American Depositary Shares, representing 20 Ordinary Shares, par value HK$0.10 per share

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Indicate the number of outstanding shares of each of the issuer’s classes of capital

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer or large accelerated filer” in Rule 12b-2 of the Exchange Act (Circle one):

Indicate by check mark which financial statement item the registrant has selected to follow.

We publish our financial statements in Hong Kong dollars. In this annual report, references to “Hong Kong dollars” or “HK$” are to the currency of Hong Kong, and references to “U.S. dollars” or “US$” are to the currency of the United States. This annual report contains translations of Hong Kong dollar amounts into U.S. dollar amounts, solely for your convenience. Unless otherwise indicated, the translations have been made at US$1.00 = HK$~~7.7767,~~7.7968, which was the noon buying rate in The City of New York for cable transfers in Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New York on August 31, ~~2006.~~2007. On January 23, ~~2007~~2008 the noon buying rate was US$1.00=HK$~~7.7998.~~7.8075. You should not construe these translations as representations that the Hong Kong dollar amounts actually represent such U.S. dollar amounts or could have been or could be converted into U.S. dollars at the rates indicated or at any other rates.

This annual report contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. These include statements with respect to City Telecom (H.K.) Limited (“City Telecom” or the “Company”) and our plans, strategies and beliefs and other statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “intend”, “estimate”, “continue”, “plan”, “predict”, “project” or other similar words. The statements are based on management’s assumptions and beliefs in light of the information currently available to us.

These assumptions involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Potential risks and uncertainties include, without limitation:

changes in the regulatory environment in which we operate, or changes in the rules and policies that government regulators apply to our businesses;

increased competition in the local or international telecommunications, Internet access, local VOIP or pay-television (“pay-TV”) markets;

the benefits we expect to receive from our continuing capital expenditure on our Next Generation Network (refer to our Metro Ethernet ~~network;~~Network and our newly deployed Gigabit Passive Optical Network (“GPON”));

our ability to maintain growth and successfully introduce new products and services; and

the continued development and stability of the technological infrastructure we use to provide our telecommunications, Internet access, local VOIP and pay-TV using Internet Protocol, which we refer to as IP-TV, services.

When considering such forward-looking statements, you should keep in mind the factors described in Item 3 “Key Information—Risk Factors” and other cautionary statements appearing in Item 5 “Operating and Financial Review and Prospects” of this annual report. Such risk factors and statements describe circumstances that could cause actual results to differ materially from those contained in any forward-looking statement.

The following table presents the selected consolidated financial information and operating information of City Telecom as of and for the years ended August 31, ~~2002,~~ 2003, 2004, 2005, 2006 and ~~2006.~~2007. The selected financial information should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements included elsewhere in this annual report, the accompanying notes thereto and Item 5 “Operating and Financial Review and Prospects”.

As a measure of our operating performance or liquidity, we believe that the most directly comparable measure to EBITDA is net cash provided by operating activities. The following table reconciles our net cash provided by ~~(used in)~~ operating activities under ~~Hong Kong GAAP~~HKFRSs to our definition of EBITDA on a consolidated basis for each of fiscal ~~2002,~~ 2003, 2004, 2005, 2006 and ~~2006.~~2007.

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EBITDA for any period means, without duplication, net income/(loss) for such period, plus the following to the extent deducted in calculating such net income/(loss): interest expense, income taxes, depreciation and amortization expense (excluding any such non cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a

prepaid cash expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under ~~Hong Kong GAAP~~HKFRSs or U.S. GAAP. We believe that EBITDA is an additional measure utilized by investors in determining a borrower’s ability to meet debt service requirements. However, EBITDA does not represent, and should not be used as a substitute for, net earnings or cash flows from operations as determined in accordance with ~~Hong Kong GAAP~~HKFRSs or U.S. GAAP, and EBITDA is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. In addition, our definition of EBITDA may differ from that of other companies.

⁽⁽⁶⁾	Capital expenditures represent additions to fixed assets and include non-cash transactions.

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Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services.

⁽⁽⁸⁾⁷⁾

~~Capital expenditures represent additions to fixed assets and include non-cash transactions.~~

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The Hong Kong Institute of Certified Public Accountants, or HKICPA, has issued a number of new and revised Hong Kong Financial Reporting Standards, or HKFRSs, that became effective or have been available for early adoption for accounting periods beginning on or after January 1, 2005. Information on the changes in accounting policies resulting from initial application of these new and revised HKFRSs is provided in note 3 to our consolidated financial statements. Figures for fiscal 2004 and fiscal 2005 have been adjusted for these new and revised HKFRSs that were adopted on September 1, 2005 in accordance with the transitional provisions and as disclosed in note 3(a) to our consolidated financial statements. Earlier years have only been restated to the extent that the new accounting policies are adopted retrospectively as disclosed in note 3(a) to our consolidated financial statements.

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As described more fully in note 3(e) to our consolidated financial statements, the amount reported for cash flows generated from operating and investing activities for the year ended August 31, 2005 have been revised. The impact of the revision was an increase in the amount reported for cash flows generated from operating activities of HK$92.9 million and a decrease in the amount reported for cash flows from investing activities of HK$92.9 million.

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Due to additional evidence and information received with respect to the collectibility of the mobile interconnection charges prior to the filing of ~~the Company’s~~our annual report on Form 20-F for fiscal 2005 ~~which~~on January 30, 2006, we were required us to reassess the conditions on which the estimates on bad debt provision for mobile interconnection charges receivables were ~~based,~~based. As a result, our Hong Kong statutory financial statements for the year ended August 31, ~~August~~ 2005 differ from the amounts reported in the consolidated financial statements reported in ~~2005~~our annual report on Form ~~20-F.~~20-F for fiscal 2005. The effect of the reassessment was reflected in our consolidated financial statements as of and for the year ended August 31, 2005 included in our annual report on Form 20-F ~~filed on January 30, 2006, whereas the effect of such reassessment was reflected~~for fiscal 2005 and in our Hong Kong statutory financial statements as of and for the year ended August 31, 2006.

Our reassessment had the following effects on our consolidated statement of operations for the years ended August 31, 2005 and 2006:

The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since 1983, the Hong Kong dollar has been officially linked to the U.S. dollar and the current rate is US$1.00 to HK$7.80. However, even with this official exchange rate, and despite the efforts of the Hong Kong Monetary Authority’s (“HKMA”) currency board to keep such rate stable, the market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be influenced by the forces of supply and demand in the foreign exchange markets. Furthermore, the official exchange rate is itself subject to fluctuations and can be reset in circumstances where the secondary foreign exchange markets move beyond the HKMA’s ability to back the official rate with foreign reserves.

Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the U.S. dollar and the Hong Kong dollar.

The following table sets forth the average, high, low and period-end noon buying rate between the Hong Kong dollar and the U.S. dollar (in Hong Kong dollars per U.S. dollar) for the periods indicated:

You should carefully consider the risks described below and other information contained in this annual report before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. If they do, our business, financial condition or results of operations could be materially adversely affected.

We cannot assure you that we will be able to ~~prevent~~maintain an increase in total revenues and operating results ~~from continuing to decline.~~

In fiscal ~~2006 ,~~2007, our total revenues ~~decreased~~increased to HK$1,141.3 million from HK$1,134.9 million ~~from HK$1,162.1 million~~ in fiscal ~~2005,~~2006, and we ~~experienced~~recorded a net profit of HK$28.9 million versus a net loss of HK$142.1 million ~~versus net loss of HK$163.5 million~~ in fiscal ~~2005.~~2006. The ~~loss~~profit in fiscal ~~2006~~2007 was mainly due to ~~a decline~~our focus on increasing the average revenue per user from our fixed telecommunications network business and also from enhancing operating efficiency over the last 18 months. Moreover, the shift in ~~contributions~~the revenue composition from our international telecommunications services ~~and continued losses from~~to our fixed telecommunications network ~~business. We~~business also represents a transition to a higher margin business model. However, we cannot assure you that we will be able to ~~turn around this loss~~maintain the profits and business ~~decline.~~growth.

~~Our~~Revenues from our international telecommunications ~~revenues declined~~business decreased by ~~21.5%~~22.4% primarily due to a decrease in the total number of minutes ~~carried~~ by ~~16.8%.~~16.4% and the intentional drop out of low profit margin subscribers. With the drop in average tariff rates and a reduced operating scale, we expect ~~that the~~ profit margins infrom our international telecommunications services will continue to be under pressure and ~~lower~~less revenue will be generated in future.

~~Our~~Revenues from our fixed telecommunications network ~~services revenues~~business increased by ~~13.8%~~14.0% in fiscal ~~2006~~2007, primarily due to an increase in our average revenue per user ~~the effects of which was partially offset by a decrease~~and an increase in our subscription base of ~~2.2%~~10.7%. ~~The decrease in our subscription base~~This increase was ~~due to assertive promotions~~mainly driven by ~~our competitors, especially~~ the ~~incumbent carrier. We, however, incurred operating losses of approximately HK$106.7 million in fiscal 2006 from such service operations. We expect~~growing demand for high bandwidth broadband Internet access service. However, we cannot assure you that our fixed telecommunications network service business will continue to ~~incur operating losses~~be profitable as we ~~expend~~will continue to expand substantial resources onin developing and marketing broadband Internet access, local VOIP, IP-TV and corporate data services. ~~We cannot assure you that we will achieve and sustain profitability in our fixed telecommunications network operations.~~

We have substantially less financial and human resources to apply to the development of our business than some of our main competitors.

The telecommunications and pay-TV markets in Hong Kong are highly competitive. Some of our main competitors for Internet access, local telephony, pay-TV and international telecommunications services have longer operating histories and others are subsidiaries of large business conglomerates. Consequently, our competitors may have resource advantages over us including as follows:

greater financial, technical, marketing and other resources;

greater existing infrastructure;

~~greater existing infrastructure;~~

greater name recognition; and

larger customer bases.

In addition, certain areas of the fixed telecommunications network services business are very capital intensive. Our competitors may be able to devote more human and financial resources to research and development, network improvement and marketing than we can.

Our growth and profitability could be affected by an increasing number of local and foreign entrants in the international and local telecommunications, ~~and~~ Internet access and television broadcasting markets.

The Hong Kong government continues to liberalize access into the telecommunications industry in Hong Kong, including issuing new wireless and wire-line fixed telecommunications network services licenses, which we refer to as FTNS Licenses. We expect the Hong Kong government to continue to open the telecommunications market in the next several years. Some of these changes may impact our ~~company.~~ Company:

As of ~~December~~January 4, ~~2006, 247~~2008, 253 public non-exclusive telecommunications service licenses, which we refer to as PNETS Licenses, for the provision of external telecommunications services had been issued in Hong Kong. Some of these licenses are held by subsidiaries of major foreign telecommunications providers, which have competitive advantage due to their global presence and size.

On December 31, 2007, TVB and ATV launched digital terrestrial television, which will expand the public’s access to free channels in both standard and high definition. This improvement in the quality of free television may result in a reduction in the number of subscribers for pay-television services. If the number of subscribers to our pay-television service declines, it could adversely affect our results of operations.

Increasing liberalization of the telecommunications market in Hong Kong may continue to attract new local and foreign entrants to the market, which may broaden the variety of telecommunications services supplied by existing service providers, thereby heightening the overall level of competition in our industry. Increased competition could result in price reductions, reduced gross margins or loss of market share, any of which could adversely affect our future growth and profitability.

The development of our ~~Metro Ethernet network~~Next Generation Network requires significant capital expenditures. These capital expenditures may vary materially from those currently planned and may impose a burden on our financing and operating activities.

Our business is capital intensive, and our capital expenditures may not have the positive effect on our business and revenues that we expect. We have made, and will continue to make, capital investments in the expansion and upgrade of our ~~Metro Ethernet network~~self-owned Next Generation Network, and the development of our telecommunications services. We incurred total capital expenditures of approximately HK$~~322.9~~132.3 million in fiscal ~~2006.~~2007. For the three fiscal ~~2007,~~years ending August 31, 2010, we expect to incur a total capital ~~expenditures~~expenditure of approximately HK$~~125 million to HK$150~~850 million, the large majority of which will be spent on the continued expansion and upgrade of our ~~Metro Ethernet~~ network.

While we intend to fund such expenditures by using our currently available cash as well as cash flow from operations, ~~and the net proceeds from our January 2005 offering of 8.75% senior notes due 2015, which we refer to in this annual report as the 8.75% notes or 10-year senior notes,~~ we may not have adequate capital to fund our projected capital expenditures. Future, additional debt or equity financing may not be available, and debt financing, if available, may involve restrictions on our investing, financing and operating activities.

We may not realize the commercial benefits we expect from our investments, which may adversely impact our business.

We have made significant investments in our network infrastructure to provide the services we offer. The launch of new and commercially viable products and services is important to compete in our business. Commercial acceptance by consumers of the new services we offer may not occur at the rate or level expected, and we may not be able to successfully adapt the new services effectively and economically to meet consumers’ demand, which could limit the return from our investments. Specifically, we cannot assure you that services enabled by upgrading and expanding our ~~Metro Ethernet network~~Next Generation Network will be accepted by the public to the extent required to generate an acceptable rate of return. Furthermore, we cannot assure you that our estimate of the necessary capital expenditure to offer such services will not be exceeded. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or a reduction in profitability to the extent that we are required under the applicable accounting standards to recognize a charge for the impairment of assets. Any such charge could materially and adversely affect our financial condition and the results of our operations.

~~As most of the services~~Although we ~~provide through~~have expressed our ~~Metro Ethernet network are still at an early stage of implementation, evaluation of our business and our prospects is difficult.~~

Due to the short operating history of most of our fixed telecommunications network services, especially our IP-TV services, our historical financial data may not provide a meaningful basis for you to evaluate us and our prospects. These services are still at an early stage of implementation, and the revenue, potential income and cash flows from these new businesses are unproven. Accordingly, evaluation of our businesses and our prospects is difficult, andinterest in Singapore’s Next Generation National Broadband Network project, we cannot ~~give~~assure you ~~any assurance~~ that we will ~~continue~~be capable of participating in the project and, if we will, that this project will be successful.

We are exploring the possibility of bidding for Singapore’s Next Generation National Broadband Network project. See “Business Overview—Developments in Fiscal Year 2007”. To participate in this project, we may be required to ~~succeed~~structure the transactions to comply with certain restrictive covenants under the 8.75% notes that we issued in ~~these businesses.~~

If we elect to submit a bid for the project, we cannot assure you that our bid will be accepted or, if accepted, that the awarded contract will generate sufficient revenues to result in profitability. Because the Infocomm Development Authority of Singapore (“IDA”) requires a bid on this project in advance of the completion of the relevant design, we are subject to the risks of unforeseen software development or other technological difficulties and/or cost overruns.

We are in the process of instituting changes to our internal controls and management systems in order to satisfy the requirements of Section 404 of the Sarbanes Oxley Act of 2002. Our failure to timely and successfully institute these changes and to maintain the adequacy of our internal controls could subject us to regulatory actions and may adversely affect our stock price and our ability to raise additional capital.

The United States Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on ~~management’s assessment of~~ the effectiveness of the company’s internal controls over financial reporting. As a non-accelerated filer, we are required to file management’s first report on internal controls over financial reporting for the fiscal year ending August 31, 2008 and our first auditor’s attestation report on ~~management’s assessment~~the effectiveness of our internal controls over financial reporting for the fiscal year ending August 31, 2009.

We are in the process of instituting changes to our internal controls and management systems to comply with the requirements. Among others, we are designing procedures to document various controls and relevant testing procedures under requirements stipulated by the Public Company Accounting Oversight Board in the United States. We have assigned an internal audit manager to oversee this compliance process, who reports to ~~both~~ our ~~audit committee~~Audit Committee, Chairman and other senior management on a periodic basis. In addition, we ~~had~~ hired external consultants to perform a high-level internal control gap ~~analysis.~~analysis and we would hire external consultants for advisory services whenever necessary.

Notwithstanding our efforts, our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may ~~still decline to attest to~~conclude that our ~~management’s assessment or may issue a report that is qualified if it~~internal control over financial reporting is not ~~satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.~~effective.

If we do not successfully design and implement changes to our internal controls and management systems, or if we fail to maintain the adequacy of these controls as such standards are modified or amended from time to time, we may not be able to comply with Section 404 of the Sarbanes Oxley Act of 2002. This could subject us to regulatory scrutiny and penalties that may result in a loss of public confidence in our management, which could, among other things, adversely affect our customer and vendor confidence, stock price, our ability to raise additional capital and operate our business as projected.

Our growth and expansion may impact our ability to manage our operations, increase our costs of operation and adversely affect the quality of our services.

We have pursued and continue to pursue a strategy of aggressive growth in our fixed telecommunications network services business. As part of this strategy, we continue to expand and invest in the ~~Metro Ethernet network~~Next Generation Network infrastructure we use to deliver broadband Internet access, local VOIP, IP-TV and corporate data services. The deployment of these projects has resulted and will result in significant demands on our systems and controls and may impact our administrative, operational and financial resources. Our ability to manage our future growth will depend upon our ability to:

simultaneously manage implementation of our infrastructure development and marketing plans;

effectively monitor our operations so as to contain costs and maintain effective quality controls; and

continue to offer competitive prices to customers for our services.

Our failure to achieve any of the above in an efficient manner and at a pace consistent with the growth of our fixed telecommunications network services business could have an adverse effect on the quality of our services and increase our costs of operation.

We depend on certain key personnel, and our business and growth prospects may be disrupted by the loss of their services.

Our future success is dependent upon the continued service of our key executives and employees. We rely extensively on the services of our executive officers, including Wong Wai Kay, Ricky, our Chairman, and Cheung Chi Kin, Paul, our Chief ~~Financial~~Executive Officer. While we have employment agreements with members of our senior management staff, we cannot assure you that we will be able to retain these executives and employees. If one or more of our key personnel were unable or unwilling to continue in their present positions, or if they joined a competitor or formed a competing company, or if they shifted their focus away from Hong Kong operations, we may not be able to replace them easily, our business may be significantly disrupted and our financial condition and results of operations may be materially and adversely affected. Furthermore, as our industry is characterized by high demand and increased competition for talent, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure you that we will be able to attract and retain the key personnel that we will need to achieve our business objectives.

Expansion of our ~~Metro Ethernet network~~Next Generation Network into certain buildings and residences may be limited by physical limitations or our ability to obtain access permits.

Expanding our ~~Metro Ethernet network~~Next Generation Network coverage requires us to install fiber-to-the-home, or fiber-to-the-building, as well as install Category 5e copper wiring within residential and commercial buildings to reach the subscriber’s premises, which we refer to as in-building-wiring. One of our competitors has already installed in-building-wiring in virtually all buildings, and we along with other fixed telecommunications network service providers may encounter a bottleneck when installing our own in-building-wiring because many buildings have limited physical space for additional in-building wiring. In addition, owners of certain single-owner commercial buildings may grant rights of access to our competitors while barring us from installing our own in-building-wiring. Furthermore, certain developers may have affiliations with our competitors and may attempt to delay our wiring installations. These constraints may hinder the expansion of our ~~Metro Ethernet network~~Next Generation Network from current ~~1.3~~1.4 million home ~~pass~~passes coverage to our ~~long term~~three-year target of ~~1.8~~2.0 million home passes. Failure to ~~grow~~expand our network coverage will limit our growth opportunities and reduce our ability to benefit from economics of scale.

Internet security concerns could limit our ability to develop revenues from Internet access services.

We intend to continue developing our broadband Internet access, local VOIP, IP-TV and corporate data services. Computer viruses, break-ins and other inappropriate or unauthorized uses of our ~~Metro Ethernet network~~Next Generation Network could affect the provision of our full suite of Internet Protocol, or IP, services. Computer viruses, break-ins or other problems could have the following effects on our fixed telecommunications network services business:

result in interruption, delays or cessation in services to our customers;

jeopardize the security of confidential information stored in the computer system of our customers; and

allow for illegal viewing or download of our content.

We may incur significant costs to protect us against the threat of security breaches or to alleviate problems caused by such breaches. In addition, alleviating these problems may cause interruptions, delays or cessation in service to our users, which could cause them to stop using our service or assert claims against us. While we continue to strengthen our network security, there is no ~~assurances~~assurance that computer viruses and other harmful attacks could not affect our business.

We will be limited in our ability to continue to expand our internet access business unless we obtain additional network capacity.

Our internet access network has limited capacity. Our ability to continue to increase internet service depends on our ability to expand the network bandwidth on a timely basis, which in turn is subject to:

~~the expansion and development of our own international telecommunications facilities;~~

the availability of leased capacity from third party carriers at favorable rates; and

the possible termination or cancellation of our existing contracts.

If we fail to increase the capacity of our international bandwidth, our ability to increase our internet access business market share and revenues will be limited.

We are vulnerable to natural disasters, and other disruptive regional events, which could cause damage to our network and result in lost revenue and perhaps lost customers.

Our network is vulnerable to damage or cessation of operations from fire, earthquakes, severe storms, power loss, telecommunications failures, network software flaws, vandalism, transmission cable cuts and other catastrophic events. We may

experience failures or shutdowns relating to individual points of presence or even catastrophic failure of our entire network. Hong Kong’s weather patterns often result in heavy rainfall during certain periods of the year. Any sustained failure of our network, our servers, or any link in the delivery chain, whether from operational disruption, natural disaster or otherwise, resulting in an interruption in our operations, could have a material adverse effect on our business, financial condition and results of operations.

The earthquake in Taiwan on December 26, 2006 interrupted international capacity access to the carriers in Hong Kong. By redirecting our tariff under our contingency plan, we were able to minimize the impact of such interruption to our business by restoring basic international services within two days of the disaster. We, however, cannot assure that our contingency plan will be sufficient to overcome natural disasters and other disruptive regional events in the future.

The loss of key suppliers or their failure to deliver equipment on a timely basis could negatively impact our business prospects.

We rely on our key suppliers Cisco Systems Inc., Nortel Networks Limited and other suppliers to provide equipment, underground cables and other necessary components in building our ~~Metro Ethernet network~~Next Generation Network infrastructure, and for our VOIP equipment. In order for new subscribers to access our IP-TV services, we must install an IP set-top-box in their homes. We must have an adequate supply of such installation equipment on hand to respond to new customer subscriptions in a timely manner. We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to acquire new subscribers or effectively appropriate our costs on to our customers. In addition, if Cisco Systems, Inc. or Nortel is unable or is delayed in providing us with the hardware required for building our fiber-based backbone infrastructure or VOIP equipment, this could negatively impact our operating results.

Our reliance on third parties to provide maintenance and repairs for our ~~Metro Ethernet network~~Next Generation Network could adversely affect our operating results if their services are not timely or do not meet our standards.

We depend on Cisco Systems, Inc. and other third parties for ongoing support and assistance with respect to maintenance and repairs. We are also dependent on certain Hong Kong rail transport providers to maintain and provide us with access to their infrastructure to support the proper functioning of our equipment and fiber-based backbone. If these third parties fail to provide us the equipment we require, or fail to respond or are untimely in their response to our maintenance and repair needs, our customers may experience interruptions or variations in the quality of our fixed telecommunications network services, which may adversely affect our operating results and our ability to retain or add new customers.

If we are unable to stay ahead of technology trends and evolving industry standards, our services may become obsolete.

Telecommunications businesses are characterized by rapidly changing technology and industry standards, evolving subscriber needs and the introduction of new services. The continuously changing nature of these services, and their increasingly shorter life cycles require us to continually improve our performance, services and network in order to compete successfully with the services offered by our competitors. Further, new technology or trends in the telecommunications industry could have an adverse effect on the services we currently offer. For example, the replacement of traditional fixed line home telephones with mobile telephones and/or VOIP services may lead to a decline in our international telecommunications services revenues. Further, technology substitution from global VOIP providers, some of which offer free PC-to-PC based international calls, is also becoming more prevalent. Changing our services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete. In addition, our new products and services may contain design flaws or other defects that could have a material adverse effect on our business, operating results or financial condition. To respond successfully to technological advances and emerging industry standards, we may require substantial capital expenditure and access to related or enabling technologies in order to integrate the new technology with our existing technology. We may not be successful in modifying our network infrastructure in a timely and cost-effective manner in response to these changes, which will affect our ability to continue to offer the products and services demanded by our customers.

Regulatory reforms and currently contemplated regulatory initiatives in the telecommunications industry may adversely affect us.

The Hong Kong telecommunications industry is undergoing continuous regulatory reform. Our business and results of operations may be adversely affected by changes in the telecommunications regulations, especially in the following areas:

In July 2004, a new provision of the Telecommunications Ordinance came into force. This anti-competition provision specifically regulates the conduct of all carrier licensees (in particular merger and acquisition ~~activities~~transactions) in the Hong Kong telecommunications industry by giving the Telecommunications Authority the power to review ~~mergers~~the conduct and ~~acquisitions~~transactions concerning carrier licensees and to take appropriate actions ~~when~~if it determines that the transaction would, or is likely to, prevent or substantially lessen competition in a telecommunications ~~market without any outweighing public benefits.~~market. The Telecommunications Authority ~~also~~ has the ~~right~~power under this provision to ~~impose~~conduct an investigation into any questionable transaction. It might consent to the transaction (unconditionally or subject to any conditions ~~upon~~it deems appropriate) or ~~oppose or unwind mergers~~reject the transaction outright. The decision of the Telecommunications Authority will take account of whether the transaction will adversely affect the public interest and ~~acquisitions.~~benefit. This ~~regulation~~provision may have an adverse effect on our ability to grow our business through mergers and acquisitions.

We offer local VOIP services through our ~~Metro Ethernet network.~~Next Generation Network. Following the conclusion of a public consultation on the regulation of Internet Protocol Telephony Services, the Telecommunications Authority issued a statement on June 20, 2005, setting out its views and decisions on the regulatory and licensing framework for the provision of VOIP services including the creation of a licensing framework, conformance to the existing system of assigning telephone numbers, imposition of interconnection charges and establishing guidelines with respect to the quality of services. ~~The proposed regulatory framework, if adopted, will subject us to further regulations that may affect our operations and increase our compliance costs.~~

We offer fixed telecommunications network services. The Telecommunications Authority is currently in the process of developing a new Fixed-Mobile Convergence, or FMC, licensing practice which may supersede the existing distinctions between fixed-line and mobile operator licensing. This effectively means that the existing four classes of carrier licenses are proposed to be replaced by a single Unified Carrier License, or UCL. This regulatory change, together with the development of new technologies, may further accelerate the convergence of fixed and mobile telecommunications services, resulting in more structural competition between fixed-line and mobile telecommunications operators. As we do not have a wireless license, our ability to compete ~~maybe~~may be hindered by our inability to offer such services independently.

We provide our IP-TV services over our ~~Metro Ethernet network~~Next Generation Network under HKBN’s FTNS License. The Hong Kong government has indicated that because our IP-TV services are carried over the Internet, we are exempt under the Broadcasting Ordinance from the requirement to obtain a domestic pay-television program service license. However, the government’s Communications and Technology Branch has informed us that the government is considering a review of the broadcasting regulatory regime and may introduce changes to the existing regulatory framework, including the existing exemption in the Broadcasting Ordinance. However, we cannot predict whether the government may require us to obtain a pay-television program service license in the future.

We require licenses from the Telecommunications Authority to provide our services. If one of these licenses is revoked or not renewed, we would be unable to deliver the services authorized by that license.

We require licenses from the Telecommunications Authority to provide our international telecommunications and fixed telecommunications network services. Our PNETS License is subject to the Telecommunications Authority’s annual renewal and HKBN’s FTNS License awarded in 2000 is initially granted for a term of 15 years, which may be renewed for such further period not exceeding 15 years at the discretion of the Telecommunications Authority. The Telecommunications Authority’s failure to renew or its revocation of any of these licenses for any reason would prohibit us from continuing to offer the services authorized by that license, which would have a significant adverse impact on our revenues and profitability. In addition, future changes in Hong Kong’s telecommunications regulations or policies that would require us to obtain additional licenses could have an adverse impact on our operations.

In China, the Ministry of Information Industry, or the MII, and the State Development Planning Commission jointly set tariffs for all domestic and international long distance services in China using public switched telephone networks, leased lines and data services. Certain tariffs payable by us to our carrier partners are based, among other things, on the tariffs set by these agencies with respect to the calls our subscribers make to persons in China. In fiscal ~~2006,~~2007, approximately 75% of our international call traffic volume was to China. We cannot predict the timing, likelihood or magnitude of any tariff adjustments that may be imposed by the

MII and the State Development Planning Commission nor can we predict the extent or potential impact upon our business of any future tariff increases. Such increases may lead to a decrease in traffic, reduce our revenues and adversely affect our business and results of operations. In addition, if we are unable to effectively manage the increased network costs, it would have an adverse effect on our profit margins for international telecommunications services.

We have approximately ~~50%~~47% of our staff located in Guangzhou, China and changes in Chinese labor or business laws may significantly affect our operations and our ability to service our Hong Kong based customers.

Our call center in Guangzhou employs over 1,200 persons and is an important resource for us. We are therefore subject, to a significant degree, to the laws and regulations that govern foreign companies with operations in China. As ~~The~~the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may lead to restrictions on our ability to hire and retain our employees in China which could impact our ability to provide service to our Hong Kong based customers.

Currency fluctuations of the Hong Kong dollar, our ~~primary operating~~functional currency, may increase our operating costs and long term liability.

A major portion of our operating costs is interconnection charges paid to overseas carriers for the delivery of our international calls. Substantially all of these interconnection charges are denominated in U.S. dollars or other currencies other than Hong Kong dollars. In addition, the equipment and hardware we purchase for the expansion of our ~~Metro Ethernet network~~Next Generation Network constitutes a large portion of our capital expenditure and is also denominated in U.S. dollars. Finally, payment of interest, principal and any other amounts due under the 8.75% notes issued in January 2005 are made in U.S. dollars. However, our revenues are predominantly denominated in Hong Kong dollars. Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$7.80 per US$1.00. We cannot assure you the link will be maintained.

In addition, the expenses that we incur in relation to our call center located in Guangzhou, China are denominated exclusively in Renminbi, the official currency of the People’s Republic of China. These include the salaries that we pay to our personnel as well as various operating expenses that we incur to maintain our operations. As a result, we are exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollar and the Renminbi. The Renminbi is presently pegged to a basket of currencies, and there remains significant international pressure on the PRC government to further liberalize its currency policy. This could result in a further and more significant appreciation in the value of the Renminbi against the Hong Kong dollar, which would increase the cost of operating our call center.

Any depreciation of the Hong Kong dollar against the U.S. dollar, Renminbi or other currencies, would increase our operating costs, including our debt servicing costs, make our capital expenditure plans more expensive, and adversely affect our profitability.

We ~~incurred a net~~cannot assure you that we will be able to generate sufficient cash ~~outflow before financing activities in each of fiscal years 2005 and 2006.~~from operations to fund our operations.

Our ability to fund operating and capital expenditures and to service debt will depend significantly on our ability to generate cash from operations. In fiscal ~~2005 and 2006,~~2007, we ~~incurred net~~were able to generate cash ~~outflow before financing activities~~from operations of HK$~~480.1 million and HK$308.6 million, respectively. We~~384.0 million. However, we cannot assure you that we will ~~need~~be able to ~~turn around~~sustain our operations in order to generate sufficient cash flows to meet our future debt service requirements. ~~However, we cannot assure you that we will be able to do so.~~

Our ability to generate cash from operations is subject to general economic, financial, industry, legal and other factors and conditions, many of which are outside our control. In particular, our operations are subject to price and demand volatility in the telecommunications industry. If we cannot finance our operations and capital expenditure using cash generated from operations, we may be required to (among other things) incur additional debt, reduce capital expenditures, sell assets, or raise equity. We may not be successful in taking these actions. In particular, Standard & Poor’s and Moody’s Investors Services downgraded our credit rating during 2005, from ‘BB-’ to ‘B’ and from ‘Ba3’to B2’, respectively. These downgrades may limit our ability to obtain future financing or make such financing more costly. Further, our ability to take many of these steps may be subject to approval by future creditors in addition to holders of the 8.75% notes issued in January 2005.

The 8.75% notes that we issued in January 2005 contain covenants that limit our financial and operating flexibility.

Covenants under the 8.75% notes that we issued in January 2005 restrict our ability to, among other things:

pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;

incur additional indebtedness or issue certain equity interests;

merge, consolidate or sell all or substantially all of our assets;

issue or sell capital stock of some of our subsidiaries;

sell or exchange assets or enter into new businesses;

create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;

create liens on assets;

enter into sale and lease back transactions; and

enter into certain transactions with affiliates or related persons.

All of these limitations are subject to exceptions and qualifications specified in the indenture governing the 8.75% notes. These restrictive covenants could limit our ability to pursue our growth plan, restrict our flexibility in planning for, or reacting to, changes in our business and industry and increase our vulnerability to general adverse economic and industry conditions.

The legal and commercial name of the Company is City Telecom (H.K.) ~~Ltd.~~Limited.

The Company was incorporated in Hong Kong.

The Company was incorporated on May 19, 1992 under the Companies Ordinance (Chapter 32 of the laws of Hong Kong) (the “Companies Ordinance”). Our registered office is located at Level 39, Tower 1, Metroplaza, No. 223 Hing Fong Road, Kwai Chung, New Territories, Hong Kong, telephone (852) 3145-6888. Our agent for U.S. federal securities laws purposes is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.

Important events in the development of our business are as follows:

We began offering international telecommunications services in September 1992. From that date, we focused on increasing our subscription base and amount of international traffic, and on building the CTI brand name as a low cost provider of international telecommunications services. In January 1999, we became the first Hong Kong company to obtain a public non-exclusive telecommunications services license, which we refer to in this annual report as a PNETS License, covering the provision of international telecommunications services using international simple resale, which had a significant positive impact on our international telecommunications revenues. We incorporated ~~HKBN~~Hong Kong Broadband Network Limited (“HKBN”) in Hong Kong in August 1999 and launched our broadband Internet access services in March 2000. In addition, we began providing local VOIP services in April 2002, IP-TV services in August 2003, and corporate data services in July 2004 using our ~~Metro Ethernet network.~~Next Generation Network.

We believe that one of the cornerstones of our success has been our ability to quickly expand our service offerings when changes in regulation or technology have provided us with an opportunity to do so. Some of the key events in our history and development include:

In January 2008, HKBN launched “Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top Box” to all customers in Hong Kong.

In September 2007, HKBN launched “Fiber-To-The-Home” residential broadband service, “FiberHome100”, “FiberHome200” and “FiberHome1000”. As the same time, we upgraded our entry level service broadband Internet access from 10 Mbps to 25 Mbps.

In July 2007, HKBN was awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence Awards

In June 2007, CTI Group was awarded “Best Retention Strategies” at the Hong Kong HR Awards 2007

In February 2007, HKBN launched bb50 and bb200 symmetric residential broadband service supported by “SDU” personalized customer care service.

In October 2006, Liu Xiang “Be Ahead of Yourself” marketing campaign won the “Certificate of Excellence” of HKMA/TVB Awards for Marketing Excellence 2006.

In July 2006, HKBN was conferred “Call Center of the Year” & “Customer Service Center of the Year” awards at the Customer Relationship Excellence Awards 2005.

In March 2006, HKBN launched our “bb25” Internet access service with symmetric 25 Mbps access for the residential mass market. This supplemented our existing bb10, bb100 and bb1000 service offerings.

In November 2005, we announced cooperation with China Telecom Hong Kong Limited to provide Pan-China Internet Protocol Virtual Private Network services to corporate customers.

In October 2005, HKBN became the first service provider in the world to achieve the Cisco Powered Network Metro Ethernet QoS Certified status.

In October 2005, HKBN launched our “2b” Broadband Phone Service, providing VOIP services to local and overseas users via a software-based broadband phone.

In September 2005, HKBN was conferred as the winner of the Global Entrepolis@Singapore Award 2005, which was presented by the Asian Wall Street Journal in association the Economic Development Board of Singapore. This award recognizes innovation in the application of technology to a strong business model with commercial potential to be an industry or market leader.

B. Business Overview

Principal Activities

We are a provider of residential and corporate fixed telecommunications network and international telecommunications services in Hong Kong. Using our self-owned ~~Metro Ethernet network,~~Next Generation Network, we deliver fixed telecommunications network services to the residential mass market and small-to-medium corporate and enterprise market segments, at competitive prices while simultaneously offering a larger bandwidth over comparable offerings by our competitors. Our integrated suite of services includes the following:

high-speed broadband Internet access services that provide our customers with symmetric upstream and downstream access speeds with options for 1025 Mbps, 2550 Mbps, 100 Mbps, 200 Mbps and 1,000 Mbps;

fixed line local telephony through our voice-over-Internet-Protocol technology;

pay television, where we deliver more than 7983 channels including self-produced news, children’s programming, international drama and movies and local interest programming using our IP platform; and

corporate data services, which includes provision of dedicated bandwidth to corporate customers.

