As filed with the Securities and Exchange Commission on ~~January 16, 2009.~~December 17, 2010

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


		~~For the fiscal year ended August 31, 2008~~

For the year ended August 31, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the transition period fromor or


o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


		Date of event requiring this shell company report

Commission file number: ~~333-11012~~000-30354

City Telecom (H.K.) Limited

(Exact name of registrant as Specified in its Charter)

Hong Kong Special Administrative Region,
The People’s Republic of China
(Jurisdiction of Incorporation or Organization)

Level 39, Tower 1, Metroplaza
No. 223 Hing Fong Road
Kwai Chung, New Territories
Hong Kong
(Address of Principal Executive Offices)

Mr. Lai Ni Quiaque
12th Floor, Trans Asia Centre
No.18 Kin Hong Street
Kwai Chung, New Territories
Hong Kong

Telephone : (852) 3145 6068
Facsimile : (852) 2199 8445
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


		Name Of Each
		Exchange On Which
Title Of Each Class		~~Name Of Each Exchange On Which~~ Registered
American Depositary Shares, each representing 20 Ordinary Shares, par value HK$0.10 per share		The Nasdaq Stock Market LLC
Ordinary Shares, par value HK$0.10 per share*		The Nasdaq Stock Market LLC*

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as at the close of the period covered by the annual report:~~650,621,823~~764,997,344 Ordinary Shares, par value HK$0.10 per share

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

Yeso Noþ

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.

Yeso Noþ

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.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso Noo

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 orand large accelerated filer” in Rule 12b-2 of the Exchange ~~Act~~Act. (Check one):


Large accelerated filero		Accelerated filero ~~Accelerated Filer~~ o ~~Non-accelerated filer~~ þ		Non-accelerated filero

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

~~US GAAP~~ o ~~International Financial Reporting Standards as issued~~
US GAAPo International Financial Reporting Standards as issuedþ Othero
by the International Accounting Standards Board

If “Other” has been checked in response to the ~~International Accounting Standards Board~~ o ~~Other~~ þ

~~Indicate~~previous question, indicate by check mark which financial statement item the registrant has selected to follow.

Item 17o Item 18þo

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).

Yeso Noþ

* Not for trading, but only in connection with the registration of the American Depositary Shares

~~USE OF DEFINED AND TECHNICAL TERMS~~Use of defined and technical terms

Except as otherwise indicated by the context, references in this annual report to:

	•		“Hong Kong Companies Ordinance” are ~~references~~ to Chapter 32 of the laws of Hong Kong;

	•		“City Telecom” or the “Company” are ~~references~~ to City Telecom (H.K.) Limited;

	•		“fiscal year” or “fiscal” are ~~references~~ to the Company’s fiscal year ended August 31 for the year referenced;

•		“FTNS business” are to our business segment in which we provide fixed telecommunications network services, including dial up and broadband Internet access services, local VoIP services, IP-TV services and corporate data services;

•		“FTNS Licenses” are ~~references~~ to the licenses issued by the Hong Kong regulatory authorities for fixed telecommunications network ~~services licenses;~~services;

	•		“GPON” are ~~references~~ to ~~our~~ Gigabit Passive Optical Network;

•		“Group” are to the Company and its subsidiaries;

•		“HKBN” are ~~references~~ to Hong Kong Broadband Network ~~Limited;~~Limited, a wholly owned subsidiary of the Company;

	•		“~~HKFRS”~~HKFRSs” are ~~references~~ to Hong Kong Financial Reporting ~~Standards;~~Standards issued by the Hong Kong Institute of Certified Public Accountants;

•		“IDD business” are to our business segment in which we provide international telecommunications services, including international long distance call services;

•		“IFRSs” are to International Financial Reporting Standards, as issued by the International Accounting Standards Board;

•		“IP-TV services” are ~~references~~ to pay-television services through Internet Protocol;

	•		“PNETS Licenses” are ~~references~~ to licenses issued by the Hong Kong regulatory authorities for the public non-exclusive telecommunications ~~service licenses;~~services;

•		“UC License” are to the Unified Carrier License issued by the Hong Kong regulatory authorities for fixed and mobile telecommunication services; and

•		“VoIP” are ~~references~~ to Voice over Internet Protocol.

~~CURRENCY TRANSLATION~~Currency translation

We publish our consolidated 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$1.00 = HK$~~7.8036,~~7.7781, which was the ~~noon buying~~exchange rate set forth in ~~The City~~the H.10 statistical release of ~~New York for cable transfers in Hong Kong dollars as certified for customs purposes by~~ the Federal Reserve ~~Bank of New York~~Board on August 31, ~~2008.~~2010. On ~~January 9, 2009~~December 10, 2010 the ~~noon buying~~exchange rate was US$~~1.00=~~1.00 = HK$~~7.7572.~~7.7737. 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.

~~FORWARD-LOOKING STATEMENTS~~Note regarding forward-looking statements

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 ~~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:

	•		~~technology~~technological changes;

	•		changes in ~~the~~our regulatory environment, ~~in which we operate,~~ including changes in rules and policies promulgated by regulatory agencies from time to time;

	•		~~the~~ increasing competition in the ~~local or international~~ telecommunications, Internet access, local VoIP, or pay-television and corporate data markets;

	•		the benefits we expect to derive from our Next Generation Network, which ~~consists of our~~utilize Metro Ethernet ~~Network~~ and ~~our newly-deployed~~ GPON technologies, in which we have been making significant capital investments;

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

	•		the continued development and stability of our technological infrastructure, a platform through which our local and international telecommunications, Internet access, local VoIP, IP-TV and ~~IP-TV~~corporate data services are offered; and

	•		changes in the local and global economic ~~and financial~~ environment.

When considering such forward-looking statements, you should keep in mind the factors described in Item 3 “Key ~~Information—Risk Factors”~~information — risk factors” and other cautionary statements appearing in Item 5 “Operating and ~~Financial Review~~financial review and ~~Prospects”~~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.

PART I

ITEM 1.1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.2 OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.3 KEY INFORMATION

A. Selected ~~Financial Data~~financial data

City Telecom’s ~~Historical Financial Information~~historical financial information

The following table presents the selected consolidated financial ~~information~~data and operating ~~information~~data of City Telecom as of and for the years ended August 31, ~~2004, 2005, 2006, 2007~~2008, 2009 and ~~2008.~~2010. The selected financial ~~information~~data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements included elsewhere in this annual report, the accompanying notes thereto and Item 5 “Operating and ~~Financial Review~~financial review and ~~Prospects”~~prospects”. As disclosed above under “Special note on our financial information presented in this annual report”, our consolidated financial statements as of and for the years ended August 31, 2008, 2009 and 2010 have been prepared and presented in accordance with IFRSs.

Selected consolidated statement of operations data:

For the year ended August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands except per share data and number of ordinary shares)
Revenue:
- FTNS business 1,011,038 1,230,880 1,356,098 174,348
- IDD business 291,943 247,359 218,589 28,103

Total operating revenue 1,302,981 1,478,239 1,574,687 202,451

Network costs:
- FTNS business (103,524 ) (107,670 ) (144,347 ) (18,558 )
- IDD business (74,843 ) (67,459 ) (50,945 ) (6,550 )

Total network costs (178,367 ) (175,129 ) (195,292 ) (25,108 )

Other operating expenses (966,094 ) (1,037,964 ) (1,105,604 ) (142,143 )

Interest expense, net (59,541 ) (50,258 ) (10,863 ) (1,397 )
Other income/(expense), net 9,393 36,671 (3,383 ) (434 )
Income taxes benefit/(expense) 16,818 (38,730 ) (42,679 ) (5,487 )

Net income 125,190 212,829 216,866 27,882

Basic earnings per share (cents) 19.7 32.4 30.7 3.9
Diluted earnings per share (cents) (note 1) 19.0 31.8 29.4 3.8
Dividends per share attributable to the year (cents) 6.0 19.0 20.0 2.6
Weighted average number of ordinary shares 634,015 657,201 706,605 706,605
Diluted weighted average number of ordinary shares (note 2) 657,997 668,384 736,616 736,616

