applications, which may not be developed successfully or may not perform as we expect.

In addition, the success of our broadband Internet services is substantially dependent on the availability of content, applications and devices provided by third-party developers. If we are unable to deliver commercially viable new services, our revenue and profitability will not grow as we expect and our competitiveness may be adversely affected.

Risks Relating to the Telecommunications Industry in China

Extensive government regulation of the telecommunications industry may limit our flexibility in responding to market conditions, competition or changes in our cost structure.

Our businesses arebusiness is subject to extensive government regulation. The Ministry of Information Industry, which is the primary telecommunications industry regulator under China’s State Council, regulates, among other things:

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Other Chinese governmental authorities also take part in regulating tariff policies, capital investment and foreign investment in the telecommunications industry. Major capital investments, including telecommunications network development projects, are subject to the approval of relevant Chinese government authorities. See “Item 4. Information on the Company — B. Business Overview — Regulatory and Related Matters — Capital Investment.”Investment”. The regulatory framework within which we operate may constrain our ability to implement our business strategies and limit our flexibility to respond to market conditions or to changes in our cost structure.

Possible future industry restructurings may materially and adversely affect our businesses.business, financial condition and results of operation.

The PRC telecommunications industry has undergone restructuring from time to time in the past and may be subject to further restructuring. Possible future restructuring, such as any consolidation among or spin-off by the services providers within the industry, might significantly change the competition environment in the PRC telecommunications industry. The rapid development of new technologies, such as 3G technology, might also cause the PRC government to make other adjustments of the existing structure of the industry. Such further industry restructuring may materially affect the operations of all telecommunications operators in China, including us. Accordingly, we cannot predict the implications and effect of any further restructuring on our business, financial condition and results of operations.

Our revenues may be adversely affected by reductions in tariffs and other changes in tariff regulations mandated by the Chinese government.

We are subject to extensive government regulations on tariffs, especially those relating to our basic telecommunications services. On October 1, 2005, the Ministry of Information Industry liberalized the tariff level by allowing telecommunication services providers to set tariffs for wireline local inter-district telephone services and all domestic and international, Hong Kong, Macau and Taiwan long distance services using public switched telephone networks provided the tariff levels are below certain tariff ceilings set by the government. See “Item 4. Information on the Company — B. Business Overview — Regulatory and Related Matters — Tariff Setting.”Setting”. We derive a substantial portion of our revenues from services that are subject to tariffs determined or regulated by the Chinese government. In the past, our revenues have been adversely affected by reductions in tariffs and other changes in tariff regulations mandated by the Chinese government. The Chinese government has encouraged mobile telecommunications services providers to implement a caller-pays tariff regime. As a result, mobile telecommunications services providers, including China Mobile, have started to offer caller-pays service plans in certain regions. We expect that the Chinese government will make the caller-pays tariff regime mandatory by 2009. If the Chinese government implements a mandatory caller-pays regime, our revenue may be adversely affected and our business, results of operations and financial conditions may be adversely affected. We cannot assure you that our businessesbusiness or results of operations will not be adversely affected by any government-mandated adjustments on tariff level in the future.

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Future changes to the regulations and policies governing the telecommunications industry in China may have a material adverse effect on our businessesbusiness and operations.

The regulations and policies governing the telecommunications industry in China experienced continuous changes in the past several years. Possible future changes to regulations and policies of the Chinese government governing the telecommunications industry could adversely affect our businessesbusiness and operations. For example, to provide a uniform regulatory framework for the orderly development of the telecommunications industry, the Chinese government is currently preparing a draft telecommunications law. If and when the telecommunications law is adopted by the National Peoples’ Congress or its Standing Committee, it is expected to provide a new regulatory framework for telecommunications regulation in China. We cannot be certain how this law will affect our businessesbusiness and operations and whether it will contain provisions more stringent regulatory requirements than the current telecommunications regulations.

The interpretation and enforcement of China’s WTO commitments regarding telecommunications services may also affect telecommunications regulations and the telecommunications industry in China. Any future regulatory changes, such as those relating to the issuance of additional telecommunications licenses, tariff setting, interconnection and settlement arrangements, competition, changes in technical and service standards, universal service obligations and spectrum and numbering resources allocations, may have a material adverse effect on our business and operations.

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The Chinese government may require us, along with other providers in China, to provide universal services with specified obligations, and we may not be compensated adequately for providing such services.

Under the Telecommunications Regulations promulgated by the State Council, telecommunications service providers in China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the Chinese government. Currently, the Chinese government andimplements the “Village to Village” projects which require telecommunications operators to provide telephone services in a number of remote villages in China as transactional measures prior to the official implementation of a universal service obligation framework. The Ministry of Information Industry has the authority to delineate the scope of universal service obligations. The Ministry of Information Industry may also select universal service providers through a tendering process. The Ministry of Information Industry, together with government finance and pricingother governmental authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. The Chinese government currently uses financial resources to compensate the expenses incurred in the “Village to Village” projects before the establishment of a universal service fund. In December 2006, the Ministry of Finance issued the Provisional Rules on Usage and Administration of Telecommunications Universal Service Fund, effective December 21, 2006, which provide a compensation scheme for certain expenses incurred in the “Village to Village” projects undertaken by telecommunications service providers. Under the compensation scheme, telecommunications operators may receive compensation from the Chinese government for the “Village to Village” projects. These rules provide for the application for the compensation, the method to calculate the amount , the approval process and the distribution of the compensation. However, the compensation from the Chinese government may not be sufficient to cover all of our expenses for providing the telecommunications services under the “Village to Village” projects.

Consequently, weWe may not be able to realize adequate return on investments for expanding networks to, and providing telecommunications services in, those economically less developed areas due to potentially higher capital expenditure requirements, lower usage by customers and lack of flexibility in setting our tariffs. As a result, our financial condition and results of operations could be adversely affected.

Risks Relatingrelating to the People’s Republic of China

Substantially all of our assets are located in China and substantially all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.

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China’s economic, political and social conditions, as well as government policies, could affect our businesses.business.

Substantially all of our businesses,business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including without limitation:

While China’s economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations applicable to us.

The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. We cannot predict the purpose and effect of future economic policies of the PRC government or the impact of such economic policies on our businessesbusiness and operations.

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Government control of currency conversion may adversely affect our financial condition.

We receive substantially all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of these revenues must be converted into other currencies to meet our foreign currency obligations. These foreign currency-denominated obligations include:

Under China’s existing foreign exchange regulations, we will be able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange by complying with certain procedural requirements. However, the Chinese government may take measures at its discretion in the future to restrict access to foreign currencies for both current account transactions and capital account transactions if foreign currencies become scarce in China.transactions. We may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, if the Chinese government restricts access to foreign currencies for current account transactions.

Foreign exchange transactions under our capital account, including foreign currency-denominated borrowings from foreign banks, issuance of foreign currency-denominated debt securities, if any, and principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State

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Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange to meet our payment obligations under the debt securities, if any, or to obtain foreign exchange for capital expenditures.