As of August 31, ~~2006,~~2007, we had a total of approximately ~~617,000~~683,000 fixed telecommunications network services subscriptions, consisting of ~~220,000~~247,000 broadband Internet access, ~~281,000~~308,000 local VOIP and ~~116,000~~128,000 IP-TV services subscriptions.

In addition to providing fixed telecommunications network services, we also offer international telecommunications services in Hong Kong and Canada. We offer a variety of international telecommunications services and products including direct dial services, international calling cards and mobile call forwarding services. Our total international telecommunications services customer database comprises approximately ~~2.2~~2.3 million registered accounts. Our international telecommunications business contributed ~~36.9%~~28.4% to our total revenues in fiscal ~~2006~~2007 as compared to ~~45.8%~~36.9% in fiscal ~~2005.~~2006.

Recent Developments

On February 9, 2007, we signed a Memorandum of Understanding with MobileOne Limited to work together to participate in Singapore’s Next Generation National Broadband Network project (“NGN”). The Project relates to the provision of ultra-high speed national connectivity in Singapore at competitive prices by 2015.

Since then we have submitted our indication of interest in response to an invitation by the IDA to participate in the Pre-Qualification Exercise and Competitve Dialogue for the NGN project.

On December 11, 2007, the IDA released the terms of Request-For-Proposal (“RFP”) for the Network Company. Under this RFP, a company will be selected to design, build and operate the passive infrastructure layer of the project. The deployment of active electronics will be done by an operating company which will also be the entity that offers wholesale broadband access to downstream retail service providers.

Under the terms of the RFP, the Singapore Government is prepared to provide a grant of up to Singapore dollar 750 million for the project and will evaluate proposals based on four key criteria:

Attractiveness of business plan to industry

Quality of network infrastructure

Level of Government grant

Financial proposition and strength of bidder

It is expect that the IDA will award the winning bid in the third quarter of 2008.

We are now exploring the viability of this project and are in the process of assessing if we will submit the bid. For uncertainties relating to our participation in this project, see “Risks Relating to Our Business and Operations – “Although we have expressed our interest in Singapore’s Next Generation National Broadband Network project, we cannot assure you that we will be capable of participating in the project, and, if we will, that the project will be successful.””

Revenues

A significant majority of our revenues are derived from business conducted in Hong Kong. A breakdown of revenues by category of activity is as follows:


	Year ended August 31,			Year ended August 31,
Revenue	2004	2005	2006	2005	2006	2007
	HK$	HK$	HK$	HK$	HK$	HK$
	(Amounts in thousands)			(Amounts in thousands)
Fixed telecommunications network services⁽¹⁾	541,902	629,464	716,600	629,464	716,600	816,800
International telecommunications services	627,978	532,595	418,276	532,595	418,276	324,470

Total operating revenue	1,169,880	1,162,059	1,134,876	1,162,059	1,134,876	1,141,270

⁽¹⁾	Includes Internet access, local telephony services, ~~and~~ pay-TV services ~~since August 2003.~~and corporate data services.

We will continue our business strategy to grow market share, increase our network coverage and introduce new services through our IP platform. We believe that our success will continue to depend on our ability to capitalize on our focus on the residential mass and small to medium corporate and enterprise market segments, our leading-edge ~~Metro Ethernet~~Next Generation Network, and our first mover advantage in an industry with high barriers to entry.

Seasonality

Our operations are not generally subject to significant seasonal fluctuations. Our international telecommunications business typically experience a slight decrease in revenue during the second fiscal quarter of each year (December through February) in connection with the Christmas holiday and Chinese New Year holiday. We do not believe that seasonality has had a material effect on our business, financial condition or results of operations.

Network infrastructure

Our self-owned network is one of the world’s largest ~~Metro Ethernet networks~~Next Generation Networks and is cited as a global reference case by our two primary vendors, Cisco Systems, Inc. and Nortel Networks Limited. Our ~~Metro Ethernet network~~Next Generation Network conforms to the industry standards for 10/100/1000 Mbps Internet access speeds, and covers ~~1.3~~1.4 million home passes, which represents coverage of approximately 60% of Hong Kong’s population. The coverage of our network is concentrated in Hong Kong’s most densely populated areas.

In most other markets, Metro Ethernet technology is primarily used in commercial buildings in metropolitan areas, as the technology is most cost effective in dense user populations where a provider can service a large number of users in a single building or cluster of buildings. We have deployed Metro Ethernet technology in densely populated residential areas in Hong Kong, where most of our customers live in high-rise apartment buildings with multiple apartments on each floor. Our strategy is to sell multiple fixed telecommunications network services using our ~~Metro Ethernet network.~~Next Generation Network. All of our fixed telecommunications network services are offered through our single IP platform, unlike our competitors who use multiple platforms to provide comparable services. In addition, unlike most other new entrants, we operate an “end-to-end” network that extends from our IP network hub sites and our switching centers in Hong Kong to our subscribers’ premises.

In November 2007, we have collaborated with one of the largest network solution providers for the deployment of the GPON in Hong Kong to deliver advanced triple play services to our subscribers and enlarge our FTTH network coverage in Hong Kong.

Our Competitive Strengths

We believe that our demonstrated success is primarily due to our ability to capitalize on the following key strengths:

Focus on the Residential Mass and Small-To-Medium Corporate and Enterprise Market Segments. We focus on offering high-bandwidth services to the residential mass and small-to-medium enterprise markets, which we believe have significant growth potential. We price our services attractively and at the same time offer bandwidth advantages over comparable service offerings by our competitors. Our IP-TV services focus on the residential mass market by providing Chinese-language content that targets the Chinese-speaking population of Hong Kong, which we believe to be largely under served. Our focus on the residential mass and small-to-medium corporate and enterprise markets has enabled us to quickly grow our subscription base and we believe this will help us to up-sell our services.

Leading-Edge ~~Metro Ethernet~~Next Generation Network. Our network deploys Ethernet technology provided by Cisco Systems, Inc. We believe our ~~Metro Ethernet network~~Next Generation Network gives us an inherent cost and performance advantage over our competitors. Our IP platform is highly scalable, enabling us to offer broadband Internet access, local VOIP, IP-TV and corporate data services over a single network while still leaving us with capacity to offer more services in the future. It is also capable of providing up to 1,000 Mbps symmetric broadband Internet access. During fiscal 2007, we launched our “Fiber-To-The-Home” (“FTTH”) residential broadband service providing 100 Mbps, 200Mbps and 1000 Mbps service. Our promotions during fiscal 2006 and 2007 highlighted the bandwidth advantage of our ~~Metro Ethernet network~~Next Generation Network over xDSL or cable modem services. Ethernet technology is “off-the-shelf” and has long been deployed for large enterprises, but we believe we are one of the first to deploy this technology for the residential market on a mass scale.

First Mover Advantage and High Barriers to Entry. Our first mover advantage and the inherent characteristics of the Hong Kong telecommunications infrastructure, which present a natural barrier to entry, make it difficult for our competitors to replicate our business model. Metro Ethernet technology is not appropriate for our competitors who intend to offer a full coverage network that includes remote and difficult to reach areas of Hong Kong. Attempting to deploy Metro Ethernet technology in such locations would significantly increase costs and completion time of such a network. While other telecommunications operators may lay their own fiber-to-the-building, we believe they would encounter significant in-building bottlenecks when attempting to complete an end-to-end network. This is because the majority of Hong Kong’s residential properties have limited space for in-building wiring leading to subscribers’ residences, making it difficult for new entrants to replicate our end-to-end network build.

significant in-building bottlenecks when attempting to complete an end-to-end network. This is because the majority of Hong Kong’s residential properties have limited space for in-building wiring leading to subscribers’ residences, making it difficult for new entrants to replicate our end-to-end network build.

Fixed Telecommunications Network Services

~~Metro Ethernet~~Next Generation Network Infrastructure

Our ~~Metro Ethernet network~~Next Generation Network is formed by using our own fiber-based backbone, wireless technology or leased wireline-based backbone to connect our in-building Ethernet infrastructures to our IP hub sites and switching centers in Hong Kong. Our Ethernet infrastructure is a system of Category-5e copper wiring that connects our subscribers’ premises to our local area network, or LAN, switches within a residential or commercial building.

The high capacity of our fiber-based backbone has enabled us to offer a suite of services on a single IP network platform. These services include our broadband Internet access, local VOIP, IP-TV and corporate data services. We incurred capital expenditures for our fixed telecommunications network infrastructure of approximately HK$~~407.5 million in fiscal 2005 and HK$~~309.1 million in fiscal ~~2006.~~2006 and HK$132.3 million in fiscal 2007. In fiscal ~~2007,~~2008 to fiscal 2010, we plan to further incur total capital expenditures of HK$~~125 million to HK$150~~850.0 million to continue increasing the capacity of our existing network coverage and extending the reach of our ~~Metro Ethernet network.~~Next Generation Network. The service area of our ~~Metro Ethernet network~~Next Generation Network currently includes approximately ~~1.3~~1.4 million home passes, representing approximately 60% of Hong Kong’s population. We plan to extend our ~~Metro Ethernet network~~Next Generation Network coverage, over the next ~~several~~three years, to ~~1.8~~2.0 million home passes, covering approximately ~~80%~~90% of Hong Kong’s population. As we expand the reach and coverage of our ~~Metro Ethernet network,~~Next Generation Network, we plan to continue introducing new services.

The first step in expanding the reach of our fixed telecommunications network infrastructure is to select buildings that we believe will provide sufficient economic returns to justify our investment based on several factors, including population density, proximity of the building to our existing fiber loop and our projected ability to sell services. We then perform a site visit to analyze the feasibility of installing our Ethernet technology. Once we are satisfied with the prospects of a particular building, we must obtain access rights from the building’s management, which may take several weeks or months. After receiving access rights, we employ a combination of our full-time staff and contractors to begin installation of our in-building Ethernet. The length of time required for the installation process depends on the size and structural features of the building and can be completed in as little as three weeks or take several months. As we install our in-building Ethernet we simultaneously connect the building to our fiber-based backbone. All the buildings that we reach through our expansion efforts will be served by our self-owned infrastructure.

The following table shows the profile of our fixed telecommunications network subscriptions over the past three years:

   As of August 31,
   2004    2005    2006
Fixed Telecommunications Network Services Subscriptions:

Broadband Internet Access
   197,000    229,000    220,000
Local VOIP⁽¹⁾
   237,000    293,000    281,000
IP-TV
   31,000    109,000    116,000

Total
   465,000    631,000    617,000

⁽¹⁾	~~Includes Hong Kong based subscriptions only.~~


	As of August 31,
	2005	2006	2007
Fixed Telecommunications Network Services Subscriptions:
Broadband Internet Access	229,000	220,000	247,000
Local VOIP	293,000	281,000	308,000
IP-TV	109,000	116,000	128,000

Total	631,000	617,000	683,000

Internet Access

HKBN offers our broadband Internet access services in Hong Kong ~~using wireless technologies such as local multi-point distribution systems.~~over our Next Generation Network. We use our broadband subscription base to up-sell our other fixed telecommunications network services such as local VOIP and IP-TV. In addition to broadband Internet access services, we ~~also currently provide~~maintain on a limited scale for the 56k dial-up Internet access and ~~limited~~ corporate Internet access via resale of another carrier’s service. However, we are focusing exclusively on growing our subscription base for our high bandwidth broadband Internet access services and are making no further investments in dial-up or resale services.

We currently offer broadband Internet access to our residential and corporate customers at access speeds of up to 1,000 Mbps, but the majority of our customers currently have access speeds of between 1025 Mbps and 100 Mbps. We currently offer broadband service for ~~bb10,~~ bb25, bb50, bb100, bb200 and ~~bb100~~bb1000 at monthly fees ranging from HK$~~158~~208 to HK$~~238~~1,688 for unlimited service. Moreover, we also offer FTTH broadband service for 100 Mbps, 200 Mbps and 1000 Mbps at monthly fees ranging from HK$378 to HK$1,688 for unlimited service. Currently, all of our broadband Internet access packages offer a free e-mail service and a variety of value added services, such as “bbDrive,” an on-line virtual hard drive with up to 10Gb of storage, “bbGuard,” an anti-spam and anti-virus package, and “bbWatch,” a full-screen IP-TV service that is viewed on a personal computer. We frequently change our promotions in response to market conditions or as a way of attracting additional subscribers.

In addition to the residential packages described above, we have also developed broadband promotions that target corporate customers. We offer prepackaged plans that provide access at speeds up to 1,000 Mbps, which include on-site training, on-site maintenance support, high capacity data transfer and e-mail services. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees that range from HK$~~230~~150 to HK$~~12,000.~~17,000.

Competition

There have been many new entrants to the Internet access business, but our main competitors are PCCW-HKT (through its current subsidiary PCCW-IMS Limited), i-Cable and HGC. PCCW-HKT has been offering broadband Internet access services since May 1998 and uses asymmetric digital subscriber line technology, or ADSL, over its telephone network to provide asymmetric Internet access typically at speeds up to 6 Mbps downstream and 640 Kbps upstream. In November 2007, PCCW-HKT announced the provision of 100 Mbps and 1000 Mbps fiber direct broadband Internet access service to two-thirds of Hong Kong’s households. i-Cable began providing broadband Internet access services in March 2000 using its hybrid fiber coaxial network that provides symmetric typical access speeds up to 8 Mbps shared by a cluster of buildings. HGC predominantly uses VDSL technology and typically provides symmetric access speeds up to 10 Mbps.

Our basic broadband Internet access service provides symmetric access speeds up to 1,000 Mbps. We believe that there is no other fixed telecommunications network service provider in Hong Kong with an existing infrastructure that could offer broadband Internet access at speeds comparable to our high-speed offerings to the residential mass market at cost-effective prices. However, our largestmain competitors have been in operation longer and may have greater market presence, brand recognition and more financial, technical and personnel resources. In addition, they may have greater network coverage in terms of homes passed.

We had approximately ~~220,000~~247,000 broadband Internet access subscriptions as of August 31, ~~2006,~~2007, which represented a market share of approximately ~~12%~~13% with respect to the total number of broadband Internet access subscribers in Hong Kong.

Local VOIP

We offer our on-network local VOIP services in Hong Kong. To provide local telephony service, we install IP-based voice switching equipment in locations already covered by our ~~Metro Ethernet network.~~Next Generation Network. Voice signals are transmitted by the VOIP switches into the Ethernet network installed in the subscriber’s building. The capital cost of installing VOIP switches is small

because the scalability of our ~~Metro Ethernet network~~Next Generation Network allows us to provide new services over existing infrastructure with only minimal additional equipment. In addition, we now install such voice switching equipment together with our new installations of broadband equipment in some buildings.

The quality of our local VOIP service is indistinguishable from traditional fixed line local telephony services and customers are able to use their existing telephone equipment. In addition, fixed line telephony subscribers switching to our local VOIP services are able to retain their existing local telephone number via fixed line number portability.

We currently charge from HK$58 to HK$99 per month for our local VOIP services depending on the service plan, and we offer a full range of value added services, including call waiting, caller display and conference call services.

We also ~~began offering~~offer hardware-based off-network local VOIP services, which we refer to as “bb Phone” services. “bb Phone” allows subscribers to use our local VOIP services via the broadband network of other operators. In October 2005, we launched our global software-based VOIP services branded as “2b”, which provides a global Hong Kong-telephone number service. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market compared to the Hong Kong market for international telecommunications services. For HK$48168 per month, “2b” provides broadband users around the world with a standard Hong Kong 8-digit fixed line number to make and receive unlimited calls within Hong Kong and to other “2b” users around the world. Moreover, we offer a full range of value added services, including call waiting, voice mail and conference call features.

Competition

PCCW-HKT, the incumbent and largest fixed telecommunications network operator in Hong Kong, announced that it had a market share of approximately ~~68%~~67% with respect to local telephony services as of June 30, ~~2006.~~2007. As the incumbent operator,

PCCW-HKT is required to allow interconnection to its fixed telecommunications network to other licensed fixed telecommunications network operators. The remainder of the market is shared among ourselves and three other alternative carriers: HGC, New World and Wharf T&T. The principal basis of competition for local telephony is price and brand name recognition. PCCW-HKT has the highest brand name recognition, but we and the other operators are contending by offering competitively priced local telephony services that provide comparable quality to PCCW-HKT. As of August 31, ~~2006,~~2007, we had ~~281,000~~308,000 local VOIP subscriptions. Our market share with respect to local residential telephony services amounts to approximately ~~13%~~14% as of August 31, ~~2006.~~2007.

IP-TV

In August 2003 we introduced our IP-TV service that provides DVD quality video delivered via our ~~Metro Ethernet network~~Next Generation Network to an IP set-top-box connected to the subscriber’s television set. In May 2007, we renamed our IP-TV service as “bbTV”. This monthly subscription-based pay television service offers 7983 channels consisting of a self-produced 24-hour news channel and education and recreation channels (including children’s programming), and channels whose content is obtained from other content-providers. Our news production team consists of a staff of 9078 employees and produces an average of 70-80 news stories per day for our 24-hour news cycle.

Because of the scalability of our ~~Metro Ethernet network~~Next Generation Network infrastructure, the current cost of adding IP-TV services to an existing broadband Internet access or local VOIP subscriber is small. Since the launch of our IP-TV services in August 2003 we have progressively adjusted our content offerings and valued added components of the services. We consider our IP-TV to be an incremental component of our broadband and VOIP service offerings, rather than a large standalone business. As of August 31, ~~2006,~~2007, we had ~~116,000~~128,000 subscriptions representing approximately 8% of the total Pay-TV subscription base in Hong Kong.

Competition

Our two main competitors in the pay-TV business are i-Cable and PCCW-HKT. The pay-TV services of i-Cable and PCCW-HKT include a significant amount of English language content such as English Premier League Football, HBO, Cinemax, ESPN and others. PCCW-HKT, in particular, has signed long-term exclusive content contracts with English Premier League Football, HBO, ESPN, and Star among others. We target a different market than these competitors by offering predominantly Chinese language content, and pricing our IP-TV service attractively to the residential mass market.

Television Broadcasts Limited and Asia Television Limited, commonly known as TVB and ATV, respectively, are indirect competitors to our pay-TV services in the Hong Kong television market. TVB and ATV account for a substantial proportion of Hong Kong’s television viewership and we market our services as supplemental to theirs. TVB and ATV are supported by advertising revenues and, therefore, must design their programming to attract the widest possible audience. In contrast, we and the other pay-TV operators rely on monthly subscription fees for most of our revenues. Other competitors include satellite TV operators, such as Star TV, as well as potential competition from direct-to-home broadcasters and broadcasters using digital terrestrial delivery methods.

On December 31, 2007, TVB and ATV launched digital terrestrial television (“DTT”) to bring viewers a wide array of free programme choices, better reception and to open up new creativity platforms for television production. New free channels on standard definition television and high definition television were launched on December 31, 2007. TVB and ATV have pledged to speed up the construction of the six transmission stations to advance the target of providing coverage to 75% of the population of Hong Kong by August 2008. As DTT signals are broadcasted on new frequency channels, building management offices of each building may need to upgrade their communal aerial broadcast distribution systems for reception and distribution of DTT programmes. Viewers are also required to maintain a digital set-top-box, or buy an integrated digital television set with a built-in decoder for receiving DTT programmes. The launch of DTT by TVB and ATV may decrease the demand for pay television service.

International Telecommunications Services

We were among the first companies to be granted a PNETS License by the Telecommunications Authority to provide international calling card services in Hong Kong. Since we first began providing international telecommunications services in 1992, we have greatly expanded the range of services that we offer. We now offer a variety of international direct dial services to our customers at competitive rates and are one of the largest providers of international direct dial services in Hong Kong. We believe that our ability to deliver a range of calling plans with varying features that cater to different customer needs has been one of the key factors of our success.

The primary international telecommunications services that we currently offer our customers are the following:


Service		Description
IDD 1666		Provides subscribers with international direct dial using the access number 1666 in Hong Kong.

IDD 0030		Provides subscribers with international direct dial using the access number 0030 in Hong Kong.

Mobile Call Forwarding Services		Allows call forwarding of Hong Kong mobile numbers so that subscribers can receive calls while overseas.

We offer our international telecommunications service under the IDD 1666 and IDD 0030 brand names. These two brands provide us with flexibility in our marketing strategies. We charge our IDD 1666 and IDD 0030 users a per minute tariff rate that varies according to the destination of the call and calling prefixes, while ~~IDD 0030~~ users of services are also provided discounts depending on the time of day or day of the week when the call is placed.

~~We actively promote our international telecommunications services to build our brand name awareness as one of Hong Kong’s leading telecommunications companies.~~ In fiscal 2004 and 2005, in order to maintain our market share, we made the decision to price our international telecommunications services at competitive levels with other market players to compete with their aggressive pricing strategies.

~~During~~ fiscal 2006, we experienced a reduction in total traffic volume of 16.8% to 788 million minutes and in fiscal ~~2006. Competition during the year~~2007, a further reduction in total traffic volume of 16.4% to 659 million minutes. The continuing reduction in traffic volume was mainly due to intense competition as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offers free PC-to-PC based international calls, is ~~also~~ becoming more prevalent. We are proactively migrating our legacy international telecommunications services to our “2b” services, which we believe will enable us to achieve higher margins and access a wider addressable market.

International Telecommunications Network

Our international telecommunications network infrastructure is a system of switches, self-owned and leased backbone capacity, interconnection arrangements and undersea cables that connect the subscriber’s telephone call to its destination.

In March 2002, we received our license to provide undersea cable-based fixed telecommunications network services. This license allows us to purchase and operate our own undersea cables. In 2000, we entered into contracts with two large consortia of international telecommunications companies to acquire undersea cable capacity. Through the first contract, we invested in the Japan-U.S. undersea cable, which was completed in August 2001. Pursuant to the second contract, we agreed to jointly construct and maintain the Asia-Pacific Cable Network 2 undersea cable as an international transmission facility. Construction of the APCN 2 cable was completed, and commercial operation began, in May 2002. We spent a total of HK$120 million on these two projects. We believe the utilization of these undersea cables provides capacity for significant future growth of our international and fixed-network ~~telecommunication~~telecommunications services.

Having our own undersea cables and our fiber-based backbone has enabled us to better control international transmission quality, reduced the costs associated with international transmission and reduced our reliance on third party infrastructure. Our international telecommunications network currently has a monthly handling capacity of approximately 150 million minutes. We believe that the continuing improvement of our international telecommunications network is important in supporting the growth in our subscription base and the expansion of our range of services.

Interconnection Arrangements

We have entered into interconnection arrangements with other local fixed network operators in Hong Kong and overseas carriers to transmit calls between Hong Kong and overseas destinations for our ~~off-network~~ customers. In choosing the local fixed network operators and overseas carriers with whom we cooperate, we take into account a number of factors including the level of termination charges and transmission efficiency and quality. We evaluate the performance of parties with whom we have interconnection arrangements periodically. We believe that we will not have difficulty in finding alternative overseas carriers if performance standards are not being met or a change is otherwise necessary. We have not experienced any disruption in the provision of our services as a result of a change of arrangements with overseas carriers or local fixed network operators.

We pay a fixed monthly fee to local fixed network operators for connection between our switches and their networks and a variable access fee payable on a per-minute basis when accessing their network. For customers using our own network, no interconnection fee is charged. We negotiate the termination charges we pay with the overseas carriers, and the termination charges vary from one overseas carrier to another. All of the interconnection and termination charges we pay to local fixed network operators and overseas carriers, respectively, are made on an open account basis with credit terms ranging from 15 to 30 days. The interconnection charges we pay to local fixed network operators are denominated in Hong Kong dollars and substantially all the interconnection charges we pay to overseas carriers are denominated in U.S. dollars.

International Telecommunications Switching Systems

We own three international telecommunications switching systems in Hong Kong and two in Canada, comprising one in each of Vancouver and Toronto.

Our three international telecommunications switching systems in Hong Kong handle telephone calls originating ~~and~~or terminating in Hong Kong. Our telecommunications network mainly consists of Nortel Networks Limited switching equipment and compression units supplied by Cisco Systems, Inc. and ECI Telecom Ltd. These systems are programmed to automatically choose the optimal routing for each transmission. Optimal routing is a function of a variety of factors, such as country or territory of origination and destination, communication quality, efficiency and costs, and the capacity of the various communication methods available.

Furthermore, since our three international telecommunications switching systems in Hong Kong operate independently of each other, if one system breaks down, all transmissions are immediately diverted to another switching system. We have never experienced a period where all systems experienced a failure at the same time since we commenced operations in 1992.

Competition

PCCW-HKT, HGC, New World, and Wharf T&T are our main competitors in the international telecommunications business. As in previous years, we experienced fierce price competition in Hong Kong during fiscal ~~2006.~~2007. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal ~~2007.~~2008. In order to maintain our market share and high traffic volume, we have significantly reduced some of our international telecommunications rates and introduce new marketing and promotional offers from time to time. We also employ two brand names, IDD 1666 and IDD 0030, to provide us with flexibility in our marketing strategies. However, to offset these price reductions, we have taken steps to reduce our cost base, such as using our relatively large traffic volume to negotiate lower prices from our international partners, establishing a call center in Guangzhou to provide customer service and back office support services, and developing our own international telecommunications infrastructure.

Sales and Marketing

We advertise our products and services through our “on-the-street” marketing ~~force, door-to-door marketing team,~~kiosks, telemarketing and direct mailing, as well as through Chinese language television, radio, print media and on the Internet.

We have developed an extensive sales network in Hong Kong. Our senior marketing personnel closely oversee our sales network to ensure that a consistent image is presented by all of the sales representatives we use to promote City Telecom and HKBN. We provide commission based incentives to our residential sales force that sell our international and fixed telecommunications network services.

We have sales division responsible for coordinating our corporate marketing and sales efforts. We believe our dedicated corporate and small-to-medium enterprise sales force is one of the largest sales forces targeted at corporate users of telecommunications and Internet services in Hong Kong. In addition, our dedicated corporate staff designs marketing and sales promotions specifically tailored to address the concerns of business users. This division also organizes seminars for current and prospective customers to promote new products and services and to raise awareness of our various corporate offerings.

Maintenance and Monitoring

To ensure reliability of our fixed telecommunications network, we continue to maintain our monitoring system which involves:

a year round, 24-hour, 7 days a week network operation center for real-time service monitoring and maintenance that is supported by ~~over 90~~about 120 operational and field staff;

individual self-reporting mechanisms and centralized performance monitoring systems for our switches and equipment;

an emergency self-reporting system that automatically contacts designated personnel; and

back-up systems for our switches, critical software and hardware components.

Once a network fault is detected by our control room, we will either remotely rectify the situation or dispatch field staff to that location should physical interaction be required. After the situation has been resolved, we will continue to monitor network performance as well as track customer service feedback until we are assured of the fault being fully rectified.

Research and Development Activities

We commit considerable resources to our research and development department in order to continuously improve our services and improve our market position. As of August 31, ~~2006,~~2007, our research and development department in Hong Kong consisted of 50approximately 30 staff members experienced in systems design, engineering, telecommunications and computer programming. Our research and development department is primarily responsible for assessing and adapting the technology that we employ in upgrading and expanding our ~~Metro Ethernet network.~~Next Generation Network. To identify and develop new market opportunities, the research and development department assesses new services offered by telecommunications and Internet companies in the United States and elsewhere and works closely with our marketing department. Our research and development expenditures were approximately HK$~~6.0~~11.0 million, HK$~~11.0~~9.6 million and HK$~~9.6~~5.0 million for fiscal ~~2004,~~ 2005, 2006 and ~~2006,~~2007, respectively.

Customer Service

We believe that providing excellent customer service and support is essential to building and retaining a large and loyal subscriber base. We therefore have committed considerable personnel and financial resources to establishing a reliable and accessible customer service system.

Our customer service department provides integrated support to our international and fixed telecommunications network services subscribers. We provide a hotline to handle complaints, subscription applications and queries relating to account balances, pricing, billing, service and technical information. Complaints and in-depth queries from subscribers that cannot be immediately remedied or answered are forwarded to a customer care team, which is responsible for answering such complaints and queries. We also have a dedicated customer service team to provide service to our corporate subscribers, which includes access to a highly skilled technical team that may go to the customer site for trouble shooting and repairs.

In February 2007, to further enhance customer experiences, we established a “Special Duty Unit” (“SDU”) customer care system whereby residential broadband customers are assigned a designated personal customer care executive for service account matters.

Our centralized customer service call center is located in Guangzhou which provides our customer service functions and back office support services at that location. This enables us to lower our operating costs while continuing to increase our customer service capabilities. As of August 31, ~~2006,~~2007, our Guangzhou customer service facility had ~~1,226~~1,264 employees.

We were awarded as the winner of “Call Center of the Year” and “Customer Service Center of the Year” under Customer Relationship Excellence Awards 2005” by Asia Pacific Customer Service Consortium in July 2006 and the Bronze medal for “Contact Center of the Year (over 100 seats)” by the Hong Kong Call Center Association in October 2006.

Billing and Collection

Our credit and control team is responsible for securing prompt payment from subscribers. Invoices are issued on a monthly or quarterly basis with a specified payment due date. Variety of payment methods are used for payment collection including cash, check, credit card, payment by telephone service, automatic transfer from subscribers’ bank accounts or through Internet banking. Our bad

debts expense represented approximately ~~1.0%,~~ 3.1%,1.5% and ~~1.5%~~0.6% of our revenue for each of fiscal ~~2004,~~ 2005, 2006 and ~~2006,~~2007, respectively. Bad debts expense for fiscal 2005 was higher compared to fiscal ~~2004~~2006 and ~~2006~~2007 due to the recognition of a provision of HK$19.5 million for mobile interconnection charges in 2005. The lower bad debt expenses in fiscal 2007 was due to the reversal of HK$9.4 million of a previously recognized provision for doubtful accounts as a result of the issuance of the Final Determination for the mobile interconnection charges. For more information regarding our provision for mobile interconnection charges, see “Our Revenues – Fixed Telecommunications Network Services” above in this annual report.

We maintain tight collection procedures including periodic reminder notices, late payment fee of 1.5% per month on outstanding overdue ~~outstanding~~ amount, right to charge the outstanding overdue amount to the subscriber’s pre-registered credit card account or, if applicable, deduct the outstanding overdue amount from the subscriber’s application deposit. Moreover, we generally suspend an account if the outstanding overdue amount is not settled within our prescribed period. If payment is still not settled after we suspend the account, ~~we determine what~~further recovery actions ~~to take, which may include~~including court proceedings and/or the use of collection ~~agencies.~~agencies will be taken.

Environmental Matters

Since our date of incorporation, we have not violated any environmental laws, ordinances or regulations, and believe that all of our operations comply fully with applicable environmental laws.

Intellectual Property Rights

We have registered our trademarks with the Trademarks Registry of the Intellectual Property Department in Hong Kong. We have no other material intellectual property.

The following is a brief summary of the Hong Kong laws and regulations that currently materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.

C. Regulatory Framework

As a provider of broadband ~~internet~~Internet access, local VoIP, IP-TV and international telecommunications services in Hong Kong, our operations are subject to the ~~provisions of the~~ Telecommunications Ordinance and the Broadcasting ~~Ordinance.~~Ordinance and their respective subsidiary legislation, regulations and codes of practice. The Telecommunications Ordinance provides the legislative and regulatory framework for the provision of telecommunications services and facilities in Hong Kong. The Broadcasting Ordinance governs the content and scope of television programming and the licensing of television broadcasters.

Our primary regulator is the Telecommunications Authority, whose responsibility and functions include regulating and licensing telecommunications network services and regulating the telecommunications markets in Hong Kong, including the issuing of non-exclusive licenses; the determination of terms of interconnection; promotion of fair competition in the telecommunications sector; management of the frequency spectrum; development of technical standards and customer equipment testing; protection of consumer interests; and the control and administration of the Hong Kong numbering plans (including allocation of numbers or codes). The Telecommunications Authority is also responsible for the administration of the Telecommunications Ordinance. We are also regulated by the Broadcasting Authority, which administers the Broadcasting Ordinance and makes recommendations to the Chief Executive-in-Council on applications for broadcasting licenses, as well as on the renewal, suspension and revocation of licenses. The Hong Kong Government has publicly announced that it is considering combining the Telecommunications Authority and the Broadcasting Authority into a Communications Authority which will likely occur in 2007 or 2008.

Telecommunications Industry

Licensing

It is unlawful to establish or maintain any means of telecommunications, or possess, use or deal with telecommunications apparatus in Hong Kong without a license. The Telecommunications Authority has the authority to grant licenses for all means of telecommunications services and facilities in Hong Kong, including the provision of fixed wireline, public mobile telephone, ~~Internet~~internet and satellite services. Furthermore, the Telecommunications Authority has the authority to require a licensee to comply with the terms of its license and any applicable legislation or regulations or codes of practice, and to suspend or revoke licenses to enforce the Telecommunications Ordinance or other rules or regulations or codes of practice to protect the public interest.

Currently, there are ~~three~~four Class Licenses within the telecommunications regulatory framework, one relating to the operation of in-building telecommunications systems, the second relating to the provision of public wireless local area network services, ~~and~~ the third relating to the operation of Citizen Band Radio by the public for recreational and other communications ~~purposes.~~purposes and the fourth relating to the provision of telecommunications services to the general public without establishment, operation or maintenance of telecommunications equipment.

The Telecommunications Authority recognizes that fixed and mobile services will converge enabling voice, data and multimedia applications to be provided over common core networks, delivered through a range of wireline and wireless customer access networks and which will be accessible from common end-user devices irrespective of whether the users are at fixed locations or on the move. As it will become more difficult to classify a service as a “fixed” or “mobile”, the Telecommunications Authority is now ~~examining whether~~proposing to abolish the ~~existing separate licensing frameworks for~~distinction between fixed and mobile ~~services remains sustainable~~carrier licenses and ~~whether~~establishing a single Unified Carrier License, or UCL which would encompass both fixed and mobile carrier services. The Telecommunications Authority has jointly with the ~~licensing framework ought~~Commerce and Economic Department Bureau issued a consultation paper inviting public submissions on this issue. The Telecommunications Authority is currently expected to ~~operate on a converged basis under a Unified License.~~make its decision after the consultations close in February 2008.

General Licensing Requirements

Generally, a licensee is required to be a company incorporated in Hong Kong (which can be wholly owned by a foreign company) or a foreign company registered in Hong Kong. Currently, there is no foreign ownership restriction on the holder of a telecommunications license under the current regulatory regime.

Non-compliance with the Telecommunications Ordinance, any subsidiary legislation made pursuant to it, any of the license conditions or any direction issued by the Telecommunications Authority by a telecommunications licensee, could result in the revocation or suspension of the relevant license. The Telecommunications Ordinance contains a set of provisions setting forth the procedural steps which the Telecommunications Authority must adhere to prior to revoking or suspending any telecommunications licenses. In addition, the Chief Executive in Council has the authority, at the recommendation of the Telecommunications Authority, to revoke a telecommunications license at any time if it is in the public interest to do so.

Public Non-Exclusive Telecommunications Services License

A PNETS License is used by the Telecommunications Authority to cover the provision of a number of different ~~telecommunication~~telecommunications services where the service provider provides the service to the public using the network of a licensed carrier or by establishing or maintaining transmission facilities within the boundary of a building or property. In practice, the PNETS License is also used as a “sweep-up” license category, where a license is required by virtue of the ~~Telecommunication~~Telecommunications Ordinance but none of the existing categories are applicable to the means of telecommunications or telecommunications service for which the license is required.

A PNETS License has a validity period of 12 months and is renewable at the discretion of the Telecommunications Authority on an annual basis upon the payment of a prescribed annual fee, which is currently set at HK$750. Where radio communications apparatus is used, there is an additional variable component calculated by reference to the number of base stations and mobile stations involved.

We currently hold a PNETS ETS License, which was issued to us in November 1998. This PNETS ETS License has been subsequently amended twice and presently gives us the right to provide calling card services, international simple resale services for facsimile and data services, virtual private network services and external telecommunications services over the external telecommunications facilities of other licensed external facilities providers. We also hold a PNETS IVANS License, which was issued to us in December 1993. This PNETS IVANS License allows us to act as an Internet Service Provider.

Under the terms of the PNETS ETS and PNETS IVANS Licenses, we and IDD 1600 Company Limited, or IDD 1600, our wholly owned subsidiary, are required to comply with certain license conditions relating to technical and reporting matters.

Fixed Telecommunications Network Services License

AnA FTNS License authorizes the licensee, among other things:

to provide a public fixed ~~telecommunication~~telecommunications network service, covering internal services or external services, or both; and

to establish and maintain a fixed telecommunications network, which may be wireline-based or wireless-based (Wi-Fi spectrum included), or a combination of both.