Selected consolidated balance sheet data:

As of August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands)
Total assets 2,093,410 1,790,408 2,251,549 289,473

Long-term debt and other liabilities (683,242 ) (162,586 ) (134,860 ) (17,338 )
Finance lease obligations (376 ) (732 ) (605 ) (78 )
Other liabilities (377,185 ) (398,563 ) (427,545 ) (54,969 )

Total liabilities (1,060,803 ) (561,881 ) (563,010 ) (72,385 )

Net assets 1,032,607 1,228,527 1,688,539 217,088

Share capital 65,062 66,418 76,500 9,835
Share premium 670,717 681,208 1,074,997 138,208
Reserves 296,828 480,901 537,042 69,045

Total shareholders’ equity 1,032,607 1,228,527 1,688,539 217,088

Other financial data:

For the year ended August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands)
EBITDA (note 3) 377,964 508,058 469,437 60,354
Net cash inflow from operating activities 381,991 536,771 485,340 62,398
Net cash outflow from investing activities (147,750 ) (176,488 ) (306,254 ) (39,374 )
Net cash outflow from financing activities (345,978 ) (561,292 ) 178,307 22,924
Capital expenditures (note 4) 211,684 286,734 344,844 44,335

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 inflow from operating activities, the most directly comparable financial measure calculated and presented in accordance with IFRSs, to our definition of EBITDA on a consolidated basis for the years ended 2008, 2009 and 2010.

For the year ended August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands)
EBITDA 377,964 508,058 469,437 60,354
Depreciation and amortization (210,051 ) (206,241 ) (199,029 ) (25,588 )
Interest expense, net (59,541 ) (50,258 ) (10,863 ) (1,397 )
Income taxes benefit/(expense) 16,818 (38,730 ) (42,679 ) (5,487 )

Net income 125,190 212,829 216,866 27,882
Depreciation and amortization 210,051 206,241 199,029 25,588
Amortization of deferred expenditure 33,777 53,160 48,621 6,251
Income taxes (benefit)/expense (16,818 ) 38,730 42,679 5,487
Interest income (15,596 ) (4,869 ) (11,372 ) (1,462 )
Interest element of finance lease 34 27 42 5
Interest, amortization and exchange difference on senior notes 72,640 49,214 6,069 780
Interest on other borrowings 3,428 885 3,260 419
Amortization of upfront cost on bank loan — — 192 25
Interest expense on bank loan — — 1,379 177
Change in fair value of derivative financial instruments — — 11,293 1,452
Realized gain on long term bank deposit (1,185 ) — — —

For the year ended August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands)
Loss/(gain) on disposal of fixed assets 1,431 1,016 (1,375 ) (177 )
Equity settled share-based transaction 4,204 4,768 5,347 687
Realized loss on derivatives financial instruments 1,039 — — —
Realized and unrealized gain on other financial assets (3,284 ) (189 ) — —
(Gain)/loss on extinguishment of senior notes (2,582 ) (31,371 ) 9,650 1,241
Taxation paid (4,250 ) (1,732 ) (3,013 ) (387 )
Change in long term receivable and prepayments 1,346 (505 ) 917 118
Change in working capital, net (27,434 ) 8,567 (44,244 ) (5,688 )

Net cash inflow from operating activities 381,991 536,771 485,340 62,398

Operating data:

As of and for the year ended August 31,
2008 2009 2010
FTNS subscriptions:
- Broadband Internet access 316,000 391,000 526,000
- Local VoIP 329,000 382,000 431,000
- IP-TV 156,000 170,000 153,000
Total 801,000 943,000 1,110,000
Registered international telecommunications accounts (note 5) 2,336,000 2,383,000 2,445,000
IDD outgoing minutes (in thousands) 574,000 487,000 464,000


Notes:

(1)		Diluted earnings per share is computed by dividing the net income by the diluted weighted average number of ordinary shares during the year.

(2)		For the years ended August 31, 2008, 2009 and 2010, the diluted weighted average number of ordinary shares was the weighted average number of ordinary shares outstanding during the respective years, plus the weighted average number of additional ordinary shares which would have been outstanding assuming all the outstanding share options have been exercised at the beginning of the respective years or on the date of issue, whichever is earlier.

(3)		EBITDA for any period means, without duplication, net income for such period, plus the following to the extent deducted in calculating such net income: 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 IFRSs. 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 IFRSs, 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.

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

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

Selected Consolidated Statement of Operations Data:


	As of and for the year ended August 31,																		For the year ended August 31,
	2004			2005⁽⁶⁾			2006⁽⁶⁾			2007			2008			2008			2006 (note 6)			2007
	HK$			HK$			HK$			HK$			HK$			US$			HK$			HK$
	(Amounts in thousands except per share data)																		(Amounts in thousands except per share data)
HKFRS

Revenues:
Fixed telecommunications network services		541,902			629,464			716,600			816,800			1,011,038			129,561			716,600			816,800
International telecommunications services		627,978			532,595			418,276			324,470			291,943			37,411			418,276			324,470


Total operating revenue		1,169,880			1,162,059			1,134,876			1,141,270			1,302,981			166,972			1,134,876			1,141,270


Network Costs:
Fixed telecommunications network services		(122,476	)		(118,383	)		(125,639	)		(103,795	)		(103,524	)		(13,266	)		(125,639	)		(103,795	)
International telecommunications services		(208,932	)		(221,019	)		(174,954	)		(110,796	)		(74,843	)		(9,591	)		(174,954	)		(110,796	)


Total network costs		(331,408	)		(339,402	)		(300,593	)		(214,591	)		(178,367	)		(22,857	)		(300,593	)		(214,591	)
Other operating expenses		(793,212	)		(958,031	)		(919,795	)		(834,104	)		(966,094	)		(123,801	)		(919,795	)		(834,104	)

Income/(loss) from operations		45,260			(135,374	)		(85,512	)		92,575			158,520			20,314
Interest income/(expense), net		3,578			(40,884	)		(68,259	)		(64,833	)		(59,541	)		(7,630	)

(Loss)/income from operations																				(85,512	)		92,575
Interest (expense)/income, net																				(68,259	)		(64,833	)
Other income, net		2,668			6,037			4,465			3,149			9,393			1,204			4,465			3,149
Income taxes (expense)/credit		(2,043	)		6,725			7,244			(2,026	)		16,818			2,155
Income taxes credit/(expense)																				7,244			(2,026	)

Net income/(loss)		49,463			(163,496	)		(142,062	)		28,865			125,190			16,043
Basic earnings/(loss) per share (cents)		8.1			(26.6	)		(23.1	)		4.7			19.7			2.5
Diluted earnings/(loss) per share (cents)⁽¹⁾		8.1			(26.6	)		(23.1	)		4.6			19.0			2.4

Net (loss)/income																				(142,062	)		28,865
Basic (loss)/earnings per share (cents)																				(23.1	)		4.7
Diluted (loss)/earnings per share (cents) (note 1)																				(23.1	)		4.6
Dividends declared per share (cents)		9.0			—			—			8.0			6.0			0.8			—			8.0
Weighted average number of shares		610,095			613,525			614,134			614,840			634,015			634,015			614,134			614,840
Diluted weighted average number of shares⁽²⁾		614,365			613,525			614,134			631,319			657,997			657,997
Diluted weighted average number of shares (note 2)																				614,134			631,319

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 operating activities under HKFRS to our definition of EBITDA on a consolidated basis for each of fiscal ~~2004, 2005,~~ 2006 ~~2007~~ and ~~2008.~~2007.