Fluctuation of the Renminbi could materially affect our financial condition and results of operations.

We receive substantially all of our revenues, and our financial statements are presented, in Renminbi. The value of the Renminbi fluctuates and is subject to changes in China’s political and economic conditions. The value of the Renminbi against U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, changes in the PRC’s and international political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous business day’s inter-bank foreign exchange market rates and current exchange rates on the world financial markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by approximately 2% against the U.S. dollar. The PRC government has since made and in the future may make further adjustments to the exchange rate system. Fluctuations in exchange rates may adversely affect the value, translated or converted into U.S. dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends payable on our H shares in foreign currency terms. Our financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi, in which our obligations are denominated. For further information on our foreign exchange risks and certain exchange rates, see “Item 3. Key Information — A. Selected Financial Data — Exchange Rate Information” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Exchange Rate Risk.”Risk”. We cannot assure you that any future movements in the exchange rate of the Renminbi against the U.S. dollar or other foreign currencies will not adversely affect our results of operations and financial condition.

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The PRC legal system has inherent uncertainties that could limit the legal protections available to you.

We were incorporated under the laws of the PRC and are governed by our Articles of Association. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the Chinese government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volumesnumber of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties.

The direct enforcement byability of our shareholders ofto enforce their rights in respect of violations of corporate governance procedures may be limited. In this regard, our Articles of Association provide that most disputes between holders of H shares and our Company, directors, supervisors, officers or holders of domestic shares, arising out of our Articles of Association or the PRC Company Law and related regulations concerning the affairs of our Company, are to be resolved through arbitration by arbitration tribunal in Hong Kong or China, rather than by a court of law. Awards that are made by Chinese arbitral authorities recognized under the Arbitration Ordinance of Hong Kong can be enforced in Hong Kong. Hong Kong arbitration awards are also enforceable in China. However, to our knowledge, no action has been brought in China by any holder of H shares to enforce an arbitral award, and we are uncertain as to the outcome of any action, if brought in China to enforce an arbitral award made in favor of holders of H shares. See “Item 10. Additional Information – B. Articles of Association.”Association”.

To our knowledge, there has not been any published report of judicial enforcement in China by holders of H shares of their rights under the Articles of Association of a PRC company or the PRC Company Law.

Unlike in the United States, under applicable laws of China, shareholders do not have the right to sue the directors, supervisors, officers or other shareholders on behalf of the corporation to enforce a claim against such party or parties that the corporation has failed to enforce itself. Our shareholders may have to rely on other means to enforce directly their rights, such as through administrative proceedings. Chinese laws and regulations applicable to overseas listed companies do not distinguish among minority, affiliated and unaffiliated shareholders in terms of their rights and protections. In addition, our minority shareholders may not be able to enjoy protections to the same extent afforded to them byshareholders of companies incorporated under the state laws of the United States.

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Although we will be subject to the Hong Kong Stock Exchange Listing Rules, or the Listing Rules, and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases, or the Codes, the holders of H shares will not be able to bring actions on the basis of violations of the Listing Rules or the Codes, and must rely on the Hong Kong Stock Exchange and The Securities and Futures Commission of Hong Kong to enforce the Listing Rules or the Codes, as the case may be.

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.

We are a company incorporated under the laws of the PRC, and substantially all of our assets and our subsidiaries are located in China. In addition, most of our directors and officers reside within China, and substantially all of the assets of our directors and officers are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon most of our directors or officers, including with respect to matters arising under applicable laws and regulations. Moreover, our Chinese counsel has advised us that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom Japan or most other Western countries. Our Hong Kong counsel has also advised us that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in China of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

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Holders of H shares may be subject to PRC taxation.

Under China’s current tax laws, regulations and rulings, dividends paid by us to holders of our H shares outside the PRC are currently exempted from PRC income tax. In addition, gains realized by individuals or enterprises upon the sale or other disposition of our H shares are currently exempted from PRC capital gains tax. If the exemptions are withdrawn in the future, holders of our H shares may be required to pay withholding tax on dividends, which is currently imposed at the rate of 20%, or income tax, which may be imposed upon individuals at the rate of 20%, and holders of our H shares may be required to pay PRC capital gains tax upon the sale or other disposition of our H shares. See “Item 10. Additional Information — E. Taxation — People’s Republic of China.”China”.

Item 4. Information on the Company.

A. History and Development of the Company

Our Restructuring and Initial Public Offering

We were incorporated under the laws of China on September 10, 2002 as a joint stock company with limited liability. As part of theour initial restructuring, China Telecom Group’s telecommunications operations in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province, together with the related assets and liabilities, were transferred to us. In consideration of the net assets related to the telecommunications operations transferred to us, which had a carrying amount of RMB97,485 million as of December 31, 2001, we issued 68,317,270,803 of our shares to China Telecom Group. Immediately prior to our initial public offering, China Telecom Group transferred to Guangdong Rising Assets Management Co., Ltd., Jiangsu Guoxin Investment Group Co., Ltd. and Zhejiang Financial Development Company 8.37%, 1.43% and 3.19%, respectively, of our outstanding shares. Under the relevant share transfer agreements, each of Guangdong Rising Assets Management Co., Ltd., Jiangsu Guoxin Investment Group Co., Ltd. and Zhejiang Financial Development Company has agreed not to sell, transfer or pledge any of our shares it obtained under the share transfer agreement during the three-year period after November 15, 2002, and following the expiry of the three-year period after November 15, 2002, not to sell or transfer more than 20% of our shares it obtained under the share transfer agreement during any six-month period for two years.

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Under a non-competition agreement between us and China Telecom Group, China Telecom Group has undertaken to us, for so long as our shares are listed on the Hong Kong Stock Exchange or another exchange, and China Telecom Group holds over 30% of our issued share capital or is regarded as our controlling shareholder under the Listing Rules, China Telecom Group will not at any time, directly or indirectly, provide basic telecommunications services or selectedspecified value-added telecommunications services in our service regions that may compete with us.

In connection with our restructuring and acquisitions, we entered into various arrangements with China Telecom Group and a number of its provincial subsidiaries relating to the mutual provision of ongoing telecommunications and other services. These agreements include agreements for trademark licensing, centralized services, interconnection arrangements, optic fiber leasing, property leasing, IT services, comprehensive services and other services. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions” for a more detailed description of these arrangements.

Following our restructuring, China Telecom Group continues to be the holder of the licenses required for operating our telecommunications business. In accordance with the approval of the Ministry of Information Industry, we derive our exclusive rights to operate our businessesbusiness from our status as a subsidiary controlled by China Telecom Group, and China Telecom Group must hold and maintain all licenses received from the Ministry of Information Industry in connection with our businessesbusiness for our benefit. The government currently does not charge license fees for the telecommunications licenses held by China Telecom Group.

In 2002, we successfully completed our initial public offering of H shares and raised approximately RMB10,659 million in aggregate net proceeds for us. Upon completion of our initial public offering, our shares became listed on the Hong Kong Stock Exchange and ADSs representing our H shares are listed and traded on the New York Stock Exchange.