AnA FTNS License is valid for a period of 15 years and is renewable for a further period not exceeding 15 ~~year~~years at the Telecommunications Authority’s discretion. The amount of license fee payable by a holder of a FTNS License comprises (i) a fixed annual amount of HK$1.0 million; (ii) a variable amount calculated on the basis of the number of customer connections (which is currently set at HK$700 for each 100 customer connections); and (iii) a variable fee calculated by reference to the radio spectrum assigned and used by the license holder.

HKBN, our wholly-owned subsidiary, currently holds ana FTNS License, which was issued to it in February 2000 initially for the operation of a local fixed wireless network. This FTNS License has been subsequently amended ~~twice~~three times and presently, HKBN is authorized to operate both local fixed telecommunications networks (wireline and wireless based) and external telecommunications facilities.

~~International Telecommunications Facilities and Services~~

~~CTI International Limited, our wholly owned subsidiary, currently holds a satellite-based fixed carrier license, which was issued to it in May 2001.~~

Interconnection

The Telecommunications Authority divides interconnection into two main types: The first type is “Type I Interconnection”, which is interconnection between network gateways, such as tandem exchanges, local exchanges or dedicated interconnection gateways, which allows end users on different networks to “communicate” with each other. The second type is “Type II Interconnection”, which is a connection to a fixed carrier’s network at points of the customer access network level (more often referred to as local access or local loop unbundling) allowing the end customer requesting the interconnection to use the customer access network of the fixed carrier to obtain fixed telecommunications services. The Telecommunications Authority ~~is empowered~~introduced the Type II interconnection policy in 1995 that the fixed carriers have obligation to ~~determine the~~provide Type II interconnection at regulated terms and ~~conditions of both types of interconnections (including~~conditions. But, in July 2004, the ~~applicable charges) and a set of guidelines was issued in 1995 (and amended in 2001) setting forth~~Government decided the ~~procedures that~~policy at the ~~Telecommunications Authority will follow in making such a determination.~~telephone exchange level to be withdrawn before June 30, 2008.

Competition Provisions

Regulation of Anti-Competitive Conduct

Although Hong Kong has never had a general competition code, historically, holders of FTNS Licenses were prohibited from engaging in anti-competitive conduct, abusing its dominant position in a telecommunications market, or engaging in any discriminatory conduct by certain competition-related license conditions contained in the FTNS Licenses issued by the Telecommunications Authority. In June 2000, the competition provisions of the Telecommunications Ordinance became operational and, as from that time, anti-competitive conduct was prohibited by legislation as well as under the relevant licence conditions.

The Telecommunications Ordinance provides an appeal mechanism by the establishment of a Telecommunications (Competition Provisions) Appeal Board. A person or a licensee aggrieved by a decision made by the Telecommunications Authority relating to the competition provisions may appeal to the Board. Additionally, a third party suffering loss or damage from breach of such competition provisions may bring an action for damages or seek other appropriate remedies against the offending licensee.

Control on Mergers and Acquisitions

If the Telecommunications Authority determines that the relevant merger and acquisition activity has, or is likely to have, the effect of preventing or substantially lessening competition in a telecommunications market, the Telecommunications Authority is empowered to direct a carrier licensee to take such actions, such as the complete or partial divestiture of the relevant parties’ interests in the merged entity, as the Telecommunications Authority considers necessary, to eliminate or avoid any anti-competitive effect. However, the Telecommunications Authority may not issue such a direction if he takes the view that the public benefit of the merger and acquisition outweighs any detriment caused by a reduction in competition. Any decision made or direction issued by the Telecommunications Authority under the mergers and acquisition provision is subject to appeal to the Telecommunications (Competition Provisions) Appeal Board.

The regulatory regime on mergers and acquisitions only applies to carrier licensees, which includes HKBN as a holder of a FTNS License, which is regarded as a carrier license for the purpose of the Telecommunications Ordinance.

Consumer Protection

The Telecommunications Ordinance also contains a statutory provision that is primarily aimed at protecting consumers. This provision prohibits a licensee from engaging in any misleading or deceptive conduct.

The Telecommunications Authority has taken an active role in enforcing this prohibition and has developed voluntary codes to assist in this respect. For instance, in November 2004, the Telecommunications Authority issued a “Code of Practice for the Service Contracts for the Provision of Public Telecommunications Services” which sets out guidelines on the preparation of service contracts. The code states that important terms of a service contract (e.g. a compensation clause for early termination by the customer) should be presented in a prominent place and should be highlighted in the contract. The code is applicable to all service providers (except mobile network operators which are subject to a separate code of practice) including holders of FTNS Licenses, such as HKBN, and holders of PNETS ETS Licenses and IVANS Licenses, such as ourselves and IDD 1600. Although the guidelines are voluntary in

nature, the Telecommunications Authority has indicated that the extent of a licensee’s compliance with the guidelines will be taken into account in assessing if a licensee has complied with the statutory provision mentioned above.

Apart from the Telecommunications Ordinance, like any companies carrying on business in Hong Kong, telecommunications operators are required to comply with applicable Hong Kong consumer protection laws, for example, the Sale of Goods Ordinance (Cap 26), Control of Exemption Ordinance (Cap 71), Supply of Services (Implied Terms) Ordinance (Cap 457), ~~and~~ the Unconscionable Contracts Ordinance (Cap 458) , Personal Data (Privacy) Ordinance (Cap 486), and the Unsolicited Electronic Messages Ordinance (Cap 593).

Regulation of Pricing

Currently, the pricing of both fixed telecommunications network services and public non-exclusive external telecommunications services in Hong Kong is regulated by license conditions. However, the regulatory frameworks of each type of services are different.

All PNETS Licenses contain license conditions requiring the licensees to publish their tariffs and to charge no more than the published tariffs.

Similarly, holders of FTNS Licenses are prohibited by license conditions from charging more than their published tariffs for their services. The FTNS License conditions prohibit licensees from offering discounts to their published tariffs and require the licensees to seek approval from the Telecommunications Authority in connection with (i) any revision of published tariffs, (ii) tariffs for any new services or products or (iii) tariffs for any trial services. However, the Telecommunications Authority may grant a waiver of the application of any or all of these restrictions in relation to a relevant telecommunications market if, in the opinion of the Telecommunications Authority, the licensee is not “dominant” in such market. This is known as an ex ante regime.

HKBN has been granted a waiver from all the tariff revision prohibitions contained in its FTNS License and is able to provide discounts and revise its tariffs in all the fixed telecommunications network services markets.

Universal Service Contribution and Local Access Charge

Under the current regulatory regime, PCCW-HKT has a universal service obligation to provide good, efficient and continuous basic ~~telephone service~~telecommunications services at reasonable cost on a non-discriminatory basis to ~~any individual or entity that requests it.~~all persons in Hong Kong. To compensate PCCW-HKT for the expenses of this obligation, certain licensees are required to contribute to such cost, which is referred to as the universal service contribution ~~or USC.~~(“USC”). Holders of FTNS Licenses and PNETS ETS Licenses, including ourselves, HKBN, and ~~IDD 1600~~IDD1600 are required to pay USC.

The level of USC is determined by the Telecommunications Authority and is ~~adjusted periodically.~~reviewed periodically based on actual cost and revenue and on a customer-by-customer basis. The average rate has declined over the past several years. ~~The~~In accordance with a statement dated December 28, 2007 issued by the Telecommunications Authority, ~~published a statement on November 11, 2005 confirming that~~ the level ~~of provisional USC on or after July 1, 2005 for traffic over Category A Routes is approximately HK$0.3 cents per minute after a USC adjustment of HK$1.3 cents per minute. The confirmed USC~~ for the period from January 1, ~~2003~~2005 to ~~December 31, 2003 for Category A Routes,~~June 30, 2007 is ~~HK$~~confirmed to be zero cent per minute. In the circumstances, PCCW-HKT must refund to all USC contributing parties HK 0.3 ~~cents~~cent per minute ~~after a revised USC~~already paid before and there will not be any interest payment for the adjustment of ~~HK$1.3 cents per minute. For routes that are~~those USC. The level of USC from July 1, 2007 onwards is to be provided through Reach Networks Hong Kong Limited’s international gateways/facilities (Category B Routes), the actual use is HK$1.6 cents per minute for July 1, 2003 to December 31, 2003. However, after August 2003, all routes have been classified as Category A Routes and as such, it is no longer necessary fordetermined by the Telecommunications ~~Authority to set a provisional USC for Category B Routes. However, with the implementation of the new IP Telephony regulatory framework it is expected that the current USC regime will be reviewed.~~Authority.

Additionally, providers of external telecommunications services, such as holders of PNETS ETS Licenses, including ourselves and IDD 1600, are required to pay a local access charge ~~or LAC,~~(“LAC”), to the local network operators whose network facilities holders of PNETS ETS Licenses use to transmit calls to and from their customers’ sites. The level of the LAC is calculated on a per-minute ~~basis. Although theoretically~~basis and its arrangement is based on the ~~operators holding PNETS ETS Licenses may negotiate~~statement dated November 25, 1998 issued by the ~~level of LAC~~Telecommunications Authority. Recently, based on the conclusion from the statement dated April 27, 2007 issued by the Telecommunications Authority, the Telecommunications Authority will not, for the time being, proceed with the ~~relevant network operator (whose LAC~~complete deregulation of LAC.

Fixed Mobile Interconnection Charge

Fixed Mobile Interconnection Charge, or FMIC, is ~~not regulated), as at the date~~an interconnection charge for circuit-switched traffic between a Fixed Network Operator and a Mobile Network Operator. The rate of ~~this annual report the bench-mark used by operators~~FMIC is ~~the LAC~~currently set by the Telecommunications ~~Authority for PCCW-HKT, whose LAC~~Authority. The current level of FMIC charged by the incumbent Fixed Network Operator, PCCW Limited is HK$4.36 cents per occupancy minute, as determined by the Telecommunications ~~Authority.~~Authority in November 2004. In June 2007, the Telecommunications Authority determined the FMIC rates for Hong Kong Broadband Network Limited, or HKBN, our wholly owned subsidiary which is a Fixed Network

Operator, with one of its Mobile Network Operators, China Resources Peoples Telephone Company Limited, or Peoples, at a rate of HK$4.8 cents per occupancy minute from April 1, 2002 to August 31, 2002, HK$4.22 cents per occupancy minute from September 1, 2002 to August 31, 2003 and HK$2.89 cents per occupancy minute from September 1, 2004 to August 31, 2004. However, in its statement published on April 27, 2007, the Telecommunications Authority has indicated that it will de-regulate the existing FMIC arrangement with effect from April 27, 2009. When this occurs the Fixed and Mobile Network Operators would have to adopt a more market driven approach in that parties are expected bilaterally to negotiate a commercially agreed FMIC without the Telecommunications Authority’s intervention.

Television Broadcasting Industry

At present, Hong Kong has two licensed domestic terrestrial broadcasters, TVB and ATV, providing free-to-air broadcasting services. In addition, there are also three licensed domestic pay-TV broadcasters, namely HKCTV, ~~PCCW-VOD~~PCCW Media Limited and Galaxy Satellite Broadcasting Limited. HKBN provides TV services over the Internet under its FTNS License, while Star TV continues to provide its services through satellite means under its satellite television uplink and downlink license.

Licensing

It is unlawful to offer any “television programme service” in Hong Kong without a license. “Television programme service” is broadly defined to mean the provision of television programs for transmission by telecommunications that are readily accessible to the general public in or outside Hong Kong or to persons in 2 or more specified premises simultaneously or on demand, whether on a point-to-point or a point-to-multipoint basis. The Broadcasting Ordinance exempts certain categories of television program services from the current licensing regime, including television program services provided on the service commonly known as the “Internet”. The Broadcasting Ordinance itself, however, does not contain a definition of “Internet”.

The validity period of a broadcasting license varies and will be determined by the Chief Executive in Council but it is unlikely that a license with a validity period exceeding 12 years would be approved. The license fee comprises a number of components, which include a fixed annual amount (e.g. for a domestic pay television program service license, the amount is currently set at around HK$1.4 million) and a variable component (e.g. for a domestic pay television program service license, HK$4 for each subscriber).

~~The~~ Secretary for Commerce, Industry and Technology has indicated that on the condition that HKBN continues to provide its service on the platform currently deployed by HKBN, the Government does not dispute that HKBN’s service is provided on the “Internet” and is thus exempt. On this basis, HKBN has not obtained a pay-television broadcasting license and provides IP-TV services under its FTNS License. Nevertheless, we applied for a domestic pay-TV program service license in October 2005 to enable us to have the flexibility of providing pay-TV services via means other than our Metro Ethernet network, such as via satellite.

Cross Media Ownership Restrictions

As with other television regulatory regimes, there are detailed cross-media ownership restrictions in the Broadcasting Ordinance. The restrictions are only applicable to domestic free and domestic pay television program service licenses.

The Broadcasting Ordinance essentially provides that a company which is either a “disqualified person” or has a “disqualified person” exercising control over it will not be eligible to be granted a broadcasting license unless it discloses the disqualification in its license application. “Disqualified person” includes, for example, a company which is an existing domestic free or domestic pay television program licensee; an advertising agent; a sound broadcasting licensee; or a proprietor of newspaper printed or produced in Hong Kong.

Generally, a disqualified person who has complied with the disclosure requirement may apply for a broadcasting license. The Broadcasting Ordinance provides that the Chief Executive in Council may grant a broadcasting license to a company, including a disqualified person or to a company which has a disqualified person exercising control, over it or to a disqualified person in which another disqualified person exercises control subject to such conditions as the Chief Executive in Council sees fit.

Foreign Ownership Restrictions

In addition to the cross-media ownership restrictions outlined above, the Broadcasting Ordinance also imposes restrictions on foreign ownership of a holder of a domestic free television program service license. The restrictions do not prohibit the ownership of any voting shares in a domestic free television program service licensee but rather take the form of prohibiting the exercise of any voting rights attached to such voting shares.

Competition Provisions

The Broadcasting Ordinance also ~~contain~~contains competition provisions, which are aimed at prohibiting a licensee from engaging in “anti-competitive conduct” and a licensee who is in a dominant position from abusing its position. “Anti-competitive conduct” is defined as conduct that has the purpose or effect of preventing, distorting or substantially restricting competition in a television program service market.

The Broadcasting Ordinance provides that a breach of any of the competition statutory ~~provision~~provisions may lead to the relevant contractual provisions in an agreement being regarded as void.

Unlike the regulatory regime for the telecommunications industry, there is no equivalent of a specialized competition appeal board for the television broadcasting industry. A licensee aggrieved by a decision made by the Broadcasting Authority however may lodge an appeal to the Chief Executive in Council.

Program Standards and Advertising Standards

A broadcasting licensee is required to comply with the program standards and the advertising standards published by the Broadcasting Authority. The latest program standards and the advertising standards were ~~revised recently in June 2003 and August 2004, respectively.~~both issued on May 4, 2007.

C.D. Organizational Structure

The following chart sets forth our principal subsidiaries as of January ~~17, 2007:~~21, 2008:

⁽¹⁾	The other immediate subsidiary of City Telecom (H.K.) Limited is Golden Trinity Holdings Limited, which has Warwick Gold Enterprises Limited and Attitude Holdings Limited as its immediate subsidiaries.

⁽²⁾	The company has only registered its Chinese name. The English name is an unregistered translation.

⁽³⁾	The other immediate subsidiaries of Automedia Holdings Limited are Global Courier Company Limited, ~~(formerly known as iStore.com Limited),~~ CTI International Limited, BBTV Company Limited, City Telecom (U.S.A.) Inc., City Telecom (Vancouver) Inc. and City Telecom (Toronto) Inc.

⁽⁴⁾	The other subsidiary of City Telecom (Canada) Inc. is 963673 Ontario Ltd.

⁽⁵⁾

The immediate subsidiaries of Hong Kong Broadband Network Limited are Excel Billion Profits Limited, Hong Kong Television Network Limited, Hong Kong Broadband Television Company Limited and Hong Kong Broadband Phone Limited and Hong Kong Broadband Digital TV ~~Limited (formerly known as TeachOnNet.com Limited).~~Limited.

The jurisdiction of incorporation and our ownership percentage of each these subsidiaries as of January ~~17, 2007~~21, 2008 were as follows:


		Percentage of interest held by City Telecom (%)
Name	Jurisdiction of Incorporation	Direct	Indirect
963673 Ontario Limited	Canada		100
Attitude Holdings Limited	British Virgin Islands		100
Automedia Holdings Limited	British Virgin Islands	100
BBTV Company Limited	Hong Kong		100
City Telecom (B.C.) Inc.	Canada		100
City Telecom (Canada) Inc.	Canada		100
City Telecom (Toronto) Inc.	Canada		100
City Telecom (U.S.A.) Inc.	The United States of America		100
City Telecom (Vancouver) Inc.	Canada		100
City Telecom Inc.	Canada		100
City Telecom International Limited	British Virgin Islands	100
Credibility Holdings Limited	British Virgin Islands	100
CTI Guangzhou Customer Services Co. Limited⁽¹⁾	China	100
CTI International Limited	Hong Kong		100
CTI Marketing Company Limited	Hong Kong		100
Excel Billion Profits Limited	Hong Kong		100
Global Courier Company Limited	Hong Kong		100
Golden Trinity Holdings Limited	British Virgin Islands	100
~~Global Courier Company Limited (formerly known as iStore.com Limited)~~	~~Hong Kong~~		~~100~~
Hong Kong Broadband Digital TV Limited ~~(formerly known as TeachOnNet.com Limited)~~	Hong Kong		100
Hong Kong Broadband Network Limited	Hong Kong		100
Hong Kong Broadband Phone Limited	Hong Kong		100
Hong Kong Broadband Television Company Limited	Hong Kong		100
Hong Kong Television Network Limited	Hong Kong		100
IDD1600 Company Limited	Hong Kong		100
SGBN Singapore Broadband Network Pte. Limited	Singapore	100
Warwick Gold Enterprises Limited	Hong Kong		100

⁽¹⁾	The company has only registered its Chinese name. The English name is an unregistered translation.

D.E. Property, Plants and Equipment

For the provision of fixed telecommunications network services, we own, or control through long-term leases, equipment consisting of switching, transmission and power equipment and connecting lines comprised of in-building wiring, fiber-based backbone, wireless and leased wire-line backbone and other support structures, conduits and similar items that comprise our ~~Metro Ethernet network.~~Next Generation Network. The majority of the fiber-based backbone connecting our services are under public road, highways and streets. HKBN, our wholly owned subsidiary, owns two offices with an aggregate of 147,000 square feet and two switching centers comprised of six switching systems in Hong Kong.

For the provision of international telecommunications services, we own three switching systems in Hong Kong and two in Canada (one each in Vancouver and Toronto). We have invested and have rights to dedicated capacity in two undersea cables, the Japan-U.S. cable and the APCN 2 cable, for use as international transmission facilities, both of which were completed and have been operational since May 2002.

In addition, we lease property in Hong Kong for ~~four~~two retail shops and for a 3,500 square foot customer service center in Mongkok.

We rely on key supplier Cisco Systems Inc., Nortel Networks Limited and other suppliers to provide equipment, underground cables and other necessary components in building our ~~Metro Ethernet network~~Next Generation Network infrastructure, and for our VOIP equipment. In order for new subscribers to be able to access our IP-TV services, we must install an IP set-top-box in their homes. We must have an adequate supply of such installation equipment on hand to respond to new customer subscriptions in a timely manner. We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to acquire new subscribers or effectively appropriate our costs on to our customers.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with the rest of this annual report, including the financial statements and related notes included elsewhere in this annual report. The results discussed below are not necessarily indicative of the results to be expected in any future periods.

Overview

We are a provider of residential and corporate fixed telecommunications network services in Hong Kong. We offer our customers an integrated suite of broadband Internet access, local VOIP, IP-TV and corporate data services through our self-owned ~~Metro Ethernet network.~~Next Generation Network. As of August 31, ~~2006~~2007 we had a total of approximately ~~617,000~~683,000 fixed telecommunications network services subscriptions. In addition to providing fixed telecommunications network services, we are a provider of international telecommunications services in Hong Kong. We offer a variety of international telecommunications services and products including direct dial services, international calling cards and mobile call forwarding services. Our total international telecommunications services customer database comprises approximately ~~2.2~~2.3 million registered accounts.

Our self-owned network is one of the world’s largest ~~Metro Ethernet networks~~Next Generation Networks and is cited as a global reference case by our primary vendors, Cisco Systems, Inc. and Nortel Networks Limited. Our ~~Metro Ethernet network~~Next Generation Network has a current coverage of ~~1.3~~1.4 million home passes, which represents approximately 60% of Hong Kong’s population. The coverage of our network is concentrated in Hong Kong’s most densely populated areas, which reduces our cost of network deployment per home pass. In most other markets, Metro Ethernet is primarily used in commercial buildings in metropolitan areas, as the technology is most cost effective in dense user populations where a provider can service a large number of users in a single building or cluster of buildings. We have applied this technology to densely populated residential areas in Hong Kong where most of our customers live in high-rise apartment buildings with multiple apartments per floor. Our Metro Ethernet network conforms to industry standards for 10/100/1,000 Mbps Internet access speeds. All of our fixed telecommunications network services are based on the single Internet Protocol, or IP, platform of our Metro Ethernet network, unlike our competitors who use multiple platforms to provide their services. In addition, unlike

Unlike other new entrant operators, we operate an “end-to-end” network that transmits data between our subscribers’ premises, our IP network hub sites and our switching centers in Hong Kong.

We also offer international telecommunications services to our FTNS customers and to other carriers’ customers via indirect access. Indirect access allows any pre-registered telecom user in Hong Kong to access our services via our two primary access codes “1666” and “0030”. By dialing our access code, our registered customers can access any destination in the World, allowing us to generate a usage charge.

Factors Affecting Our Results of Operations

~~Operation of Metro Ethernet network~~

The wireless-based FTNS License that HKBN obtained from the Telecommunications Authority in February 2000 provided HKBN with the authority to begin installation of the wireless network that we use to provide broadband Internet access services. To enable HKBN to provide fixed telecommunications network services using wire-line technology in addition to wireless technology, our FTNS License was amended in April 2002 to include provision of local fixed wireline network services. This amendment allowed us to develop our own fiber-based backbone to replace our existing wireless and leased wireline-based backbone. To maximize our return on investment, we have focused on building our Metro Ethernet network in Hong Kong’s most densely populated areas to achieve cost savings and provide additional bandwidth capacity for further growth. After our initial capital expenditure, our operating costs have declined and our service quality has improved because we rely less on backbone transmission facilities owned by third parties and thereby decrease the leasing fees that we pay.

Having our own fiber-based backbone allows us to offer broadband Internet access, local VOIP, IP-TV and corporate data services over a single IP platform without being subject to network limitations of other fixed telecommunications network operators. During fiscal 2006, we devoted considerable resources to marketing our broadband Internet access, local VOIP and IP-TV services. As a result, our revenues from fixed telecommunications network services grew by 13.8% to HK$716.6 million in fiscal 2006.

~~Competition from other international telecommunications service providers.~~

Our total international telecommunications services customer database comprises approximately 2.2 million registered accounts. During fiscal 2006, we experienced a reduction in total traffic volume of 16.8% to 788 million minutes. Competition during the year was intense as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent. As a consequence of reduced minutes and lower revenues per minute, our total international telecommunications revenues decreased by 21.5% to HK$418.3 million in fiscal 2006.

Our Revenues

Fixed Telecommunications Network Services. We charge our customers a monthly service charge for each of the fixed telecommunications network services that we provide, and the scalability of our network allows us to sell additional services to our existing customers, for example adding local VOIP or IP-TV services to our current broadband Internet subscribers, with minimal additional network and operating costs. As a result, each new service we add to our existing subscription base contributes significantly to our profitability. We have not generally sold our fixed telecommunications network services bundled together at discounted rates. Instead, we have focused on increasing our subscription base by offering a single service to new subscribers at an attractive entry price. After the customer has begun to use our service, we then try to up-sell additional services to the customer.

In addition to the monthly service charges generated by our fixed telecommunications network business, we also receive interconnection charges from other telecommunications operators in Hong Kong that use our network to deliver their customers’ telecommunications traffic.

As a Fixed Telecommunications Network Services, or FTNS, licensee, HKBN, a wholly-owned subsidiary of the Company, is obliged to provide interconnection services to enable delivery of telecommunications service to customers of different operators, including mobile network operators. Unless an agreement cannot be reached, the rate of such interconnection charges are subject to commercial agreement between interconnecting parties. Since the issuance of its FTNS license, HKBN has been charging mobile network operators for its interconnection services using the available rates under the existing calculation model (fully distributed cost model) for interconnection services between fixed and mobile operators, which are based on historical cost data of PCCW-HKT, the incumbent FTNS operator. We have recognized all such mobile interconnection charges as revenue. As of August 31, ~~2006,~~2007, the majority of the mobile interconnection charges billed to mobile network operators had not been collected.

In May 2004, the Telecommunications Authority confirmed that mobile network operators are obliged to pay interconnection charges to HKBN in accordance with the charging principles promulgated by the Telecommunications Authority. Certain mobile network operators, however, disputed the basis of our calculation. In August 2004, to resolve our dispute with one mobile network operator, we asked the Telecommunications Authority to make a determination on the level of interconnection charges payable by such mobile network operator to HKBN and the effective date of the determined interconnection charges.

In November 2005, HKBN entered into contractual agreements with two other mobile network operators, who agreed to pay to HKBN on interim mobile interconnection charges at a rate based on PCCW-HKT’s published fully distributed cost model of HK$0.0436 per occupancy minute until the Telecommunications Authority issued its final ruling. ~~The~~

In March 2006, the Telecommunications Authority, or TA, made a confidential preliminary ~~ruling~~analysis (the “2006 PA”) on the Determination with respect to the rates of mobile interconnection charges payable by mobile operators under dispute and the timing of the Determination. The final level of mobile interconnection charges was then subject to the Determination to be issued by TA. As a result of the foregoing, in ~~March~~fiscal 2006, ~~but has~~we recognized mobile interconnection charges of HK$46.7 million, which included mobile interconnection charges for fiscal 2005 previously not ~~announced its final ruling.~~recognized due to the uncertainties existing at that time and charges for fiscal 2006, both of which were measured based on the 2006 PA.

In ~~fiscal 2005 and~~March 2007, the TA issued a revised confidential preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA. In June 2007, the TA issued a final determination (the “Final Determination”) which set out the rates of mobile interconnection charges payable by the mobile operator under dispute, which approximate the rates stated in the 2007 PA.

Based on the Final Determination, we recorded mobile interconnection charges of HK$~~24.7~~40.9 million in fiscal 2007 which include charges for the current fiscal year and ~~HK$22.0 million respectively. As of August 31,~~additional charges for fiscal 2005 and 2006 ~~our mobile interconnection charges receivable, net~~previously measured based on the 2006 PA. We have also reversed a portion of the provision for doubtful accounts ~~were HK$49.8 million and HK$62.1 million respectively. For the year ended August 31, 2006, due to the uncertainty of the final ruling, we recognized~~for mobile interconnection charges receivables of HK$~~22.0~~9.4 million based on the ~~preliminary rates from the Telecommunications Authority~~

~~For further discussion of our revenue recognition of mobile interconnection charges, please refer~~amount we expected to ~~the note 26(c) of the consolidated financial statements.~~collect for billings outstanding through August 31, 2007.

International telecommunications.

Our total international telecommunications services customer database comprises approximately 2.3 million registered accounts. During fiscal 2007, we experienced a reduction in total traffic volume of 16.4% to 659 million minutes. Competition during the year was intense as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent. As a consequence of reduced minutes and lower revenues per minute, our total international telecommunications revenues decreased by 22.4% to HK$324.5 million in fiscal 2007.

Substantially all of our international ~~telecommunication~~telecommunications revenues are generated by the per minute ~~fees~~tariff rate that we charge our IDD customers. For each of our 1666 and 0030 calling plans, these charges vary according to the destination of the ~~call. For our 0030 calling plan,~~call and we also provide certain discounts that depend on the time of day or day of the week at which the call is placed.

Our Expenses

Network Costs. Network costs vary according to either our network capacity or our traffic volume. Such costs mainly include leased line rentals, program fees and production costs for the IP-TV service and costs of inventories sold, local interconnection charges payable to other local fixed network operators and interconnection charges payable to international bandwidth providers and do not include depreciation charge which is included in general and administration expenses.

Other Operating Expenses.We have incurred significant operating costs related to our efforts to promote our broadband Internet access, local VOIP, IP-TV and corporate data services. As a result, our sales and marketing costs in subscription acquisition activities have been relatively high. We expect that we will be required to continue to invest significant financial and human resources in our sales and marketing efforts as we strive to build our subscription base, particularly as we work towards enhancing our brand value.

Other operating expenses include salaries and related costs, office, general and administrative costs and depreciation and amortization. Salaries and related costs include those employees working on our various service offerings and on ~~the upgrade~~maintaining and ~~expansion of~~operating our ~~Metro Ethernet network.~~Next Generation Network.

Critical Accounting Policies

Introduction

Our consolidated financial statements have been prepared in accordance with ~~Hong Kong GAAP.~~HKFRSs. Accounting principles generally accepted in Hong Kong differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”), details of which are set out in note 3029 to our consolidated financial statements. Our significant accounting policies are more fully described in note 2 to our consolidated financial statements. The preparation of our financial statements in conformity with ~~Hong Kong GAAP~~HKFRSs requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to fixed assets, provision for doubtful accounts, ~~receivable,~~ deferred taxes, USC charges and certain revenue items. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates as facts, circumstances and conditions change. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Our accounting policies have been developed over many years as the telecommunications industry and ~~Generally Accepted Accounting Principles, or GAAP,~~generally accepted accounting principles have evolved. As our financial statements are prepared under ~~Hong Kong GAAP,~~HKFRSs, our accounting policies are necessarily compliant with all aspects of ~~Hong Kong GAAP. Hong Kong GAAP~~HKFRSs. HKFRSs is based on a “substance over form” conceptual framework that requires us to look through the legal interpretation of an arrangement or transaction to its underlying purpose and to reflect it in our financial statements on that basis.

In developing accounting policies, in addition to ~~Hong Kong GAAP~~HKFRSs requirements, we also consider telecommunications industry practice in other countries. Where there is no conflict with ~~Hong Kong GAAP~~HKFRSs we also align our accounting policies with U.S. GAAP. In all material respects our accounting policies are applied consistently across City Telecom. The critical accounting policies discussed below generally apply to all segments of City Telecom.

The following are the most significant accounting estimates and judgments we apply in producing our consolidated financial statements.

Useful lives of fixed assets

We estimate the useful lives of fixed assets in order to determine the amount of depreciation expense to be recorded. The useful lives are estimated at the time the asset is acquired based on historical experience, the expected usage, wear and tear of the assets, as well as technical obsolescence arising from changes in the market demands or service output of the assets. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change.

We ~~perform periodic reviews to confirm~~started providing broadband Internet access service in 2000 and substantially completed the ~~appropriateness~~construction of the fibre backbone network in fiscal 2005. With only a short history of operating the broadband business, we assessed the estimated ~~economic~~ useful lives ~~for each class~~of our network assets based on our knowledge and expected usage at that time. As we have gained more experience and knowledge of the broadband business, our expected usage of the assets and the impact of certain new telecommunication technologies indicated that we should re-evaluate the estimated useful lives of our network assets.

During the second half of fiscal 2007, we reviewed the estimated useful lives of fixed ~~assets. For the three years ended August 31, 2006, no changes~~assets based on technology considerations, actual business experience, consultation with internal experts and external valuation firm and industry benchmarks. Based on such review, certain classes of network assets are expected to operate beyond their original estimated useful lives and as such the estimated useful lives of the fibre network and related peripherals have ~~occurred.~~been revised from 4-15 years to 6-20 years effective from June 1, 2007.

The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, the depreciation expense decreased by HK$15.9 million, and both income before taxation and net income after taxation increased by HK$15.9 million for fiscal 2007. The increase in net income resulted in a HK$2.6 cents increase in both basic earnings per share and diluted earnings per share. This change also increased each of total assets, retained profits and total shareholders’ equity for fiscal 2007 by HK$15.9 million.

Impairment of fixed assets

Under ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP, if a triggering event occurs indicating that the carrying amount of an asset may not be recoverable, a new assessment of the carrying amount of that asset is required. Triggering events include significant adverse changes in the market value of an asset, changes in the business or regulatory environment, or certain legal events. The interpretation of such events requires judgment from the management with respect to whether such an event has occurred and whether the management feels that reassessment of the carrying value of the asset is required. If an event occurs that could affect the carrying value of the asset and the management does not identify it as a triggering event and identify the asset as impaired, future operations could be adversely affected if this asset is subsequently written off or sold for less than its carrying value due to sudden downturns in the business environment.

Upon the occurrence of triggering events, the carrying amounts of fixed assets are reviewed to assess whether their recoverable amounts have declined below their carrying amounts. Under ~~HKGAAP,~~HKFRSs, the recoverable amount is the present value of estimated net future cash flows which we expect to recover from the future use of the asset, plus the asset’s residual value on disposal, discounted at the financial asset’s original effective interest rate. Where the recoverable amount of fixed and other long-lived assets is less than their carrying value, an impairment loss is recognized to write down the assets to their recoverable amount, which is based on the fair value or discounted estimated cash flows.

Under U.S. GAAP, recoverability of assets is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset which is the amount the asset can be bought and sold in a current transaction between willing parties.

Estimation of cash flows arising from future use of the asset requires careful analysis regarding what we expect to recover from its future use. This includes consideration of our target market share and customer base, market competition, future changes to our cost structure and technological change. In addition, the residual value of the asset on disposal requires judgment, as the estimated fair value of the asset at the time of disposal could change in response to market conditions and changes in expected use of the asset prior to disposal. Changes in the estimate of cash flows arising from expected future use of the asset or its residual value on disposal — based on changes in market conditions, changes in the use of assets, management plan, foreseeable technological changes or otherwise — could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss. This in turn could significantly affect the results of our operations.

For the three fiscal years ended August 31, ~~2006,~~2007, except for investment property, no impairment loss was recognized based on the estimated recoverable amount of our long-lived assets. The Company has assessed the open market value of the investment property and based on such assessment, the carrying amount has been written down by HK$~~1,131,000.~~1.1 million for the year ended August 31, 2006. There was no difference between ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP in the accounting for the impairment in our investment property because the investment property represents the lowest level at which cash flows can be identified that are largely independent of the cash flows of other asset groups and its carrying value before the recognition of an impairment loss was higher than its recoverable amount.

Accounts Receivable

Under ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP, provision is made against accounts receivable to the extent they are considered to be doubtful. This provision requires judgment regarding the collectibility of certain receivables both as they are incurred and as they age. We determine bad debt provisions based on past experience of recovery of old receivables, the aging of the accounts receivable balance and historical write-off experience. Certain receivables may be initially identified as collectible, yet subsequently become uncollectible and result in a subsequent write-off of the related receivable to the consolidated statement of operations. Changes in the collectibility of accounts receivable for which provisions are not made could affect our future results of operations.

Included in the accounts receivable balance (net of provision for doubtful ~~debts)~~accounts) are receivables for mobile interconnection charges of HK$49.8 million, HK$62.1 million and ~~H$62.1~~HK$103.8 million as of August 31, 2005, 2006 and ~~2006,~~2007, respectively. The balance represented mobile interconnection charges we billed to the local mobile network operators and the majority of which, however, had not been collected. As discussed in more detailed under “Our Revenues—Fixed Telecommunications Network Services”, we are currently awaiting a final ruling by the Telecommunications Authority on the level of charges payable by one of the mobile network operators. Our assessment on the collectibility of these receivables therefore has also taken into consideration of the uncertainty of the final ruling from the Telecommunications Authority.

Changes in the provision for doubtful ~~debts~~accounts consist of:


	Year ended August 31,						Year ended August 31,
	2004		2005		2006		2005		2006		2007
	(Thousands of HK$)						(Thousands of HK$)
Balance at beginning of the year	22,916		22,959		48,316		22,959		48,316		55,745
Additions charged to expense⁽¹⁾⁽²⁾	11,502		35,445		17,450		35,445		17,450		15,973
Write-off	(11,459	)	(10,088	)	(10,021	)
Revesals							—		—		(9,404	)
Write-off⁽²⁾							(10,088	)	(10,021	)	(39,922	)

Balance at the end of the year	22,959		48,316		55,745		48,316		55,745		22,392

⁽¹⁾

Provision for doubtful ~~debts~~accounts as at August 31, 2005 and 2006 includes provision for mobile interconnection charges receivables of HK$19.5 million and 20.8 million respectively (For more information regarding our provision for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report.).