	As of and for the year ended August 31,																		For the year ended August 31
	2004			2005			2006			2007			2008			2008			2006			2007
	HK$			HK$			HK$			HK$			HK$			US$			HK$			HK$
	(Amounts in thousands)																		(Amounts in thousands)
EBITDA⁽³⁾		244,945			108,377			195,417			353,827			377,964			48,435
EBITDA (note 3)																				195,417			353,827
Depreciation and amortization		(197,017	)		(237,714	)		(276,464	)		(258,103	)		(210,051	)		(26,917	)		(276,464	)		(258,103	)
Interest income/(expense), net		3,578			(40,884	)		(68,259	)		(64,833	)		(59,541	)		(7,630	)
Income taxes (expense)/credit		(2,043	)		6,725			7,244			(2,026	)		16,818			2,155
Interest expense, net																				(68,259	)		(64,833	)
Income taxes credit/(expense)																				7,244			(2,026	)


Net income/(loss)		49,463			(163,496	)		(142,062	)		28,865			125,190			16,043
Net (loss)/income																				(142,062	)		28,865
Depreciation and amortization		197,017			237,714			276,464			258,103			210,051			26,917			276,464			258,103
Impairment loss on investment property		—			—			1,131			—			—			—			1,131			—
Amortization of deferred expenditure		1,828			12,927			13,973			15,580			33,777			4,329			13,973			15,580
Income taxes expense/(credit)		2,043			(6,725	)		(7,244	)		2,026			(16,818	)		(2,155	)
Income taxes (credit)/expense																				(7,244	)		2,026
Interest income		(3,753	)		(13,578	)		(20,378	)		(22,671	)		(15,596	)		(1,999	)		(20,378	)		(22,671	)
Interest, amortization and exchange difference on senior notes		—			54,065			86,664			89,879			72,640			9,309			86,664			89,879
Other borrowing costs		—			—			1,919			(739	)		(1,185	)		(152	)		1,919			(739	)
(Gain) / loss on disposal of fixed assets		(34	)		(134	)		9,621			1,714			1,431			183
Loss on disposal of fixed assets																				9,621			1,714
Equity settled share-based transaction		87			6,965			6,823			5,727			4,204			539			6,823			5,727
Realized and unrealized loss on derivatives financial instruments		—			—			125			806			1,039			133			125			806
Unrealized losses/(gain) on other investments		1,696			(300	)		(668	)		(1,887	)		(3,284	)		(421	)
Gain on extinguishment of senior notes		—			—			—			—			(2,582	)		(331	)
Unrealized gain on other investments																				(668	)		(1,887	)
Taxation paid		(24,819	)		(1,393	)		(2,532	)		(2,171	)		(4,250	)		(545	)		(2,532	)		(2,171	)
Change in long term receivable		(6,206	)		(6,893	)		567			5,600			1,346			173			567			5,600
Change in working capital, net		(13,559	)		(41,769	)		(40,252	)		3,167			(27,434	)		(3,516	)		(40,252	)		3,167


Net cash flow provided by operating activities																				184,151			383,999

As of and for the year ended August 31,
2004 2005 2006 2007 2008 2008
HK$ HK$ HK$ HK$ HK$ US$
(Amounts in thousands)
Net cash flow provided by operating activities 203,763 77,383 184,151 383,999 378,529 48,507

~~Operating Data:~~

As of and for the year ended August 31,
2004 2005 2006 2007 2008
Fixed Telecommunications Network Services Subscriptions:
Broadband Internet Access 197,000 229,000 220,000 247,000 316,000
Local VoIP 237,000 293,000 281,000 308,000 329,000
IP-TV 31,000 109,000 116,000 128,000 156,000

Total 465,000 631,000 617,000 683,000 801,000

Registered international telecommunications accounts ⁽⁵⁾
1,916,235 2,054,036 2,201,963 2,331,000 2,336,000
IDD outgoing minutes (in thousands) 1,007,000 947,100 788,000 659,000 574,000


Notes:

(1)		Diluted ~~earnings/~~(loss)/earnings per share is computed by dividing the net ~~income/~~(loss)/income by the diluted weighted average number of ordinary shares during the year.

(2)		For fiscal ~~2004,~~ 2007, ~~and 2008,~~ the diluted weighted average number of shares was the weighted average number of ordinary shares outstanding during the ~~respective years,~~year, plus the weighted average number of additional ordinary shares which would have been outstanding assuming all the outstanding share options and share warrants (if any) have been exercised at the beginning of the respective years or on the date of issue, whichever is earlier. For fiscal ~~2005 and~~ 2006, the diluted weighted average number of shares was equal to the weighted average number of ordinary shares outstanding during the respective years because the incremental effect of share options and share warrants was anti-dilutive in a loss-making year.

(3)		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 HKFRS 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 HKFRS 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.

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

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

(6)		Due to additional evidence and information received with respect to the collectability of the mobile interconnection charges on January 30, 2006, we were required to reassess the conditions on which the estimates on bad debt provision for mobile interconnection charges receivables were based. Such assessment were made after the publication of our Hong Kong statutory financial statements for fiscal 2005 but prior to the filing of our annual report on Form 20-F for fiscal 2005. The effect of the reassessment was reflected in our annual report on Form 20-F for fiscal 2005 and in our Hong Kong statutory financial statements for fiscal 2006.

		Our reassessment had the following effects on our consolidated statement of operations for fiscal 2005 and 2006:

As previously

reported in

As previously

2006 Hong Kong

reported in 2005 Hong

As reported

statutory

As reported

Kong statutory

in 2005 Form

financial

in 2006

financial statements

20-F

statements

Form 20-F

HK$

(Amounts in thousands except per share data)

Total operating revenue

1,137,356

1,162,059

1,159,579

1,134,876

Provision for doubtful debts

(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

410

Exchange ~~Rate Information~~rate information

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~~Despite the efforts of the Hong Kong Monetary Authority, or ~~HKMA’s currency board~~HKMA, to keep ~~such~~the official exchange 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~~exchange rate between the Hong Kong dollar and the U.S. dollar (in Hong Kong dollars per U.S. dollar) for the fiscal periods ~~indicated~~:indicated:

Average⁽¹⁾ High Low Period-End
HK$ HK$ HK$ HK$

Fiscal 2004 7.7821 7.8010 7.7085 7.8000
Fiscal 2005 7.7869 7.8002 7.7684 7.7718
Fiscal 2006 7.7601 7.7796 7.7506 7.7767
Fiscal 2007 7.8029 7.8289 7.7665 7.7968
Fiscal 2008 7.7915 7.8159 7.7497 7.8036
July 2008 7.8001 7.8039 7.7959 7.8017
August 2008 7.8076 7.8142 7.8036 7.8036
September 2008 7.7854 7.8094 7.7582 7.7659
October 2008 7.7589 7.7736 7.7503 7.7503
November 2008 7.7507 7.7560 7.7497 7.7501
December 2008 7.7504 7.7522 7.7497 7.7499
January 2009 (through January 9, 2009) 7.7533 7.7572 7.7504 7.7572

Average High Low Period-end
(note)
HK$ HK$ HK$ HK$
Fiscal 2006 7.7601 7.7796 7.7506 7.7767
Fiscal 2007 7.8029 7.8289 7.7665 7.7968
Fiscal 2008 7.7915 7.8159 7.7497 7.8036
Fiscal 2009 7.7550 7.8094 7.7495 7.7505
Fiscal 2010 7.7646 7.8040 7.7495 7.7781
June 2010 7.7880 7.8040 7.7690 7.7865
July 2010 7.7753 7.7962 7.7651 7.7672
August 2010 7.7702 7.7788 7.7605 7.7781
September 2010 7.7643 7.7738 7.7561 7.7599
October 2010 7.7580 7.7642 7.7513 7.7513
November 2010 7.7547 7.7656 7.7506 7.7649
December 2010 (through December 10, 2010) 7.7666 7.7737 7.7612 7.7737


~~(1)~~Note:		The average ~~of the noon buying~~ rates on the last business day of each month during the relevant fiscal year period or the average ~~noon buying~~ rates for each business day during the relevant monthly period.

Source:		For all periods prior to January 1, 2009, the exchange rate refers to noon buying rate as reported by the Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.

~~Source: Federal Reserve Bank of New York.~~

B. Capitalization and indebtedness

Not ~~applicable~~applicable.

C. Reasons for the offer and use of proceeds

Not applicable

D. Risk ~~Factors~~factors

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.

Risks ~~Relating~~relating to ~~Our Business~~our business and ~~Operations~~operations

WeIn light of the intense competition in our target markets, we cannot assure you that weour revenues and net profit will ~~be able~~continue to ~~maintain an increase in~~grow.