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Our Acquisitions in 2003 and in 2004

On December 31, 2003, we acquired from China Telecom Group the entire equity interests in each of Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited and certain network management and research and development facilities (the “First Acquisition”).

The purchase price of the First Acquisition amounted to RMB46 billion. Of the purchase price, we paid an initial consideration of RMB11 billion in cash upon the completion of the acquisition. The deferred consideration of the remaining RMB35 billion is payable on December 31, 2013. We may prepay all or, from time to time, a part of the deferred consideration at any time within a ten-year period without penalty. We will pay interest to China Telecom Group at semi-annual intervals on the actual amount of the deferred consideration remaining outstanding at an annual rate of 5.184% for the first five years after December 31, 2003. This rate will be adjusted on the fifth anniversary of the completion of the acquisition on December 31, 2003 based on the then current Renminbi lending rate of the Chinese commercial banks for loans with tenure of more than five years. In 2005,2006, we paid China Telecom Group approximately RMB1,753RMB930 million interest on the deferred consideration for our acquisition in 2003. We also repaid RMB10 billion of the deferred consideration to China Telecom Group in each of October 2005.2005 and April 2006.

In connection with this acquisition and for the purpose of paying consideration to People’s Government of Fujian province for acquiring the rural telecommunication assets in Fujian province, China Telecom Group agreed to transfer 969,317,182 of its 969,317,182 shares in our Company to Fujian State-Owned Assets Investment Holdings Co., Ltd,Ltd., a state-owned enterprise owned by the provincial government of the Fujian province to hold such transferred shares.

On December 31, 2003, our Company, together with our wholly-owned subsidiary, Shanghai Telecom Company Limited, acquired from China Telecom Group the entire equity interest in China Telecom Group Yellow Pages Information Company Ltd.

On June 30, 2004, we acquired from China Telecom Group its entire equity interests in each of Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan

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Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (the “Second Acquisition”).

The purchase price of the Second Acquisition amounted to RMB27.8 billion. Of the purchase price, we paid an initial consideration of RMB8.34 billion in cash upon the completion of the acquisition. The deferred consideration of the remaining RMB19.46 billion is payable on June 30, 2014. We may prepay all or, from time to time, a part of the deferred consideration at any time within a ten-year period without penalty. On June 30, 2004, we repaid RMB4.31 billion of this payable amount using the net proceeds from issuethe issuance of new H shares in May 2004. From June 30, 2004, we will pay interest to China Telecom Group at semi-annual intervals on the actual amount of deferred consideration remaining outstanding at an annual rate of 5.184% for the first five years after June 30, 2004, being 10% discount to the RMB lending rate of 5.76% per year of commercial banks in the PRC in respect of loans with tenure of more than five years as published by the People’s Bank of China and prevailing at 12:00 noon (Beijing time) on April 8, 2004, being the business day immediately preceding the day of the execution of the acquisition agreement.2004. This rate will be adjusted on June 30, 2009 based on the then current Renminbi lending rate of the Chinese commercial banks for loans of similar amount and tenure, with the sameless a 10% discount. In 2005,2006, we paid China Telecom Group approximately RMB785 million interest on the deferred consideration for such acquisition.

Our Global Offering in 2004

In May 2004, we issued 5,318,181,818 new H shares with a par value of RMB1.00 each, representing 4,466,693,018 H shares and 8,514,888 ADSs, each representing 100 H shares, at prices of HK$2.30 per H share and US$29.49 per ADS, respectively, by way of a global offering to Hong Kong and overseas investors. We raised net

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proceeds of RMB12,702 million from this issuance of new H shares.shares and ADSs. On June 30, 2004, we used RMB12,650 million of the net proceeds from this issuance to make a cash payment for the acquisition of 2004, i.e.,Second Acquisition, including RMB8,340 million as the initial consideration and RMB4,310 million as part of the deferred consideration. As part of the global offering, 531,818,182 existing domestic shares of RMB1.00 each owned by China Telecom Group and our other domestic shareholders were converted into H shares and sold to Hong Kong and overseas investors.

Our Acquisitions in 2007

We entered into an Equity Purchase Agreement with China Telecom Group on June 15, 2007, pursuant to which China Telecom Group agrees to transfer, and cause its wholly-owned subsidiary China Huaxin Post and Telecommunications Development Center to transfer to us, 100% equity interest in each of China Telecom (Hong Kong) International Company Limited, China Telecom System Integration Co., Ltd. and China Telecom (USA) Corporation for a total consideration of RMB1.408 billion in cash.

The Equity Purchase Agreement will become effective upon obtaining all necessary regulatory approvals of the transactions from relevant governmental authorities including Ministry of Commerce and State-owned Assets Supervision and Administrative Commission of the State Council. We expect the completion of the acquisition to take place on June 30, 2007 or as otherwise agreed by both parties. The consideration will be paid upon completion from our internal resources. Upon completion of the transactions contemplated under the Equity Purchase Agreement, the financial statements of the three acquired companies will be consolidated into our financial statements.

China Telecom (Hong Kong) International Company Limited is a company incorporated under the laws of Hong Kong Special Administrative Region on February 25, 2000. It operates in the Asia Pacific region and its principal business is engaging in ChinaNet transit, international IP-VPN, international private leased circuits, cross-border transit connection and Internet data centre service in Asia. The target customers are Chinese companies that require telecommunications services in the Asia Pacific region and Asia-based companies and telecommunication operators doing business in China.

China Telecom System Integration Co., Ltd. is a company incorporated under the laws of the PRC on September 13, 2001. It operates in China and the principal business is provision of system integration services, outsourcing services, development of software application as well as consultancy services in China. Its target customers primarily comprise telecommunication operators that require IT support, and companies and government agencies that require integration and outsourcing services.

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China Telecom (USA) Corporation is a company incorporated under the laws of Delaware, USA on November 22, 2001. It operates in North and South America. The principal business is engaging in ChinaNet transit, voice wholesale, international IP-VPN, international private leased circuits, cross-border transit connection and internet data centre service. Its target customers comprise multinational corporations and Chinese companies with overseas businesses requiring telecommunications connections between Asia and the Americas.

We expect that the acquisition of the three companies will help us to expand our service areas and extend our telecommunication business overseas. We also expect to exploit technological advantages and increase economies of scale benefits through acquisition of the three companies by reducing operational costs, consolidating business resources, improving network and services system.

Set out below is our corporate structure as of June 8, 2006:

15, 2007:

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Commercial Paper Issuance in 2005 and 2006 and Proposed Issuance of Commercial Paper in 20062007

Pursuant to the resolution passed at the extraordinary general meeting held on October 18, 2005, we issued short-term commercial paper in an aggregate principal amount of RMB10 billion with an annual interest rate of 2.54%. The short-term commercial paper was issued in the PRC inter-bank debenture market at a discount to its par value. All the proceeds from this issue of short-term commercial paper were used to satisfy our funding needs of operation.