(2)

Following the TA’s Final Determination issued in June 2007, the Company has reversed HK$9.4 million of the provision for doubtful accounts previously recognized for mobile interconnection charges to the consolidated statement of operations and has written off the remaining balance of the provision of HK$11.4 million against the accounts receivable relating to mobile interconnection charges.

Deferred Taxation

Under ~~Hong Kong GAAP,~~HKFRSs, we recognized deferred tax assets for all deductible temporary differences, and operating loss carry forwards to the extent it is probable that future taxable profits will be available against which the asset can be utilized.

In assessing whether a deferred tax asset is expected to be utilized in the foreseeable future, we consider all available evidence, including projected future taxable profit by taking into consideration of the effect of our capital expenditures and other plans, such as the existing network capacity, technological changes, future market trends and projected fixed network coverage.

Under U.S. GAAP, a valuation allowance against deferred tax assets is recorded if we determine it is more likely than not that we will not be able to utilize such benefits in the future.

The recognition of deferred tax assets requires judgment regarding the results of future operations, including the assumption that there will be sufficient future operations to allow us to utilize the related deferred tax asset. Any changes in the estimate of future operations could change the recognition of such assets, which could significantly affect the results of our operations.

A change in judgment regarding the likelihood of the generation of future taxable income necessary to realize deferred tax assets could result in a change in the valuation allowance on deferred tax assets which would impact our results under both ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP.

USC charges

Our management makes their best estimates for charges of the USC payable to PCCW-HKT in order to fund the costs of network development incurred by PCCW-HKT in remote areas in Hong Kong (the “Development”). Such estimated costs are included as part of our costs of rendering services. The estimate is made based on the provisional rates announced by the Telecommunications Authority and is effective up to the date of the release of our financial statements. The Telecommunications Authority periodically reviews the actual costs incurred by PCCW-HKT in the Development and adjusts the amounts owed to PCCW-HKT, or to be refunded by it, to the respective USC contributing parties, including our company (the “Rate Revisions”). Accordingly, the estimate made by our management is subject to changes based on the Rate Revisions identified during a financial year and up to the date prior to the release of our financial statements. We adjust such differences as an addition to, or reduction of, the corresponding costs of services in that particular reporting period.

Any sum received in advance from PCCW-HKT as an estimated refund of USC on a provisional basis, which is subject to the final confirmation and determination of the Telecommunications Authority, is recorded in other payables and accrued charges in our balance sheet.

Revenue Recognition

Revenue for the provision of telecommunications services is recognized when an arrangement exists, service is rendered, fee is fixed or determinable and collectibility is probable. Revenue received in advance is deferred and recognized as revenue on a

straight-line basis over the stated period of time in the subscriber agreement. Network interconnection charges are recorded as revenue based on usage of the fixed telecommunications network of the Company by mobile and other fixed telecommunications network operators. The determination of the rates on mobile interconnection charges at which revenue is recognized involved significant estimates by management. Significant changes in management estimates may result in material revenue adjustments.

Mobile network operators are obliged to pay interconnection charges to HKBN in accordance with the charging principles promulgated by the Telecommunications Authority. Because certain local mobile network operators disagreed with the level of charges computed by HKBN, the majority of the mobile interconnection charges billed by HKBN had not been collected as of August 31, ~~2006.~~2007. We recognize revenue related to mobile interconnection charges at amounts we believe to be realizable after consideration of the uncertainty regarding the timing and amount of the ultimate collection of amounts due. The amount recognized for the fiscal 2004 or before was determined using the available rates under the existing calculation model (fully distributed cost model) for interconnection service between fixed and mobile operators, which are based on historical cost data of PCCW-HKT Telephone Limited. The amount recognized ~~for the~~in fiscal year 2005 reflects a discount from the amount billed which is determined based on our assessment of the range of likely outcomes from the determination process. The amount recognized ~~for~~in fiscal year 2006 is based on the preliminary rates from the Telecommunications ~~Authority. We are awaiting~~Authority as we await a final ruling by the Telecommunications Authority on the level of charges payable by one of the operators. The ~~ruling~~amount recognized in fiscal year 2007 is ~~expected to affect~~based on the ~~amounts of~~final determination which set out the rates payable by a mobile ~~interconnection charges that we may realize from other operators.~~operator under dispute. For a discussion of our revenue recognition of mobile interconnection charges, please refer to “Our Revenues-Fixed Telecommunications Network Services” above in this Item 5 of this annual report and notes ~~26(c)~~25(c) to our consolidated financial statements. Actual amounts realized could be different from our estimate.

Fair value of share options

In assessing the value of the share options granted, Black-Scholes option pricing model (the “Black-Scholes Model”) has been used. The Black-Scholes Model is one of the most generally accepted methodologies used to calculate the value of options and the assumptions used in the Black-Scholes Model include expected life of the options, risk-free interest rate, expected volatility, expected dividend yield and the market value of the ordinary shares of the Company.

The Black-Scholes Model, applied for determination of the estimated fair value of the share options granted under the Company’s share option scheme was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Such an option pricing model requires input of ~~subjective~~ assumptions, including the expected stock volatility, and expected ~~dividend.~~dividend yield. As the Company’s share options have characteristics significantly different from those of traded options, ~~changes in subjective inputs may materially affect~~ the ~~estimated~~determination of fair value of the options ~~granted.~~granted is sensitive to certain assumptions used in the valuation model, in particular the expected volatility.

Legal contingencies

We are currently involved in certain legal proceedings. The assessment of the ultimate outcome of those proceedings is derived from consultation with outside counsel, as well as an assessment of litigation and settlement strategies. A future event or change in the facts and circumstances may require us to make accruals which would be charged to our income statement in the future.

A. Operating Results

In addition to our operations in Hong Kong, we also provide international telecommunications and Internet access services in Canada. We own all of the share capital of two telecommunications companies in Canada, City Telecom Inc. and City Telecom (B.C.) Inc., through a wholly owned subsidiary. We acquired our interests in these companies in December 1998 as part of our efforts to increase our market share of the telecommunications traffic between Canada and Hong Kong.

Our consolidated financial statements reflect the consolidated results of operations and financial position of these subsidiary companies from the date of their acquisition by us. However, as of August 31, ~~2006,~~2007, none of these subsidiary companies located outside of Hong Kong has made a material contribution to our revenues or results of operations, and in fiscal ~~2006,~~2007, they contributed approximately 1.8% to our revenues.

The following table sets forth, for the years indicated, a summary of our results of operations.


	Year Ended August 31,
	2005		2006		2007		2007
	HK$		HK$		HK$		US$
	(In thousands)
HKFRSs
Revenues
Fixed telecommunications network services	629,464		716,600		816,800		104,761
International telecommunications	532,595		418,276		324,470		41,616

	1,162,059		1,134,876		1,141,270		146,377

Operating Expenses:
Network costs	(339,402	)	(300,593	)	(214,591	)	(27,523	)
Other operating expenses
Salaries and related costs	(259,392	)	(256,721	)	(221,102	)	(28,358	)
Sales and marketing expenses	(267,983	)	(204,952	)	(219,253	)	(28,121	)
Office, general and administrative expenses	(157,497	)	(164,208	)	(129,077	)	(16,555	)
Depreciation and amortization	(237,714	)	(276,464	)	(258,103	)	(33,104	)
Provision for doubtful accounts	(35,445	)	(17,450	)	(6,569	)	(843	)

Total other operating expenses	(958,031	)	(919,795	)	(834,104	)	(106,981	)

Total Operating Expenses	(1,297,433	)	(1,220,388	)	(1,048,695	)	(134,504	)

Income/(loss) from operations	(135,374	)	(85,512	)	92,575		11,873
Interest income	13,578		20,378		22,671		2,908
Interest expense	(54,462	)	(88,637	)	(87,504	)	(11,223	)
Other income, net	6,037		4,465		3,149		404

Income/(loss) before taxation	(170,221	)	(149,306	)	30,891		3,962
Income taxes (expense)/credit	6,725		7,244		(2,026	)	(260	)

Net income/(loss)	(163,496	)	(142,062	)	28,865		3,702

Year Ended August 31, 2007 Compared to Year Ended August 31, 2006

   Year Ended August 31,

2004
(restated)⁽¹⁾

2005
(restated)⁽¹⁾
2006 2006
   HK$ HK$ HK$ US$
   (In thousands)
Hong Kong GAAP

Revenues

Fixed telecommunications network services
   541,902 629,464 716,600 92,147
International telecommunications
   627,978 532,595 418,276 53,786

   1,169,880 1,162,059 1,134,876 145,933

Operating Expenses:

Network costs
   (331,408 ) (339,402 ) (300,593 ) (38,653 )
Other operating expenses

Salaries and related costs
   (226,737 ) (259,392 ) (256,721 ) (33,012 )
Sales and marketing expenses
   (228,169 ) (267,983 ) (204,952 ) (26,355 )
Office, general and administrative expenses
   (129,787 ) (157,497 ) (164,208 ) (21,115 )
Depreciation and amortization
   (197,017 ) (237,714 ) (276,464 ) (35,550 )
Provision for doubtful accounts receivable
   (11,502 ) (35,445 ) (17,450 ) (2,244 )

Total other operating expenses
   (793,212 ) (958,031 ) (919,795 ) (118,276 )

Total Operating Expenses
   (1,124,620 ) (1,297,433 ) (1,220,388 ) (156,929 )

Income/(loss) from operations
   45,260 (135,374 ) (85,512 ) (10,996 )
Interest income
   3,753 13,578 20,378 2,620
Interest expense
   (175 ) (54,462 ) (88,637 ) (11,397 )
Other income, net
   2,668 6,037 4,465 574

Income/(loss) before taxation
   51,506 (170,221 ) (149,306 ) (19,199 )
Income taxes (expense)/credit
   (2,043 ) 6,725 7,244 932

Net income/(loss)
   49,463 (163,496 ) (142,062 ) (18,267 )

~~(1)~~

~~Please see note 3 to our consolidated financial statements for more information on the restatements.~~

Revenues. Our total revenues increased by 0.6% to HK$1,141.3 million in fiscal 2007. The 22.4% decline in our international telecommunications services revenues to HK$324.5 million in fiscal 2007 offset our 14.0% increase in FTNS revenues to HK$816.8 million in fiscal 2007.

Our fixed telecommunications network services continued to record significant revenue growth and increased their contribution to our total revenues, accounting for 71.6% of total revenues in fiscal 2007, compared to 63.1% and 54.2% in fiscal 2006 and fiscal 2005, respectively. During fiscal 2007, our FTNS subscription base increased 10.7% to 683,000. This return to growth is an indicator that the market has now accepted a premium pricing positioning.

With respect to voice services, our VOIP subscription base rose by 9.6%, to 308,000 subscriptions due to improved branding and crossing selling from our broadband customers.

With respect to broadband services, our subscription base rose by 12.3%, to 247,000 subscriptions. During fiscal 2007, we focused on differentiating our services by emphasizing our ultra high Internet access speeds, which allow us to increase our average revenue per user. By providing stable and high speed broadband services and reliable customer service, we aim to acquire and retain customers with longer subscription period at higher price. This has significantly increased our revenue from our fixed telecommunications network services.

With respect to IP-TV services, our subscription base increased by 10.3% to 128,000 subscriptions, with the majority of the new subscriptions coming from existing broadband and voice customers.

Our international telecommunications business revenues decreased by 22.4% to HK$324.5 million in fiscal 2007 due to the combined effects of lower volumes and lower revenue per minute. Competition during the year was intense as some of our integrated competitors offered international direct dial minutes for free or at very low cost as a marketing incentive to gain local fixed line and mobile market share. Further, technology from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent.

Network costs. Network costs decreased by 28.6% to HK$214.6 million in fiscal 2007 mainly due to a reduction in international tariff volume and less reliance on third parties backhaul for our FTNS business.

Other operating expenses. Our other operating expenses, excluding network costs, decreased by 9.3% to HK$834.1 million in fiscal 2007.

Salaries and related costs. Salaries and related costs decreased by 16.1% to HK221.1 million in fiscal 2007. During fiscal 2007, we increased our total work force by 4.9% to 2,692 employees due to the expansion of operations in fixed telecommunications network services. The reduction in salaries and related costs was mainly due to the flow over benefits from streamlining the work force in fiscal 2006.

Sales and marketing expenses.Our sales and marketing expenses increased by 6.9% to HK$219.2 million in fiscal 2007 as we increased our sales and marketing efforts in brand building through mass media advertising. We started a strategy of promoting the brand to a wider audience. A series of 1 minute mini programs were shown to educate viewers on the merits of HKBN’s high bandwidth Next Generation Network.

Office, general and administrative expenses. Office, general and administrative expenses decreased by 21.4% to HK$129.1 million in fiscal 2007 mainly as a result of last year’s operational efficiency plan and cost savings due to the decentralization of authority to department heads.

Depreciation and amortization. Depreciation and amortization expenses decreased by 6.7% to HK$258.1 million in fiscal 2007 mainly due to changes in the estimated useful lives of certain assets amounting to HK$15.9 million.

During the second half of fiscal 2007, we reviewed the estimated useful lives of fixed assets based on technology considerations, actual business experience, consultation with external valuation firm and industry benchmark. Based on the review, the estimated useful lives of certain classes of network assets have been extended from 4-15 years to 6-20 years effective from June 1, 2007.

The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, depreciation expense decreased by HK$15.9 million for the year ended August 31, 2007. Earning per share is also increased by 2.6 cents. This change does not have any effect on the total depreciation charges of those assets during their remaining useful lives.

Provision for doubtful accounts. Overall, our provision for doubtful accounts decreased to HK$6.6 million in fiscal 2007 mainly due to the reversal of previously recognized provisions for mobile interconnection charges receivable. In fiscal 2006, we recorded a provision of HK$20.8 million for mobile interconnection charges receivable accumulated from previous years following our assessment of the collectibility of these charges. In fiscal 2007, we have reversed a portion of this provision by HK$9.4 million based on the rates set by the TA in the final determination issued in June 2007. Our provision for other trade receivables recorded in fiscal 2007 was HK$16.0 million compared to the HK$17.5 million in fiscal 2006. For more information regarding our provisions for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report.

Income from operations. We recorded an income from operations of HK$92.6 million in fiscal 2007, compared to a loss from operations of HK$85.5 million in fiscal 2006. The income from operations is due to higher revenue contribution from fixed telecommunications network services and the increase in margin from our international business services as a result of the drop off of low margin customers.

Interest income and expense. Our interest income was HK$22.7 million in fiscal 2007 compared to HK$20.4 million in fiscal 2006. The increase in interest income was due to a strong net cash inflow from our operations and a favorable interest rate environment. We derive interest income from our deposit of surplus capital in interest-bearing accounts at commercial banks. Our interest expense in fiscal 2007 was HK$87.5 million which is comparable to HK$88.6 million in fiscal 2006. Such interest expense was predominantly due to the interest expense of our 8.75% notes issued in January 2005.

Other income, net. Our other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses and management and other fees we received in the ordinary course of our business. Other income, net of expenses was HK$3.1 million in fiscal 2007 compared to HK$4.5 million in fiscal 2006. The other income, net in fiscal 2007 mainly includes and net realized and unrealized gains on investment securities and derivative financial instruments of HK$1.8 million.

Income tax (expense)/credit. We recognized income tax expense of HK$2.0 million for fiscal 2007 compared to an income tax credit of HK$7.2 million in fiscal 2006. Our income tax expense in fiscal 2007 was mainly due to the tax paid by one of our subsidiaries in Guangzhou. Our income tax credits in fiscal 2006 were mainly related to the recognition of deferred tax assets in respect of the tax losses from our fixed telecommunications network services business offset by the income tax expense associated with the profit generated from our international telecommunications services.

Net income. For the foregoing reasons, we had a net income of HK$28.9 million in fiscal 2007 compared to a net loss of HK$142.1 million in fiscal 2006.

Year Ended August 31, 2006 Compared to Year Ended August 31, 2005

Revenues. Our total revenues decreased by 2.3% to HK$1,134.9 million in fiscal 2006 due to a significant decrease in revenues from our international telecommunications services. The 21.5% decline in our international telecommunications services revenues to HK$418.3 million in fiscal 2006 offset our 13.8% increase in FTNS revenues to HK$716.6 million in fiscal 2006.

Our fixed telecommunications network services continued to record significant revenue growth and increased their contribution to our total revenues, accounting for 63.1% of total revenues in fiscal 2006, compared to 54.2% and 46.3% in fiscal 2005 and fiscal 2004, respectively. During fiscal 2006, our FTNS subscription base declined 2.2% to 617,000 as of August 31, 2006 as we placed a priority on revenue yields by increasing revenue per user over subscription growth.

With respect to voice services, our VOIP subscription base fell by 4.1% year-on-year, to 281,000 subscriptions due to intensive competition.

With respect to broadband services, our subscription base fell by 3.9% year-on-year, to 220,000 subscriptions. During fiscal 2006, we focused on differentiating our services by emphasizing our high internet access speeds, which allow us to increase our revenue per user. By providing stable and high speed broadband services and good quality of customer service, we are able to acquire and retain customers with longer subscription period at higher price. This has significantly increased our revenue in fixed telecommunications network services despite a decrease in our subscription base.

With respect to IP-TV services, we grew our subscription base by 6.4% to 116,000 subscriptions, with the majority of the new subscriptions being an upsell to existing broadband and voice customers.

Our international telecommunications business revenues decreased by 21.5% to HK$418.3 million in fiscal 2006 due to the combined effects of lower volumes and lower revenues per minute. Competition during the year was intense as some of our integrated competitors offered international direct dial minutes free or at very low cost as a marketing incentive to gain local fixed line and

mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent. As a result, we expect that our international telecommunications business continues to decline in future.

Network costs. Network costs decreased 11.4% to HK$300.6 million in fiscal 2006 mainly due to a reduction in international tariff volume.

Other operating expenses. Our other operating expenses, excluding network costs, decreased by 4.0% to HK$919.8 in fiscal 2006.

Salaries and related costs. Salaries and related costs decreased by 1.0% to HK256.7 million in fiscal 2006. During fiscal 2006, we reduced our total work force by 34.2% to 2,565 employees with the majority of the reductions occurring towards the end of the fiscal year. The reduction in our work force was a result of our efforts to eliminate duplication of operational procedures and to enhance efficiency and improve quality of our work flows. The aggregate amount of severance payments made was not significant, as most of the terminations of employment were voluntary.

Sales and marketing expenses.Our sales and marketing expenses decreased by 23.5% to HK$205.0 million in fiscal 2006 as we switched our sales and marketing efforts from costlier mass media advertising to word-of-mouth efforts. Word-of-mouth results from existing customers sharing their positive service experience with their associates, thereby enhancing our brand value without the need for direct advertising expenditure.

Office, general and administrative expenses. Office, general and administrative expenses increased by 4.3% to HK$164.2 million in fiscal 2006 mainly due to increase in rental expenses as a result of inflationary pressures.

Depreciation and amortization. Depreciation and amortization expenses increased by 16.3% to HK$276.5 million in fiscal 2006 mainly due to expansion of our ~~Metro Ethernet network.~~Next Generation Network.

Provision for doubtful ~~accounts receivable.~~accounts. Overall, our provision for doubtful accounts ~~receivable~~ decreased by 50.8% to HK$17.4 million in fiscal 2006 mainly due to the decrease in provision for mobile interconnection charges receivable. In fiscal 2005, we recorded a provision of HK$19.5 million for mobile interconnection charges receivable accumulated from previous years following our assessment of the collectibility of these charges. In fiscal 2006, we increased such provision by HK$1.3 million to HK$20.8 million based on the preliminary rates from the Telecommunications Authority. Provision for other trade receivables recorded in fiscal 2006 was HK$16.1 million which is comparable to the HK$15.9 million in fiscal 2005. For more information regarding our provision for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report.

Loss from operations. We suffered loss from operations of HK$85.5 million in fiscal 2006, compared to loss from operations of HK$135.4 million in fiscal 2005. The loss from operations is due to reduced profitability of our international telecommunications business as a result of intense competition from local ~~telecommunication~~telecommunications services companies and global VOIP providers and losses from our FTNS business.

Interest income and expense. Our interest income was HK$20.4 million in fiscal 2006 compared to HK$13.6 million in fiscal 2005. The increase in interest income was due to the full year impact of investment return on proceeds from our 8.75% notes issued in January 2005 and a higher overall interest rate environment. We derive interest income from our deposit of surplus capital in interest-bearing accounts at commercial banks. Our interest expense increased to HK$88.6 million in fiscal 2006 compared to HK$54.5 million in fiscal 2005, predominantly due to the full year impact of interest expense of our 8.75% notes issued in January 2005.

Other income, net. Our other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses, small penalties we have received from time to time from contractors that we employ, and management and other fees we receive from other fixed line operators in the ordinary course of our business. Other income, net of expenses was HK$4.5 million in fiscal 2006 compared to HK$6.0 million in fiscal 2005. The other income, net in 2006 mainly includes net exchange gains of HK$1.1 million, net realized and unrealized gains on investment securities and derivative financial instruments of HK$0.6 million and penalty received from contractors of HK$0.3 million.

Income tax( expense)/credit. We recognized income tax credit of HK$7.2 million for fiscal 2006 compared to income tax credit of HK$6.7 million in fiscal 2005. Our income tax credits in fiscal 2006 and fiscal 2005 were mainly related to the recognition of deferred tax assets in respect of the tax losses from our fixed telecommunications network services business offset by the income tax expense associated with the profit generated from our international telecommunications services.

Net loss. For the foregoing reasons, we incurred a net loss of HK$142.1 million in fiscal 2006 compared to a net loss of HK$163.5 million in fiscal 2005.

Year Ended August 31, 2005 Compared to Year Ended August 31, 2004

Revenues. Our total revenues decreased by 0.7% from HK$1,169.9 million in fiscal 2004 to HK$1,162.1 million in fiscal 2005, due to a significant decrease in revenues from our international telecommunications services. The 15.2% decline in our international telecommunications services revenues from HK$628.0 million in fiscal 2004 to HK$532.6 million in fiscal 2005 offset our 16.2% increase in FTNS revenues from HK$541.9 million in fiscal 2004 to HK$629.5 million in fiscal 2005.

Our fixed telecommunications network services continued to record significant revenue growth and increased contribution to our total revenues. Revenue from FTNS accounted for 54.2% of our total revenues in fiscal 2005, compared to 46.3% and 32.6% in fiscal 2004 and fiscal 2003, respectively. Revenues increased from HK$541.9 million in fiscal 2004 to HK$629.5 million in fiscal 2005, representing 16.2% growth. During the year we grew our FTNS subscription base by 166,000, or 35.7% year-on-year, to 631,000 as of August 31, 2005.

With respect to voice services, we grew our VOIP subscription base by 56,000, or 23.6% year-on-year, to 293,000 subscriptions.

With respect to broadband services, we grew our subscription base by 32,000, or 16.2% year-on-year, to 229,000 subscriptions. During fiscal 2005, we focused on differentiating our services by emphasizing our high bandwidth with the commercial launch of our “bb100” and “bb1000” supported by the Liu Xiang advertising campaign. Furthermore, we introduced value-added services such as “bbDrive” (an on-line virtual hard drive with up to 10 Gbps storage), “bbGuard” (an anti-spam and anti-virus package) and “bbWatch” (a full screen IP-TV experience via the PC).

With respect to IP-TV services, we grew our subscription base by 78,000, or 251.6% year-on-year, to 109,000 subscriptions, although the majority of the new subscriptions were from our free trial promotions for periods of six to twelve months.

Our international telecommunications business revenues decreased by 15.2% from HK$628.0 million in fiscal 2004 to HK$532.6 million in fiscal 2005 due to the combined effects of lower volumes and lower revenues per minute. Competition during the year was intense as some of our integrated competitors offered international direct dial minutes free or at very low cost as a marketing incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent.

Network costs. Network costs increased by 2.4% from HK$331.4 million in fiscal 2004 to HK$339.4 million in fiscal 2005. Our fixed telecommunications network costs declined by 3.3% from HK$122.5 million in fiscal 2004 to HK$118.4 million in fiscal 2005. The decline was mainly due to reduction in our backbone expenses as our network became more self-reliant as we continue to roll out self-owned fiber based backbone. International telecommunications network costs increased by 5.8% from HK$208.9 million in fiscal 2004 to HK$221.0 million in fiscal 2005, which was principally due to an increase in sales volume for products offered through CTImall and INCmall.

Other operating expenses. Our other operating expenses, excluding network costs, increased by 20.8% from HK$793.2 million during fiscal 2004 to HK$958.0 million during fiscal 2005.

Salaries and related costs. Salaries and related costs increased by 14.4% from HK$226.7 million during fiscal 2004 to HK$259.4 million during fiscal 2005. Our total number of permanent full time employees increased from 3,583 as of August 31, 2004 to 3,896 as of August 31 2005.

Sales and marketing expenses. Our sales and marketing expenses increased by 17.4% from HK$228.2 million during fiscal 2004 to HK$268.0 million during fiscal 2005. Sales and marketing increased due to several marketing programs that we utilized to grow our FTNS subscription base. We also increased the number of sales and marketing personnel in marketing and servicing our various service offerings and launched a large scale branding campaign for our broadband Internet access and IP-TV services. This investment in sales and marketing was important to the continued expansion of our customer base for fixed telecommunications network services, which we believe will increase our revenues in the future. Additionally, during fiscal 2005 we introduced our “Liu Xiang” series of television, radio and print branding promotions. Liu Xiang is the first Chinese man to win an Olympic gold medal in a track and field event, having secured this honor in the 110 meter hurdles at the 2004 Olympic Games.

Office, general and administrative expenses. Office, general and administrative expenses increased by 21.4% from HK$129.8 million in fiscal 2004 to HK$157.5 million in fiscal 2005 due mainly to our expanded office and warehouse space and higher equipment maintenance costs.

Depreciation and amortization. Depreciation and amortization expenses increased by 20.7% from HK$197.0 million in fiscal 2004 to HK$237.7 million in fiscal 2005 due to the increased capital expenditures that we incurred for the upgrade and expansion of our ~~Metro Ethernet~~Next Generation Network.

Provision for doubtful ~~accounts receivable.~~accounts. Our provision for doubtful accounts ~~receivable~~ increased by 208.2% from HK$11.5 million in fiscal 2004 to HK$35.4 million in fiscal 2005, which included a provision of HK$19.5 million for mobile interconnection charge receivables. We recorded a provision of HK$19.5 million for mobile interconnection charges receivable in fiscal 2005 given the uncertainty regarding the timing and amount of the ultimate collection of amounts due. For more information regarding our provision for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report. Provision for other trade receivables recorded in fiscal 2005 was HK$15.9 million compared to HK$11.5 million in fiscal 2004. The provision as a percentage of revenue was approximately 1% of our revenue for both years.

Loss from operations. We suffered loss from operations of HK$135.4 million in fiscal 2005, compared to profit from operations of HK$45.3 million in fiscal 2004. The loss from operations is due to reduced profitability of our international telecommunications business, provisions for mobile interconnection charges, increased acquisition and marketing costs for new fixed telecommunications network services subscriptions and early-stage operations of IP-TV services.

Interest income and expense. Our interest income was HK$13.6 million in fiscal 2005 compared to HK$3.8 million in fiscal 2004. We derive interest income from our deposit of surplus capital in interest-bearing accounts at commercial banks. The substantial increase in fiscal 2005 interest income is due to the temporary surplus cash from our US$125 million 8.75% senior notes issued in January 2005. Our interest expense increased to HK$54.5 million in fiscal 2005 compared to HK$0.2 million in fiscal 2004, predominantly due to the interest expense of our 8.75% notes issued in January 2005. We also capitalized our borrowing costs of HK$2.0 million of the funding for our network rollout.

Income tax (expense)/credit. We recorded income tax credit of HK$6.7 million for fiscal 2005 compared to income tax expense of HK$2.0 million during fiscal 2004. Income tax is calculated based on our estimated assessable profit during each period, and our income tax credit in fiscal 2005 was mainly related to the recognition of deferred tax assets on current year’s unrecognized tax losses from our fixed telecommunications network services business that offset by the income tax expense associated with profit generated from our international telecommunications services in fiscal 2005.

Net loss. For the foregoing reasons, we incurred a net loss of HK$163.5 million in fiscal 2005 compared to a net income of HK$49.5 million in fiscal 2004.

U.S. GAAP Reconciliation

Our financial statements are prepared in accordance with ~~Hong Kong GAAP,~~HKFRSs, which differs in certain ~~material~~significant respects from U.S. GAAP. The following tables provide a comparison of our net income/(loss) and shareholders’ equity in accordance with ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP


	As of and for the Year Ended August 31,							As of and for the Year Ended August 31,
	2004 (restated)	2005 (restated)		2006		2006		2005 (restated)		2006		2007	2007
	HK$	HK$		HK$		US$		HK$		HK$		HK$	US$
	(in thousands)							(in thousands)
Net income/(loss) in accordance with:
Hong Kong GAAP	49,463	(163,496	)	(142,062	)	(18,267	)
HKFRSs								(163,496	)	(142,062	)	28,865	3,702
Net income/(loss) under U.S. GAAP	51,565	(149,148	)	(142,062	)	(18,267	)	(149,148	)	(142,062	)	28,865	3,702

Shareholders’ Equity
Hong Kong GAAP	1,175,698	1,020,454		891,654		114,657
HKFRSs								1,020,454		891,654		903,882	115,930
Total shareholders’ equity under U.S. GAAP	1,180,930	1,032,680		897,271		115,379		1,032,680		897,271		909,499	116,650

Differences between ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP for the periods presented relate primarily to:

~~Share-based compensation cost;~~

Share-based compensation cost;

~~Goodwill; and~~

Goodwill; and

Financial instruments

Disclosure relating to those differences can be found in note 30 to our consolidated financial statements. In addition, our condensed consolidated statement of operations, changes in shareholders’ equity and comprehensive (loss)/ income have been included in note 3029 to our consolidated financial statements to reflect the impact of the significant differences between ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP.

Recently issued and adopted accounting pronouncements under ~~Hong Kong GAAP~~HKFRSs and U.S. GAAP have been included in ~~notes 3 and 29~~note 28 to our consolidated financial statements.

As of August 31, ~~2006,~~2007, we had a total cash position of HK$~~483.0~~634.5 million and outstanding borrowings of HK$~~950.4~~953.8 million. Our long term liability consists mainly of our 8.75% senior notes due 2015, which amounted to HK$~~948.0~~952.6 million. Our total cash position of HK$~~483.0~~634.5 million consisted of HK$~~144.9~~532.9 million in cash and bank balances, HK$~~237.5 million in term deposits, HK$87.0~~87.2 million in pledged bank deposits and HK$~~13.6~~14.4 million in long term bank deposits.

AWe expect cash flows generated from operations will continue to be our principal source of ~~our liquidity will be internally generated cash flow from operations and the remaining net proceeds from the US$125 million 8.75% senior notes due 2015 offering in January 2005.~~liquidity.

The following table summarizes our cash flows for each of fiscal ~~2004,~~ 2005, 2006 and ~~2006:~~2007:

Our net cash flow from operating activities for fiscal 2007, 2006 ~~2005~~ and ~~2004~~2005 was an inflow of HK$~~184.2~~384.0 million, HK$~~77.4~~184.2 million and HK$~~203.8~~77.4 million, respectively. The principal source of cash flow from operating activities in each of these fiscal years was the cash flow we generate from our fixed telecommunications network services and international telecommunications businesses.

In fiscal 2007, we generated a net cash inflow from our operating activities that amounted to HK$384.0 million. The increase in operating cash flow was mainly due to increased revenue from our fixed telecommunications network services and lower network costs as a result of the decrease in our international telecommunications services. Moreover, leveraging on last year’s operating efficiency plan and decentralizating of authority to individual department heads helped to increase our operating cash flow.

In fiscal 2006, we generated a net cash inflow from our operating activities that amounted to HK$184.2 million. The increase in operating cash flow was mainly due to lower network costs as a result of the completion of our fiber backbone network, which reduced our network costs paid to third party network operators. Moreover, by leveraging on ~~last year’s~~the large scale sales and marketing activities ~~for enhancing~~in fiscal 2005 which has enhanced brand image and ~~improving~~improved customer experience, less sales and marketing expenses were incurred ~~this year,~~in fiscal 2006, which also helped to increase the operating cash flow.

In fiscal 2005, we generated a net cash inflow in our operating activities that amounted to HK$77.4 million. The reduced operating cash flow when compared with fiscal 2004 was principally due to the significant cash we spent in sales and marketing expenses in offering incentives to acquire new subscriptions and retain our growing subscription base. Since such expenses were incurred before cash receipts from customers, it significantly reduced our operating cash flow. Moreover, increases in staff costs due to the expansion of our fixed telecommunications network services operations and increases in home equipment installation necessitated by the growth of our customer base also reduced our cash flow from operations. Cash from operating activities also decreased due to increased spending for early stage operations of our IP-TV service.

Net cash provided by operating activities amounted to HK$203.8 million during fiscal 2004, which represented a substantial decrease compared with fiscal 2003, principally as a result of the significant cash we continued to invest in our Metro Ethernet network. Cash from operating activities also decreased due to increased costs we incurred in promoting our new services, as well as decreased profitability of our international telecommunications business. In fiscal 2004, we recorded an increase in trade and other payables of HK$31.0 million that comprised amounts owed to our supplier of household appliances that we offered to new subscribers under our free appliance program. We also recorded an increase in deferred service income of HK$29.3 million in fiscal 2004 associated with our free appliance program, as we billed new subscribers’ credit cards a fee equivalent to 18 months of service charges upon their signing a 24 to 36 month contract with us. Net cash provided by operating activities in fiscal 2004 was offset by an increase in trade and other receivables of HK$50.4 million. The principal component of this receivable consisted of an increase in income of HK$38.7 million in connection with mobile interconnection charges that we believe are due to us by Hong Kong mobile telecommunications operators based on their use of our Metro Ethernet network to transmit mobile telecommunications traffic. We also recorded an increase in prepayments of HK$8.3 million in fiscal 2004 in connection with our use of the fiber ring owned and operated by the KCRC. Finally, our cash flows from operations were reduced by Hong Kong profits taxes paid of HK$24.0 million.

~~Net~~In fiscal 2007, net cash generated from investing activities was HK$114.1 million, whereas in fiscal 2006 and 2005, net cash used in investing activities was HK$492.7 million and HK$557.4 million respectively. In 2006 and ~~HK$406.2 million during fiscal 2006,~~ 2005, ~~and 2004, respectively. Throughout each of the three fiscal years,~~ investing activities consisted primarily of purchases of fixed assets for the development of our ~~Metro Ethernet network~~Next Generation Network and upgrading of our international telecommunications ~~facilities. In fiscal 2006~~facilities of HK$382.2 and ~~2005, an~~HK$415.4 respectively. An increase in term deposits of HK$144.6 million and HK$92.9 million respectively ~~also~~further increased the cash outflow for investing activities ~~accordingly.~~in 2006 and 2005 respectively. In fiscal 2007, the net cash generated was mainly due to the receipt in term deposits of HK$237.5 million and lower level in purchase of fixed assets of HK$149.3 million.

Net cash ~~provided by~~used in financing activities was ~~an outflow~~HK$109.5 million in fiscal 2007 consisting mainly of interest paid on our 8.75% senior notes of HK$85.3 million and interim dividend of HK$24.6 million.

Net cash used in financing activities was HK$86.4 million in fiscal 2006 which mainly consisted of interest paid on our 8.75% senior notes of HK$85.2 million.

Net cash provided by financing activities was ~~an inflow of~~ HK$792.2 million in fiscal 2005, which mainly consisted of our net proceeds of US$121.0 million from our 8.75% notes issued in the amount of HK$943.7 million and a bank loan of HK$100.0 million. The cash inflow was offset by our repayment of a bank loan in the amount of HK$200.0 million and interest payments for the 8.75% notes in the aggregate amount of HK$52.4 million.

Net cash provided by financing activities was HK$47.2 million in fiscal 2004, which consisted of our draw down of HK$100.0 million on our loan facility with HSBC, offset by our payment of HK$54.9 million in dividends during fiscal 2004.

On January 20, 2005 we issued unsecured 10-year senior fixed rate notes in the aggregate principle amount of US$125 million at par value. The notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum. Interest on the notes are payable semi-annually in arrears on February 1 and August 1. The notes are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of our existing and future subsidiaries (other than, as of the issue date of the notes, CTI Guangzhou and, subsequently, any other subsidiary prohibited by applicable law, regulation or order from issuing a guarantee of the notes).