We derive our total revenues from our FTNS business and ~~operating results~~

our IDD business. Our FTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and corporate data services, while our IDD business primarily consists of direct dial, international calling cards and mobile call forwarding services. Our total revenues increased by 6.5% to HK$~~1,303.0~~1,574.7 million in fiscal ~~2008~~2010 from HK$~~1,141.3~~1,478.2 million in fiscal ~~2007,~~2009, and ~~we recorded a~~our net profit ofincreased by 1.9% to HK$~~125.2~~216.9 million in fiscal ~~2008 versus~~2010 from HK$~~28.9~~212.8 million in fiscal ~~2007.~~2009. The ~~increased~~increase in net profit in fiscal ~~2008~~2010 was ~~mainly~~primarily due to ~~the benefit of shifting~~increased contribution from our ~~business mix towards the more sustainable~~ FTNS business and finance cost savings of HK$32.9 million as a ~~change~~result of repurchase and redemption of our outstanding 10-year senior notes.

Although revenue from our FTNS business increased by 10.2% in the estimated useful lives for certain major telecommunications equipment effective from June 1, 2007, interest savings from senior-notes buyback and tax benefit from recognition of deferred tax asset on tax loss in prior years. However,fiscal 2010, we cannot assure you that we will be able to maintain ~~our~~such revenue and profit growth.

~~A larger portion~~ The increase in revenue of our ~~revenue~~FTNS business was primarily due to an increase in ~~fiscal 2008 was derived~~our broadband subscription base of 34.5%, driven by our marketing program between November 2009 to August 2010, which lowered by approximately 50.0% our symmetric 100Mbps service to HK$99 per month, including a Member-Get-Member promotion at this price for both the referee and referrer. Effective from September 1, 2010, we terminated such marketing program and increased the price of our residential broadband service plan from HK$99 per month to HK$169 per month. We cannot assure you whether our revenues and net profit will continue to grow as a result of such price increase due to intense competition in our industry. The growth of our subscription base will depend on our ability to continue to expand our network coverage and operate in a highly competitive market.

Further, revenue from our ~~fixed telecommunications network business, which carries a higher margin than our international telecommunications business. Revenues from our international telecommunications~~IDD business decreased by ~~10.0%~~11.6% in fiscal ~~2008,~~2010. The decrease was primarily due to a decrease in the total number of airtime minutes by ~~12.9%, which reflected~~4.7% and a ~~reduction~~decrease in ~~the operating scale of~~ our ~~international telecommunications~~tariff rate that we are able to charge our customers. On our IDD service, our strategy is to focus on cash flow rather than market share. Due to increasing competition, we expect our IDD business.~~With expected competitive~~ will continue to experience pressure on tariff rates and ~~a reduced operating scale, we expect our international telecommunications business~~ to contribute to a smaller portion of our revenue and net profit over time.

~~Revenues from~~Our ability to continue to grow our ~~fixed~~total revenues and net profit in the rapidly evolving telecommunications ~~network business increased by 23.8% in fiscal 2008, primarily due~~industry depends on many factors, including our ability to ~~an increase in our average revenue per user~~accurately identify and ~~an increase in our subscription base by 17.3%. This increase was mainly driven by the growing~~respond to demand for ~~high bandwidth~~new services, success in developing new services on a timely basis, quality and cost competitiveness of our services, effectiveness of our sales and marketing efforts, and the number and nature of competitors in a given market segment. The global economic uncertainty has resulted in decreased consumer confidence and overall slower economic activity, which may dampen the demand for broadband ~~Internet access service. However,~~services or affect our customers’ ability to continue with existing services. We cannot assure you that we can maintain the current level of revenue growth and profitability.

Given the pace of change in the telecommunications industry and the characteristics of our target markets, we cannot assure you that our ~~fixed telecommunications network~~FTNS business will continue to be ~~profitable, as we will need~~profitable.

The main target market for our FTNS business is Hong Kong. The Hong Kong telecommunications industry is highly competitive. The intense 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. We expect competition to continue to ~~expend substantial resources in developing and marketing broadband Internet access, local VoIP, IP-TV and corporate data services.~~

~~We have substantially less financial and human resources~~increase for the ~~development of our business than some of our main competitors.~~

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

	•		~~greater financial, technical, marketing~~Increasing liberalization of the telecommunications industry in Hong Kong may continue to attract new local and ~~other resources;~~foreign entrants and broaden the variety of telecommunications services available in the market, thereby increasing the overall level of competition in our industry.

	•		~~greater existing infrastructure;~~

	•		~~greater name recognition;~~The Hong Kong government may continue to issue new wireless and

	•		~~larger customer bases.~~

In addition, certain areas of the fixed telecommunications network 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, 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 FTNS Licenses. We expect the Hong Kong government to continue to open the telecommunications market in the next several years. In particular, the Company may be adversely affected as a result of the following:

	•		~~As of January 6, 2009, 246~~ wire-line FTNS Licenses. For instance, 291 PNETS Licenses had been issued in Hong Kong as of October 31, 2010 for the provision of ~~external~~“external telecommunications ~~services as~~services” (as defined in the Telecommunications Authority’s Determination as of December 30, ~~1998.~~1998). Some of these licenses are held by subsidiaries of major foreign telecommunications providers, which have competitive advantages over us due to their global presence and size.

	•		Around December 31, 2007, Television Broadcasts Limited and Asia Television Limited, commonly known as TVB and ATV, respectively, the only two licensed domestic ~~territorial~~free television programme broadcasters in Hong Kong, launched their digital terrestrial television services and have since broadened such services to cover an increasingly large percentage of the viewing public in Hong Kong. ~~The~~As of December 14, 2010, their services ~~offer~~offered a total of 1311 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.

~~Increasing liberalization~~As some of our main competitors have longer operating histories and others are subsidiaries of large business conglomerates, they may have greater financial, technical, marketing and other resources; a more sophisticated infrastructure; better brand recognition; and a larger subscription base and may be able to devote more human and financial resources to research and development, network improvement and marketing than we can. Our competitive position varies significantly by service type because each service is characterized by a different market. If we cannot compete effectively in a major market, our business, operating results and financial condition could be adversely affected.

Our services may become obsolete if we cannot address the changing needs of our customers.

The telecommunications industry is characterized by rapidly changing technology and industry standards, evolving subscriber needs and the changing nature of services with increasingly short life cycles. We cannot assure you that we will be able to respond successfully to technological advances and stay ahead of the evolving industry standards, for the following reasons:

	•		To compete successfully, we must constantly increase the diversity and sophistication of the services we offer and upgrade our telecommunications technologies. We may be required to make substantial capital expenditures and may not be successful in modifying our network infrastructure in a timely and cost-effective manner in response to these changes.

	•		New technology, such as the possible development of 4G wireless data networks as a substitute for fiber-based services, or other trends in the telecommunications industry, could have an adverse effect on the services we currently offer. For example, traditional fixed line home telephones are being replaced by mobile telephones and/or VoIP services. Technology substitution from global VoIP providers, some of which offer free PC-to-PC based international calls, is also becoming more prevalent. Increased adoption of such competing technology may lead to a decline in our revenues.

	•		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. We may also need to gain access to related or enabling technologies in order to integrate the new technology with our existing technology. Our new services may contain design flaws or other defects when first introduced to the market.

If we cannot offer the new services demanded by our customers 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 ina timely manner, our ~~industry. Increased competition~~business, operating results or financial condition could ~~result in price reductions, reduced gross margins or loss of market share, any of which could~~be adversely ~~affect our future growth and profitability.~~affected.

The development of our Next Generation Network requires significant capital ~~expenditures. These capital~~ expenditures, which may ~~vary materially from those currently planned and~~not be available on terms satisfactory to us or may impose a burden on our ~~financing and operating~~other business activities.