On April 10, 2006, we issued short-term commercial paper in an aggregate principal amount of RMB20 billion due in one year with an annual interest rate of 3.05%. The short-term commercial paper was issued through a centralized book-building and allocation process in the PRC inter-bank debenture market at par value. All the proceeds from this issue of short-term commercial paper would bewere used to satisfy our funding needs of operation. The commercial paper was repaid in full in April 2007.

At the annual general meeting held on May 23, 2006,29, 2007, our shareholders approved the proposal for our Company to issue short-term commercial paper.debentures. Pursuant to the resolutions passed at the annual general meeting, we will be able tomay issue short-term commercial paper with a maximum outstanding amount of RMB30 billion before the end of October 2006, and short-term commercial paper,debentures denominated in local or foreign currencies, in one or more tranches, including, but not limited to, short-term commercial paper, asset-backed notes, company bonds, corporate debts and asset securitization products, from the date of the annual general meeting until the date on which the annual general meeting of the Company for the year ended 2007 is held, with a maximum outstanding principal amount of RMB40 billion, from the end of October 2006billion. Our Company does not have any definitive plan to the date before next annual general shareholders’ meeting of our Company in 2007.issue any debentures at this time.

General Information

Our principal executive offices are located at 31 Jinrong Street, Xicheng District, Beijing, China 100032 and our telephone number is (86-10) 6642-8166. Our website address is www.chinatelecom-h.com. The information on our web site is not a part of this annual report. We have appointed CT Corporation System at 111 Eighth Avenue, New York, New York 10011 as our agent for service of process in the United States.

B. Business Overview

We are the leading provider of wireline telecommunications services in Shanghai municipality, Guangdong province, Jiangsu province, Zhejiang province, Anhui province, Fujian province, Jiangxi province, Guangxi Zhuang autonomous region, Chongqing municipality, Sichuan province, Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui autonomous region and Xinjiang Uygur autonomous region in China. Our scope of business includes:

In 2005,2006, our business grew steadily and our customer base gradually expanded. Our total operating revenue increased from RMB161,212RMB169,310 million in 20042005 to RMB169,310RMB175,093 million, or by approximately 5.0%3.4%, in 2005.2006. Revenue from our local telephone services, interconnection, Internet and value-added services and leased line and othermanaged data services increased while revenue from local telephone services, long distance telephone services and managed dataleased line and other services decreased. With the introduction of new technology and the launch of various new services by the telecommunications service providers, the market competition among telecommunications service providers has intensified. In order to respond

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to such intensified competition, we will continue to focus on transforming from a traditional basic network operator into a modern integrated information services provider and explore new growth areas to assure the sustainable growth of our Company.

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Our operating revenue depends largely on the size of our customer base, usage volume and the level and structure of our tariffs. The following table shows our selected operating data as of the dates and for the periods indicated.

The number of our local access lines in service increased by approximately 12.6%6.2% from 186.7 million in 2004 to 210.1 million in 2005.2005 to 223.0 million in 2006. The total usage of our local telephone services increaseddecreased by approximately 1.7 %7.7% from 466.8 billion pulses in 2004 to 474.7 billion pulses in 2005.2005 to 438.2 billion pulses in 2006. Subscribers for our broadband access services grew from 13.8 million as of December 31, 2004 to 21.0 million as of December 31, 2005. We expect broadband business2005 to become a key driver28.3 million as of our future growth.December 31, 2006. We experienced significant growth in value-added services in 2005.2006. The subscriber number of subscribers to our caller ID services increased by approximately 20.6%10.8% in 2005.2006. The usage of telephone information services increased by approximately 46.3% from 2,419 million minutes in 2004 to 3,540 million minutes in 2005. The subscriber number of oursubscribers to Color Ring Tone services was 18.236.7 million in 2005.as of December 31, 2006. The usage volume of our short message services was 17.323.3 billion messages in 2005.2006. We expect to further capitalize on the market potential ofour broadband services and value-added services continue to be key drivers of our growth in the future.

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The following table sets forth a breakdown of our operating revenue for 2003, 2004, 2005 and 2005:2006:

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Wireline Telephone Services

Our telephone services consist of local telephone, domestic long distance, international, Hong Kong, Macau and Taiwan long distance and interconnection.

Wireline telephone services are our main services, generating 76.8%71.8% (including upfront connection fees) of our total operating revenue in 2005,2006, compared to 80.3%76.8% (including upfront connection fees) in 2004.2005. Revenue generated by these services increaseddecreased by approximately 0.3%3.2% from RMB129,534 million in 2004 to RMB129,964 million in 2005.2005 to RMB125,797 million in 2006 due to the increasing substitution of wireline telephone services by mobile telephone services and the diversification of the means of communication. We believeexpect that our wireline telephone services will continue to provide a steadysignificant revenue source to our overall business.

Local Telephone Services

Our local telephone services provide the largest revenue source for our wireline telephone services. In 2005,2006, revenue from local telephone services increaseddecreased by approximately 0.8%3.5% from RMB80,338 million in 2004 to RMB80,945 million in 2005. In 2005 to RMB78,074 million in 2006 as a consequence of the continuing decrease in the difference between tariffs for mobile services and for wireline telephone services continued to decrease,and intensified mobile substitution for wireline telephone subscribers and local voice usage intensified.usage. To maintainfurther the steady development of our local telephone services, we have adopted initiatives to segmentdifferentiate our subscribers and services plans, offered service discounts“voice + Internet access” plans optimized our distribution channelsto enhance customer loyalty, developed value-added services such as Color Ring Tone and strengthened our agent channelsBest Tone to add more value to the wireline telephone services, and on-line channels.promoted services such as Super Cordless and Smart Cordless that combine the services provided by wireline and PHS. In addition, we focused our efforts to optimize the coverage of our wireless local access network for the regions that have the most customers to improve our service quality.

Our local telephone subscribers reached 210.1223.0 million at the end of 2005,2006, which represents an increase of 23.512.9 million, or approximately 12.6%6.1% from 2004. Wireless2005. The growth rate of the subscribers of our wireless local access service and public telephone service subscribers grew relatively faster.slowed in 2006 compared with 2005. As of the end of 2005,2006, wireless local access service subscribers and public telephone service subscribers reached 57.162.7 million and 14.115.5 million, respectively, which represent increases of 14.95.6 million and 1.71.4 million, or approximately 35.3%9.8% and 13.7%9.9%, respectively, from 2004.2005.

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Access lines. The following table sets forth selected information regarding our local telephone subscribers as of the dates indicated:

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Service usage. The following table sets forth certain usage information regarding our local telephone services for the periods indicated:

Local voice usage reached 449,404 millionwas 422.6 billion pulses in 2005, an increase2006, a decease of approximately 4.7%6.0% from 2004.2005. As customers of our dial-up Internet services continued to shift to our broadband Internet services, dial-up Internet usage, including dial-up usage of customers of other Internet service providers, decreased by 32.7%37.9% from 37.6 billion minutes in 2004 to 25.3 billion minutes in 2005.2005 to 15.7 billion minutes in 2006. Tariffs for dial-up Internet access were much lower than the usage fees for voice services.