We may redeem all but not less than all of the 8.75% notes in the event we have to pay additional amounts as a result of certain changes in taxation. We may redeem the notes, in whole or in part, on or after February 1, 2010, at the redemption prices set forth in the indenture governing the notes. In addition, prior to February 1, 2008, we may redeem up to a maximum of 35% of the original aggregate principal amount of the notes with the proceeds from one or more specified public or private offerings of our common stock at a redemption price equal to 108.75% of the principal amount of the notes. In all cases of optional redemption, we will pay principal at the redemption price specified plus accrued and unpaid interest, additional amounts, if any, thereon to, but not including, the date of redemption.

The indenture governing the 8.75% notes contains covenants that limit, among other things, our ability and the ability of certain of our existing and future subsidiaries to:

pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;

merge, consolidate or sell all or substantially all of our assets;

issue or sell capital stock of some of our subsidiaries;

sell or exchange assets or enter into new businesses;

create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;

create liens on assets;

enter into certain transactions with affiliates or related persons; and

enter into sale and lease back transactions.

The net proceeds of the 8.75% notes were approximately US$121.0 million after deduction of expenses and commissions. We used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds has been and will continue to be used for capital expenditures, including costs incurred in expanding and upgrading our ~~Metro Ethernet network~~Next Generation Network in Hong Kong, and for additional working capital and general corporate purposes.

As of August 31, ~~2006,~~2007, the 8.75% notes were stated at the amortized cost of US$~~121,854,000~~122.1 million (HK$~~948,027,000)~~952.6 million), compared with the amortized costs of US$~~121,660,000~~121.9 million (HK$~~945,348,000)~~948.0 million) as of August 31, ~~2005.~~2006.

As of August 31, ~~2006,~~2007, we had available banking facilities of HK$~~80.0~~80.2 million of which HK$~~78.0~~78.6 million was unutilized.

During December 2007 and January 2008, we have bought back cumulative principal value of 8.75% notes of US$21.9 million by way of market acquisition. The total consideration (including accrued interest) paid was US$22.1 million. The principal value of 8.75% notes remaining in issue after the buy-back is US$103.2 million. The 8.75% notes bought back have been cancelled subsequently in December 2007 and January 2008.

In order to ~~continue the development of~~further develop our ~~Metro Ethernet network~~Next Generation Network and maintain the operations of our international telecommunications business, we plan to make total capital expenditures of approximately HK$~~125~~850 million over the next three years to increase our home pass from 1.4 million to ~~HK$150~~1.8 million ~~in fiscal 2007.~~and to increase our fiber-connected commercial buildings from 600 to 1,800. Our required capital expenditures ~~other than with respect to our network expansion,~~ will be ~~influenced to a significant degree~~financed by the ~~rate of growth~~company’s free cash flow in the ~~subscription base for our services, the expansion of our network coverage and any changes to our business plan.~~respective year.

As of August 31, ~~2006,~~2007, we had capital commitments contracted but not provided for relating to the purchase of telecommunications, computer and office equipment of HK$~~80.2~~54.2 million. In addition, we had commitments under non-cancelable operating leases relating to land, buildings, telecommunications facilities and computer equipment of HK$~~61.4~~83.6 million, of which HK$~~40.1~~43.6 million is due in fiscal ~~2007.~~2008. We also had commitments on program fees of HK$~~12.5~~14.0 million, of which HK$~~7.6~~10.3 million is due in fiscal ~~2007.~~2008. As of August 31, ~~2006~~2007 we utilized HK$~~2.0~~1.6 million of the HK$80 million available banking facilities.

The following table sets forth information regarding our aggregate payment obligations in future years of the contractual obligations and commercial commitments that we had as of August 31, ~~2006.~~2007.

During December 2007 and January 2008, we have bought back and cancelled cumulative principal value of the 8.75% notes of US$21.9 million (equivalent to HK$170.7 million) by way of market acquisition. As a result of the buy-back of the 8.75% notes, our contractual obligations in respect of the short-term and long-term debt (principal and interest payments) has decreased by US$36.3 million (equivalent to HK$283.0 million).

Our working capital as of August 31, ~~2006~~2007 was HK$~~416.5~~563.9 million, which we believe is sufficient for our current requirements. Further, we believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs, including for working capital, capital expenditure, repayment of our indebtedness and various contractual obligations, for at least the next 12 months. However, if our customer demand changes significantly due to rapid technological changes, if we are not able to successfully compete with local and foreign entrants into the market, or if we fail to maintain or obtain the necessary license renewals from the Telecommunications Authority, this could have a significant adverse impact on our cash flows from operations, which could effect our ability to make planned capital expenditures as well as meet scheduled payments on the 8.75% notes, our various operating and capital leases commitments and amounts due under banking facilities.

We commit considerable resources to our research and development department in order to continuously improve our services and improve our market position. As of August 31, ~~2006,~~2007, our research and development team consisted of 50approximately 30 staff members experienced in systems design, engineering, telecommunications and computer programming. Our research and development department is primarily responsible for assessing and adapting the technology that we employ in upgrading and expanding our ~~Metro Ethernet network.~~Next Generation Network. To identify and develop new market opportunities, the research and development team assesses new services offered by telecommunications and internet companies in the United States and elsewhere and works closely with our marketing department. Our research and development expenditures were approximately HK$~~6.0~~11.0 million, HK$~~11.0~~9.6 million and HK$~~9.6~~5.0 million for fiscal ~~2004,~~ 2005, 2006 and ~~2006,~~2007, respectively.

During fiscal ~~2006,~~2007, our international telecommunications business experienced a ~~16.8%~~16.4% decline in volume to ~~788.0~~659.0 million minutes, which combined with the lower revenue per minute, resulted in a ~~21.5%~~22.4% reduction in our international telecommunications revenues to HK$~~418.3~~324.5 million in fiscal ~~2006.~~2007. The principal reason for this decline was the intense competition, as our key competitors introduced highly aggressive price cuts. We expect that such decline will continue in future. Rather than directly competing on price, our strategy is to proactively migrate our international telecommunications customers to our FTNS global “2b” VOIP service which we believe will enable us to obtain higher margins and provide us with access to a wider addressable market.

Our revenues from our fixed telecommunications network services grew by ~~13.8%~~14.0% to HK$~~716.6~~816.8 million in fiscal ~~2006 despite~~2007 due to a ~~fall~~rise in the subscription base of our fixed telecommunications network services of ~~2.2%~~10.7% to ~~617,000~~683,000 subscriptions as of August 31, ~~2006.~~2007. The revenue growth was attributable to our success in raising revenue yields per subscription.

Other than as described above in “— Critical Accounting Policies” and note 2827 to our Consolidated Financial Statements, we have not entered into any off-balance-sheet arrangements with any entities or individuals.

Our board of directors consists of seven directors, three of whom are independent non-executive directors and one of whom is a non-executive director. Three are executive directors, namely, Mr. Wong Wai Kay, Ricky, Mr. Cheung Chi Kin, Paul, and Mr. Lai Ni Quiaque. The non-executive director is Mr. Cheng Mo Chi, Moses. The three independent non-executive directors are Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu.

The following table sets forth certain information concerning our directors and senior management as of January ~~17, 2007.~~

Mr. WONG Wai Kay, Ricky, aged ~~45,~~46, is the co-founder and ~~chairman~~Chairman of City Telecom. He is responsible for our overall strategic planning and management. Mr. Wong holds a bachelor’s degree in science from The Chinese University of Hong Kong and has over 20 years’ experience in the telecommunications and computer industries. Mr. Wong ~~has~~had worked at a major ~~U.S.-listed~~US-listed computer company as a marketing representative and was responsible for ~~the~~ marketing and ~~the~~ distribution of computer products in Hong Kong from 1985 to 1989. He was also a co-founder and director of a company principally engaged in the import and distribution of computer systems in Canada prior to co-founding of City Telecom. Mr. Wong is a first cousin of Mr. Cheung Chi Kin, Paul, our ~~chief executive officer.~~

Chief Executive Officer. Currently, he is a member of Commission on Youth, a member of the Zhejiang Committee, Chinese People’s Political Consultative Conference, an independent non-executive director of Bossini International Holdings Limited and a member of the Board of Trustees, United College, The Chinese University of Hong Kong.

Mr. CHEUNG Chi Kin, Paul, aged ~~49,~~50, is the co-founder and ~~chief executive officer~~Chief Executive Officer of City Telecom. He is responsible for our day-to-day operations and technological research, development and support activities. Mr. Cheung graduated with a diploma of advanced programming and system concepts design from Herzing Institute, Canada. He has more than 2526 years’ experience in the telecommunications and computer industries. Mr. Cheung ~~has~~had worked in companies engaged in application software development and computer consultancy prior to co-founding of City Telecom. Mr. Cheung is a first cousin of Mr. Wong Wai Kay, Ricky, our ~~chairman.~~Chairman.

Mr. LAI Ni Quiaque, aged ~~37,~~38, is our ~~chief financial officer.~~Chief Financial Officer, Company Secretary and Head of Staff Engagement. Mr. Lai joined City Telecom in May ~~2004 and is responsible for our financial and human resources functions.~~2004. Mr. Lai has ~~14 years’~~extensive experience in telecommunications industry research and ~~finance.~~finance, being highly rated in this field. Prior to joining City Telecom, Mr. Lai was ~~the~~ Director and Head of Asia Telecom Research for Credit Suisse ~~First Boston,~~, having spent ~~eight~~8 years with the firm. During his tenure with Credit Suisse, he was involved in global fund raisings for a wide range of Asian Telecom carriers such as China Mobile, China Telecom, China Unicom, China Netcom, SK Telecom, PCCW, Telekom Malaysia, etc. Before that, Mr. Lai held positions with Hongkong Telecom and Kleinwort Benson Securities (Asia). Mr. Lai holds a Bachelor of Commerce degree from the University of Western Australia, ~~and~~ is a ~~qualified~~fellow member of CPA Australia and a member of Hong Kong Institute of Directors. Mr. Lai has been accepted into the ~~Australian Society of CPAs.~~Kellogg-HKUST EMBA program commencing in January 2008.

Mr. CHENG Mo Chi, Moses, aged ~~56,~~57, was re-designated as a non-executive director of City Telecom with effect from September 30, 2004. He was appointed as an independent non-executive director of the Company since June 17, ~~1997 and a member of the Audit Committee since its establishment on March 22, 1999.~~1997. He is the senior partner of P.C. Woo & Co., a firm of solicitors and notaries in Hong Kong, the Founder Chairman of the Hong Kong Institute of Directors of which he is now the Honorary President and Chairman Emeritus and the Chairman of the ~~Council and Court of the Hong Kong Baptist University and the Football~~ Betting and Lotteries Commission. Mr. Cheng was appointed as a member of the Legislative Council of Hong Kong from 1991 to 1995.

Dr. CHAN Kin Man, aged 48, is an associate professor in the Department of Sociology of The Chinese University of Hong Kong, specializing in state-society relations in Mainland China and Hong Kong. He received a Bachelor of Social Science degree from The Chinese University of Hong Kong in 1983 and a doctor of philosophy degree from Yale University in the U.S. in 1995. Dr. Chan has been a director of City Telecom since June 1997.

Mr. LEE Hon Ying, John, aged ~~60,~~61, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the Regional Director, Asia Pacific of Northrop Grumman — Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable & Wireless HKT and Hong Kong Telecom. He is a chartered engineer and a member of each of the Institution of ~~Electronic~~Engineering and ~~Radio Engineers,~~Technology, the United Kingdom and the Hong Kong Institution of Engineers and the Hong Kong Computer Society. He received a master’s degree in information systems from The Hong Kong Polytechnic University in 1992. In addition, he is the Territory Vice-President of the Society of St. Vincent de Paul of Asia and Oceania, which is an international charity body. He is the ~~Chairperson~~Commission member of ~~the~~ Catholic Diocese of Hong Kong Diocesan for Hospital Pastoral Care. Mr. Lee has been a director of City Telecom since June 1997.

Dr. CHAN Kin Man, aged 47, is an associate professor of the Department of Sociology of The Chinese University of Hong Kong, specializing in the state-society relations in China and Hong Kong. He received a Bachelor of Social Science degree from The Chinese University of Hong Kong in 1983 and a doctor of philosophy degree from Yale University in the U.S. in 1995. Dr. Chan has been a director of City Telecom since June 1997.

Mr. PEH Tun Lu, Jefferson, aged ~~47,~~48, is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountant of CPA Australia. Mr. Peh holds a ~~Master’s~~master’s degree in business from the University of Technology, Sydney. He has over 2425 years of experience in finance, accounting and management ~~with~~from listed and private companies in Hong Kong and Australia. Mr. Peh has been a director of City Telecom since September 2004.

Mr. CHANG Wing Fu, Stephen, aged 44, is our Chief Technology Officer. Mr Chang joined the Company in July 2006 as Chief Information Officer and has also been the Company’s Chief Technology Officer since December 2006. He provides advice and assistance to the Company, to ensure that information and communications technologies are acquired and managed in a manner that is aligned with business strategy, supporting the goals and objectives of the Company and its various business units. Mr Chang graduated from Australia and holds a Masters in Information Systems degree and a Bachelor of Science degree from Monash University. Mr Chang has 19 years of experience in Systems Development, Project Management, Consulting and Information Technology Management. Prior to joining the Company, Mr Chang was the Asia Pacific/Japan Vice-President of Worldwide Support for a U.S. software company. Before that he was the General Manager of Information Technology at SmarTone-Vodafone.

Mr. CHONG Kin Chun, John, aged ~~44,~~45, is the director of ~~our~~the corporate division. He is responsible for sales, marketing and servicing development of ~~our~~the Company’s international telecommunications services and fixed telecommunications network services for ~~our~~ business and corporate customers. Mr. Chong joined City Telecom in February 1996 and ~~was appointed as an executive director in June 1997. He~~ holds a bachelor’s degree in arts from ~~the~~The University of Hong Kong. Mr. Chong worked as a general manager overseeing product management and the sales force of a listed telecommunications products company in Hong Kong from 1987 to 1996.

Mr. LO Sui Lun, aged ~~42,~~43, is ~~the~~a director of ~~network development.~~Hong Kong Broadband Network Limited (HKBN). He is ~~responsible~~now in charge of the Company’s participation in the Next Generation National Broadband Network (NGNBN) project in Singapore. That project is to develop a FTTH network for the ~~engineering~~whole country. Before that, Mr. Lo was in charge of regulatory, carrier business, international business, network operation and network development ~~of our fixed telecommunications network.~~for HKBN. He joined City Telecom in September ~~1998 and was promoted to the title of director in 1999.~~1998. Prior to ~~joining City Telecom,~~that, Mr. Lo worked for ~~PCCW-HKT~~PCCW (formerly known as ~~“Cable & Wireless HKT”~~“Hong Kong Telecom”) for ~~nine~~9 years, gaining experience in network planning and undersea cable investment. Mr. Lo holds a bachelor’s degree in sciences in electronics from The Chinese University of Hong Kong and a master’s degree in ~~Business Administration~~business administration from the University of Strathclyde, UK.

Ms. TO Wai Bing, aged 45, is our managing director of business development. Ms. To is a member of the management committee of the Company and in charge of the International Business Department and the Carrier Business Department. She is responsible for the control of cost of services, carrier relations, sales of carrier business, exploring and securing business partnerships to strengthen the Company’s business operations and development. Before joining the Company, Ms. To had worked for the Hong Kong Telecom Company for 16 years after graduating from Hong Kong Polytechnic University with a Diploma in Electronic Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the Company in May 2007 after her previous services with the Company from September 1998 to July 2006.

Mr. YEUNG Chu Kwong, William, aged ~~46,~~47, is our ~~chief operating officer.~~Chief Operating Officer. Mr. Yeung joined City Telecom in October 2005 and is responsible ~~for heading~~to head our ~~customer engagement department~~Customer Engagement Department to oversee customer relationship management. Mr. Yeung is also responsible to head Network Development Department. He holds a Bachelor of Arts degree from Hong Kong Baptist University, a Master of Business Administration degree from University of Strathclyde, UK and a Master of Science ~~degree~~Degree in ~~electronic commerce~~Electronic Commerce and Internet ~~computering~~Computing from The University of Hong Kong. Mr. Yeung has more than 1415 years’ experience in the ~~telecommunications~~telecom industry. Prior to joining City Telecom, Mr. Yeung was the Director of Customers Division ~~at Smartone-Vodafone,~~in SmarTone-Vodafone, the General Manager of Personal Communications and Retail Division at Tricom Telecom Limited, and ~~has been~~was also an Inspector of Police in the Hong Kong Police Force.

Mr CHANG Wing Fu, Stephen, aged 43, is our chief technology officer. Mr Chang joined the group in July 2006 as Chief Information Officer and has taken up the role as the Group’s Chief Technology Officer since December 2006. He’s responsible to provide advice and assistance to the Group, to ensure that information technology is acquired and information resources are managed in a manner that is aligned with business strategy, supporting the goals and objectives of the Group and its various business units. He also overseas the Group’s Technology Development. Mr Chang graduated from Australia and holds a Masters in Information Systems Degree and a Bachelor of Science Degree from Monash University. Mr Chang has 18 years of experience in Systems Development, Project Management, Consulting and I.T.Management. Prior to joining the Group, Mr Chang was the Asia Pacific/Japan VP of Worldwide Support for a U.S. software company. Before that he was the General Manager of I.T. at SmarTone-Vodafone.

Ms. HARE Kai Tamara, aged 48, is the General Counsel –Head of Legal Department & Corporate Secretary Office. Ms. Hare has over 25 years of legal and senior management experience. For the past 6 years, she was Chief Executive Officer for a venture backed risk management software company in San Francisco. She has served several times as General Counsel and held other senior management positions for multinational companies with business focus in Asia and Western Europe. Additionally, she has extensive private legal practice work with emphasis on corporate finance and intellectual property. She was associated with well known international U.S. based law firms after receiving her Juris Doctor in 1985 from Georgetown University Law Center and Bachelors of Arts from U.C. Berkeley in 1982. Ms. Hare is a frequent lecturer and writer on the topics of cyber security and commercial practice. She is duly admitted to practice in the States of New York and California and to appear before the Southern District Court of New York.

Our directors and senior management receive compensation in the form of salaries, housing allowances, discretionary bonuses, other allowances and benefits in kind, including our contribution to the pension schemes for such individuals.

The aggregate amount of salaries or other compensation, housing allowances, discretionary bonuses, share-based payment, other allowances and benefits in kind paid by us to our directors (not including our non-executive directors) during fiscal ~~2006~~2007 was approximately HK$~~19.7~~19.4 million. We paid approximately HK$1.4 million as our contribution to the pension schemes of the directors ~~in the year ended August 31, 2006.~~during fiscal 2007. In addition we paid our fiscal non-executive directors fees in the aggregate amount of approximately HK$605,000 during fiscal ~~2006.~~2007.

Each executive director is entitled to receive an annual discretionary bonus of such amount as shall be determined by the board of directors upon recommendation and approval by the Remuneration Committee (as defined below). Additionally, our senior management and employees are entitled to receive an annual discretionary bonus based on their individual performance and our financial performance during the year in question.

~~The total number of ordinary shares representing outstanding options granted under the 2002 Scheme (as defined under “Share Option Schemes” below) as~~As of January ~~17, 2006 was 36,520,000. On October~~ 21, ~~2004, we~~2008, the Company granted share options to ~~our~~various directors and members of our senior ~~managers under our 2002 Scheme options~~management. For details, please refer to subscribe for 14,670,000 ordinary shares. On October 21, 2004, the board of directors also proposed to grant options to subscribe for 8,000,000 ordinary shares to each of Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul. The proposed grants of option were approved by shareholders at our annual general meeting held on December 29, 2004. On October 3, 2005, the board of directors granted options to subscribe for 1,000,000 ordinary shares to Mr. Yeung Chu Kwong, William. The total number of ordinary shares representing outstanding options under the 1997 Scheme (as defined under “Share Option Schemes” below) as of January 17, 2006 was 528,000.Item 6EShare Ownership herein.

Except as discussed herein, no other payments have been paid or are payable, in respect of fiscal ~~2006,~~2007, by us or any of our subsidiaries to our directors and senior management.

The aggregate amount of salaries or other compensation, housing allowances, other allowances and benefits in kind paid by us to our senior management during the fiscal ~~2006~~2007 was approximately HK$~~7.6~~13.4 million.

For fiscal ~~2006,~~2007, the aggregate amount accrued by us to provide pension retirement or similar benefits for our directors, senior management and other employees was approximately HK$~~28.0~~23.9 million. (please refer to the second paragraph of this section)

We ~~have~~ entered into service ~~contracts~~agreements with ~~two of~~ our three executive directors, Wong Wai Kay, Ricky, ~~and~~ Cheung Chi Kin, ~~Paul. The service agreements with Mr. Wong~~Paul and ~~Mr. Cheung had an initial term that ended on June 30, 2000.~~Lai Ni Quiaque respectively. These service agreements are automatically renewed annually after the initial term until termination with prior notice. After the initial term, the agreements with Mr. Wong and Mr. Cheung can be terminated by either party with six months’ notice. We will also enter into a service contract with Mr. Lai Ni Quiaque as the Chief Financial Officer upon approval by the Remuneration Committee. These service contracts include non-competition clauses under which our executive directors agree not to compete with us in accordance with the terms and conditions ~~therein.~~therein and shall continue to be effective unless and until terminated by either party of the respective service agreements. None of the agreements provide for any benefits or compensation upon termination of employment.

Our board of directors established an Audit Committee in March 1999 to ensure the impartial supervision of our accounting and business operations. The Audit Committee is comprised of three independent non-executive directors, namely, Mr. Lee Hon Ying, John (the Chairman of the Audit Committee), Dr. Chan Kin Man and Mr. Peh Tun Lu, Jefferson. Mr. Peh was appointed to the Audit Committee on September 1, 2004 and is a “financial expert” within the meaning of, and as required by the U.S. Sarbanes-Oxley Act of 2002.

The Audit Committee is governed by our audit committee charter, which was adopted by our board of directors at a meeting held in August 2004. It is responsible for overseeing the accounting and financial reporting process of the ~~Group~~Company and the audits of the ~~Group’s~~Company’s financial statements on behalf of the Board of Directors.

Additionally, the Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the work of City ~~Telecom ‘s~~Telecom’s independent auditors (including resolution of disagreements between management and the auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for City Telecom.

~~The~~As provided in our audit committee charter, the Audit Committee shall meet in person or telephonically at least twice a ~~year. The Audit Committee~~year and shall have the resources and authority appropriate to discharge its responsibilities as required by law, including the authority to engage independent counsel and other advisors as the Audit Committee deems necessary to carry out its duties.

The Audit Committee met three times in fiscal 2007. The major works performed by the Committee from September 1, 2006 to August 31, 2007 included:

Our board of directors established a ~~remuneration committee~~Remuneration Committee in August 2001 to ~~ensure the supervision~~manage our offer of ~~the~~ remuneration packages ~~we pay~~ to ~~our~~ executive directors. The ~~remuneration committee~~Remuneration Committee is comprised of 6six members with three independent non-executive directors,

Mr. Lee Hon Ying, John, Mr. Peh Tun Lu, Jefferson and Dr. Chan Kin Man, the non-executive director, Mr. Cheng Mo Chi, Moses, Mr. Lai Ni Quiaque, our ~~finance director~~Chief Financial Officer, Company Secretary and Head of Staff Engagement and our director of ~~human resources.~~Talent Management. The ~~remuneration committee’s~~Remuneration Committee’s main duties are set out as follows:-

The following chart sets forth the number of our employees by functional area as of August 31, ~~2006.~~2007.

The following chart sets forth the number of our employees by geographical region as of August 31, ~~2006.~~2007.

As of August 31, ~~2004,~~ 2005, 2006 and ~~2006,~~2007, we had ~~3,583,~~ 3,896, 2,565 and ~~2,565~~2,692 employees, respectively. In connection with the transfer of our calling center operations to Guangzhou, China, we have hired over 1,200 customer service representatives and back office employees to staff that facility. ~~Our~~The slight increase in our total number of employees ~~decreased~~ in fiscal ~~2006. The reduction~~2007 was mainly due to the expansion in staff was achieved on a planned basis with re-engineering of processes to ensure service continuation. Multiple operational processes were reviewed and consolidated to enhance efficiency and improve quality. We have also outsourced some of our ~~operations, which helped to reduce non-essential staff functions. We have not experienced any work slowdowns or stoppages and we consider our relations with our employees to be good.~~fixed telecommunications network business.

The following chart sets forth the share ownership of our directors and senior management as of January ~~17, 2007.~~21, 2008.

⁽⁷⁾

Options to subscribe for 2,000,000 shares were granted to Mr. Chong on October 21, 2004 for a purchase price of HK$~~1.0,~~1.00, at an exercise price of HK$1.54 per share and exercisable on or before October 20, 2014 in the following manner: (i) 1,000,000 on or after January 1, 2005, (ii) 500,000 on or after January 1, 2006, and (iii) 500,000 on or after January 1, 2007. Options to subscribe for 1,500,000 shares were granted to Mr. Chong on May 22, ~~May~~ 2006 for a purchase price of HK$1.00, at an exercise price of HK$0.66 per share and exercisable on or before May 21, 2016 in the following manner: (i) 500,000 on or after May 22, ~~May~~ 2007, (ii) 500,000 on or after May 22, ~~May~~ 2008; and (iii) 500,000 on or after 22 May 2009. On December 13, 2007, Mr. Chong exercised options to acquire 500,000 shares for a total amount of consideration of HK$330,000.

⁽⁽⁸⁾⁸⁾

Options to subscribe for 500,000 shares were granted to Mr. Lo on October 21, 2004 for a purchase price of HK$~~1.0,~~1.00, at an exercise price of HK$1.54 per share and exercisable on or before October 20, 2014 in the following manner: (i) 200,000 on or after January 1, 2005, (ii) 200,000 on or after January 1, 2006, and (iii) 100,000 on or after January 1, 2007. Options to subscribe for 1,500,000 shares were granted to Mr. Lo on May 22, ~~May~~ 2006 for a purchase price of HK$1.00, at an exercise price of HK$0.66 per share and exercisable on or before May 21, 2016 in the following manner: (i) 500,000 on or after May 22, ~~May~~ 2007, (ii) 500,000 on or after May 22, ~~May~~ 2008; and (iii) 500,000 on or after May 22, ~~May~~ 2009.

⁽⁽⁹⁾⁹⁾

Options to subscribe for 1,000,000 shares were granted to Mr. Yeung on October 3, 2005 for a purchase price of HK$~~1.0,~~1.00, at an exercise price of HK$0.81 per share and exercisable ~~on or after~~from October 1, 2006 ~~but before October 2,~~to September 30, 2015. Options to subscribe for 3,000,000 shares were granted to Mr. Yeung on May 22, ~~May~~ 2006 for a purchase price of HK$1.00, at an exercise price of

HK$0.66 per share and exercisable on or before May 21, 2016 in the following manner: (i) 1,000,000 on or after May 22, ~~May~~ 2007, (ii) 1,000,000 on or after May 22, ~~May~~ 2008; and (iii) 1,000,000 on or after May 22, ~~May~~ 2009. On November 22, 2007, Mr. Yeung exercised options to acquire 2,000,000 shares for a total amount of consideration of HK$1,470,000.

⁽¹⁰⁾

Options to subscribe for 1,000,000 shares were granted to Mr. Chang on July 3, ~~July~~ 2006 for a purchase price of HK$1.00, at an exercise price of HK$0.68 per share and exercisable on or before July 2, 2016 in the following manner: (i) 300,000 on or after July 3, ~~July~~ 2007, (ii) 300,000 on or after July 3, ~~July~~ 2008; and (iii) 400,000 on or after July 3, 2009. On July ~~2009.~~9, 2007, Mr. Chang exercised options to acquire 300,000 shares for a total amount of consideration of HK$204,000.

⁽⁽¹¹⁾¹¹⁾

Beneficial ownership is determined in accordance with the rules of the SEC.

All shareholders own ordinary shares and enjoy the same voting rights with respect to each share.

We adopted a second share option scheme, which we refer to as the 2002 Scheme, on December 23, 2002 and terminated the share option scheme adopted and in effect since July 12, 1997, which we refer to as the 1997 Scheme. ~~The provisions~~Upon termination of the 1997 Scheme, ~~remain in force to the extent necessary to give effect to the exercise of any option~~no further options can be granted ~~pursuant to~~under the 1997 Scheme. ~~Such options continue to be valid and exercisable in accordance with~~Options granted under the 1997 ~~Scheme.~~Scheme that are not exercised have lapsed automatically on July 12, 2007. Under the terms of the 2002 Scheme, our board of directors or the Board, may, in its discretion from time to time, and subject to such conditions as the Board may determine, within ten years beginning on December 23, 2002, grant ~~employees, including~~any employee or executive or officer of the Company or any of its subsidiaries (including executive, non-executive and independent non-executive directors of ~~City Telecom or any~~each of ~~its subsidiaries~~the abovementioned companies) and any suppliers ~~and~~or professional advisers ~~of City Telecom~~who will or ~~any of~~have provided services to the Company and/or its subsidiaries ~~options~~ to subscribe for our ordinary shares.

The maximum number of ordinary shares which may be issued upon exercise of all options to be granted under our 2002 Scheme and any of our other share option scheme(s) must not exceed 10% of the ordinary shares in issue as of the date of approval or adoption of the scheme by the shareholders which was December 23, 2002 for the 2002 Scheme. Ordinary shares which would have been issuable pursuant to options which have lapsed in accordance with the terms of such share option schemes will not be counted for the purpose of the 10% limit. Such limit may be refreshed upon approval by shareholders and compliance with all requirements under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, which we refer to as the Listing Rules. Pursuant thereto, such limit was refreshed with the approval of our shareholders in our annual general meeting held on December ~~29, 2004~~24, 2007 up to a maximum limit equal to 10% of our total number of issued shares as at December ~~29, 2004.~~24, 2007. Notwithstanding the foregoing, the number of ordinary shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under our 2002 Scheme and any of our other share option scheme(s) at any time shall not exceed 30% of the total number of ordinary shares in issue from time to time.

The total number of ordinary shares issued and which may be issued upon exercise in full of the options granted under our 2002 Scheme and any of our other share option scheme(s) (including exercised, cancelled and outstanding options) to each eligible participant in any 12 month period up to and including the date of grant shall not exceed 1% of the outstanding ordinary shares as at the date of grant. Any further grant of options in excess of this 1% limit must be approved by shareholders.

The subscription price for an ordinary share payable by a participant upon the exercise of any option granted under the 2002 Scheme will be determined by the Board in its absolute discretion, except that such price will not be less than the highest of (a) the closing price of the ordinary shares as stated in The Stock Exchange of Hong Kong Limited’s daily quotations sheet on the date of grant, which must be a business day; (b) the average of the closing prices of the ordinary shares as stated in The Stock Exchange of Hong Kong Limited’s daily quotations sheets for the ~~five~~5 business days immediately preceding the date of grant; and (c) the nominal value of an ordinary share.

Any grant of options to any of our directors, chief executives or substantial shareholders or any of their respective associates (as defined in the Listing Rules) is required to be approved by our non-grantee independent non-executive directors. If we propose to grant options to a substantial shareholder or any of its independent non-executive directors, or their respective associates, which will result in the number of ordinary shares issued and to be issued upon exercise of options granted and to be granted under our 2002 Scheme and any of our other share option scheme(s) (including options exercised, cancelled and outstanding) to such person in the 12 month period up to and including the date of such grant (a) representing in aggregate over 0.1% of the outstanding ordinary shares; and (b) having an aggregate value in excess of HK$5 million, based on the closing price of the ordinary shares at the date of each grant, such further grant of options will be subject to approval by shareholders and all requirements under the Listing Rules.

A grant of options may not be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information, including annual and interim results, has been made public.

The period during which an option may be exercised will be determined by the Board in its absolute discretion, except that no option may be exercised later than ten years from the date of grant. No option may be granted more than ten years after December 23, 2002. Subject to our earlier termination, the 2002 Scheme shall be valid and effective for a period of ten years after the date of adoption, that is, until December 23, 2012. In addition and to the extent not already exercised, an option will automatically lapse and not be exercisable upon the occurrence of any of the following events:

~~Through~~As of January ~~17, 2007, the Board had adopted four resolutions pursuant to the 2002 Scheme. The~~21, 2008, a total number of 72,280,000 options were granted, in12,625,000 options were exercised, 8,020,000 options were lapsed and 51,635,000 options remain outstanding and unexercised. In our annual general meeting held on December 24, 2007, our shareholders approved the ~~resolutions pursuant to~~refreshment of the 2002 Scheme limit, i.e. 62,704,840 shares representing 10% of the issued share capital of the Company as at December 24, 2007. A total number of 62,704,840 options is available for issue as of January ~~17, 2007 is 33,760,000, of which 710,000 have been exercised, 32,590,000 are outstanding and 460,000 have lapsed, been forfeited or cancelled.~~21, 2008.

The following table sets forth certain information regarding ownership of our ordinary shares as of January ~~17, 2007~~21, 2008 by all persons who are known to us to own beneficially 5% or more of our ordinary shares.

⁽³⁾

Of the ~~34,275,738~~352,792,737 shares, 318,516,999 shares are beneficially owned through Mr. Cheung’s 27.062% interest in Top Group, 10,508,000 shares are ~~personally~~ owned directly by Mr. Cheung and 23,767,738 shares are beneficially owned through Mr. Cheung’s 50% interest in Worship Limited. ~~The shareholdings of Mr. Cheung were reduced from 329,024,999 to 34,275,738.~~

⁽⁴⁾	The 318,516,999 shares are beneficially owned through Mr. Leung’s 21% and Mr. Yau’s 9.8% interest in Top ~~Group International Limited.~~Group.

⁽⁵⁾⁽⁵⁾

The ~~67,900,000~~55,542,000 shares owned by EK Investment Management Limited is the number of shares as notified to us by EK Investment Management Limited as of ~~August 15, 2005.~~December 18, 2007.

⁽⁶⁾⁽⁶⁾

Beneficial ownership is determined in accordance with the rules of the SEC.

As of ~~December 2006,~~January 21, 2008, there were ~~fifteen~~11 registered holders of ~~1,666,712 of our~~2,586,127 American ~~depositary shares~~Depositary Shares in the United States, consisting of ~~approximately 5.43%~~8.25 % of our outstanding shares.

All shareholders own ordinary shares and enjoy the same voting rights with respect to each share.

Top Group International ~~Limited~~Ltd. is a holding company incorporated in British Virgin Islands with no active operations. Top Group has two directors, Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul, who are our chairman and chief executive ~~officer.~~officer respectively. They are two of shareholders of Top Group. Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew are the two other shareholders of Top Group.

Mr. Leung Ka Pak was ~~an executive~~a director and the president of all subsidiaries in Canada other than City Telecom (Canada) Inc.. He resigned as a director and president in October 2005. After Mr. Leung resigned, Mr. Yau Ming Yan, Andrew was a director and the president of all our subsidiaries in Canada other than City Telecom (Canada) ~~Inc. until October 2005 when he resigned. Mr. Yau Ming Yan, Andrew, is an executive~~Inc.. He resigned as a director and ~~the~~ president ~~of our subsidiaries~~ in ~~Canada other than City Telecom (Canada) Inc.~~July 2006.

EK Investment Management Limited is not affiliated with us or our officers or directors.

Except as disclosed above, we are not directly or indirectly owned or controlled by any other person, corporation or foreign government.

We are not aware of any arrangement the operation of which may at a subsequent date result in a change of control of City Telecom.

For the period since the beginning of our preceding three financial years up to the date of this document, we were a party to the following related party transactions.

On July 15, 2003, Automedia Holdings Limited, a wholly-owned subsidiary of the Company, entered into a conditional agreement with Takua Corporation, or Takua, for the sale of the entire issued share capital of City Telecom (Japan) Co., Ltd., or City Telecom Japan, for an aggregate price of JPY30.0 million (approximately HK$2.0 million), which is to be paid by Takua in thirty monthly installments. Prior to the entering into the Agreement, City Telecom Japan was our wholly-owned subsidiary. Takua is wholly-owned by Mr. Masaaki Asai, who is a brother of Mr. Tatsushi Asai, a director of City Telecom Japan. Mr. Tatsushi Asai also acts as a guarantor for the due and punctual performance of Takua’s obligations under this agreement for no additional consideration.

~~As of August 31, 2006, we had received approximately HK$0.3 million from Takua.~~

~~The transaction has been completed as at August 31, 2006 and there was no outstanding amount due from Takua.~~

All of our directors and senior management have employment service agreements with ~~us except for our recently appointed Chief Financial Officer who will enter into an employment service contract after approval from the Remuneration Committee.~~us. Certain of our directors and senior management receive housing allowances, pensions and bonuses. In addition, some of our directors are also senior management of City Telecom and these persons may also have the ability to make significant business decisions effecting our operations. See Item 6 “Directors and Senior Management” of this annual report for details concerning these arrangements.