Our business is capital ~~intensive,~~intensive. We need to continue to devote substantial resources in infrastructure construction and upgrade to provide consistent and high quality services. In particular, because we deliver our ~~capital expenditures may not have the positive effect on~~fixed telecommunications network services through our ~~business and revenues that~~self-owned Next Generation Network, we ~~expect. We~~ have made, and will continue to make, capital investments in the expansion and upgrade of ~~our self-owned Next Generation Network~~this network and the development of ~~our~~various telecommunications services. We incurred total capital expenditures of approximately HK$~~211.7~~344.8 million in fiscal ~~2008 and~~2010.

We expect to incur capital expenditures ofranging from approximately HK$~~650~~320 million to HK$350 million in ~~total in fiscal 2009 and 2010,~~2011, a large majority of which will be spent on the continued expansion and upgrade of our network.

While we intend to fund such expenditures by using our currently available cash as well as cash flow from operations, we may not have adequate capital to fund our projected capital expenditures. ~~Future,~~Our ability to fund operating and capital expenditures depends significantly on our ability to generate cash from operations. In fiscal 2010, we generated cash from operating activities of HK$485.3 million. However, we cannot assure you that we will be able to sustain our operations in order to generate sufficient cash flows to meet our future requirements. 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. The global economic uncertainty has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and volatility in the capital markets. Although we have sufficient cash to meet our anticipated cash needs for at least the next 12 months, the current market conditions may affect our ability to obtain further financing to support our network expansion in the future. Any failure to do so will negatively impact our business and slow down our network deployment, in that we may not be able to continue expanding our network infrastructure to cover substantial area of the Hong Kong territory. Additional debt or equity financing may not be available, and debt financing, if available, may involve restrictions on our investing, financing and operating activities.

	•		In developing new services, we are required to continue to make significant investments in our network infrastructure in order to support these services. If we exceed our budgeted capital expenditure and cannot meet the additional capital requirements in time through operating cash flows and planned financings, we may have to delay the project.

	•		Any of our new services may not be commercially successful. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or, to the extent that we are required under the applicable accounting standards to recognize a charge for the impairment of assets. Any impairment charges could materially adversely affect our financial condition and the results of our operations.

Specifically, we cannot assure you that any services enabled by upgrading and expanding our Next Generation Network will ~~be accepted by the public to the extent required to generate~~provide us with an acceptable rate of return. ~~Furthermore, we~~This would depend on our ability to accurately identify and respond to emerging consumer trends and demand. We cannot assure you that ~~our estimate of the necessary capital expenditure to offer such services will not be exceeded. The failure of~~we can generate satisfactory investment returns on any of our services to achieve commercial acceptance could result in additional capital expenditures or, to the extent that we are required under the applicable accounting standards to recognize a charge for the impairment of assets, a reduction in our profitability. Any such charge could materially and adversely affect our financial condition and the results of our operations.new service.

We may need to improve our internal controls over financial reporting and our independent auditors may not be able to attest to their effectiveness.

The United States Securities and Exchange Commission, or the SEC, as required by Section ~~404~~404(a) of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act, 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,~~Effective from September 21, 2010, the SEC adopted amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 404(c) provides that Section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer. During fiscal 2010, we became an accelerated filer. Therefore, we are required to have an independent registered public accounting firm ~~must~~to attest to and report on 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 fiscal 2008 and our first auditor’s report on the effectiveness of our internal controls over financial reporting ~~for~~starting from fiscal 2010.

We have evaluated our internal controls surrounding the financial reporting process for the current fiscal period so that management can attest to the effectiveness of these controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. We have implemented appropriate steps to strengthen the internal controls. However, we may identify conditions that could result in significant deficiencies or material weaknesses in the future. As a result, we could experience a negative reaction in the financial markets and incur additional costs in improving the condition of our internal controls. For a detailed discussion of controls and procedures, see Item 15 “Controls and ~~Procedures”.~~procedures.”

Notwithstanding our efforts, our management may subsequently conclude that our internal controls over ~~our~~ financial reporting are not effective. ~~However, in fiscal 2010,~~Further, even if our management concludes that our internal controls over ~~our~~ financial reporting are effective, our independent registered public accounting firm may conclude that our internal control over financial reporting is not 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~~404(a) of the ~~Sarbanes Oxley Act of 2002.~~Sarbanes-Oxley Act. 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 ~~customers~~customer and vendor confidence, stock price and our ability to raise additional capital and operate our business as projected.

~~Our~~If we cannot manage the growth ~~and expansion may impact~~in our ~~ability to manage our operations, increase our costs of operation and adversely affect~~FTNS business, the quality of our ~~services.~~services and our operating results could be adversely affected.

We have been pursuing aan aggressive strategy ~~of aggressive growth~~ in growing our ~~fixed telecommunications network services~~FTNS business. As part of this strategy, we intend to continue to expand and invest in our Next Generation Network infrastructure to support our range of 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. These projects will also place significant demands on us to maintain the quality of our services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our services.

Our ability to manage the growth in our ~~future growth~~FTNS business will depend upon our ability to:

	•		~~simultaneously manage implementation of~~improve our existing operational, administrative and technological systems and our financial and management controls;

	•		enhance our infrastructure ~~development and~~to support the expansion;

	•		develop effective marketing plans;

	•		~~effectively monitor our operations so as to contain~~control operational 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~~FTNS 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.~~Talents (All individuals employed by the Group, including directors of the Company are defined as “Talents” hereafter). 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.~~senior management. If one or more of our key personnel ~~are~~were unable or unwilling to continue in their present positions, or if they ~~join~~joined a competitor or ~~form~~formed a competing company, or if they ~~shift~~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,~~Talents, 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~~Our ability to further expand the coverage of our Next Generation Network ~~into certain buildings and residences~~ may be limited by the physical limitations or our ability to obtain access ~~rights.~~rights in certain buildings.

~~We intend to continue to expand the coverage of our Next Generation Network. To expand coverage to a new physical site within a residential or commercial building, we are required to connect our~~Our Next Generation Network has the capability of providing value-added broadband services and content that combine voice, data and images with increased efficiency and flexibility. As part of our strategy to ~~the site by installing fiber-to-the-home or fiber-to-the-building plus Category-5e copper wiring, which~~grow our FTNS business, we ~~refer to as in-building wiring. Our target is~~plan to increase the coverage of our Next Generation Network from the current number of ~~1.5~~1.77 million residential ~~home passes~~homes pass as of August 31, 2010 to our target of 2.0 million residential ~~home passes~~homes pass by ~~2010. Such~~the end of 2011. To connect our Next Generation Network to a new physical site, we need to install fibre-to-the-home or fibre-to-the-building with Category-5e copper wiring, which we refer to as “in-building wiring”. Our expansion ~~however,~~plan may be hindered bybecause the installation of in-building wiring is subject to the following constraints:

	•		Because at least one of our competitors has already installed in-building wiring in virtually all buildings and many buildings have limited physical space for additional in-building wiring, other ~~fixed telecommunications network service~~FTNS providers, including us, may encounter a bottleneck when installing our own in-building ~~wiring because many buildings have limited physical space for additional in-building wiring.~~wiring;

	•		Some single-owner commercial buildings may grant rights of access to our competitors while barring us from installing our own in-building ~~wiring.~~wiring; and

	•		Certain developers may have affiliations with our competitors and may attempt to delay or inhibit our wiring installations.

We may be unable to capitalize on any economy of scale benefits if we fail to expand our network coverage at our projected rate. Our growth opportunities will also be limited as a result.

Internet security concerns could adversely affect our Internet access services.

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

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

	•		a threat to the security of confidential information stored in the computer system of our customers; and

	•		illegal viewing or download of our contents.

~~There is no assurance that~~To protect our business from computer viruses and other harmful attacks, ~~could not affect our business. We~~we may need to incur significant costs to protect us against the threat of security breaches or to alleviate problems caused by such breaches. We intend to continue to strengthen our network security to alleviate these problems. Our efforts, however, may cause interruptions, delays or ~~cessation~~cessations of our services, and our customers may stop using our service or assert claims against us as a result.

Although we have expressed our interest in obtaining a Broadband Wireless Access (“BWA”) license, we cannot assure you that we will be the successful bidder, and, if we are granted the license, that the business in relation to BWA will be successful.