Tariffs. For our local telephone services, we charge a fixed monthly fee and usage fees based on call usagesusage in terms of pulses. The tariffs are regulated by the Chinese government. The local call usage fees are either intra-district or inter-district, depending upon whether a call is within a single service district or between service districts. See “—Regulatory and Related Matters—Tariff Setting” included elsewhere under this Item. In addition, we also charge installation fees for installing telephone for our subscribers. We charge the installation fee based on the actual cost of the installation.

The following table sets forth the tariffs we currently charge for local telephone services:services for the periods indicated:

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Domestic Long Distance Services

In order to stabilize our revenue in the increasingly competitive market environment for our long distance services market, we have responded to market changes by adopting flexible operating strategies such as differentiating our customers and offeredoffering service discounts plans tothat meet the needs of subscribers from different customer segmentssubscribers in the market.

In 2005,2006, revenue from domestic long distance services was RMB25,993RMB25,517 million, representing a decrease of approximately 0.9%1.8% from 2004.2005. Total revenue from our domestic long distance services represented approximately 15.4%14.6% of our total operating revenue in 2005,2006, compared to approximately 16.3%15.4% in 2004.2005.

Service usage. The following table shows the total minutes of domestic long distance calls carried through our long distance network for the periods indicated:

Total domestic long distance usage was 93,81795,567 million minutes in 2005,2006, representing an annual growth rate of approximately 14.5%. Our domestic long distance services had a market share of 43.7%, which decreased by 2.1 percentage points1.9% from 2004. The market share was measured by total minutes carried through our networks based on statistical data from the Ministry of Information Industry.

The usage of our VoIP domestic long distance services as a percentage of the total usage of domestic long distance services decreased from approximately 51.4% in 2004 to approximately 49.4% in 2005. The lower tariff rates of VoIP domestic long distance services attracted many users to adopt VoIP services in the past. Such price advantage has gradually decreased after telecommunications providers were permitted to set, subject to certain tariff ceiling, tariffs for public switched telephone networks services by themselves.

Tariffs. Currently, all domestic long distance services using public switched telephone networks are charged at the unified rate of RMB0.07 per six seconds, with a discount rate of up to 40% applicable to calls made during off-peak hours, which are from 12:00 am to 7:00 am every day.

The following table sets forth the tariffs for our domestic long distance telephone services which are based on state tariff rates:

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International, Hong Kong, Macau and Taiwan Long Distance Services

In 2005,2006, competition in international and Hong Kong, Macau and Taiwan long distance telephone services further intensified. Diversion of customers to service based on technologies such as Instant Message and IP telephony had increased. Revenue from our international, Hong Kong, Macau and Taiwan long distance services amounted to RMB3,407RMB3,140 million in 2005,2006, representing a decrease of approximately 10.1%7.8% from 2004.2005. Our international, Hong Kong, Macau and Taiwan long distance telephone services contributed approximately 2.0%1.8% to our total operating revenue in 2005,2006, compared to approximately 2.3%2.0% in 2004.2005.

In order to maintain our revenue from international, Hong Kong, Macau and Taiwan long distance telephone services, we launched a number of service discounts plans to address various needs of different customer segments.

We also provide VoIP In 2006, we focused our marketing and advertising effort to promote the public awareness of the tariff discount plans for our international, Hong Kong, Macau and Taiwan long distance services, similar to our VoIP domestic long distance services in our service regions.telephone services.

Service usage. The following table sets forth certain information related to the usage of our international, Hong Kong, Macau and Taiwan long distance services, including usage of international, Hong Kong, Macau and Taiwan long distance services by mobile subscribers, for the periods indicated:

Usage in 20052006 was 1,7111,601 million minutes, representing an increasea decrease of approximately 3.4%6.4% from 2004. Our market share in this sector was 50.8%, representing a 5.4 percentage points decrease from 2004. The market share was measured by total minutes carried through our networks based on statistical data from the Ministry of Information Industry.2005.

Tariffs. The following table sets forth our international, Hong Kong, Macau and Taiwan long distance tariffs in 2005:for the years indicated:

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We offer international, Hong Kong, Macau and Taiwan long distance services through the international gateways of China Telecom Group. China Telecom Group negotiates bilateral settlement arrangements and rates based on the international settlement standards in the telecommunications industry, and we follow those settlement arrangements and rates also apply to us.rates.

Interconnection

In 2005, revenueRevenue from interconnection increased by approximately 19.8%9.8% from RMB10,719 million in 2004 to RMB12,838 million in 2005 to RMB14,095 million in 2006, representing approximately 7.6%8.1% of our total operating revenue in 2005.2006. As the number of mobile subscribers continued to grow, the volume of inbound local calls reached 102,670124,452 million minutes in 2005,2006, representing an increase of approximately 8.4%21.2% from 2004.2005.

Under relevant regulations, we are exempt from any interconnection payment for outbound local traffic to mobile operators. See “—Regulatory and Related Matters—Interconnection” for tariff details.

We have interconnection arrangements with other telecommunications operators, including China Telecom Group, China Netcom Group, China Mobile and China Unicom. All interconnection and settlement arrangements among public wireline telephone, mobile, and Internet networks in China are governed by the Telecommunications Regulations and the rules on interconnection arrangements and settlement promulgated by the Ministry of Information Industry. See “— Regulatory and Related Matters — Interconnection” included elsewhere under this item.Item.

China Telecom Group entered into interconnection agreements with other telecommunications service providers in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province, prior to our incorporation in 2002, with other telecommunications service providers in Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan Province, prior to our acquisition in 2003 and with other telecommunications service providers in Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region prior to our acquisition in 2004. These agreements provide for interconnection settlement with respect to local calls and domestic and international, Hong Kong, Macau and Taiwan long distance calls involving our networks. In connection with our initial public offering in 2002 and the acquisitions in 2003 and 2004, China Telecom Group has assigned to us, and we have assumed, its rights and obligations under these agreements in relation to our service regions. We also entered into an interconnection agreement with China Telecom Group. The economic terms and the settlement procedures under that agreement are in accordance with the standards set forth in the interconnection rules and regulations, which are described in more details under “— Regulatory and Related Matters — Interconnection” included elsewhere under this item. See also “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Ongoing Related Party Transactions between Usus and China Telecom Group — Interconnection Agreement.”Agreement”.

Internet Access and Value-added Services

In addition to basic local and long distance voice services, we offer Internet access and value-added services. In 2005,2006, these services grewcontinued to grow rapidly and becamewere an important revenue growth driver. Revenue from our Internet access and value-added services increased by 37.6%35.7% from RMB20,229 million in 2004 to RMB27,838 million in 2005 to RMB37,763 million in 2006, representing 16.4%21.6% of our operating revenue.