We are currently involved in ~~four~~two material legal or regulatory proceedings. They are described below:

People’s Telecom. In March 2004, ~~we asked~~our wholly owned subsidiary, Hong Kong Broadband Network Limited (“HKBN”) requested the Telecommunications Authority to make a determination, onpursuant to section 36A of the Telecommunications Ordinance (Cap 106), in respect of the level of ~~charges~~fixed-mobile interconnection charge (“FMIC”) to be paid by China Resources Peoples Telephone Company Limited ~~or People’s Telecom, for direct interconnection between its mobile network and our Metro Ethernet network~~(“Peoples”) and the effective date of such ~~charges under~~charges. This FMIC is paid by a mobile network operator to the ~~Telecommunications Ordinance.~~interconnecting fixed network operator for telephony traffic both from a fixed line to a mobile phone and from a mobile phone to a fixed line. In May 2004, the Telecommunications Authority confirmed to ~~People’s Telecom~~Peoples and HKBN that mobile operators (in this case Peoples) should pay interconnection charges to fixed network operators ~~including ourselves,~~(in this case HKBN) in accordance with the existing charging principles ~~provided~~stated clearly in the relevant Statements issued by the Telecommunications ~~Authority.~~Authority, particular in Statements No. 5 & 7. In August 2004, the Telecommunications Authority agreed to ~~make~~commence a determination regarding the level and effective date of ~~interconnection charges~~FMIC payable to usHKBN by ~~People’s Telecom.~~Peoples. In March 2006, the Telecommunications Authority issued a preliminary analysis and requested comments from HKBN. HKBN submitted its response to the Telecommunications Authority in July 2006 and September 2006 respectively. ~~These proceedings are still~~Finally, in ~~progress and~~June 2007, the Telecommunications Authority ~~is considering~~made a determination on the ~~submissions, information and comments submitted~~level of FMIC payable by ~~both parties. The Telecommunications Authority has not yet reached any conclusion.~~Peoples to HKBN for the period from April 2002 to August 2004.

~~Jade Com~~PCCW case~~. Jade Com Development~~On December 24, 2007, PCCW IMS Limited ~~or Jade Com,~~filed a ~~Hong Kong company, alleged in a claim filed in April 13, 1999 in~~Writ together with an Endorsement of Claim with the High Court of Hong Kong, ~~that we, as~~alleging a ~~principal~~claim against the Company in respect of ~~one~~an advertisement published by the Company on December 19, 2007, seeking damages of ~~our wholly owned subsidiaries, wrongfully terminated~~

~~a telecommunications service agreement entered into on November 26, 1997. Jade Com claimed damages for breach of contract~~no less than HK$1,000,000 and misrepresentation, but did not state the specific amount of its claim. If the agreement had not been terminated, we would have had a remaining commitment of approximately US$3.6 million under the agreement. We filed a defense in May 24, 1999 asserting that we were not the principalan injunction preventing further publication of the ~~wholly owned subsidiary which entered the agreement~~advertisement, based on defamation and ~~alternatively, Jade Com had breached a condition of the agreement that they possess all the legal approvals and licenses necessary~~malicious falsehood. The Company is now waiting for the ~~provision~~detailed Statement of their services. Specifically, our defense asserts that Jade Com did not have certain regulatory approvals required for the provision of the international telecommunications services that formed the basis of the agreement. As such, we asserted in our defense that our wholly owned subsidiary was entitledClaim to ~~terminate the agreement. In February 2001, the parties consented to adjourn the case indefinitely with liberty to restore. Accordingly, we have not made any reserve for~~be filed by PCCW IMS Limited and shall contest this ~~litigation.~~claim accordingly.

Unless the relevant provisions of the Companies Ordinance require otherwise, we may by ordinary resolution (being a resolution passed by a majority of our shareholders who attend and vote at a meeting of shareholders) from time to time declare dividends, but no dividend shall exceed the amount recommended by our board of directors. Our Articles contain provisions on apportioning dividends where shares are not or were not fully paid for during the period covered by the dividend.

Unless the relevant provisions of the Companies Ordinance require otherwise, our board of directors may pay such interim dividends as appears to them to be justified by our financial position and pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, whatever our financial position, if the board of directors feels that this payment is justified.

Any dividend not claimed by a shareholder after a period of six years from the date when it was first due to be paid shall be forfeited and shall revert to us. The payment by our board of directors of any unclaimed dividend, interest or other sum payable on or in respect of a share into a separate account shall not make us responsible as a trustee for such sums.

~~No dividends were~~For fiscal 2007, an interim dividend was declared and paid of HK4 cents per ordinary share totaling of HK$24,635,000. A final dividend of HK4 cents per ordinary share together with a script alternative was proposed on November 22, 2007, which was subsequently approved by shareholders in ~~fiscal 2005 and 2006.~~the annual general meeting held on December 24, 2007.

Our ordinary shares were listed under the number “1137” on the Stock Exchange of Hong Kong Limited (the “SEHK”) on August 4, 1997. Our American depositary shares, each representing 20 ordinary shares, were listed under the symbol “CTEL” on the Nasdaq on November 3, 1999. Our 8.75% notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the Singapore Exchange Securities Trading Limited (“SGX-ST”) on January 24, 2005. The 8.75% notes were subsequently exchanged for registered notes with ISIN code US178677AB60 pursuant to a registration statement under the U.S. Securities Act of 1933 on June 24, 2005.

The price of our ordinary shares on the SEHK as of its close of trading on January ~~17, 2007~~21, 2008 was HK$~~0.60~~1.92 per share. The table below shows the high and low closing prices of the shares on the SEHK since listing.

The price of our American depositary shares on Nasdaq as of its close of trading on January ~~17, 2007~~18, 2008 was US$~~1.59~~4.70 per American depositary share. The table below shows the high and low closing prices of the American depositary shares on Nasdaq since listing.

2005

July
   2.300    2.100
August
   2.320    2.060
September
   2.140    1.900
October
   2.440    1.910
November
   2.080    1.640
December
   1.700    1.370
2006

January
   1.590    1.440
February
   1.890    1.460
March
   1.970    1.670
April
   2.010    1.750
May
   1.880    1.350
June
   2.610    1.400
July
   1.790    1.510
August
   1.800    1.570
September
   1.780    1.510
October
   1.700    1.270
November
   1.850    1.400
December
   2.500    1.510
2007

January through (January 23, 2007)
   7.100    1.900

Our ordinary shares of common stock were listed under the number “1137” on the SEHK on August 4, 1997. Our American depositary shares, each representing 20 ordinary shares, were listed under the symbol “CTEL” on the Nasdaq on November 3, 1999. Our 8.75% notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the SGX-ST on January 24, 2005. The 8.75% notes were subsequently exchanged for registered notes with ISIN code US178677AB60 pursuant to a registration statement under the U.S. Securities Act of 1933 on June 24, 2005.

Described below is a summary of certain provisions of our existing Memorandum and Articles of Association (the “Articles”)~~, as amended on December 29, 2004 and December 29, 2005 and currently in effect,~~ and, where relevant, the Companies Ordinance (Chapter 32 of the laws of Hong Kong) (the “Companies Ordinance”). As this is a summary, it does not contain all the information that may be important to you. You should

therefore read our complete Articles if you would like additional information, which were filed with the U.S. Securities and Exchange Commission as an exhibit 1 to the annual report on Form 20-F for fiscal 2005 and is incorporated by reference herein.

~~We were~~City Telecom was incorporated in Hong Kong on May 19, 1992 under the Companies Ordinance. ~~Article~~Clause 3 of the Memorandum of Association states that ~~City Telecom’s~~the Company’ s objects are to carry on the business of telecommunications services in addition to various other related and unrelated business activities.

A director shall not vote on, or be counted in the quorum in relation to, any resolution of ~~the~~our board of directors in respect of any contract in which the director or any of his associate(s) (within the meaning of the Listing Rules) has a material interest. This prohibition shall not apply to the following:

Unless the relevant provisions of the Companies Ordinance require otherwise, our board of directors may pay such interim dividends as appears to them to be justified by our financial position and pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, ~~whatever~~whenever our financial position, if the board of directors feels that this payment is justified.

In respect of any dividend proposed to be paid or declared by our board of directors or by us in a general meeting, our board of directors may further propose and announce prior to or at the same time as the payment or declaration of such dividend either that:

Any general meeting declaring a dividend may, upon the recommendation of our board of directors, by ordinary resolution, direct that the dividend shall be met, wholly or partly, by the distribution of our assets.

If ~~City Telecom~~the Company commences liquidation, the liquidator may, with the sanction of a special resolution of ~~City Telecom~~the Company and any other sanction required by the Companies Ordinance:

but no shareholder shall be compelled to accept any shares or other assets upon which there is any liability.

The Companies Ordinance requires our board of directors to hold an annual general meeting of our shareholders once every calendar year and not more than 15 months after our previous annual general meeting. The annual general meeting and any other general meeting of our shareholders held for the passing of a special resolution (being a resolution passed by a majority of not less than 75% of those shareholders who attend and vote at a meeting of shareholders) should be convened by not less than 21 clear days’ notice in writing. The notice shall specify the place, date and time of meeting and the general nature of the business to be transacted. An annual general meeting may be called by less than 21 clear days’ notice if it is agreed to by all shareholders entitled to attend and vote at the meeting. The business of the annual general meeting will include:

Our board of directors may convene an extraordinary general meeting (which is any general meeting of the shareholders other than the yearly annual general meeting) whenever it thinks fit and must do so upon the request in writing of shareholders holding not less than one-twentieth of our paid-up capital carrying the right to vote at the general meeting. All extraordinary general meetings (other than those convened for the passing of a special resolution referred to above) should be convened by not less than 14 clear days’ notice in writing. Extraordinary general meetings may be called by less than 14 clear days’ notice by a majority in number of the shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving that right.

Except as otherwise provided by our Articles, two shareholders present in person or by proxy and entitled to vote shall be a quorum for all purposes. No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the choice or appointment of a chairman which shall not be treated as part of the business of the meeting.

~~Nasdaq’s~~The Nasdaq marketplace rules ~~which apply to all companies listed on~~also provide that a foreign private issuer such as the Nasdaq Stock Market, state in Rule 4350(f) that the minimum quorum for any meeting of holders of a company’s common stock is 33 1/3% of the outstanding shares. Consistent with practice of companies incorporated in Hong Kong, our articles of association only require a quorum of two “Members” (as such term is defined our articles of association) for any general meeting of our shareholders. As a result, we requested, and NasdaqCompany may be granted ~~to us,~~ an exemption from ~~compliance with~~such requirements if it follows the ~~Rule 4350(f) requirement.~~practice of its home country.

There are no restrictions, either pursuant to our Articles, or pursuant to the laws of Hong Kong, on the rights of non-residents of Hong Kong or foreign persons to hold or exercise voting rights with respect to our ordinary shares.

~~Under the Companies Ordinance, any action~~Any business to be ~~taken~~transacted by the shareholders in a general meeting requires the passing of either an ordinary or a special resolution at such meeting. Generally, resolutions of the shareholders are passed by ordinary resolution. However, the Companies Ordinance and our Articles provide that certain matters may only be passed as special resolutions.

Unless any shares have special terms as to voting, on a show of hands every ~~member~~shareholder who is present in person at a general meeting, shall have one vote and on a poll every shareholder member who is present in person or by proxy shall have one vote for every share of which he is the holder. Our Articles set out the circumstances in which a poll can be demanded.

Any shareholder that is a recognized clearing house within the meaning of the Securities and Futures Ordinance of Hong Kong may authorize such person or persons as it thinks fit to act as its representative (or representatives) at any general meeting or at any separate meeting of any class of shareholders (if relevant). However, if more than one person is authorized, the authorization must specify the number and class of shares in respect of which each person is in fact authorized. The authorized person will be entitled to exercise the same power on behalf of the recognized clearing house as that clearing house (or its nominees) could exercise if it were an individual ~~shareholder.~~shareholder of the Company.

Under the Companies Ordinance, our board of directors may, without the prior approval of the shareholders, offer to issue new shares to existing shareholders in proportion to their current shareholdings. Our board of directors may not issue new shares in any other way without the prior approval of the shareholders in a general meeting. Any such approval given in a general meeting shall continue in force until the earlier of: (1) the conclusion of the next ~~year’s~~ annual general meeting; or (2) the expiration of the period within

which the next annual general meeting is required by law to be held; or (3) when revoked or varied by an ordinary resolution of the shareholders in a general meeting. If such approval is given, subject to the Listing Rules, our unissued shares shall be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the directors may decide.

Unless specifically restricted by our Articles, any shareholder may transfer all or any of his shares by an instrument of transfer in the usual or common form or in such other form as our board of directors may accept and may approve. Such transfer may be signed by hand or, if the buyer or seller is a clearing house or its nominee(s), signed by hand or by a machine imprinted signature or by such other manner as our board of directors may approve from time to time.

The instrument of transfer of a share shall be signed by or on behalf of both the buyer and the seller of that share provided that our board of directors may dispense with the signing of the instrument of transfer by the buyer in any case which it thinks fit in its discretion to do so. Except as provided in the paragraph above, our board of directors may also decide, either generally or in any particular case, upon request by either the buyer or seller of shares to accept mechanically signed transfers. The seller shall be deemed to remain the holder of the share until the name of the buyer is entered into our register in respect of that share. All instruments of transfer, when registered, may be retained by us. Nothing in our Articles shall prevent our board of directors from recognizing a renunciation of the allotment or provisional allotment of any share by the person to whom the shares were to be allotted in favor of some other person.

Our board of directors may in its absolute discretion and without giving any reason, decline to register any transfer of any share which is not a fully paid share.

If our board of directors declines to register a transfer of any share, it shall, within two months after the date on which the instrument of transfer was lodged, send to the ~~purchaser~~buyer notice of the refusal.

In accordance with ~~the Companies Ordinance and~~ our Articles, only persons who are registered in our register of members are recognized by us as shareholders and absolute owners of the shares. The register of members may be closed by our board of directors at such times and for such periods as it may from time to time decide, but the register shall not be closed in any year for more than 30 days (excluding Sundays and public holidays).

Other than such contracts as are described in our disclosure in Item 7 “Major Shareholders and Related Party Transactions – Related Party Transactions”, we have not entered into any material contracts outside the ordinary course of our business within the two years preceding the date of this annual report.

The Basic Law of Hong Kong provides that the Hong Kong dollar will remain the legal tender in Hong Kong after July 1, 1997. The Basic Law also provides that no foreign exchange control policies will be applied in Hong Kong and that the Hong Kong dollar will be freely convertible. During the Asia regional economic crisis in 1998, however, the Hong Kong Government intervened on several occasions in the foreign exchange market by purchasing the Hong Kong dollar and selling the U.S. dollar to support the value of the Hong Kong dollar.

The following provides a general outline of the material tax considerations that may be relevant to a decision to own or dispose of our American depositary shares or shares but does not purport to deal with the tax consequences applicable to all categories of investors. Prospective investors should consult their own professional advisers on the Hong Kong, United States and overall tax implications of investing, holding or disposing the American depositary shares or shares under the laws of the countries in which they are liable to taxation. The discussion below is applicable to both U.S. and non-U.S. citizens as an investor.

No tax is payable in Hong Kong by withholding or otherwise in respect of dividends paid by City Telecom.

No tax is imposed in Hong Kong in respect of gains from the sale of our shares and American depositary shares, unless all the following three factors are present:

Taxable gains will be subject to Hong Kong profits tax which is currently imposed on corporations at the rate of 17.5% and on unincorporated ~~business~~businesses or ~~individuals.~~individuals at the rate of 16%.

Gains from sales of our shares, which are effected on the Hong Kong Stock Exchange, will be considered to be derived from or arising in Hong Kong. Liability to Hong Kong profits tax in respect of such gains would arise if the ~~Shares~~shares were not held as capital assets and the gains are attributable to a business, trade or profession carried out in Hong Kong.

Gains from sales of our American depositary shares will be considered to be derived from or arising in Hong Kong if the relevant purchase or sales contracts are ~~negotiated and concluded~~effected in Hong Kong, and such gains will be subject to Hong Kong profits tax in the case of those persons dealing or trading in the American depositary shares as part of their trade, profession or business being carried out in Hong Kong. In any case of an exchange of any American depositary receipts evidencing American depositary shares for certificates representing shares, any gain on subsequent disposition of such shares will be the difference between the initial price of American depositary shares and the market value of such shares at the date of disposition.

A sale or purchase of shares is subject to Hong Kong stamp duty which is payable by each of the seller and the purchaser in equal shares at the rate of HK$1.00 per HK$1,000 or part thereof by reference to the value of the consideration paid or the market value of the shares on the Hong Kong Stock Exchange or otherwise on the date the contract note for the sale or purchase is executed, whichever is greater. If, in the case of a sale or purchase of the shares by a person who is not resident in Hong Kong, the stamp duty on either or both of the contract notes is not paid, the transferee will be liable to pay stamp duty on the instrument of transfer in an amount equal to the unpaid duty. If the stamp duty is not paid on or before the due date, a penalty of up to ten times the duty payable may be imposed. In addition, a fixed duty of HK$5.00 is currently payable on any instrument of transfer of shares.

~~Upon~~In addition to the ~~exchange~~depositary’s charges, if any, the withdrawal of ~~any~~the shares upon the surrender of American depositary receipts evidencing American depositary shares, ~~for certificates representing shares, or exchange~~and the issuance of ~~shares for~~ American depositary receipts evidencing American depositary shares upon the deposit of the shares, will be subject to Hong Kong stamp duty ~~aggregating HK$1.00 per HK$1,000~~at the rate described above for sale and purchase transactions, unless the withdrawal or ~~part thereof is payable~~deposit does not result in ~~addition to~~change in the ~~depositary’s charges, if any.~~beneficial ownership of the shares under Hong Kong law. Investors are not liable for stamp duty on the issuance of the American depositary shares upon the initial deposit of shares issued directly to the depositary or for the account of the depositary. No Hong Kong stamp duty is payable upon the transfer of American depositary receipts evidencing our American depositary shares if such American depositary receipts are not maintained on a register in Hong Kong.

There is currently no reciprocal tax treaty between Hong Kong and the U.S. regarding withholding.

The following is a summary of certain United States federal income tax considerations that are anticipated to be material to the purchase, ownership, and disposition of our shares or American depositary shares by U.S. Holders, as defined below. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed U.S. Treasury regulations, published rulings and court decisions, all as in effect on the date hereof. These laws are all subject to change or different interpretation, possibly on a retroactive basis. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as investors subject to special tax rules including: partnerships, financial institutions, insurance companies, broker-dealers, tax-exempt organizations, and, except as described below, non-U.S. Holders, or to persons that will hold our shares or American depositary shares as part of a

straddle, hedge, conversion, or constructive sale transaction for United States federal income tax purposes or that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, or local tax considerations. This summary assumes that investors will hold our shares or American depositary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code.

Each prospective investor is urged to consult its own tax advisor regarding the United States federal, state, local, and foreign income and other tax considerations of the purchase, ownership, and disposition of our shares or American depositary shares.

For purposes of this summary, a U.S. Holder is a beneficial owner of shares or American depositary shares that is for United States federal income tax purposes:

an individual who is a citizen or resident of the United States;

a corporation, or other entity that is taxable as a corporation, created in or organized under the laws of the United States or any State or political subdivision thereof;

an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;

a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust; or

a trust that was in existence on August 20, 1996, was treated as a United States person, for United States federal income tax purposes, on the previous day, and elected to continue to be so treated.

A beneficial owner of our shares or American depositary shares that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”

A foreign corporation will be treated as a “passive foreign investment company” or “PFIC”, for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of “passive” income or 50% or more of its assets are passive for any year. Based on our current and projected income, assets, and activities, we presently believe that we are not a PFIC in the current year and do not anticipate becoming a PFIC in the future. This is, however, a factual determination made on an annual basis. Because the classification of certain of our assets for United States federal income tax purposes is uncertain, the PFIC rules are subject to administrative interpretation, and the relevant facts may change in the future, however, no assurance can be given that we are not or will not be treated as a PFIC. The discussion below under “U.S. Holders-Dividends” and “U.S. Holders-Sale or Other Disposition of Shares or American depositary shares,” assumes that we will not be subject to treatment as a PFIC for United States federal income tax purposes. If we were currently or were to become a PFIC, U.S. Holders would be subject to special rules and a variety of potentially adverse tax consequences under the Code. See “PFIC Considerations” below.

For United States federal income tax purposes, a U.S. Holder of an American depositary share will be treated as the owner of the proportionate interest of the shares held by the depositary that is represented by an American depositary share and evidenced by such

American depositary share. Accordingly, no gain or loss will be recognized upon the exchange of an American depositary share for the holders’ proportionate interest in the shares. A U.S. Holder’s tax basis in the withdrawn shares will be the same as the tax basis in the American depositary share surrendered therefore, and the holding period in the withdrawn shares will include the period during which the holder held the surrendered American depositary share.

Dividends. Any cash distributions paid by us out of our earnings and profits, as determined under United States federal income tax principles, will be subject to tax as ordinary dividend income and will be includible in the gross income of a U.S. Holder upon actual or constructive receipt. Cash distributions paid by us in excess of our earnings and profits will be treated first as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in our shares or American depositary shares, and thereafter as gain from the sale or exchange of a capital asset. Dividends paid in Hong Kong dollars will be includible in income in a United States dollar amount based on the United States dollar to Hong Kong dollar exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of American depositary shares, or by the U.S. Holder, in the case of shares held directly by such U.S. Holder. U.S. Holders should consult their own tax advisors regarding the United States federal income tax treatment of any foreign

currency gain or loss recognized on the subsequent conversion of Hong Kong dollars received as dividends to United States dollars. Dividends received on shares or American depositary shares will not be eligible for the dividends received deduction allowed to corporations.

Under current law, “qualified dividend income” received by an individual after December 31, 2002 and before January 1, ~~2009~~2011 is subject to United States federal income tax rates lower than those applicable to ordinary income. The top federal income tax rate on such qualifying dividends received by an individual is 15%, or 5% for those individuals whose incomes fall in the 10- or 15- percent brackets. Based upon our existing and anticipated future operations and current assets, we believe that we are a “qualified foreign corporation” and that our dividends paid to U.S. Holders who are individuals will be eligible to be treated as “qualified dividend income”, provided that such Holders satisfy applicable holding period requirements with respect to the American depositary shares and other application requirements. Dividends paid by foreign corporations that are classified as PFICs are not “qualified dividend income”. See “PFIC Considerations” below.

Dividends received on shares or American depositary shares generally will be treated, for United States federal income tax purposes, as income from non-U.S. sources. Such non-U.S. source income generally will be “passive income” or “financial services income” for taxable years beginning on or before December 31, 2006, and as “passive category income”, or in certain cases “general category income”, for taxable years beginning after December 31, 2006, which is treated separately from other types of income for purposes of computing the foreign tax credit. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on shares or American depositary shares. U.S. Holders who do not elect to claim a foreign tax credit for federal income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the U.S. Holder elects to do so for all creditable foreign income taxes.

In addition, the United States Treasury has expressed concerns that parties to whom depositary shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of American depositary shares. Accordingly, the analysis of the creditability of foreign withholding taxes could be affected by future actions that may be taken by the United States Treasury.

Sale or Other Disposition of Shares or American depositary shares. A U.S. Holder will recognize capital gain or loss upon the sale or other disposition of shares or American depositary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted tax basis in such shares or American depositary shares, as each is determined in U.S. dollars. Any such capital gain or loss will be long-term if the shares or American depositary shares have been held for more than one year and will generally be United States source gain or loss. The claim of a deduction in respect of a capital loss, for United States federal income tax purposes, may be subject to limitations. If a U.S. Holder receives Hong Kong dollars for any such disposition, such U.S. Holder should consult its own tax advisor regarding the United States federal income tax treatment of any foreign currency gain or loss recognized on the subsequent conversion of the Hong Kong dollars to United States dollars.

Pursuant to recently-enacted legislation, a penalty in the amount of $10,000 in the case of a natural person and $50,000 in any other case is imposed on any taxpayer that fails to timely disclose its participation in a “reportable transaction” (as defined in Section 6011 of the Code). A taxpayer that has participated in a “reportable transaction” during the tax year must attach a disclosure statement to its United States federal income tax return. A “reportable transaction” includes a transaction generating a loss under Code Section 165 in excess of certain specified amounts (which amounts vary depending on several factors, including the status of the taxpayer as an individual, trust, partnership or corporation). Investment in shares and American depositary shares could be treated as a “reportable transaction” that must be disclosed on a U.S. Holder’s United States federal income tax return if the investment results in the taxpayer claiming a foreign currency loss on such tax return equal to or greater than the specified amount (e.g., $50,000 in the case of a taxpayer that is an individual or trust). U.S. Holders are urged to consult their own tax advisors regarding the circumstances in which an investment in shares or American depositary shares may result in a “reportable transaction” that is required to be disclosed.

If we were to be classified as a PFIC for any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of the shares or American depositary shares may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sales of the shares or American depositary shares and (ii) any “excess distribution” paid on the shares or American depositary shares (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution. Prospective investors are urged to consult their own tax advisors regarding the potential tax consequences to them if we are or do become a PFIC, as well as certain elections that may be available to them to mitigate such consequences.

An investment in shares or American depositary shares by a Non-U.S. Holder will not give rise to any United States federal income tax consequences unless:

the dividends received or gain recognized on the sale of the shares or American depositary shares by such person is treated as effectively connected with the conduct of a trade or business by such person in the United States as determined under United States federal income tax law, and the dividends are attributable to a permanent establishment (or in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. Holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate, or

in the case of gains recognized on a sale of shares or American depositary shares by an individual, such individual is present in the United States for 183 days or more and certain other conditions are met. The non-U.S. Holder will be subject to United States federal income tax at a rate of 30% on the amount by which the U.S.-source capital gains exceed non-U.S.-source capital losses.

In general, information reporting requirements will apply to dividends on or the proceeds received on the sale, exchange or redemption of shares or American depositary shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations, and backup withholding tax at the rate of 28% may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number (or otherwise establishes, in the manner provided by law, an exemption from backup withholding) or to report dividends required to be shown on the U.S. Holder’s United States Federal income tax returns.

Backup withholding is not an additional income tax, and the amount of any backup withholding from a payment to a U.S. Holder will be allowed as credit against the U.S. Holder’s United States Federal income tax liability provided that the appropriate returns are filed.

A non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status to the payor, under penalties of perjury, on IRS Form W-8BEN.

We filed with Securities and Exchange Commission in Washington, D.C. a registration statement on Form F-1 (Registration No. 333-11012) under the Securities Act in connection with our global offering of American depositary shares in November 1999. The registration statement contains exhibits and schedules. For further information with respect to City Telecom and the American

depositary shares, please refer to the registration statement and to the exhibits and schedules filed with the registration statement. In addition, whenever a reference is made in this annual report to a contract or other document of City Telecom, you should be aware that such reference is not necessarily complete and that you should refer to the exhibits and schedules that are a part of the registration statement for a copy of the contract or other document.

Our functional currency is the Hong Kong dollar, the currency in which the majority of our revenue and related accounts receivable and expenses are denominated. Certain of the expenses of our telecommunications business are payable in other currencies, primarily the U.S. dollar. Since the exchange rate between the Hong Kong and the U.S. dollar is pegged, our operations have not been significantly affected by exchange rate fluctuations. Therefore, we do not use derivative financial instruments to manage our exchange rate exposures.

In the normal course of business, we also face other risks such as country risk, credit risk and legal risk and we do not use derivative financial instruments to hedge such risks.

We are exposed to market risk from changes in currency exchange rates and interest rates.

The functional currency of our operations, and our financial statement reporting currency, is the Hong Kong dollar. Our monetary assets and liabilities are primarily denominated in Hong Kong dollars, substantially all our net sales are denominated and received in Hong Kong dollars, and our labor and administrative costs are incurred primarily in Hong Kong dollars. However, we have certain current and long-term bank deposits, other investments and short-term bank loans which are primarily denominated in U.S. dollars.

As of August 31, ~~2006,~~2007, we had the following significant foreign currencies denominated account balances:

Further, our principal long-term debt obligations are the US$125.0 million 8.75% senior notes issued in January 2005, which are denominated in U.S. dollars.

As the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HK$7.80=$1.00 since 1983, we have not experienced significant foreign exchange gains or losses associated with that currency. The Hong Kong government could, however, change the pegged rate or abandon the peg altogether. Depreciation of the Hong Kong dollar against the U.S. dollar would generally increase our U.S. dollar expenses, and increase the amount of Hong Kong dollar revenue that we would be required to earn to meet our payment obligations under the 8.75% notes.

We also incur expenses denominated in Renminbi, the official currency of the People’s Republic of China, in connection with our Guangzhou call centre. These include the salaries that we pay to our personnel as various operating expenses that we incur to maintain our operations. As a result, we are exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollar and the Renminbi. If the Renminbi appreciates against the Hong Kong dollar, the amount of Hong Kong dollars we would be required to spend to maintain our call center would increase. Therefore, in order to limit our foreign currency risk exposure on the Renminbi, we have entered into certain forward foreign exchange contracts during fiscal 2006 which matured as at August 31, 2006. In prior years, no recognition of such instrument is required under Hong Kong GAAP. However, with effect from September 1, 2005, under Hong Kong GAAP reporting, such instrument are also required to be recorded at fair value. Under U.S. GAAP reporting, all forward foreign exchange contracts are and have been recorded at fair value.maintain Renminbi cash balance that approximates three months’ operating cash flow.

Prior to our repayment in full of our floating interest rate loan facility with HSBC, we were exposed to interest rate risks. In connection with this facility, we entered into an interest rate swap agreement to hedge the impact of fluctuations in interest rates, under which we make a monthly interest payment at a fixed rate of 2.675% per annum on a notional amount of HK$100.0 million (which is reduced by the principal repayment schedule during the loan period), and will receive monthly interest payments calculated at HIBOR during the period from March 2004 to December 2009 or until the facility is repaid and we terminate the swap agreement.

In prior years, no recognition of such instrument is required under ~~Hong Kong GAAP.~~HKFRS. However, with effect from September 1, 2005, such interest rate swap instrument must be recorded at fair value, which we determined to be approximately HK$~~2,570,000~~1.8 million as of August 31, ~~2005~~2006 and HK$~~1,845,000~~1.0 million as of August 31, ~~2006.~~2007. Under U.S. GAAP reporting, such interest rate swap instrument is and has been recorded at fair value. ~~The~~As of August 31, 2007, the interest rate swap agreement remains outstanding following the full repayment of our loan facility with HSBC. On January 24, 2008, the interest rate swap agreement has been unwound.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by City Telecom in reports that we file or submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. With the passing of the U.S. Sarbanes-Oxley Act of 2002, we have adopted additional measures to strengthen the internal controls within City Telecom, including the following:

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.Subsequent to the date of their evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls.

Our board of directors established an Audit Committee to ensure the impartial supervision of our accounting and business operations. The Audit Committee is comprised of three independent non-executive directors, namely, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Tun Lu Jefferson. Mr. Peh was appointed to the Audit Committee on September 1, 2004 and is a “financial expert” within the meaning of, and as required by, the U.S. Sarbanes-Oxley Act of 2002.

All of our employees, officers and directors are bound by our code of business ethics and conduct. We adopted our code of ethics ~~in 1995~~ and modified it following the passage of, and to comply with, the U.S. Sarbanes Oxley Act of 2002. Copies of our code of ethics are available for viewing on our website at www.ctigroup.com.hk and free of charge upon request made to our ~~corporate~~company secretary. We have not made any amendment to our code of ethics since our most recently completed fiscal year. We have never granted a waiver for non-compliance with the policies and procedures set forth in the code of ethics for any employee of our company or any of our subsidiaries.

With effect from May 13, 2005, PricewaterhouseCoopers, or PwC, tendered its resignation. KPMG was appointed as our independent auditor to fill the casual vacancy caused by the resignation of PwC until the conclusion of the annual general meeting held on December 29, 2005. A resolution was passed in the annual general meeting to reappoint KPMG as our auditor. The fees for the professional services rendered by ~~PwC and KPMG in fiscal 2005, and by~~ KPMG in fiscal 2006 and in fiscal 2007, are set forth in the table below.

Audit fees are the aggregate fees billed by our independent auditors for the annual financial statement audit, subsidiary audits and other procedures required to be performed for the auditors to form an opinion on our consolidated financial statements.

Audit-related fees are the aggregate fees billed by our independent auditors for accounting and advisory services fees and generally include support for the interpretation and implementation of new accounting and reporting standards and acquisition accounting. It also includes the review of the Statement on Details of Contribution of the Occupational Retirement Scheme, and the audit and review of reports for compliance with telecommunications regulations and debt obligations.

~~Tax Fees are the aggregate fees billed by our independent auditors for tax compliance, tax planning and tax consultation services on domestic and international taxation matters.~~

All other fees are the aggregate fees for agreed upon procedures performed in respect of our internal control procedures over financial reporting.

The engagement of PwC and KPMG and the services provided pursuant to such engagement were approved by our audit committee in accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees for all such services have been pre-approved by our audit committee. Our audit committee has satisfied itself that the provision of the above-stated non-audit services has not impaired the independence of ~~PwC and~~ KPMG.

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

By way of a general mandate granted to our directors, the maximum aggregate nominal amount of shares that may be purchased pursuant to a mandate corresponds to 10% of the aggregate nominal amount of our issued share capital at the date the mandate was granted. In fiscal ~~2006,~~2007, no shares were purchased under the mandate then in force.

City Telecom has selected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.

~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~Index to Consolidated Financial Statements

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheets of City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the ~~“Company”~~“Group”) as of August 31, ~~2005~~2006 and ~~2006,~~2007, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years ~~then ended.~~in the three-year period ended August 31, 2007. These consolidated financial statements are the responsibility of the ~~Company’s~~Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our ~~audit~~audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City Telecom (H.K.) Limited and its subsidiaries as of August 31, ~~2005~~2006 and ~~2006,~~2007, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, ~~2005 and 2006,~~2007, in conformity with ~~accounting principles generally accepted in Hong Kong.~~

~~As further described in note 3 (a)-(c), in order to comply with the new and revised~~ Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants, the Company changed its accounting polices for goodwill, share-based payment and financial instruments. Consequently certain amounts previously reported for the years ended August 31, 2004 and 2005 have been restated in order to comply with these new HKFRSs. Also, as further described in note 3(e) to the consolidated financial statements, the Company has restated amounts previously reported for net cash flows from operating activities and net cash flows from investing activities for the year ended August 31, 2005 to present cash outflows for term bank deposits as investing activities instead of operating activities.Standards.

Accounting principles generally accepted in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America. Since prior period consolidated financial statements have been restated, the significant differences between HK GAAP and US GAAP are restated accordingly. Information relating to the nature and effect of such differences is presented in note 30 to the consolidated financial statements.

We have audited the consolidated statement of operations, of cash flows and of changes in shareholders’ equity of City Telecom (H.K.) Limited and its subsidiaries (hereafter collectively referred to as the “Company”) for the year ended August 31, 2004, all expressed in Hong Kong Dollars. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended August 31, 2004, in conformity with accounting principles generally accepted in Hong Kong.

~~As discussed in note 3 to the consolidated financial statements, the Company adopted a number of new or revised~~ Hong Kong Financial Reporting Standards ~~effective September 1, 2005 which resulted in significant changes in the accounting policies of the Company as set out in note 3 to the consolidated financial statements.~~

~~Accounting principles generally accepted in Hong Kong~~ vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in ~~Note 30~~note 29 to the consolidated financial statements.

November ~~23, 2004,~~22, 2007, except ~~for Note 31,~~ as to note 30 which ~~the date~~ is as of January ~~20, 2005, and except for Note 3, as to which the date is January 26, 2007~~22, 2008

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~Consolidated financial statements for the year ended August 31, 2007

The ~~accompanying~~accompany notes are an integral part of these consolidated financial statements.

~~CONSOLIDATED BALANCE SHEETS~~Consolidated financial statements for the year ended August 31, 2007

The ~~accompanying~~accompany notes are an integral part of these consolidated financial statements.

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY~~Consolidated financial statements for the year ended August 31, 2007

The ~~accompanying~~accompany notes are an integral part of these consolidated financial statements.