Even though we have participated in the auction, we cannot assure you that our bid will be successful, if succeeded and the related license is granted to HKBN eventually, that our business and operation in relation to BWA will generate sufficient revenues to result in profitability. We are also subject to the risks of unforeseen technological development or other technological difficulties and/or cost overruns.

~~Risks Relating to Our Technological Infrastructure~~

We may be unable to further expand the scope of our Internet access ~~business~~services unless we obtain additional network capacity.

Our ability to transition from time to time to more advanced technologies for faster Internet access ~~network~~is critical to our sustainable competitiveness. Because our Next Generation Network has limited ~~capacity. Our ability to continue to increase Internet service depends on~~capacity, our ability to expand the network bandwidth on a timely basis ~~which in turn~~ is subject ~~to:~~to the following factors:

	•		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 market share and revenue in the Internet access ~~business~~market segment will be limited.

~~We are vulnerable to natural~~Natural disasters and other disruptive regional events ~~which~~ could ~~cause~~ damage to our network and ~~result in lost revenue~~adversely affect our business and ~~perhaps lost customers.~~operating results.

Our network is vulnerable to damage or cessation of operations from fire, earthquakes, severe storms, heavy rainfall, power loss, telecommunications failures, network software flaws, vandalism, transmission cable cuts and other catastrophic events. We may experience failures or shut downs relating to individual points of presence or even catastrophic failure of our entire network. Any sustained failure of our network, our servers, or any link in the delivery chain, whether from operational disruption, natural disaster or otherwise, could have a material adverse effect on our business, financial condition and results of operations.

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

We rely on ~~our suppliers~~third parties for ~~our Next Generation Network infrastructure and follow-up maintenance.~~the supply of network equipment. Further, because an IP set-top-box must be installed in order to access our IP-TV services, we must have an adequate supply of such installation equipment on hand for delivery to ~~respond to new customer subscriptions~~our customers 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~~spread the costs over a larger subscription base or effectively ~~appropriate our~~pass the additional costs on to our ~~customers.~~subscribers.

~~Our reliance~~Because we rely on third parties ~~to provide maintenance and repairs for~~in delivering services through our Next Generation Network, ~~could adversely affect~~ our operating results could be adversely affected if their services are not timely or do not meet our standards.

We depend on ~~our suppliers and other~~ third parties for the ongoing ~~support and assistance with respect to~~ maintenance and ~~repairs~~repair of ~~major~~our Next Generation Network. Further, although our Next Generation Network is operated essentially as an independent network, ~~equipments.~~a small portion of it is connected to the network of other providers under interconnection agreements. 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 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. Any service interruptions or variations ~~may~~could adversely affect our operating results and our ability to retain or add new customers.

~~If we are unable~~Risks relating to ~~stay ahead of technology trends~~the regulatory, political and ~~evolving industry standards, our services may become obsolete.~~economic environment

To compete successfully, we are required to continually improve our performance, services and network. Telecommunications businesses are characterized by rapidly changing technology and industry standards, evolving subscriber needs and the changing nature of services with increasingly shorter life cycles. To respond successfully to technological advances and emerging industry standards, we may be required to make substantial capital expenditures and gain access to related or enabling technologies in order to integrate the new technology with our existing technology.

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 revenue from international telecommunications services and local telephony services. 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.

Finally, 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. 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.

~~Risks Relating to the Regulatory, Political and Economic Environment~~

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 transactions) in the Hong Kong telecommunications industry by giving the Telecommunications Authority the power to review the ~~conduct~~conducts and transactions concerning carrier licensees and to take appropriate actions if it determines that the transaction would, or is likely to, prevent or substantially lessen competition in a telecommunications market. The Telecommunications Authority has the power under this provision to conduct an investigation into any questionable transaction. It might consent to the transaction (unconditionally or subject to any conditions it deems appropriate) or reject the transaction outright. The decision of the Telecommunications Authority will take into account of whether the transaction will adversely affect the public interest and benefit. This provision may have an adverse effect on our ability to grow our business through mergers and acquisitions.

	•		We offer local VoIP services through our Next Generation Network under HKBN’s FTNS License. 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.

			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 mobile license, and are not currently ~~authorised~~authorized to provide mobile services, our ability to compete may be hindered by our inability to offer such services independently.

	•		We provide our IP-TV services over our 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~~exempted under the Broadcasting Ordinance from the requirement to obtain a domestic pay-television ~~program~~programme 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~~programme 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 or there are substantial changes in its terms and conditions, we ~~would~~may 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 and international telecommunications services. Our ~~PNETS License is subject~~business operations therefore are susceptible to the ~~Telecommunications Authority’s annual renewal. HKBN’s FTNS License was initially granted~~following changes in ~~2000 for a term of 15 years and may be renewed for such further period not exceeding 15 years at~~ the ~~discretion of the Telecommunications Authority.~~ regulatory environment in particular:

	•		Our ability to adjust the tariffs for different services are governed by the terms and conditions of the relevant licenses. The licenses, however, are issued under different regulatory frameworks. The differences in regulatory structure for these licenses may constrain our flexibility to respond to market conditions, competition or cost structure.

	•		We have been granted a waiver by the Telecommunications Authority to comply with the tariff restrictions contained in HKBN’s FTNS License. If the waiver is revoked, our ability to adjust the tariffs for our fixed telecommunication network services, including our offer of discounts to subscribers from time to time, will be restricted.

	•		Our PNETS License is subject to the Telecommunications Authority’s annual renewal. On October 19, 2009, the Telecommunications Authority announced the replacement of the PNETS License by a new class of Services-Based Operator License, Class 3 Modified Services-Based Operator License. On November 10, 2009, the PNETS License of City Telecom was replaced by a Class 3 Modified Services-Based Operator License. It is noted that the PNETS License of HKBN would also be replaced by a Class 3 Modified Services-Based Operator License on December 7, 2009 through the renewal procedure. HKBN’s FTNS License was initially granted in 2000 for a term of 15 years and 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 or its amendment of any of the terms and conditions contained in such licenses for any reason would prohibit us from continuing to offer the services authorized by those 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, there may be future changes in Hong Kong’s telecommunications regulations or policies that would require us to obtain additional licenses, which could have an adverse impact on our operations.

Our international telecommunications revenues may be adversely affected by increases in ~~tariffs~~carrier charges in China.

In China, tariffs for all domestic and international long distance services offered through public switched telephone networks, leased lines and data services are jointly set by the Ministry of Information Industry of the PRC and the State Development Planning Commission. 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 ~~2008,~~2010, approximately ~~77%~~79% 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 Ministry of Information Industry of the PRC 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~~ the profit margins ~~for~~of our ~~international telecommunications services.~~IDD business could be adversely affected.

As approximately ~~49%~~50% of our ~~staff~~Talents are located in Guangzhou, China, changes in Chinese labor or business laws may significantly affect our operations and our ability to ~~service~~serve our Hong Kong based customers.

Our call center in Guangzhou employs over ~~1,400 persons~~1,600 Talents and is an important resource ~~for~~to us. We are therefore significantly affected by the laws and regulations ~~that govern~~governing foreign companies with operations in China. As 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~~Talents in China, which could impact our ability to provide ~~service~~services to our Hong Kong-based customers.

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

~~Our~~We are exposed to a certain amount of foreign exchange risk because our revenues are predominantly denominated in Hong Kong ~~dollars. A~~dollars, while a major portion of our operating costs ~~consist of 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, Renminbi or other foreign currencies. ~~In addition,~~Our foreign currency-denominated expenses primarily consist of the following:

	•		A major portion of our operating costs of interconnection charges payable to overseas carriers for the delivery of our international calls. Substantially all of these interconnection charges are denominated in U.S. dollars or other foreign currencies.

	•		The equipment and hardware we purchase for the expansion of our Next Generation Network constitutes a large portion of our capital expenditures and is also denominated ~~in U.S. dollars. Finally, payment of interest, principal and any other amounts due under our 8.75% senior notes due 2015 are made~~ in U.S. dollars.