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Internet Access Services

In 2005,2006, revenue from Internet access services became increasingly important in our revenue structure. Our broadband subscribers maintained its strong growth. In 2005,2006, our broadband subscribers increased by 51.9%34.7% from 13.8421.0 million to 21.0228.3 million. We also focused on the segmentation of the broadband subscribers and provideddifferentiation of our broadband products to provide various services in terms of quality, application contents and prices to different customer groups. We also optimized our network in order to provide high-end subscribers with broadband products that offer more applications and better quality.

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The following table sets forth selected information regarding our broadband access services for the periods indicated:

DSL services. In 2005, we continued to leverage on our dominant position in local access networks, extensive distribution network and high quality customer services in promoting our DSL services. We promoted DSL services as the primary broadband Internet access means for our residential customers and small- and medium-sized enterprise customers. DSL services can be offered over existing copper wires and are suitable for high-speed Internet access. We had approximately 10.0 million DSL subscribers as of December 31, 2004 and approximately 15.1 million DSL subscribers as of December 31, 2005.

Fiber-Ethernet access services. We offer broadband access services through fiber optic cables that directly link Ethernet technology-based LANs in office buildings or high-end residential complexes to the Internet. Fiber-Ethernet access uses optic fiber technology and Ethernet protocol to connect residential users and business users to a telecommunications network and greatly expands capacity of the access network. As of December 31, 2004 and 2005, we had approximately 3.7 million customers and 5.9 million customers, respectively, using fiber-Ethernet access services.

Value-added Services

Our value-added services comprise primarily callerwireline value-added services, Internet value-added services and integrated information value-added services. Caller ID services, short messaging services, telephone information services ring tone services and Internet value-added services. As a result of our promotion of value-added services on PHS, we launched “SMS over PHS” service in 2004. We also promoted “Color Ring Tone” service in 2004. Colorservices are wireline value-added services. “Color Ring ToneTone” refers to thea service where subscribers can customize the answer ring tone from a wide selection of songs, melodies, sound effects or voice recordings to replace the monotonous ring connecting tone. We also established our service provider management platform and cooperated extensively with content providers for SMS and “Color Ring Tone”. The annual SMS usage volume amounted to 17.3was 23.3 billion messages and there were 36.7 million subscribers for the “Color Ring Tone” service amountedin 2006. Internet value-added services include “ChinaVNet” services, IPTV, Internet through TV services, collaborative communication services and music gateway services. “ChinaVNet” services refer to 18.2 million. In 2005, we launched BizNavigatorproducts and applications, such as music, video, software and recharge of online game cards, provided through broadband access and operated on a nationwide basis. “Best Tone” services. We have promoted BizNavigator as a new brand name. The related services, include, among others, e-mail account service to certain enterprises which do not have their own server, office automation service, voice mail service“BizNavigator” services and system integration.IT services and applications are our integrated information value-added services. “Best Tone” service is an integrated information enquiries service. It provides our customers with phone number storage, enquiry and call transfer services, as well as various information needed in daily life. In 2006, we promoted “BizNavigator” as our corporate customer brand and improved the recognition of such brand among our corporate customers. “BizNavigator” provides tailored application solutions to satisfy the different information and IT needs of large, medium and small-sized corporate customers. Our “BizNavigator” subscribers reached 507,000 in 2006.

Tariffs. Internet and value-added services are classified as “market-based” for purpose of tariff determination by relevant regulatory authorities. We determine tariffs for our Internet and value-added services according to market conditions. See “– Regulatory and Related Matters – Tariff Setting.”

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Managed Data

In 2005,2006, revenue from managed data decreasedincreased by approximately 1.9%2.5% from RMB3,015 million in 2004 to RMB2,958 million in 2005 to RMB3,031 million in 2006, representing approximately 1.8%1.7% of our total operating revenue in 2005.2006.

Our managed data services include Digital Data Network, or DDN, frame relay, or FR, and Asynchronous Transfer Mode, or ATM, services. In 2005,2006, we continued to focus on government, financial and large enterprise customers. Our marketing efforts focused on providing global one-stop shop, tailored services and comprehensive solutions to these customers. Our customers can enjoy a full range of consulting, trouble-shooting, billing and collection, and technical support services by contacting any designated account manager in our Company.

DDN services. Our DDN services provide high-quality and reliable transmission at speeds ranging from 64Kbps to 2Mbps and continue to meet the increasing demand for low- to medium-speed transmission capacity from enterprise customers. DDN systems are composed of optic fibers, digital transmission paths and digital cross multiplexing nodes. DDN systems are capable of providing high-quality private circuits and other services at various data rates to satisfy users’ multimedia communications needs.

Frame relay/ATM services. We offer advanced high-speedmanaged data communications services based on frame relay and ATM technologies. These services enable flexible and cost-effective usage of bandwidth resources. Frame relay is a type of connection-oriented packet switching technology that employs statistical multiplexing over a shared network. Frame relay offers both access to a network and transmission of data across a network and is used by customers with significant amounts of data traffic. ATM is a high bandwidth and multiplexing technology. ATM is developed for high data rates with a high quality of service, and can offer integrated voice, data and video services at various data rates.

We offer these services as part of our total telecommunications solutions to large enterprise customers, including government agencies, large corporations and institutions. Many of these customers choose frame relay and ATM services to form VPNs and link their local area networks at different locations. We also collaborate with a number of international telecommunications service providers to build global communications networks for multinational corporations.

Tariffs. We determine most of the tariffs for our data services within a price range set by the Chinese government. We generally charge an upfront fee for installation and testing for our data services and a fixed monthly fee. We offer various promotion discounts for our customers who wish to upgrade to higher bandwidth services. These promotion discounts have stimulated demand for our managed data services in recent years.

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The following table sets forth the monthly fees for DDN services at the bandwidth of 64Kbps and 2Mbps in 2005:for the years indicated:

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The following tables set forth the monthly fees in 2004, 2005 and 2006 for frame relay and ATM services, which include monthly fees for port access and permanent virtual circuits, or PVCs

PVC monthly fees (RMB):⁽¹⁾

Leased Line and Other Services

In 2005,2006, revenue from leased line services and other services increaseddecreased by approximately 1.4%0.6% from RMB8,434 million in 2004 to RMB8,550 million in 2005 to RMB8,502 million in 2006, representing 5.0%4.9% of our total operating revenue in 2005.2006.

Leased Line Services

The following table sets forth the total amounts of bandwidth of our leased line service as of the end of the year indicated:

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Tariffs. The leased line tariff rates are set by the Chinese government based on bandwidth and whether the leased line is local or long distance. Leased line tariffs have generally decreased in recent years and leased line providers are allowedpermitted to charge monthly fees for leased lines on a discount basis.basis and leased line tariffs have generally decreased in recent years. We provide different discounts to our customers on a case by case basis. See “Regulatory and Related Matters — Tariff Setting.”

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The following table sets forth the tariffs for 2Mbps and 155Mbps digital circuits in 2005for the years indicated as set by the Chinese government:

Other Services

Our other services primarily include sale andsales, repairs and maintenance of customer-end equipment and provisionconstruction of consulting services.telecommunications network and infrastructure for customers.