~~The accompanying notes are an integral part of these consolidated~~Consolidated financial ~~statements.~~

   Year ended August 31,

2004
(restated)

2005
(restated)
2006
   HK$ HK$ HK$
   (Amounts in thousands)
Financing activities

Proceeds from exercise of share options and warrants
   2,168 1,430 13
Net proceeds from issuance of senior notes
   —   943,655 —
Interest paid on senior notes
   —   (52,372 ) (85,235 )
Proceeds from bank loan drawn
   100,000 100,000 —
Repayment of bank loan
   —   (200,000 ) —
Repayment of capital element of finance leases
   —   (497 ) (1,210 )
Dividend paid
   (54,947 ) —   —

Net cash inflow/(outflow) from financing activities
   47,221 792,216 (86,432 )

(Decrease)/increase in cash and bank balances
   (155,260 ) 312,159 (395,023 )
Cash and bank balances at the beginning of year
   383,860 228,347 539,591
Effect of foreign exchange rate changes on cash and bank balances
   (253 ) (915 ) 349

Cash and bank balances at the end of year (note 20)
   228,347 539,591 144,917

~~The amount relates to proceeds received upon maturity of the foreign exchange forward contracts during~~statements for the year ended August 31, 2007

The ~~accompanying~~accompany notes are an integral part of these consolidated financial statements.

~~1 Description of business and basis of presentation~~City Telecom (H.K.) Limited

City Telecom (H.K.) Limited (the “Company”) was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. ~~The Company~~City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the ~~“Company”~~“Group”) are engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.

AsThe following is a list of principal subsidiaries which principally affect the results, assets or liabilities of the Group as at August 31, ~~2006 the Company had the following principal direct and indirect subsidiaries:~~2007:

The accompanying consolidated financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”) which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), as well as accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. ~~Accounting principles generally accepted in Hong Kong~~HKFRSs differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”), details of which are set out in note ~~30.~~29.

The HKICPA has issued certain new and revised HKFRSs that are effective or available for early adoption for accounting periods beginning on or after January 1, 2005. Information on the changes in accounting policies resulting from initial application of these new and revised HKFRSs

Consolidated financial statements for the ~~current and prior accounting periods reflected in the accompanying consolidated financial statements is provided in Note 3.~~year ended August 31, 2007

The consolidated financial statements consist of the balance sheets of the Company and all its subsidiaries as of August 31, ~~2005 and~~ 2006, and 2007 and the related statements of operations, cash flows and changes in shareholders’ equity for the years ended August 31, ~~2004,~~ 2005, 2006 and ~~2006.~~2007.

The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that certain ~~investment securities and derivative~~ financial ~~instruments~~assets are stated at their fair value or amortized cost as ~~described~~explained in the accounting policies set out below (see ~~Note~~notes 2(j) and 2(k)).

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and ~~underlying~~associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

All amounts are expressed in Hong Kong Dollars, the functional currency of City Telecom (H.K.) Limited. Unless indicated otherwise, amounts in Hong Kong Dollars have been rounded to the nearest thousand.

A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the City Telecom (H.K.) Limited, directly or indirectly, holds more than half of the issued share capital or controls more than half the voting power or controls the composition of the board of directors. Subsidiaries are ~~considered to be~~entities controlled ifby the Company. Control exists when the Company has the power ~~directly or indirectly,~~ to govern the financial and operating policies of an entity so as to obtain benefits from ~~their~~its activities. In assessing control, potential voting rights that presently exercisable are taken into account.

~~(d) Group accounting~~Consolidated financial statements for the year ended August 31, 2007

A controlled subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.

Intercompany balances and transactions and any unrealized profits arising from intercompany transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intercompany transactions are eliminated in the same way as unrealized gains but only to the extent that there is no evidence of impairment.

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising from these ~~translations~~transactions are dealt with in the consolidated statement of operations.

For consolidation purposes, the balance sheets of subsidiaries with functional currencies other than Hong Kong Dollars ~~the functional currency of City Telecom (H.K.) Limited,~~ are translated at the ~~rates~~rate of exchange ruling at the balance sheet ~~date whilst the statement of operations is~~date. Revenues and expenses are translated at anthe average rate ~~for~~prevailing during the year. ~~Such~~The resulting exchange differences are dealt with in the consolidated statement of shareholders’ equity as translation reserves.

Goodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date. Any excess of the ~~Company’s~~Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate of a jointly controlled ~~entitiy~~entity is recognized immediately in ~~profit or loss.~~the consolidated statement of operations.

Goodwill is stated at cost less accumulated impairment losses, if any. Goodwill is allocated to cash-generating units and is tested annually for impairment (see ~~Note~~note 2(i)). In respect of associates or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity.

On disposal of a cash generating unit, an associate or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

Investment properties are land and/or buildings held to earn rental income and/or for capital appreciation.

Investment properties are stated in the balance sheet at cost less accumulated depreciation (see ~~Note~~note 2(g)) and impairment losses (see ~~Note~~note 2(i)), if any. Any gain or loss arising from the retirement or disposal of an investment property is recognized in the consolidated statement of operations. Rental income from investment property is accounted for as described in ~~Note 2(u)~~note 2(t)(vi).

Fixed assets are stated at cost less accumulated depreciation and impairment losses.

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:

Where the parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.

Major costs incurred in restoring fixed assets to their normal working condition are charged to the consolidated statement of operations. Major improvements are capitalized and depreciated over ~~their~~the expected useful ~~lives.~~lives of the related asset.

The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in the consolidated statement of ~~operations.~~operations on the date of disposal.

During the year ended August 31, 2007, the Group changed the estimated useful lives of certain telecommunications equipment. The effect of such change is set out in note 9(d).

Under certain circumstances, the ~~company~~Group may have obligation to dismantle part of its network upon request by concerned parties. Owing to the absence of such history, no reliable estimate can be reasonably made in respect of such potential obligation.

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

~~Assets that are held by the Company~~ under leases which transfer to the ~~Company~~Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the ~~Company~~Group are classified as operating leases.

Land held for own use under an operating lease ~~where~~which its fair value cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease (see ~~Note~~note 2(h)(iii)).

Where the ~~Company~~Group acquired the use of assets under finance leases, the ~~amount~~amounts representing the lower of the fair value of the leased asset, or the present value of the minimum lease payments is recorded in fixed assets with the corresponding liability, net of finance charges, recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy in ~~Note~~note 2(g) and ~~Note~~note 2(i). Finance charges implicit in the lease payments are charged to ~~profit or loss~~the consolidated statement of operations over the period of the leases so as to produce an ~~approximately~~approximate constant periodic rate of charge on the remaining balance of the ~~obligations~~obligations.

Consolidated financial statements for ~~each accounting period.~~the year ended August 31, 2007

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Receipts and payments made under operating leases, net of any incentives, ~~received by/from the lessor~~ are credited/charged to the consolidated statement of operations on a straight-line basis over the lease periods.

~~Investment~~Investments securities ~~that are stated at amortized cost~~ and other current and non-current receivables that are stated at cost or amortized cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognized as follows:

For investment securities carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets).

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through ~~profit or loss.~~the consolidated statement of operations. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.

For current and non-current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for receivables are reversed if in a subsequent period the amount of the impairment loss decreases.

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decrease:

~~investment property; and~~

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

~~Calculation of recoverable amount~~

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

~~Recognition of impairment losses~~

An impairment loss is recognized in ~~profit or loss~~consolidated statement of operations whenever the carrying amount of an asset, or the ~~cash generating~~cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of ~~cash generating~~cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the ~~cash generating~~cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

~~Reversals of impairment losses~~

Except in the case of goodwill, an impairment loss is reversed if there has been a favorable change in the ~~estimates~~estimate used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to ~~profit or loss~~consolidated statement of operations in the year in which the reversals are recognized.

The ~~Company’s policies~~Group’s accounting policy for investments ~~in debt and equity~~ securities ~~are~~is as follows:

~~Investments in securities~~Financial assets at fair value through profit or loss comprise of financial assets held for trading and those designated as at fair value through profit or loss at inception. They are initially stated at fair value and are classified as current assets, ~~and~~if they are ~~initially stated at fair value.~~expected to be realized within 12 months. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized in ~~profit~~the consolidated statement of operations. The net gain or ~~loss.~~loss recognized in the consolidated statement of operations does not include any interest earned on these investments as these are recognized in accordance with the policies set out in notes 2(t)(v).

~~Dated~~Held-to-maturity securities are dated debt securities that the ~~Company~~Group has the positive ability and intention to hold to ~~maturity are classified as held-to-maturity securities. Held-to-maturity securities~~maturity. They are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, ~~the securities~~they are stated in the balance sheet at amortized cost less impairment losses (see ~~Note~~note 2(i)(i)).

~~Other investments in~~Investment securities that are not classified as held for trading, financial assets at fair value through profit or loss, or held-to-maturity securities, are classified as available-for-sale securities. Available-for sale securities ~~and~~ are initially recognized at fair value plus transaction costs. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized directly in equity, except for impairment losses (see note 2(i)(i)) and, in the case of monetary items such as debt securities, foreign exchange gains and losses ~~which~~that are recognized directly in ~~profit or loss.~~the consolidated statement of operations. Where these investments are interest-bearing, interest ~~bearing, interest is~~ calculated using the effective interest method ~~and~~is recognized in ~~profit or loss.~~the consolidated statement of operations. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in ~~profit or loss.~~the consolidated statement of operations.

Investments are recognized on the date the ~~Company~~Group commits to purchase the investments. Investments are derecognized when:

Derivative financial instruments are recognized initially at fair value. At each balance sheet date the fair value is remeasured. The gain or loss on remeasurement to fair value is charged immediately to ~~profit or loss,~~the consolidated statement of operations, except where the ~~derivatives~~derivative qualify for cash flow hedge accounting or hedge the net investment in a foreign operation, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged.

Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a ~~long-term~~ service ~~agreements.~~subscription agreement with a customer. Such costs are deferred and amortized on a straight-line basis over the period of the underlying service subscription ~~agreements executed with~~agreement.

Consolidated financial statements for the ~~customers. All other related advertising and marketing costs are charged to the statement of operations as incurred.~~year ended August 31, 2007

Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for ~~bad and~~ doubtful debts (see ~~Note~~note 2(i)(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful ~~debts (see Note 2(i)(i)).~~debts.

Cost is determined using the first in, first out method and comprises all costs of purchase.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

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

For the years ended August 31, ~~2004,~~ 2005, 2006 and ~~2006,~~2007, there was no write-down ~~or provision made against~~of inventories.

~~Cash consists~~balances consist of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash that is restricted for use or pledged as security is disclosed separately on the face of the consolidated balance sheet, and is not included in the cash and bank balances total in the consolidated statements of cash flows. The pledged bank deposits represent cash maintained at a bank as security for bank facility and bank guarantees issued by the bank to third party suppliers and utility vendors (see ~~Note 16)~~note 15).

~~(p) Provisions~~Consolidated financial statements for the year ended August 31, 2007

Provisions are recognized for other liabilities of uncertain timing or amount when the ~~Company~~Group has a ~~present~~ legal or constructive obligation arising as a result of a past ~~events,~~event, it is probable that an outflow of ~~resources~~economic benefits will be required to settle the obligation and a reliable estimate ~~of the amount~~ can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

~~(i) Employee leave entitlements~~Consolidated financial statements for the year ended August 31, 2007

Employee entitlements to annual leave and long service leave are recognized when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as ~~a result of~~ services are rendered by ~~employees up to the balance sheet date.~~employees. Employee entitlements to sick leave and maternity or paternity leave are not recognized until the time of leave.

Provisions for profit sharing and bonus plans are recognized when the ~~Company~~Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made.

The ~~Company~~Group contributes to defined contribution retirement schemes which are available to certain employees. Contributions to the schemes by the ~~Company and employees~~Group are calculated as a percentage of employees’ basic ~~salaries. The retirement benefit scheme cost~~salaries and charged to the consolidated statement of ~~operations represents contributions payable by the Company to the fund.~~operations. The ~~Company’s~~Group’s contributions are reduced by contributions forfeited by those employees who leave the scheme prior to ~~vesting~~being fully vested in the Group’s contributions.

The assets of the scheme are held ~~separately from those of the Company~~ in an independently administered ~~fund.~~fund that is separated from the Group’s assets.

The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to the ~~profit or loss~~consolidated statement of operations in the year of the review, unless the original employee ~~expenses qualify~~cost qualified for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The ~~equity~~ amount relating to share options expense is ~~recognized~~recorded in the capital reserve until either the option is exercised or the option expires.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not be reversed in the foreseeable future.

~~Long-term debt, representing senior notes, is~~ are recognized initially at fair value less direct and incremental issuance costs. Subsequent to initial recognition, the senior notes are stated at amortized ~~cost with any~~cost. The difference between ~~cost~~the original issuance price and redemption ~~value being~~price of the notes is recognized in ~~profit or loss~~the consolidated statement of operations over the period of the notes using the effective interest method.

In the event that the senior notes are redeemed prior to the maturity date, the unamortized notes issuance costs are charged immediately to the consolidated statement of operations.

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognized but is disclosed in the notes to the financial statements unless the probability of outflow of economic benefits is remote. When a change in the probability of an outflow occurs so that outflow is probable and the amount of obligation can be measured reliably, the amount is recognized as a liability.

(vi)

Rental income receivable under operating leases is recognized in the consolidated statement of operations in equal ~~installments~~instalments over the periods covered by the lease term. Lease incentives granted are recognized in the consolidated statement of operations as an integral part of the aggregate net lease payments receivable.

Borrowing costs are expensed in ~~profit or loss~~the consolidated statement of operations in the period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an ~~asset which necessarily takes a substantial period of time to get ready for its intended use or sale.~~asset.

The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

~~No borrowing~~Borrowing costs of $2,047,000, nil and nil was capitalized for the ~~year~~years ended August 31, 2005, 2006 ~~(2005: HK$2,047,000~~ and ~~2004: HK$3,053,000).~~2007, respectively.

In accordance with the ~~Company’s~~Group’s internal financial reporting, the ~~Company~~Group has determined that business segment is the primary reporting format and geographical is the secondary reporting format.

Segment assets consist primarily of goodwill, fixed assets, trade and other receivables and cash and bank deposits. Segment liabilities comprise operating liabilities and exclude items such as taxation and senior notes. Capital expenditure comprises purchases of fixed assets.

In respect of geographical segment reporting, sales are reported based on the country in which the customer is located. Total assets and capital expenditure are reported based on where the assets are located.

Consolidated financial statements for ~~barter transactions~~the year ended August 31, 2007

When goods or services are exchanged ~~or swapped~~ for goods or services which are of a similar nature and value, the exchange is not regarded as a revenue generating transaction.

When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the ~~goods~~consideration received or ~~services rendered,~~receivable adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services ~~given up,~~provided, adjusted by the amount of any cash or cash equivalents transferred.

For the purposes of these financial statements, ~~parties are~~a party is considered to be related to the Company if the Company has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the CompanyGroup if:

Close family members of an individual are ~~subject to common control or common significant influence. Related parties~~those family members who may be ~~individuals (being members of key management personnel, significant shareholders and/~~expected to influence, or be influenced by, that individual in their ~~close family members) or other entities and include entities which are under~~dealings with the significant influence of related parties of the Company where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Company or of any entity that is a related party of the Company.entity.

~~3. Changes in accounting policies and prior period adjustments~~City Telecom (H.K.) Limited

The HKICPA has issued a number of new and revised HKFRSs that are effective for accounting periods beginning on or after January 1, 2005. The Company has not applied any new standard or interpretation that is not yet effective for the current accounting period (see Note 29).

The accounting policies of the Company that are described in note 2 reflect the adoption of these new and revised HKFRSs. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in theseConsolidated financial ~~statements.~~

In prior years, no amounts were recognized when employees (which term included directors) were granted share options of the Company. Upon the exercise of the options, the nominal amounts of share capital and share premium were credited by an amount equal to the option’s exercise price.

With effect from September 1, 2005, in order to comply with HKFRS 2, the Company recognizes the fair value of such share options as an expense in the statement of operations, or as an asset, if the cost qualifies for recognition as an asset with a corresponding amount credited to capital reserve within equity. The fair value of the share options is measured at the date of grant.

Where the employees are required to meet vesting conditions before they become entitled to the options, the Company recognizes the fair value of the options granted over the vesting period. Otherwise, the Company recognizes the fair value in the period in which the options are granted.

~~Upon exercise of the options, the related capital reserve is transferred to share capital and share premium. If the options lapse, the related capital reserve is transferred to share premium.~~

This new accounting standard has been applied retrospectively with comparatives restated in accordance with HKFRS 2, except that the Company has taken advantage of the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following options:

~~(ii) all options granted to employees after November 7, 2002 but which had vested before September 1, 2005.~~

~~As a result of the adoption of HKFRS 2, operating expenses~~statements for the year ended August 31, 2006 increased by HK$6,823,000 with the corresponding amount credited to capital reserve and HK$882,000 was transferred from capital reserve to share premium for vested share options that lapsed during the year.

The retrospective adoption of this accounting policy resulted in amounts previously reported to be restated as follows: (a) an increase in other operating expenses of HK$87,000 for the year ended August 31, 2004 and a corresponding increase in capital reserve; (b) a decrease of HK$87,000 in the opening balance of the retained profits at September 1, 2004 and a corresponding increase in capital reserve; (c) an increase in other operating expenses of HK$6,965,000 for the year ended August 31, 2005 and a corresponding increase in capital reserve and; (d) a decrease of HK$7,052,000 of the opening balance of the retained profits at September 1, 2005 and a corresponding increase in capital reserve. See note 7 for impact on previously reported earnings (loss) per share.

~~Details of the employee share option scheme can be found in note 25 to the consolidated financial statements.~~

~~(b) Accounting for goodwill (HKFRS 3, Business combinations and HKAS 36, Impairment of assets)~~2007

positive or negative goodwill which arose prior to September 1, 2001 was taken directly to reserves at the time it arose, and was not recognized in the statement of operations until disposal or impairment of the acquired business;

positive goodwill which arose on or after September 1, 2001 was amortized on a straight-line basis over its estimated useful life and was subject to impairment testing when there were indications of impairment; and

negative goodwill which arose on or after September 1, 2001 was amortized over the weighted average useful life of the depreciable/amortizable non-monetary assets acquired, except to the extent it related to identified expected future losses as at the date of acquisition. In such cases it was recognized in the consolidated statement of operations as those expected losses were incurred.

With effect from September 1, 2005, in accordance with HKFRS 3 and HKAS 36, the Company no longer amortizes positive goodwill. Such goodwill is tested annually for impairment, as well as when there are indications of impairment. Impairment losses are recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amount.

Also with effect from September 1, 2005 and in accordance with HKFRS 3, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill), (a) the acquirer shall reassess the identification and fair value measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the business combination and (b) recognize immediately in profit and loss any excess remaining after the reassessment. Further, in accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before September 1, 2001) will not be recognized in the statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The Company did not have any goodwill that arose before September 1, 2001 that was taken directly to reserves.

The new policy in respect of the amortization of positive goodwill has been applied prospectively in accordance with the transitional arrangements under HKFRS 3. As a result, comparative amounts have not been restated, the cumulative amount of amortization as at September 1, 2005 has been offset against the cost of the goodwill and, no amortization charge for goodwill has been recognized in the consolidated statement of operations for the year ended August 31, 2006. Goodwill amortization recognized in the consolidated statement of operations for each of the years ended August 31, 2005 and 2004 was HK$1,065,000. The change in policy relating to negative goodwill had no effect on the financial statements as no negative goodwill existed as at August 31, 2005.

~~(c) Financial instruments (HKAS 32, Financial instruments: Disclosure and presentation and HKAS 39, Financial instruments: Recognition and measurement)~~

With effect from September 1, 2005, in order to comply with HKAS 32 and HKAS 39, the Company has changed its accounting policies relating to financial instruments. Further details of the changes are as follows.

The Company’s investments in debt securities consisting of mutual funds (included in investment securities) have been carried at fair value since inception. At each balance sheet date, the net unrealized gains or losses arising from the change in fair value of debt securities are recognized in statement of operations. Profits or losses on disposal of these investments, representing the difference between the net sales proceeds and the carrying amounts, are recognized in the statement of operations.

With effect from September 1, 2005, and in accordance with HKAS 39, these investments are carried at fair value with changes in fair value recognized in statement of operations. No adjustment arose from the adoption of the new policies for these securities because they have been carried at fair value prior to the adoption.

~~The Company’s long-term bank deposit (included in investment securities) has been carried at amortized cost since inception.~~

With effect from September 1, 2005, and in accordance with HKAS 39, loans and receivables that are non-derivative financial assets with fixed or determinable payments, and that are not quoted in an active market are included in current assets, except for maturities greater than 12 months after the balance sheet date. Financial assets classified under loans and receivables are carried at amortized cost. The Company’s long-term bank deposit is classified as loans and receivables and is included in investment securities. No adjustment arose from the adoption of the new policies for the long-term bank deposit because it has been carried at amortized cost prior to the adoption.

Prior to September 1, 2005, derivative financial instruments entered into by the Company to hedge the interest rate risk of a recognized asset or liability or the foreign currency risk of a committed future transaction were recognized on an accrual basis with reference to the timing of recognition of the hedged transaction.

With effect from September 1, 2005, and in accordance with HKAS 39, all derivative financial instruments entered into by the Company are stated at fair value. Changes in the fair value of derivatives held as hedging instruments in a cash flow hedge are recognized in equity to the extent that the hedge is effective and until the hedged transaction occurs. Any changes in the fair value of derivative financial instruments which do not qualify as cash flow hedges are recognized in profit or loss.

The adoption of this accounting policy resulted in recognition of derivative financial instruments as assets of HK$6,609,000 on September 1, 2005 and a corresponding increase in the opening balance of retained profits at September 1, 2005. In addition, the adoption resulted in a loss from change in fair value of derivative financial instruments of HK$725,000 for the year ended August 31, 2006 with a corresponding reduction in derivative financial instruments at August 31, 2006.

Prior to September 1, 2005, the Company’s 10-year senior notes payable (included in long-term debt and other liabilities) was initially measured at fair value (which is equivalent to the issuance price) less direct incremental issuance costs. After initial recognition, the senior notes were stated at amortized cost.

With effect from September 1, 2005, and in accordance with HKAS 39, financial liabilities, other than those held for trading purposes, are measured initially at fair value with transaction costs included in the initial measurement. Subsequent to initial recognition, financial liabilities are measured at amortized cost except for those liabilities (a) measured at fair value through profit or loss and (b) that arise when a transfer of a financial asset does not qualify for derecognition and therefore is accounted for using the continuing involvement approach. The adoption of this new accounting policy for the 10-year senior notes did not result in any adjustments because the notes have been carried at amortized cost prior to the adoption.

As a result of the adoption of HKAS 24, Related party disclosures, the definition of related parties as disclosed in Note 2(y) has been expanded to include entities that are under the significant influence of a related party that is an individual (i.e. key management personnel, significant shareholders and/or their close family members) and post employment benefit plans which are for the benefit of employees of the Company or of any entity that is a related party of the Company. The expansion of the definition of related parties has not resulted in any material changes to the previously reported disclosures of related party transactions nor has it had any material effect on the disclosures made in the current period.

For the year ended August 31, 2005, the Company made an adjustment to its consolidated statement of cash flows to classify the cash outflows for term bank deposits as investing activities instead of operating activities. The impact of this adjustment on the consolidated statement of cash flows for the year ended August 31, 2005 was as follows:

Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, production costs for the ~~IP-TV~~pay-TV using Internet Protocol service and costs of inventories sold, and ~~do not include~~exclude depreciation charge which is included in general and administration expenses.

~~The Company estimates~~Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a Fixed Telecommunications Network Services (“FTNS”) licensee, is obligated to contribute Universal Services Contributions (“USC”) ~~payable~~as compensation to PCCW-HKT Telephone Limited (“PCCW-HKT”) ~~to fund~~for the ~~costs~~cost of network development in remote areas in Hong ~~Kong and includes such estimated costs as part of its network costs.~~Kong.

~~Management of the Company makes its best~~The Group estimates ~~for charges of~~ the USC payable to ~~PCCW-HKT. The estimate is made~~PCCW-HKT based on the provisional rates announced by the ~~Telecommunications Authority (“TA”) which is effective up to the date of the release of the consolidated financial statements of the Company.~~TA. The TA periodically reviews the actual costs incurred by PCCW-HKT in the network development and revises the amounts owed to, or to be refunded by, PCCW-HKT to the respective USC contributing parties, including the ~~Company~~HKBN (“the Rate Revisions”). Accordingly, the estimate made by the ~~Company’s~~HKBN’s management is subject to ~~changes~~change based on the Rate Revisions identified during a financial year and up to the date prior to the release of the financial statements of the ~~Company.~~Group. The ~~Company~~Group adjusts such differences as an addition or reduction of the corresponding costs of services in that particular reporting period.

Any sum received in advance from PCCW-HKT as an estimated refund of the USC on a provisional basis, which is subject to the final confirmation and determination of TA, is recorded in other payables and accrued expenses in the ~~Company’s~~Group’s consolidated balance sheet.

On November 19, 2004, the TA issued a statement on the USC that confirmed the actual contribution level for calendar year 2002. In aggregate, an amount of HK$31,689,000 was recorded as a reduction against the network costs of the Company for the year ended August 31, 2004.

On November 11, 2005, the TA issued a statement on the USC and confirmed the actual contribution level for calendar year 2003. In aggregate, an amount of ~~HK$6,448,000~~$6,448,000 was recorded as a reduction against the network cost of the ~~Company~~Group for the year ended August 31, 2005.

On November 13, 2006, TA issued a statement (the “2006 TA”) on the USC and confirmed the actual contribution level for calendar year 2004. In aggregate, an amount of ~~HK$1,365,088~~$1,365,088 was recorded as a reduction against the network costs of the ~~Company~~Group for the year ended August 31, 2006.

The actual contribution level for calendar year 2005, 2006 and ~~2006~~2007 had not yet been confirmed by the TA as of the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes. For the year ended August 31, 2007, the Group recorded USC charges based on the provisional rates set out in the 2006 TA.

See note 30 for discussion of Rate Revisions issued by TA subsequent to the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes.

~~For the year ended August 31, 2005 goodwill was amortized on a straight-line basis over five years. The amortization of goodwill~~Consolidated financial statements for the year ended August 31, ~~2005 was included in “general and administrative expenses” in~~2007

Consolidated financial statements for the ~~consolidated statement of operations.~~year ended August 31, 2007

With effect from September 1, 2005, goodwill is no longer amortized in accordance with ~~the transitional provisions set out in~~ HKFRS 3 but tested for impairment on an annual ~~basis~~basis. The amount of accumulated amortization as ~~follows.~~at September 1, 2005 has been offset against the cost of goodwill.

Goodwill has been allocated to the ~~Company’s~~Group’s fixed telecommunications network services ~~segment or~~ cash-generating unit ~~(GCU)~~(“CGU”) for purposes of the goodwill impairment test.

Based on ~~the~~ management’s goodwill impairment test, the carrying amount of the fixed telecommunications network services ~~segment~~CGU was lower than its recoverable amount. The recoverable amount was determined based on the value-in-use methodology. This methodology ~~use~~uses cash flow projections based on financial budgets approved by management covering a three-year period. Cash flows for the three-year period were estimated based on growth rates between 10% to ~~17%~~16% and a pre-tax discount rate of ~~18%~~14%. Cash flows beyond the three year period were assumed to remain constant. The estimated growth rates used were comparable to the growth

rate for the industry. The key assumption used in the value-in-use methodology was the annual growth of the ~~turnover~~revenue of the fixed telecommunications network services ~~segment~~CGU which is determined based on the past performance and management’s expectation for ~~market development.~~future performance. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market ~~assessments~~assessment of the time value of money and the risks specific to the fixed ~~telecommunication~~telecommunications services ~~segment.~~CGU. Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.

During the year ended August 31, 2006, a property which had been held for own use was leased to a third party to earn rental income. Upon adoption of HKAS 40, the Group assessed the open market value of the property and based on such assessment, wrote down the carrying amount of the property by $1,131,000 (included in “other operating expenses”). The estimate of open market value was made by reference to net rental income allowing for reversionary income potential.

The estimated fair value of the investment property held by the Group as of August 31, 2006 and 2007 amounted to HK$3,200,000 and HK$3,096,000, respectively.

During the second half of fiscal 2007, taking into consideration of the current conditions and expected usage of existing telecommunications equipment, management engaged an external valuation firm to assist with its assessment of the estimated useful lives of such asset. As a result of this assessment, management revised the estimated useful lives of the fibre network and related peripherals from 4-15 years to 6-20 years.

The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, depreciation expense decreased by HK$15,930,000, and both income before taxation and net income after taxation decreased by HK$15,930,000 for the year ended August 31, 2007. The increase in net income resulted in a HK2.6 cents increase in both the basic earnings per share and diluted earnings per share. Such change also increased each of total assets, retained profits and total shareholders’ equity at August 31, 2007 by HK$15,930,000.

Note: Amount of other accruals consisted of primarily accruals for utilities, rent and other ~~carrier~~administrative charges.

~~Deferred taxation is calculated in full on temporary differences under the liability method using the taxation rates prevailing in respective countries in which the subsidiaries operate.~~ The movement of ~~the~~ deferred tax liabilities ~~account~~ is as follows:

As of August 31, 2006 and 2007, the ~~Company~~Group had accumulated tax losses amounting to HK$1,159,787,000 ~~(2005:~~and HK$~~1,011,475,000)~~1,037,141,000, respectively that can be carried forward ~~and applied~~ to reduce future taxable income derived in Hong Kong, Canada and the United States, as applicable. ~~The~~As of August 31, 2006 and 2007, the tax effect of the accumulated tax losses amounted to HK$204,300,000 ~~(2005:~~and HK$~~177,827,000).~~182,739,000, respectively. These tax losses ~~will~~ expire in the following ~~fiscal periods ending August 31:~~periods:

The tax losses of the Company and its Hong Kong subsidiaries can be carried forward indefinitely while tax losses of subsidiaries in ~~the mainland China and Canadian~~Canada and the United States expire within periods ranging from 2 to 20 years.

Deferred tax assets are recognized to the extent that realization of the related tax benefit is probable. The ~~Company~~Group has unrecognized tax losses carried forward from prior years of HK$279,199,000 and HK$268,004,000 at August 31, 2006 ~~(2005: HK$165,861,000)~~and 2007 respectively which can offset against future taxable ~~income and unrecognized deferred tax assets in respect of equity settled share-based payment expenses of HK$13,171,000 at August 31, 2006.~~income. Accumulated tax losses for which deferred tax assets were not recognized ~~will~~ expire in the following ~~fiscal periods ending August 31:~~periods:

The ~~movement~~movements in deferred tax assets and liabilities (prior to offsetting of balances within the same taxation jurisdiction) during the ~~year is~~years ended August 31, 2006 and 2007, are as follows:

Deferred income tax assets and liabilities are offset when there is a legally enforceable ~~right~~rights to set off current tax assets against current tax liabilities and when the deferred income ~~taxes~~tax assets and liabilities relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are reported in the consolidated balance sheet:

~~Deferred expenditure represents costs incurred to acquire subscribers and are amortized over the period of the underlying service subscription agreements.~~

The ~~Company’s~~Group’s long-term debt and other liabilities were repayable as follows:

On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the “10-year senior notes”) with a principle amount of US$125 million at par value. The 10-year senior notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum and is payable semi-annually on February 1 and August 1 of each year, commencing August 1, 2005.

The 10-year senior notes are fully, irrevocably and unconditionally guaranteed, jointly and ~~irrevocably guaranteed~~severally, on a ~~joint and several bases~~senior unsecured basis by all of the ~~Company’s~~ subsidiaries ~~(other than~~of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. ~~Limited)~~Ltd. in the PRC (“Non-guarantor Subsidiary”).

The net proceeds of 10-year senior notes were approximately US$121 million after ~~deduction of expenses~~issuance costs and ~~commissions.~~commission. The ~~Company~~Group used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds is to be used for capital expenditures, including expanding and upgrading the ~~Company’s~~Group’s Metro Ethernet network in Hong Kong, and for additional working capital and general corporate purposes.

The Company may redeem the 10-year senior notes, in whole or in part, on or after February 1, 2010, at the redemption ~~prices~~price set forth in the indenture governing the 10-year senior notes. In addition, prior to February 1, 2008, using the proceeds from one or more specified public or private offerings of the Company’s common stock, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the 10-year senior notes ~~with the proceeds from one or more specified public or private offerings of the Company’s common stock~~ at a redemption price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of ~~optional~~ redemption, the Company will pay principal at the redemption price specified plus accrued and unpaid interest ~~additional amounts, if any, thereon to, but not including,~~through the date of redemption.

The indenture governing the ~~10-years~~10-year senior notes contains covenants that limit, among other things, the ~~Company’s~~Group’s ability and the ability of certain of its existing and future subsidiaries to:

At August 31, ~~2005~~2006 and ~~2006,~~2007, the 10-year senior notes were stated at the amortized ~~costs~~cost of ~~US$121,660,000 (equivalent to HK$945,348,000) and~~ US$121,854,000 (equivalent to HK$948,027,000) and US$122,127,000 (equivalent to HK$952,593,000), respectively.

~~(a) Capital commitments~~Consolidated financial statements for the year August 31, 2007

~~(i) At~~Consolidated financial statements for the year August 31, ~~2005 and 2006, the Company had future aggregate lease income receivable under non-cancelable operating leases as follows:~~2007

~~(ii) At August 31, 2006 and 2005, the Company had future aggregate minimum lease payments under non-cancelable operating leases as follows:~~

The ~~Company~~Group entered into several ~~long-term~~ agreements with program content providers with respect to the ~~Company’s~~Group’s IP-TV services. ~~Minimum amounts~~The amount of program fees ~~to be paid~~payable by the ~~Company are~~Group is as follows:

~~(a) As at August 31, 2006, the Company had pledged bank deposits of US$9,900,000 (equivalent to HK$77,022,000) and HK$10,000,000 as security of the following banking facilities:~~

(i) bank facility of US$9,000,000 (equivalent to HK$70,020,000) granted by a bank for issuance of bank guarantees to third party suppliers, letters of credit, short term loan, overdraft, foreign exchange and interest rate hedging arrangements.

As of August 31, ~~2006, bank guarantee of HK$2,003,000 were issued against this bank facility (August 31, 2005: bank guarantees of HK$1,900,000~~2007 and ~~letters of credit of HK$11,350,000 were issued against this bank facility);~~

(ii) bank guarantees of HK$4,300,000 (August 31, 2005: HK$4,300,000) issued by a bank to third party suppliers of the Company and one of its subsidiaries for payment of certain products and services procured by the Company from these third party suppliers;

~~(iii) bank guarantees of HK$5,272,000 (August 31, 2005: HK$3,772,000) issued by a bank to certain utility vendors of the Company in lieu of payment of utility deposits; and~~

~~As at August 31, 2005,~~2006, the Group had pledged bank deposits of US$9,900,000 (equivalent to HK$~~76,923,000), RMB4,705,000 (equivalent to HK$4,524,000)~~77,220,000 and HK$~~9,000,000~~77,022,000, respectively) and HK$10,000,000 as security for the ~~above~~following banking ~~facilities and forward foreign exchange contract.~~facilities:

(b) On October 9, 2002, the Company entered into a HK$200,000,000 long-term loan facility (the “2002 facility”) with The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) to provide funding for further development of the fixed telecommunications network of a subsidiary of the Company. According to the agreement, all amounts under the 2002 facility were required to be drawn by December 31, 2004 and to be repaid in 60 equal monthly installments beginning in January 2005. On January 3, 2005, approximately HK$3.3 million of the 2002 facility was repaid. As disclosed in note 14, on January 20, 2005, the Group completed a US$125 million notes offering of 8.75% senior notes due 2015, and received net proceeds of approximately US$121 million after deduction of expenses and commissions. The Group used the net proceeds, in part, to repay in full the outstanding bank loan in the amount of HK$196.7 million on January 24, 2005.

~~On July 27, 2004, the Company entered into an additional HK$200,000,000 long-term loan facility (the “2004 facility”~~City Telecom (H.K.) ~~with HSBC to provide funding~~Limited

Consolidated financial statements for the same purpose. All amounts under the facility were required to be drawn by December 31, 2006 and to be repaid in 60 equal monthly installments beginning in January 2007. The Company had not drawn any amount under this facility during the years endedyear August 31, ~~2005 and 2006.~~

In January 2005, both the 2002 and 2004 facilities were cancelled upon the request of the Company, which was approved by HSBC and the fixed and floating charges covering all assets of the Company were released.