	•		Expenses incurred for the operation of our call center located in Guangzhou, China are denominated exclusively in Renminbi, the official currency of the People’s Republic of China. These include salaries paid to our personnel as well as various operating expenses that we incur to maintain our operations.

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, however, cannot assure you the link will be maintained in ~~future.~~

~~The expenses that we incur in relation to our call center located in Guangzhou, China are denominated exclusively in Renminbi,~~ the ~~official currency~~future. Any depreciation 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 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 ~~the Renminbi.~~adversely affect our profitability.

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,Our Chairman and ~~adversely affect our profitability.~~

~~Impact of credit crunch on local and global economy may negatively impact our business and our progress on NGN development.~~

~~The current credit crunch will affect both the local economy and global economy. Although we~~Vice Chairman have ~~sufficient cash to meet our anticipated cash needs for at least the next 12 months, the current market conditions may affect our ability to obtain further financing to support our network expansion~~significant ownership interest in the future. Failure to do so will negatively impact our business and slow down our progress on NGN deployment. The economic downturn may also dampen the demand for broadband services or affect our customers’ ability to continue with existing services.

~~Risks Relating to our Securities~~

company. We cannot assure you that weour Chairman and Vice Chairman will ~~be able~~not engage in any transactions that lead to ~~generate sufficient cash~~conflicts of interest resulting from ~~operations to fund our operations.~~their ownership interests.

Our ~~ability to fund operating~~Chairman and ~~capital expenditures and to service debt will depend significantly on our ability to generate cash from operations. In fiscal 2008, we were able to generate cash from operations~~Vice Chairman each have an indirect ownership interest in the Company through Top Group International Limited (“Top Group”), which, as of ~~HK$378.5 million. However, we cannot assure you that we will be able to sustain our operations in order to generate sufficient cash flows to meet our future debt service requirements.~~

~~Our ability to generate cash from operations is subject to general economic, financial, industry, legal and other factors and conditions, many~~December 14, 2010, held approximately 44.22% of the Company’s shares, of which ~~are outside~~42.12% and 27.06% was owned by our ~~control. In particular, our operations are subject to price~~Chairman and ~~demand volatility~~Vice Chairman, respectively. Top Group International Limited is a special purpose vehicle incorporated in the ~~telecommunications industry. If we~~British Virgin Islands. Its board of directors consists of Mr. Wong and Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares held by Top Group International Limited, the 7,145,289 shares held by Mr. Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. We cannot ~~finance~~make assurances that 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,~~Chairman or ~~raise equity. We~~Vice Chairman will not take actions that may not be ~~successful~~ in ~~taking these actions. Further, our ability to take many of these steps may be subject to approval by future creditors in addition to holders~~the best interests of our ~~8.75% senior notes due 2015.~~

~~Our 8.75% senior notes due 2015 contain covenants that limit our financial and operating flexibility.~~

~~Covenants under our 8.75% senior notes due 2015 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% senior 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.shareholders.

~~ITEM 4. INFORMATION ON THE COMPANY~~Item 4 Information on the Company

A. History and ~~Development~~development of the Company

The legal and commercial name of the Company is City Telecom (H.K.) Limited. The Company was incorporated ~~in Hong Kong~~ on May 19, 1992 under the Hong Kong Companies Ordinance asand is a limited liability company. 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.

We began offering international telecommunications services in September 1992. ~~From that date,~~In our early stage of development, 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 addition to our operations in Hong Kong, we also provide international telecommunications and Internet access services in Canada through two telecommunications companies in Canada, City Telecom Inc. and City Telecom (B.C.) Inc. 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.

In January 1999, we became the first company in Hong Kong to obtain the first PNETS License. The ~~License~~license gives us the right to offer international telecommunications services using international simple resale and has had a significant positive impact on our international telecommunications revenues. We incorporated 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 Next Generation Network. The network has the capability of providing value-added broadband services and content that combine voice, data and images with increased efficiency and flexibility.

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 the following:

	•		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 with 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.

	•		~~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 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 June 2007, ~~CTI Group was~~we were awarded “Best Retention Strategies” at the Hong Kong HR Awards ~~2007~~2007.

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

	•		In September 2007, ~~HKBN~~we launched ~~“Fiber-To-The-Home”~~“Fibre-To-The-Home” residential broadband service, ~~“FiberHome100”~~“FibreHome100”, ~~“FiberHome200”~~“FibreHome200” and ~~“FiberHome1000”~~“FibreHome1000”. As the same time, we upgraded our entry level service broadband Internet access from 10 Mbps to 25 Mbps.

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

	•		In February 2008, ~~HKBN was~~we were awarded ~~the~~ contract for the provision of payphone service at the Hong Kong International Airport.

	•		In September 2008, ~~HKBN~~we launched the National Geographic Channel’s first ever Interactive Channel.

	•		In June 2009, we launched the first Online Broadband Service Registration Platform in Hong Kong.

	•		In November 2009, we accepted the Innovation in Recruitment award and Champion of HR award at the Hong Kong HRM Awards 2009.

	•		In December 2009, we shattered the one-million mark for Fixed Telecommunications Network Services subscriptions.

	•		In March 2010, we launched our “bb100” symmetric broadband and WiFi services at Hong Kong International Airport.

	•		In April 2010, we launched our 1Gbps symmetric residential broadband service at HK$199 per month.

B. Business ~~Overview~~overview

Principal Activities

We are a Hong Kong-based provider of residential and corporate fixed telecommunications network and international telecommunications ~~services and~~services. We specialize in the residential mass market and small-to-medium corporate and enterprise market segments. The majority of our revenues are derived from business conducted in Hong Kong.

We derive our revenues from two business segments: FTNS and IDD. A breakdown of our revenues is as follows:


							For the year ended August 31,
							2008		2009		2010
							HK$		HK$		HK$
	Year ended August 31,						(Amounts in thousands)
Revenue	2006		2007		2008
	HK$		HK$		HK$
	(Amounts in thousands)
Fixed telecommunications network services⁽¹⁾		716,600		816,800		1,011,038
International telecommunications services		418,276		324,470		291,943
FTNS business								1,011,038		1,230,880		1,356,098
IDD business								291,943		247,359		218,589


Total operating revenue		1,134,876		1,141,270		1,302,981		1,302,981		1,478,239		1,574,687

     ~~As of August 31, 2008, we had a total of approximately 801,000 subscriptions for our fixed telecommunications network services, consisting of 316,000 broadband Internet access, 329,000~~
As of August 31, 2010, we had a total of approximately 1,110,000 subscriptions for our fixed telecommunications network services, consisting of 526,000 broadband Internet access, 431,000 local VoIP and 153,000 IP-TV services subscriptions.
• IDD business.Our IDD business involves the provision of international telecommunications services. Such services include direct dial services, international calling cards and mobile call forwarding services in Hong Kong and Canada. As of August 31, 2010, the customer base for our total international telecommunications services consisted of approximately 2.4 million registered accounts.
Strategy and ~~156,000 IP-TV services subscriptions.~~
     Our international telecommunications services include direct dial services, international calling cards and mobile call forwarding services in Hong Kong and Canada. As of August 31, 2008, the customer database for our total international telecommunications services comprised approximately 2.3 million registered accounts.Competitive Strengths~~Our international telecommunications business contributed 22.4% of our total revenues in fiscal 2008 as compared to 28.4% in fiscal 2007.~~
     Our strategy is to market multiple fixed telecommunications network services ~~using~~by capitalizing on the new in-building blockwiring we have done on a mass scale for our Next Generation Network and will focus on growing our market share, increasing our network coverage and introducing new services through our IP platform. We believe that our success
12

will continue to depend on our ability to capitalize on our focus on the residential mass and ~~small to medium~~small-to-medium corporate and enterprise market segments, our leading-edge Next Generation Network, and our first mover advantage in ~~an industry with~~the fixed line telecommunications market, which has a high ~~barriers to entry.~~

~~Our Competitive Strengths~~entry barrier.