Marketing, Distribution and Customer Services

Marketing Initiatives

We market all of our telecommunications services under the “China Telecom” brand name, which is one of the best known brand names in China. We devote substantial efforts in advertisements to promote social recognition of and loyalty to our products and services. In order to respond to migration of our subscribers to mobile services and motivate our customers to continue to use our services, we have also packaged certain of our local and long distance services, differentiated price for one or more products and combined certain products into one integrated service plan to our targeted customers to address their telecommunications needs. In 2006, we divided customers into three types: corporate customers, household customers and individual customers. We launched various service plans tailored for the needs of these different types of customers and devise our marketing effort accordingly. In particular, we promoted “BizNavigator” as our brand targeting corporate customers and launched “One Home” as our brand targeting household customers. The marketing of these brand names will help to change the public image of the Company from a traditional wireline operator to an integrated information services provider.

Sales, Distribution and Customer Services

In 2005,2006, we continued to implement our dedicated service system, standardize and expand our business outlets, strengthen and promote our customer service hotlines, and improve our online customer services. By gradually integrating the dedicated service channel, electronic-based service channel, business outlet service channel and the agency service channel, we aim to provide our customers with more effective and efficient services.

Dedicated service channel. We have implemented a dedicated service channel comprising customer managers specifically assigned to market our services to large enterprises, communities and rural areas. We designed and customized products based on the

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various needs of our customers, and promote these products through our dedicated customer managers. We conduct periodic performance reviews and evaluations of the performance of these dedicated customer managers based on several factors, including revenue growth, customer satisfaction, business promotion and customer retention.

Electronic-based service channel. We provide customer services through our customer service hotlines with the access number of “10000” and online service centers. Our customer service hotlines handle service inquiries, service applications, customers’ complaints and promote our products and services. Our online service centers provide all the customers with service inquiry, service application and other services. We maintain and enhance our communications with our customers through the electronic-based service channel.

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Business outlet channel. Through our own business outlets as well as agents and business outlets set up with third parties, we provide our customers with better service experience, promote our corporate image and new products.

Agency service channel. We have established rules to supervise and cooperate with our agencies and distributors and develop our business, expand our customer base and provide better customer services.

Network System

We werehave been able to realize significant economies of scale as a result of the extensive coverage and scale of our network. ItOur network employs a variety of advanced technologies and suitable architecture and can be efficiently migrated to the next generation of network technology. Our network system is managed and operated by our experienced network management and maintenance teams and offers flexible functionality and reliable operation. It supports a comprehensive range of end-to-end wireline telecommunications services and enables customized products to be delivered for a variety of telecommunications needs. Our networks and services are supported by our strong research and development capabilities. We have formulated viable plans in light of future advances in technology to migrate our network system smoothly to the next generation of network technology in order to protect our existing investments.

Network Architecture

Our network system consists of local access networks, transport networks, core networks, service platform and support networks.

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Network Capacity and Technology

Local access networks. We own extensive local access networks in our service regions. As of December 31, 2005,2006, our local access networks covered all cities, counties and most rural villages in our service regions. As part of our strategic focus on the broadband and PHS network in order to optimize our network and improve utilization, we continue to expand our broadband local access networks utilizing our existing copper line resources and optimizing our PHS network. At the same time, we are selectively connecting additional large office buildings and business centers with fiber optic access. We also developed wireless LANs in certain business areas in major cities, including hotels, airports, cafes and office buildings to provide business travelers with broadband access services.

Transport network. Our transport system is based on an advanced, high-speed, large-capacity, secure and reliable fiber optic network throughout our service regions. Our fiber optic transport network is also supplemented by satellite transmissions and digital microwave links.

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Wireline telephone networks. OurIn 2006, we improved the overall service capacity of our switch telephone networks through the upgrade of the wireline telephone networknetworks to the intelligent networks and the application of the softswitch technology. The improvement of our networks facilitated the introduction of new services.

As of the end of 2006, we completed the upgrade of our wireline networks to intelligent networks. We have implemented the central management of subscriber data which in turn has been substantially built inimproved the last decade utilizing digital technology. service capacity of our networks. The operating capacity of our customer-oriented networks, as well as their operating efficiency, have also improved.

In addition, China Telecom Group has built2006, we applied softswitch technology into all levels of our networks. For international gateways in Shanghai and Guangzhou and we utilize these international gateways for our international, Hong Kong, Macau and Taiwan long distance telephone services.

In developing our wirelineservices, we are currently constructing international gateways that use softswitch technology in Guangzhou and Shanghai. For inter-provincial long distance telephone networks,services, we have adopted technologies that enable high capacity and fewer exchanges to reduce ourcompleted the construction and operating costs. We have installed advanced intelligent networks over our telephone networks. Intelligent networks combine advanced computer technologies with traditional switching techniques to provide flexible value-added services such as prepaid services, virtual private network services and toll free call services.

In 2005, we started to construct long distanceof a Domestic Code layer 1, or DC1, “softswitch” network insoftswitch network. We also expanded our service regions and added 15,000 ports with 2Mbps for domestic long distance telephone services. As of the end of 2005, fourteen of our subsidiaries in various provinces, autonomous regions and municipalities have upgraded the wireline network to intelligent network, and thereby introduced the “softswitch” technology, which improved the service capacity of the public switch telephone network and the services provided through the network.intra-provincial softswitch networks by adding new networks.

Internet and managed data networks. We have developed a large-capacity, high-quality, reliable and extensive Internet and managed data network system in our service regions. Our Internet and managed data networks allow us to provide services both at the network layer, such as Internet access, managed data and virtual private network services, and at the application layer, such as Internet data center, e-commerce and video-on-demand services.

Our data network system includes a DDN network, a frame relay network and an ATM network. These networks cover all cities and counties in our service regions. Our ATM network allows multi-service access and flexible bandwidth management and provides high-quality, integrated end-to-end services.

CHINANET, our Internet network, deploys mainstream Gigabyte routers as the main network technology. Most of its backbone routes allow high-speed transmission with the use of several 10Gbps circuits.

China Telecom Next Carrying Network, or CN2, is our next generation core multi-service carrier platform. When CN2 isplatform and has been fully implemented, itimplemented. It is capable of supporting voice, managed data, and video services at the same time. CN2 will be uniformly designed and constructed. It covers most of our local networks and will cover nine overseaoverseas cities. As the carrier network within the telecommunications network, CN2 is capable of carrying softswitch network, 3G mobile network, video-on-demand service, CHINANET and other important services. In addition, as a high-quality Internet network, CN2 will provideprovides Multi-protocol Label Switch Virtual Private Network, or MPLS VPN, service and Internet access service.

Support networks. The operation of our wireline telephone, Internet and managed data networks depends on various support networks, including a signaling network based on a signaling technology known as Signaling System No. 7 protocol, a digital synchronous network and network management systems for various networks and services, such as Internet data center, e-commerce and video-on-demand services.