CURRENCY TRANSLATION		41
FORWARD-LOOKING STATEMENTS		41
PART I		41
	ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	41
	ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	41
	ITEM 3. KEY INFORMATION	41
	ITEM 4. INFORMATION ON THE COMPANY	1713
	ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	3329
	ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	4644
	ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	5451
	ITEM 8. FINANCIAL INFORMATION	52
	ITEM 9. THE OFFER AND LISTING	53
	ITEM 10. ADDITIONAL INFORMATION	55
	~~ITEM 9. THE OFFER AND LISTING~~	56
	~~ITEM 10. ADDITIONAL INFORMATION~~	58
	ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	6763
	ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	6864
PART II		6964
	ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	6964
	ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	6964
	ITEM 15. CONTROLS AND PROCEDURES	6964
	ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	6965
	ITEM 16B. CODE OF ETHICS	7065
	ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	7065
	ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	7166
	ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	7166
PART III		7266
	ITEM 17. FINANCIAL STATEMENTS	7266
	ITEM 18. FINANCIAL STATEMENTS	7266
	ITEM 19. EXHIBITS	7266


	As of and for the year ended August 31,												As of and for the year ended August 31,
	2002		2003		2004		2005		2006⁽¹⁰⁾		2006⁽¹⁰⁾		2003		2004		2005		2006		2007		2007
	HK$		HK$		HK$		HK$		HK$		US$		HK$		HK$		HK$		HK$		HK$		US$
	(Amounts in thousands)												(Amounts in thousands)
Consolidated Balance Sheet Data:
Hong Kong GAAP
HKFRSs
Total assets	1,327,285		1,548,534		1,683,408		2,347,428		2,124,215		273,151		1,548,534		1,683,408		2,347,428		2,124,215		2,161,133		277,182

Debt	—		(18,174	)	(119,170	)	(945,348	)	(948,027	)	(121,906	)	(18,174	)	(119,170	)	(945,348	)	(948,027	)	(952,593	)	(122,177	)
Finance lease obligation	(2,949	)	—		—		(3,135	)	(2,373	)	(305	)	—		—		(3,135	)	(2,373	)	(1,210	)	(155	)
Other liabilities	(419,348	)	(351,185	)	(388,540	)	(378,491	)	(282,161	)	(36,283	)	(351,185	)	(388,540	)	(378,491	)	(282,161	)	(303,448	)	(38,920	)

Total liabilities	(422,297	)	(369,359	)	(507,710	)	(1,326,974	)	(1,232,561	)	(158,494	)	(369,359	)	(507,710	)	(1,326,974	)	(1,232,561	)	(1,257,251	)	(161,252	)

Net assets	904,988		1,179,175		1,175,698		1,020,454		891,654		114,657		1,179,175		1,175,698		1,020,454		891,654		903,882		115,930
Minority interest	—		—		—		—		—		—		—		—		—		—		—		—

Net assets employed	904,988		1,179,175		1,175,698		1,020,454		891,654		114,657		1,179,175		1,175,698		1,020,454		891,654		903,882		115,930

Share capital	50,086		60,496		61,057		61,412		61,417		7,898		60,496		61,057		61,412		61,417		61,650		7,907
Share premium	572,656		615,886		617,986		619,408		620,298		79,764		615,886		617,986		619,408		620,298		622,433		79,832
Reserves	282,246		502,793		496,655		339,634		209,939		26,995		502,793		496,655		339,634		209,939		219,799		28,191

Total shareholders’ equity	904,988		1,179,175		1,175,698		1,020,454		891,654		114,657		1,179,175		1,175,698		1,020,454		891,654		903,882		115,930


	As of and for the year ended August 31,												As of and for the year ended August 31,
	2002		2003		2004 (restated) ⁽⁸⁾		2005 (restated) ^(8)(10)		2006⁽¹⁰⁾		2006⁽¹⁰⁾		2003		2004		2005⁽⁸⁾		2006⁽⁸⁾		2007		2007
	HK$		HK$		HK$		HK$		HK$		US$		HK$		HK$		HK$		HK$		HK$		US$
	(Amounts in thousands)												(Amounts in thousands)
Other Financial Data:
EBITDA⁽⁵⁾	227,684		449,058		244,945		108,377		195,417		25,129		449,058		244,945		108,377		195,417		353,827		45,381
Net cash provided by operating activities⁽⁹⁾	288,444		414,500		203,763		77,383		184,151		23,680		414,500		203,763		77,383		184,151		383,999		49,251
Net cash used in investing activities⁽⁹⁾	(475,212	)	(309,634	)	(406,244	)	(557,440	)	(492,742	)	(63,361	)
Net cash (used in) / generated from investing activities													(309,634	)	(406,244	)	(557,440	)	(492,742	)	114,053		14,628
Net cash provided by (used in) financing activities	9,109		(10,274	)	47,221		792,216		(86,432	)	(11,114	)	(10,274	)	47,221		792,216		(86,432	)	(109,504	)	(14,045	)
Capital expenditures⁽⁷⁾⁽⁶⁾	579,066		250,209		410,046		419,126		322,935		41,526		250,209		410,046		419,126		322,935		132,250		16,962


	As previously reported in 2005 Hong Kong statutory financial statements		As reported in 2005 Form 20-F		As previously reported in 2006 Hong Kong statutory financial statements		As reported in 2006 Form 20-F
	HK$		HK$		HK$		HK$
	(Amounts in thousands except per share data)
Revenue from provision of telecommunication and other services, net	1,137,356		1,162,059		1,159,579		1,134,876
Provision for doubtful accounts receivable	(60,563	)	(35,445	)	7,668		(17,450	)
Net loss after tax	(206,352	)	(156,531	)	(92,241	)	(142,062	)
Loss per share - Basic and Diluted	(33.6) cents		(25.5) cents		(15.0) cents		(23.1) cents


	As previously reported in 2005 Hong Kong statutory financial statements		As reported in 2005 Form 20-F		As previously reported in 2006 Hong Kong statutory financial statements		As reported in 2006 Form 20-F
	HK$		HK$		HK$		HK$
	(Amounts in thousands except per share data)
Revenue from provision of telecommunications and other services, net	1,137,356		1,162,059		1,159,579		1,134,876
Provision for doubtful accounts	(60,563	)	(35,445	)	7,668		(17,450	)
Net loss after tax	(206,352	)	(156,531	)	(92,241	)	(142,062	)
Loss per share - Basic and Diluted	(33.6) cents		(25.5) cents		(15.0) cents		(23.1) cents


	Average⁽¹⁾	High	Low	Period-End
	HK$	HK$	HK$	HK$
2001	7.7996	7.8004	7.7970	7.7980
2002	7.7996	7.8095	7.7970	7.7988
2003	7.7864	7.8001	7.7085	7.7640
2004	7.7891	7.8010	7.7632	7.7723
2005	7.7775	7.7999	7.7514	7.7718
2006	7.7681	7.7928	7.7506	7.7767
August 2006	7.7762	7.7796	7.7723	7.7767
September 2006	7.7825	7.7913	7.7767	7.7913
October 2006	7.7849	7.7928	7.7746	7.7780
November 2006	7.7816	7.7875	7.7751	7.7779
December 2006	7.7733	7.7787	7.7665	7.7771
January 2007 (through January 23, 2007)	7.7968	7.8100	7.7797	7.7998


	Year Ended August 31,
	2004 (restated)⁽¹⁾		2005 (restated)⁽¹⁾		2006		2006
	HK$		HK$		HK$		US$
	(In thousands)
Hong Kong GAAP
Revenues
Fixed telecommunications network services	541,902		629,464		716,600		92,147
International telecommunications	627,978		532,595		418,276		53,786

	1,169,880		1,162,059		1,134,876		145,933

Operating Expenses:
Network costs	(331,408	)	(339,402	)	(300,593	)	(38,653	)
Other operating expenses
Salaries and related costs	(226,737	)	(259,392	)	(256,721	)	(33,012	)
Sales and marketing expenses	(228,169	)	(267,983	)	(204,952	)	(26,355	)
Office, general and administrative expenses	(129,787	)	(157,497	)	(164,208	)	(21,115	)
Depreciation and amortization	(197,017	)	(237,714	)	(276,464	)	(35,550	)
Provision for doubtful accounts receivable	(11,502	)	(35,445	)	(17,450	)	(2,244	)

Total other operating expenses	(793,212	)	(958,031	)	(919,795	)	(118,276	)

Total Operating Expenses	(1,124,620	)	(1,297,433	)	(1,220,388	)	(156,929	)

Income/(loss) from operations	45,260		(135,374	)	(85,512	)	(10,996	)
Interest income	3,753		13,578		20,378		2,620
Interest expense	(175	)	(54,462	)	(88,637	)	(11,397	)
Other income, net	2,668		6,037		4,465		574

Income/(loss) before taxation	51,506		(170,221	)	(149,306	)	(19,199	)
Income taxes (expense)/credit	(2,043	)	6,725		7,244		932

Net income/(loss)	49,463		(163,496	)	(142,062	)	(18,267	)


	Year Ended August 31,
	2004		2005 (restated) ⁽¹⁾		2006		2006
	HK$		HK$		HK$		US$
	(In thousands)
Net cash flow from operating activities	203,763		77,383		184,151		23,680
Net cash used in investing activities	(406,244	)	(557,440	)	(492,742	)	(63,361	)
Net cash (used in) provided by financing activities	47,221		792,216		(86,432	)	(11,114	)

(Decrease)/increase in cash and bank balances	(155,260	)	312,159		(395,023	)	(50,795	)
Cash and bank balances, at the beginning of year	383,860		228,347		539,591		69,385
Effect of foreign exchange rate changes	(253	)	(915	)	349		45

Cash and bank balances, at the end of the year	228,347		539,591		144,917		18,635


	Payments due by period					Payments due by period
Contractual Obligations	Total	Within 1 year	More than 1 year but within 3 years	More than 3 years but within 5 years	More than 5 years	Total	Within 1 year	More than 1 year but within 3 years	More than 3 years but within 5 years	More than 5 years
	(Thousands of HK$)					(Thousands of HK$)
Capital expenditure items	80,240	80,240	—	—	—	54,165	54,165	—	—	—
Operating leases	61,438	40,093	12,776	2,169	6,400	83,600	43,566	13,758	9,892	16,384
Short-term and long-term debt (principal and interest payments)	1,655,028	86,409	171,244	170,115	1,227,260	1,615,464	86,146	170,839	170,685	1,187,794
Programming fees (IP-TV)	12,526	7,638	4,888	—	—	13,981	10,345	3,636	—	—

Total	1,809,232	214,380	188,908	172,284	1,233,660	1,767,210	194,222	188,233	180,577	1,204,178


Name	Age	Position	Date Joined City Telecom	Age	Position	Date Joined City Telecom
Board of Directors:
WONG Wai Kay, Ricky	45	Chairman	1992	46	Chairman	1992
CHEUNG Chi Kin, Paul	49	Chief Executive Officer	1992	50	Chief Executive Officer	1992
LAI Ni Quiaque	37	Chief Financial Officer	2004	38	Chief Financial Officer & Company Secretary	2004
CHENG Mo Chi, Moses	56	Non-Executive Director	1997	57	Non-Executive Director	1997
CHAN Kin Man				48	Independent Non-Executive Director	1997
LEE Hon Ying, John	60	Independent Non-Executive Director	1997	61	Independent Non-Executive Director	1997
CHAN Kin Man	47	Independent Non-Executive Director	1997
PEH Tun Lu, Jefferson	47	Independent Non-Executive Director	2004	48	Independent Non-Executive Director	2004

Senior Management:
CHANG Wing Fu, Stephen				44	Chief Technology Officer	2006
CHONG Kin Chun, John	44	Director, Corporate Division	1996	45	Director, Corporate Division	1996
LO Sui Lun	42	Director, Network Development	1998	43	Director, Singapore NGNBN	1998
TO Wai Bing				45	Managing Director, Business Development	2007
YEUNG Chu Kwong, William	46	Chief Operating Officer	2005	47	Chief Operating Officer	2005
CHANG, Stephen	43	Chief Technology Officer	2006
HARE Kai Tamara	48	General Counsel	2007


		Employees
Information technology and engineering		~~731~~479
Sales and marketing, customer service and “Special Duty Unit” (“SDU”)		~~918~~
~~Customer service~~		~~579~~1,897
General administration and others		~~337~~316

Total		~~2,565~~2,692


		Employees
Hong Kong		~~1,309~~1,401
Guangzhou		~~1,226~~1,264
Canada		3027

Total		~~2,565~~2,692


Title of Class	Identity of Person or Group	Beneficially Owned⁽⁶⁾		Percentages of Shares Beneficially Owned (%)⁽¹⁾	Identity of Person or Group	Beneficially Owned⁽⁶⁾		Percentages of Shares Beneficially Owned (%)⁽¹⁾
Ordinary Shares	Wong Wai Kay, Ricky	318,671,261	⁽²⁾	51.89	Wong Wai Kay, Ricky	318,771,261	⁽²⁾	50.82
Ordinary Shares	Cheung Chi Kin, Paul	34,275,738	⁽³⁾	5.6	Cheung Chi Kin, Paul	352,792,737	⁽³⁾	56.25
Ordinary Shares	Top Group International Limited	318,516,999		51.86	Top Group International Ltd.	318,516,999		50.78
Ordinary Shares	Leung Ka Pak	318,516,999	⁽⁴⁾	51.86	Leung Ka Pak	318,516,999	⁽⁴⁾	50.78
Ordinary Shares	Yau Ming Yan, Andrew	318,516,999	⁽⁴⁾	51.86	Yau Ming Yan, Andrew	318,516,999	⁽⁴⁾	50.78
Ordinary Shares	EK Investment Management Limited	67,900,000	⁽⁵⁾	11.06	EK Investment Management Limited	55,542,000	⁽⁵⁾	8.86


	Price
	High	Low
	(In HK$)
2001	0.890	0.420
2002	1.690	0.740
2003	3.375	1.320
2004	2.975	1.310
2005	1.530	0.550

2004
January to March	2.975	2.400
April to June	2.525	1.310
July to September	1.930	1.390
October to December	1.690	1.460


	Price
	High	Low
	(In US$)
2000	20.500	1.125
2001	2.400	1.030
2002	4.350	2.600


2005
July	2.300	2.100
August	2.320	2.060
September	2.140	1.900
October	2.440	1.910
November	2.080	1.640
December	1.700	1.370

2006
January	1.590	1.440
February	1.890	1.460
March	1.970	1.670
April	2.010	1.750
May	1.880	1.350
June	2.610	1.400
July	1.790	1.510
August	1.800	1.570
September	1.780	1.510
October	1.700	1.270
November	1.850	1.400
December	2.500	1.510
2007
January through (January 23, 2007)	7.100	1.900


		As of August 31, ~~2006~~2007
		(Thousands of HK$)
Cash and bank balances:
Denominated in U.S. dollars		~~153,178~~165,226
Denominated in Chinese renminbi		~~78,357~~9,136
Denominated in Canadian dollars		~~3,220~~5,981
Long-term bank deposits:
Denominated in U.S. dollars		~~13,641~~14,415
Other investments:
Denominated in U.S. dollars		~~26,633~~28,577


Nature of the service	2005	2006
	(HK$ million)	(HK$ million)
Audit fees	1.3	1.8
Audit-related fees	0.2	0.3
Tax fees	—	—
All other fees	0.1	0.7

Total	1.6	2.8


~~Nature of the service~~		~~2005~~
		~~(HK$ million)~~
~~Audit fees~~		~~0.3~~
~~Audit-related fees~~		~~0.2~~
~~Tax fees~~		~~0.1~~
~~All other fees~~		—

~~Total~~		~~0.6~~


Audited Consolidated Financial Statements		Pages
Report of Independent Registered Public Accounting Firm		F-1

~~Reports~~Consolidated Statements of ~~Independent Registered Public Accounting Firm~~Operations		F-2 3

Consolidated ~~Statements of Operations~~Balance Sheets		~~F-4~~F-3, 4

Consolidated ~~Balance Sheets~~Statements of Changes in Shareholders’ Equity		F-5

~~Consolidated Statements of Changes in Shareholders’ Equity~~		~~F-6~~

Consolidated Statements of Cash Flows		~~F-7,~~F-6, 7, 8

Notes to the Consolidated Financial Statements		F-9


		Year ended August 31,
	Note	2004 (restated)		2005 (restated)		2006
		HK$		HK$		HK$
		(Amounts in thousands except per share data)
Revenue from provision of telecommunication and related services		1,169,880		1,162,059		1,134,876
Operating expenses
Network costs	4	(331,408	)	(339,402	)	(300,593	)
Salaries and related costs		(226,737	)	(259,392	)	(256,721	)
Sales and marketing expenses		(228,169	)	(267,983	)	(204,952	)
General and administrative expenses		(326,804	)	(395,211	)	(440,672	)
Provision for doubtful accounts receivable		(11,502	)	(35,445	)	(17,450	)

Income/(loss) from operations		45,260		(135,374	)	(85,512	)
Interest income		3,753		13,578		20,378
Interest expense		(175	)	(54,462	)	(88,637	)
Other income, net		2,668		6,037		4,465

Income/(loss) before taxation	5	51,506		(170,221	)	(149,306	)
Income tax credit/(expense)	6	(2,043	)	6,725		7,244

Net income/(loss)		49,463		(163,496	)	(142,062	)

Earnings/(loss) per share
Basic	7	8.1 cents		(26.6) cents		(23.1) cents

Diluted	7	8.1 cents		(26.6) cents		(23.1) cents


		*Year ended August 31,*
	*Note*	*2005*		*2006*		*2007*
		HK$		HK$		HK$
Revenue		1,162,059		1,134,876		1,141,270

Operating expenses

Network costs	3	(339,402	)	(300,593	)	(214,591	)
Salaries and related costs		(259,392	)	(256,721	)	(221,102	)
Sales and marketing expenses		(267,983	)	(204,952	)	(203,673	)
General and administrative expenses		(395,211	)	(440,672	)	(402,760	)
Provision for doubtful accounts		(35,445	)	(17,450	)	(6,569	)

(Loss)/income from operations		(135,374	)	(85,512	)	92,575

Interest income		13,578		20,378		22,671
Interest expense	4	(54,462	)	(88,637	)	(87,504	)
Other income, net	4	6,037		4,465		3,149

(Loss)/income before taxation	4	(170,221	)	(149,306	)	30,891
Income tax credit/(expense)	5	6,725		7,244		(2,026	)

Net (loss)/income		(163,496	)	(142,062	)	28,865

(Loss)/Earnings per share
Basic	6	(26.6) cents		(23.1) cents		4.7 cents

Diluted	6	(26.6)cents		(23.1)cents		4.6 cents


		August 31,
	Note	2005 (restated)	2006
		HK$	HK$
		(Amounts in thousands except number of shares and per share amounts)
ASSETS
Current assets
Cash and bank balances	20	539,591	144,917
Term bank deposits	20	92,850	237,496
Pledged bank deposits	16	90,447	87,022
Trade receivables, net	8(a)	130,010	140,598
Other receivables, deposits and prepayments	8(b)	78,758	77,583
Inventories		1,957	856
Deferred expenditure	13	12,960	10,808
Income tax receivable		535	347

Total current assets		947,108	699,627
Goodwill	9	1,066	1,066
Fixed assets, net	10	1,336,543	1,367,234
Investment securities	17	41,441	40,274
Derivative financial instruments	18	—	1,845
Long term receivables and prepayment	28	13,099	12,532
Deferred expenditure	13	8,171	1,637

Total assets		2,347,428	2,124,215

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade payables		90,762	86,385
Deposits received		15,510	16,230
Current portion of deferred services income		36,744	33,743
Other payables and accrued expenses	11	223,208	143,486
Income taxes payable		1,728	1,964
Current portion of obligation under finance lease	14	1,194	1,297

Total current liabilities		369,146	283,105
Long-term liabilities
Deferred taxation	12	10,539	353
Long-term debt and other liabilities	14	947,289	949,103

Total liabilities		1,326,974	1,232,561
Commitments and contingencies	15
Shareholders’ equity
Ordinary shares, par value $0.10 per share — 2,000,000,000 shares authorized — 614,125,404 shares issued and outstanding at August 31, 2005, 614,175,404 shares issued and outstanding at August 31, 2006	19	61,412	61,417
Share premium		619,408	620,298
Retained profits		331,742	196,289
Capital reserve		7,052	12,993
Translation reserve		840	657

Total shareholders’ equity		1,020,454	891,654

Total liabilities and shareholders’ equity		2,347,428	2,124,215


		*August 31,*
	*Note*	*2006*	*2007*
		HK$	HK$
ASSETS

Current assets

Cash and bank balances	19	144,917	532,894
Term bank deposits	19	237,496	—
Pledged bank deposits	15	87,022	87,220
Investment securities		—	3,779
Trade receivables, net	7(a)	140,598	170,551
Other receivables, deposits and prepayments	7(b)	77,583	59,372
Inventories		856	477
Deferred expenditure	12	10,808	13,584
Income tax receivable		347	—

Total current assets		699,627	867,877

Goodwill	8	1,066	1,066
Fixed assets, net	9	1,367,234	1,237,223
Investment securities	16	40,274	39,213
Derivative financial instrument	17	1,845	1,039
Long term receivables and prepayment		12,532	6,932
Deferred expenditure	12	1,637	7,783

Total assets		2,124,215	2,161,133

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Trade payables		86,385	76,019
Deposits received		16,230	16,188
Current portion of deferred services income		33,743	64,202
Other payables and accrued charges	10	143,486	145,267
Income tax payable		1,964	1,481
Current portion of obligations under finance leases	13	1,297	835

Total current liabilities		283,105	303,992

Long-term liabilities

Deferred taxation	11	353	291
Long-term debt and other liabilities	13	949,103	952,968

Total liabilities		1,232,561	1,257,251


			Percentage ~~holding~~ *holding*
*Name*	*Place and date of* *establishment/operation*	*Issued capital*	~~Direct~~*Directly*	~~Indirect~~*Indirectly*	*Nature of* *business*
963673 Ontario Limited	Canada November 12, 1991	Common ~~CAD502,000~~ Canadian dollar (“CAD”) 502,000	—	100	Investment holding in Canada

Attitude Holdings Limited	British Virgin Islands November 3, 1997	Ordinary US$1	—	100	Inactive

Automedia Holdings Limited	British Virgin Islands January 23, 2001	Ordinary US$1	100	—	Investment holding in Hong Kong

City Telecom (B.C.) Inc.	Canada February 25, 1992	Common CAD501,000	—	100	Provision of international telecommunications and dial-up ~~internet~~ Internet access services in Canada

City Telecom (Canada) Inc.	Canada October 6, 1997	Common CAD100	—	100	Leasing and maintenance of switching equipment and provision of operational services in Canada
~~City Telecom Inc.~~	~~Canada September 19, 1991~~	~~Common CAD1,000~~	—	~~100~~	~~Provision of international telecommunications and dial-up internet access services in Canada~~
~~City Telecom International Limited~~	~~British Virgin Islands May 8, 1997~~	~~Ordinary US$5,294~~	~~100~~	—	~~Investment holding in Hong Kong~~
~~City Telecom (USA) Inc.~~	~~USA May 5, 1997~~	~~Common US$1~~	—	~~100~~	~~Inactive~~
~~Credibility Holdings Limited~~	~~British Virgin Islands December 18, 1998~~	~~Ordinary US$1~~	~~100~~	—	~~Investment holding in Hong Kong~~
~~CTI Guangzhou Customer Service Co. Ltd. (translated from the registered name in Chinese)~~	~~The People’s Republic of China (“the PRC”) April 29, 2002~~	~~Paid in capital of HK$8,000,000~~	~~100~~	—	~~Provision of administrative support services in the PRC~~
~~CTI International Limited~~	~~Hong Kong August 23, 1999~~	~~Ordinary HK$10,000,000~~	—	~~100~~	~~Inactive~~
~~CTI Marketing Company Limited~~	~~Hong Kong August 23, 1999~~	~~Ordinary HK$10,000~~	—	~~100~~	~~Provision of media marketing services in Hong Kong~~
~~Golden Trinity Holdings Limited~~	~~British Virgin Islands June 11, 1997~~	~~Ordinary US$1~~	~~100~~	—	~~Investment holding in Hong Kong~~


	*Place and* date of establishment/ operation			Percentage ~~holding~~
~~Name~~*holding*	*Place and* date of establishment/ operation	~~Place and date~~*Nature of* *business*
*Name*		~~Place and date~~*Nature of* *business*	*Issued capital*	*Directly*	*Indirectly*
City Telecom Inc.	Canada September 19, 1991		Common CAD1,000	—	100	Provision of international telecommunications and dial-up Internet access services in Canada
City Telecom International Limited	British Virgin Islands May 8, 1997		Ordinary US$5,294	100	—	Investment holding in Hong Kong
City Telecom (U.S.A.) Inc.	USA May 5, 1997		Common US$1	—	100	Inactive
Credibility Holdings Limited	British Virgin Islands December 18, 1998		Ordinary US$1	100	—	Investment holding in Hong Kong
CTI Guangzhou Customer Service Co. Ltd (translated from the registered name in Chinese)	The People’s Republic of China (“the PRC”) April 29, 2002		Paid in capital of HK$8,000,000	100	—	Provision of administrative support services in the PRC
CTI International Limited	Hong Kong August 23, 1999		Ordinary HK$10,000,000	—	100	Inactive
CTI Marketing Company Limited	Hong Kong August 23, 1999		Ordinary HK$10,000	—	100	Provision of media marketing services in Hong Kong
Golden Trinity Holdings Limited	British Virgin Islands June 11, 1997		Ordinary US$1	100	—	Investment holding in Hong Kong


	*Place and* date of establishment/ operation		*Percentage* *holding*		*Nature of* *business*
*Name*	*Place and* date of establishment/ operation	*Issued capital*	~~Direct~~*Directly*	~~Indirect~~*Indirectly*	*Nature of* *business*	~~Nature of business~~
Hong Kong Broadband Network Limited	Hong Kong August 23, 1999	Ordinary HK$383,049	—	100	Provision of international telecommunications and fixed telecommunications network services in Hong Kong
~~IDD1600~~IDD 1600 Company Limited	Hong Kong November 4, 1998	Ordinary HK$2	—	100	Provision of international telecommunications services in Hong Kong
Global Courier Company Limited (formerly known as iStore.com Limited)	Hong Kong September 17, 1999	Ordinary HK$10,000	—	100	Inactive
SGBN Singapore Broadband Network Pte. Limited	Singapore March 29, 2007	Ordinary Singapore dollar 1	100	—	Inactive


–- Buildings and investment property situated on leasehold land	over the shorter of the unexpired ~~term of lease and their estimated~~ ~~useful lives of 50 years~~
~~– Furniture, fixtures and fittings~~		~~4 years~~
~~– Telecommunications, computer and office equipment~~		~~4-15 years~~
~~– Motor vehicles~~		~~4 years~~
~~– Leasehold improvements~~	~~over the shorter of the unexpired~~ term of the leases and their ~~expected~~ estimated useful lives of 50 years

- Furniture, fixtures and fittings	4 years

- Telecommunications, computer and office equipment	4 - 20 years

- Motor vehicles	4 years

- Leasehold improvements	over the shorter of the unexpired term of the leases and their estimated useful lives

3
	~~HK$’000~~
~~Net cash outflow from operating activities, as previously reported~~	~~(13,677~~	)
~~Adjustment for term bank deposits~~	~~92,850~~

~~Net cash inflow from operating activities, as revised~~	~~79,173~~


~~Net cash outflow from investing activities, as previously reported~~	~~(464,590~~	)
~~Adjustment for term bank deposits~~	~~(92,850~~	)

~~Net cash outflow from investing activities, as revised~~	~~(557,440~~	)
		Network costs


	Investment property (note (c))	Leasehold land and buildings		Leasehold improvements		Furniture, fixtures and fittings		Telecommunications computers and office equipment		Motor vehicles		Total
	HK$’000	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Cost
At September 1, 2004	—	83,708		64,699		13,238		1,660,799		7,773		1,830,217
Exchange adjustments	—	—		244		133		2,497		—		2,874
Additions	—	462		3,701		2,122		411,550		1,291		419,126
Adjustment (note (b))	—	—		—		—		(4,825	)	—		(4,825	)
Disposals	—	—		(26	)	(1	)	(2,875	)	(692	)	(3,594	)

At August 31, 2005	—	84,170		68,618		15,492		2,067,146		8,372		2,243,798

At September 1, 2005	—	84,170		68,618		15,492		2,067,146		8,372		2,243,798
Exchange adjustments	—	—		281		126		2,180		—		2,587
Additions	—	625		9,342		2,880		309,744		344		322,935
Disposals	—	—		—		(728	)	(26,817	)	(1,760	)	(29,305	)
Transfer to investment property	5,197	(5,197	)	—		—		—		—		—

At August 31, 2006	5,197	79,598		78,241		17,770		2,352,253		6,956		2,540,015

Accumulated depreciation:
At September 1, 2004	—	5,024		21,603		9,052		630,027		5,636		671,342
Exchange adjustments	—	—		188		68		1,768		—		2,024
Charge for the year	—	1,678		8,445		1,390		224,444		1,346		237,303
Adjustment (note (b))	—	—		—		—		(654	)	—		(654	)
Disposals	—	—		(11	)	(1	)	(2,260	)	(488	)	(2,760	)

At August 31, 2005	—	6,702		30,225		10,509		853,325		6,494		907,255

At September 1, 2005	—	6,702		30,225		10,509		853,325		6,494		907,255
Exchange adjustments	—	—		223		74		1,642		—		1,939
Charge for the year	—	1,695		9,980		2,190		261,819		780		276,464
Disposals	—	—		—		(326	)	(11,922	)	(1,760	)	(14,008	)
Transfer to investment property	866	(866	)	—		—		—		—		—
Impairment loss (note (a))	1,131	—		—		—		—		—		1,131

At August 31, 2006	1,997	7,531		40,428		12,447		1,104,864		5,514		1,172,781

Net book value:
At August 31, 2006	3,200	72,067		37,813		5,323		1,247,389		1,442		1,367,234

At August 31, 2005	—	77,468		38,393		4,983		1,213,821		1,878		1,336,543


	Investment property	Leasehold land and buildings		Leasehold improvements		Furniture, fixtures and fittings		Tele- communications, computer and office equipment		Motor vehicles		*Total*
	HK$’000	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
	(Note (a))	(Note (a))
*Cost*:

At September 1, 2005	—	84,170		68,618		15,492		2,067,146		8,372		2,243,798
Exchange adjustments	—	—		281		126		2,180		—		2,587
Additions	—	625		9,342		2,880		309,744		344		322,935
Disposals	—	—		—		(728	)	(26,817	)	(1,760	)	(29,305	)
Transfer to investment property	5,197	(5,197	)	—		—		—		—		—

At August 31, 2006	5,197	79,598		78,241		17,770		2,352,253		6,956		2,540,015

At September 1, 2006	5,197	79,598		78,241		17,770		2,352,253		6,956		2,540,015
Exchange adjustments	—	—		773		253		2,560		—		3,586
Additions	—	—		1,627		496		129,950		177		132,250
Disposals	—	—		(3	)	(1,100	)	(8,988	)	(315	)	(10,406	)

At August 31, 2007	5,197	79,598		80,638		17,419		2,475,775		6,818		2,665,445

*Accumulated depreciation:*

At September 1, 2005	—	6,702		30,225		10,509		853,325		6,494		907,255
Exchange adjustments	—	—		223		74		1,642		—		1,939
Charge for the year	—	1,695		9,980		2,190		261,819		780		276,464
Disposals	—	—		—		(326	)	(11,922	)	(1,760	)	(14,008	)
Transfer to investment property	866	(866	)	—		—		—		—		—
Impairment loss (note (a))	1,131	—		—		—		—		—		1,131

At August 31, 2006	1,997	7,531		40,428		12,447		1,104,864		5,514		1,172,781

At September 1, 2006	1,997	7,531		40,428		12,447		1,104,864		5,514		1,172,781
Exchange adjustments	—	—		612		160		1,874		—		2,646
Charge for the year	104	1,592		9,269		2,028		244,581		529		258,103
Disposals	—	—		—		(683	)	(4,465	)	(160	)	(5,308	)

At August 31, 2007	2,101	9,123		50,309		13,952		1,346,854		5,883		1,428,222

*Net book value:*

At August 31, 2007	3,096	70,475		30,329		3,467		1,128,921		935		1,237,223

At August 31, 2006	3,200	72,067		37,813		5,323		1,247,389		1,442		1,367,234


	Accelerated depreciation allowances			Others			Total			Accelerated depreciation allowances				*Others*			*Total*
Deferred tax liabilities	2005	2006		2005	2006		2005	2006
	HK$’000	HK$’000		HK$’000	HK$’000		HK$’000	HK$’000		*2006*		*2007*		*2006*		*2007*	*2006*		*2007*
										HK$’000		HK$’000		HK$’000		HK$’000	HK$’000		HK$’000
Deferred tax liabilities:
At the beginning of the year	140,202	158,477		49	85		140,251	158,562		158,477		154,678		85		—	158,562		154,678
(Credited)/charged to statements of operations	18,267	(3,805	)	35	(86	)	18,302	(3,891	)
Credited to consolidated statement of operations										(3,805	)	(19,772	)	(86	)	—	(3,891	)	(19,772	)
Exchange differences	8	6		1	1		9	7		6		4		1		—	7		4

At the end of the year	158,477	154,678		85	—		158,562	154,678		154,678		134,910		—		—	154,678		134,910


	Share-based payment			Tax losses				Total				*Share-based payment*				*Tax losses*				*Total*
Deferred tax assets	2005	2006		2005		2006		2005		2006
	HK$’000	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		*2006*		*2007*		*2006*		*2007*		*2006*		*2007*
												HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Deferred tax assets:
At the beginning of the year	—	—		(121,589	)	(148,023	)	(121,589	)	(148,023	)	—		(123	)	(148,023	)	(154,202	)	(148,023	)	(154,325	)
Credited to statements of operations	—	(123	)	(26,426	)	(6,173	)	(26,426	)	(6,296	)
Charged/ (credited) to consolidated statement of operations												(123	)	123		(6,173	)	19,590		(6,296	)	19,713
Exchange differences	—	—		(8	)	(6	)	(8	)	(6	)	—		—		(6	)	(7	)	(6	)	(7	)

At the end of the year	—	(123	)	(148,023	)	(154,202	)	(148,023	)	(154,325	)	(123	)	—		(154,202	)	(134,619	)	(154,325	)	(134,619	)


	17	~~August 31,~~Derivative financial instrument
		~~2005~~ ~~note (c)~~	~~2006~~
		~~HK$’000~~	~~HK$’000~~
~~Non-current assets~~
~~Interest rate swap, at fair value through profit or loss (note (a))~~		—	~~1,845~~

~~Current assets~~
~~Forward foreign exchange contracts, at fair value through profit or loss (note(b))~~		—	—


		*Ordinary shares*
	Number of shares outstanding	Amount outstanding	Share premium	Capital reserve		Warrant reserve		Translation reserve		Retained profits		Total shareholders’ equity
		HK$	HK$	HK$		HK$		HK$		HK$		HK$
		(Amounts in thousands, except number of shares)
Balance at September 1, 2004	610,573,361	61,057	617,986	87		365		983		495,220		1,175,698
Release of warrant reserve upon warrant expiration	—	—	—	—		(18	)	—		18		—
Shares issued upon exercise of warrants	3,500,043	350	1,397	—		(347	)	—		—		1,400
Shares issued upon exercise of share options	52,000	5	25	—		—		—		—		30
Equity settled share-based compensation	—	—	—	6,965		—		—		—		6,965
Net loss	—	—	—	—		—		—		(163,496	)	(163,496	)
Foreign currency translation adjustment	—	—	—	—		—		(143	)	—		(143	)

Balance at August 31, 2005	614,125,404	61,412	619,408	7,052		—		840		331,742		1,020,454
Changes in accounting policy - opening balance adjustment arising from adoption of HKAS 32 and HKAS 39 (note (a))	—	—	—	—		—		—		6,609		6,609

Balance at September 1, 2005	614,125,404	61,412	619,408	7,052		—		840		338,351		1,027,063
Shares issued upon exercise of share options	50,000	5	8	—		—		—		—		13
Equity settled share-based compensation	—	—	882	5,941		—		—		—		6,823
Net loss	—	—	—	—		—		—		(142,062	)	(142,062	)
Foreign currency translation adjustment	—	—	—	—		—		(183	)	—		(183	)

Balance at August 31, 2006	614,175,404	61,417	620,298	12,993		—		657		196,289		891,654
2007 interim dividends declared and paid	—	—	—	—		—		—		(24,635	)	(24,635	)
Shares issued upon exercise of share options	2,328,000	233	2,135	(611	)	—		—		—		1,757
Equity settled share-based compensation	—	—	—	5,727		—		—		—		5,727
Net income	—	—	—	—		—		—		28,865		28,865
Foreign currency translation adjustment	—	—	—	—		—		514		—		514

Balance at August 31, 2007	616,503,404	61,650	622,433	18,109		—		1,171		200,519		903,882