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Equipment procurement. We purchase most of our network equipment from leading international and domestic suppliers. We purchase a variety of network equipment from domestic suppliers, such as transport equipment and local switches. We make most of our purchases through competitive tenders primarily based on product and service quality, system compatibility and price.

Purchases from our five largest suppliers of telecommunications equipment accounted for approximately 33.7%36.6% of our total amount of annual purchases for 2005.2006. Purchases from our largest supplier of telecommunications equipment accounted for approximately 10.8%12.7% of our total amount of annual purchases for 2005.2006.

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Information Technology Systems

Our strategic goal is to establish a new comprehensive information technology platform, the CTG-MBOSS, in the next three to five years along with our strategic transformation from a traditional basic network operator into a modern integrated information services provider. CTG-MBOSS will include business support systems, or BSS, to support marketing and customer services, operation support systems, or OSS, to support network operation and resource allocation, management support systems, or MSS, to support management, enterprise and data architecture, or EDA, for data management, operation analysis and decision making, and the related information organization and control systems. Adoption of the enterprise application integration, or EAI, technology has allowed for smooth interconnection among all major systems of our Company, enabling full information sharing within our Company.

We have set up three phases for developing our information technology system. First, we plan to enable full and organized information sharing within our Company. To satisfy the operational needs of our Company, we plan to provide data upon request in a timely manner. Second, we plan to improve the operation and management efficiency, lower operation and information technology supporting cost by providing effective and organized information technology support. Third, we plan to apply for proprietory rights for our intellectual properties, train our dedicated IT supporting staff. In addition, by gaining experience through improving our own information technology system, we canexpect to provide third parties with more sophisticated IT services and make CTG-MBOSS a new growth driver.

Competition

We compete with other telecommunications service providers in our wireline telephone, Internet, managed data and leased line services. All of our principal competitors are wholly or majority owned by the Chinese government. Currently, providers of basic telecommunications services must apply for a license from the Ministry of Information Industry. Only a limited number of providers have obtained licenses to provide basic telecommunications services in China. In China, there are currently two licensed mobile telecommunications service providers, China Mobile Communications Corporation, or China Mobile, and China United Telecommunications Corporation, or China Unicom, and four wireline service providers, China Network Communications Group

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Corporation, or China Netcom Group, China Unicom, China Railway Communication Co., Ltd., or China Railcom, and us. We face direct and indirect competition from our competitors in all of our businessesservices within our service regions.

During the implementation of our strategy to become an integrated information service provider, we will not only face competition in our traditional wireline service, but also in new services, including mobile telecommunications service. We also expect the level of competition to increase as further deregulation occurs within China’s telecommunications industry. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our BusinessesBusiness — We face increasing competition, which may adversely affect our business growth and results of operations.”operations” and “— Regulatory and Related Matters — Licensing” included elsewhere under this item.Item.

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Competition in Wireline Telephone Services

Local telephone services. Mobile service substitution for our wireline telephone services has been the principal competition to our local telephone services. Currently, China Mobile and China Unicom are the only licensed providers of mobile communications services in China. Comparedrecent years. Currently, compared with these mobile service providers, our wireline telephone services continue to offer better voice quality, higher communication consistency, reliability and lower cost, and our wireless local access services also offer mobility within limited local areas. Mobile service providers, however, have the advantages ofa competitive advantage by providing unrestricted mobility and roaming capability.

Until the mid-1990s, we were the sole licensed wireline local telephone services provider in our service regions. Our local telephone services currently compete with the wireline services offered by China Netcom Group and China Railcom, which have been licensed to provide local telephone services in our service regions. We compete with these operators primarily on the basis of brand name, network coverage, service quality and service offerings. In addition, we have a large customer base, which allows us to compete through economies of scale and to cross-sell our services to our existing customers.

Long distance telephone services. We compete with China Unicom, China Railcom and China Netcom Group with respect to long distance telephone services using public switched telephone networks in our service regions. Mobile telecommunications services have diverted some of the traffic from our long distance telephone services. We compete with these service providers on the basis of customer base, brand name, network resources, quality of service and marketing and distribution strength. Access to our long distance services does not require the dialing of any pre-set access number or password.

China Mobile, China Netcom Group, China Unicom, China Railcom and China Satellite provide VoIP services that compete with our public switched telephone network and VoIP long distance services in our service regions.services. We compete with these VoIP service providers on the basis of customer base, reliability, quality and coverage of networks and general service quality.

Competition in Internet Service

We compete with other service providers ofChina Netcom Group, China Mobile, China Unicom and China Railcom with respect to Internet access services on the basis of customer base, brand name, coverage of access networks and cooperation with the providers of Internet content and applications.

Competition in Managed Data Services

We compete with China Netcom Group, China Railcom and China Unicom for managed data services. We compete on the basis of end-to-end connectivity, network coverage, service quality and scale efficiency.

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Competition in Leased Line Services

We compete with China Netcom Group, China Unicom, and China Railcom in leased line services. We compete with them on the basis of the coverage and quality of networks, ability to provide end-to-end connectivity, quality of network management and customer services.

Competitive Implications of China’s Accession to WTO

Since China’s accession to the WTO, foreign operators have been permitted to gradually increase their investments in the telecommunications industry in China. Like domestic service providers, foreign operators are subject to the licensing requirements of the Ministry of Information Industry. In addition, investments by foreign operators may not exceed limits set forth in the relevant laws and regulations with respect to the amount of investment and percentage of total investmentownership interests that foreign operators are permitted to make in telecommunications

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enterprises in China. For example, the foreign ownership percentage in basic telecommunications services will be subject to a maximum limit of 49%. See “— Regulatory and Related Matters — Licensing” included elsewhere under this item.Item.

Foreign operators may have competitive advantages over us in terms of financial and management resources, network management and technical expertise. On the other hand, because foreign operators currently are prohibited from establishing wholly owned subsidiaries in the telecommunications industry in China, we believe that we are well positioned to establish strategic alliances with strong global operators in this respect. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our BusinessesBusiness — We face increasing competition, which may adversely affect our business growth and results of operations.”operations”.

Trademarks

We conduct our businessesbusiness under the “China Telecom” brand name and logo. Currently, China Telecom Group owns certain trademarks in China, some of which have been registered with the Trademark Office of the PRC State General Administration for Industry and Commerce, or the Trademark Office, and some of which are in the process of being registered with the Trademark Office. China Telecom Group has executed a trademark license agreement with us. Under this agreement, China Telecom Group agreed to grant to us and our subsidiaries the right to use these trademarks upon the completion of the registration on a royalty-free basis until December 31, 2006,2009, which is automatically renewable for three more years at our option. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Ongoing Related Party Transactions between us and China Telecom Group — Trademark License Agreements.”Agreements”.

Regulatory and Related Matters

Overview

The telecommunications industry in China is subject to extensive government regulation. A number of central government authorities have regulatory responsibilities for various aspects of the telecommunications industry. These authorities primarily include:

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