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~~Segments.. We focus on offering high-bandwidth services to the residential mass and small-to-medium enterprise markets in Hong Kong, which we believe have significant growth potential. We price our services attractively on a ~~value for bandwidth~~value-for-bandwidth basis 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. We have also strengthened our English language contents over the past year to increase our competitiveness by adding Disney Channels, Discovery Channels, National Geographic, AXN, Bloomberg and other channels. 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 Next Generation ~~Network~~Network.. We believe our self-owned Next Generation Network, a fiber-based backbone, gives us an inherent cost and performance advantage over our competitors. ~~Our~~The high capacity of this network has enabled us to offer a suite of services on a single IP network platform. This IP platform is highly scalable, enabling us to offer broadband Internet access, local VoIP, IP-TV and corporate data services over a single network. It is also capable of providing up to ~~1,000~~1000 Mbps symmetric broadband Internet access. Whereas our competitors are on a linear improvement path, we can upgrade our fiber based services logarithmically from 100Mbps to 1000Mbps on our existing passive fiber infrastructure which existing technology cannot accomplish using legacy telephone lines.

	•		First Mover Advantage and High Barriers to ~~Entry~~Entry.~~. Our first mover advantage and~~Despite the intense competition in the Hong Kong telecommunications industry, the inherent characteristics of the ~~Hong Kong~~fixed line telecommunications ~~infrastructure, which present~~market create a ~~natural barrier to~~high entry ~~make it difficult for~~barrier. Accordingly, we believe that our ~~competitors~~Next Generation Network’s current coverage of 1.77 million residential homes pass, substantially all in densely populated areas, gives us a first mover advantage over our competitors. Competitors who want to replicate our business ~~model. Metro Ethernet technology is not appropriate for our competitors who intend~~model to ~~offer~~provide a full coverage network that includes remote and ~~difficult to reach~~difficult-to-reach areas of Hong ~~Kong.~~Kong may encounter technological difficulties. 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 some would encounter significant in-building bottlenecks when attempting to complete an end-to-end network. This is because a 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.

Recent ~~Developments~~Development

On ~~February 9, 2007,~~December 31, 2009, we ~~signed a Memorandum of Understanding with MobileOne Limited, setting forth our interest to participate as a member of~~submitted an application for the ~~bidding consortium~~domestic free television programme service license in ~~the Next Generation National Broadband Network project in Singapore. The project relates~~Hong Kong to the ~~provision of ultra-high speed national connectivity in Singapore at competitive prices by 2015, and the Singapore government is expected~~Broadcasting Authority. If granted, such license would allow us to provide a grant of up to S$750 million for the project. A company is expected to be selected to design, build and operate the passive infrastructure layer of the project. The deployment of active electronics is expected to be handled by another company, which is expected to be the entity that offers wholesale broadband access to downstream retail service providers.

~~After extensive evaluation and business planning, the Company ceased to be a member of the bidding consortium with effect from August 20, 2008.~~

~~On January 2, 2009, the Telecommunications Authority unveiled five qualified bidders for the BWA spectrum auction~~free television programme services in Hong Kong. ~~BWA is~~We expect the cumulative investment amount to be approximately HK$210 million before we are able to generate positive cash flow from such services. We completed a ~~radio technology that can support~~public offering of our American depositary shares, or ADSs, in April 2010 and expect to use a ~~variety of wide area high-speed wireless data services for fixed and mobile customers. Our wholly owned subsidiary, HKBN, is one~~portion of the ~~qualified bidders. The other four qualified bidders are, namely, China Mobile Hong Kong Company Limited, CSL Limited, Genius Brand Limited, and SmarTone Wireless Limited.~~net proceeds of this offering to fund such services.

~~All qualified bidders are eligible for participating in the BWA spectrum bidding stage. The bidding stage started on January 12, 2009 is still in progress as on January 16, 2009.~~

For uncertainties relating to BWA, see “Risks Relating to Our Business and Operations — Although we have expressed our interest in obtaining a BWA license, we cannot assure you that we will be the successful bidder, and, if we are granted the license, that the business in relation to BWA will be successful”.

Our Services

Fixed ~~Telecommunications Network Services~~telecommunications network services

We offer our fixed telecommunications network services ~~over~~through our Next Generation Network. 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. ~~The table below shows the profile of the subscriptions for our fixed telecommunications network services over the past three years:~~

As of August 31,
2006 2007 2008
Broadband Internet Access 220,000 247,000 316,000
Local VoIP 281,000 308,000 329,000
IP-TV 116,000 128,000 156,000

Total Subscriptions 617,000 683,000 801,000

~~Broadband Internet Access~~

~~We offer our broadband Internet access services in Hong Kong through HKBN.~~ Our strategy is to leverage our broadband subscription base to up-sell our other fixed telecommunications network services such as local VoIP and IP-TV.

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 25 Mbps and 100 Mbps. We currently offer broadband service for bb25, bb50, bb100, bb200 and bb1000 at monthly fees ranging from HK$208 to HK$1,680 for unlimited access. Moreover, we also offer FTTH broadband service for 200 Mbps and 1000 Mbps at monthly fees at HK$688 and HK$1,680 respectively for unlimited access. Instead of using Category-5e copper wiring for the last mile, optical fiber is used in FTTH broadband service. Currently, all of our broadband Internet access packages offer a free e-mail service and at a charge, offer customers for 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, “bbWatch”, a full-screen IP-TV service that is viewed with a desktop or laptop computer, “bbWi-Fi”, a service in which subscribers can have wireless Internet access through more than 2,000 hotspots, and “getFAXEASY”, a service in which subscribers can simply receive fax by their designated email address in Hong Kong and worldwide. An unique Hong Kong fax number is assigned to each subscriber. We frequently alter our promotions in response to changing 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 of up to 1,000 Mbps. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees that range from HK$150 to HK$22,000. Our prepackaged plans include on-site training, on-site maintenance support, high capacity data transfer and e-mail services.

~~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 mainly 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 1,000 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 access speeds up to 100 Mbps.

Our main 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 the number of homes passes.

We had approximately 316,000 broadband Internet access subscriptions as of August 31, 2008, which represented a market share of approximately 16% 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 by installing IP-based voice switching equipment in locations already covered by our Next Generation Network. Voice signals are transmitted by the VoIP switches into the Ethernet network installed in the subscriber’s building.

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, with portability of fixed line numbers, fixed line telephony subscribers switching to our local VoIP services are able to retain their existing local telephone number.

We currently charge HK$88 to HK$118 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 offer hardware-based off-network local VoIP services, which we refer to our “Broadband Phone” service. “Broadband 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 service called “2b”. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market with higher tariff compared to the Hong Kong market. For HK$168 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 to/from Hong Kong. Moreover, we offer a full range of value added services, including call waiting, voice mail and conference call features.

1420

~~Competition~~

~~PCCW-HKT is~~The table below shows the ~~incumbent and largest~~profile the subscriptions of our fixed telecommunications network ~~operator in Hong Kong. Based on public information, PCCW-HKT had a market share of approximately 71% with respect to local telephony~~ services ~~as of June 30, 2008. The remainder of~~over the ~~market is shared among ourselves and~~past 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, 2008, we had 329,000 localyears:

As of August 31,
2008 2009 2010
Broadband Internet access 316,000 391,000 526,000
Local VoIP 329,000 382,000 431,000
IP-TV 156,000 170,000 153,000

Total FTNS subscriptions 801,000 943,000 1,110,000

Broadband Internet Access

	•		Scope of service.Our broadband Internet access services in Hong Kong are offered through HKBN. We currently offer our residential and corporate customers broadband Internet access speeds of up to 1000 Mbps, but the majority of our customers currently have access speeds of 100 Mbps. We also offer Fiber-to-the-Home, or FTTH, broadband service for 100 Mbps, 200 Mbps and 1000 Mbps. Rather than using Category-5e copper wiring for the last mile, optical fiber is used in FTTH broadband service. Currently, all of our broadband Internet access packages include free e-mail and for additional charges, offer customers for a variety of value added services, such as “bbWatch,” a full-screen IP-TV service that is viewed with a desktop or laptop computer; “bbWi-Fi”, a service in which subscribers can have wireless Internet access through more than 2,000 hotspots; and “Game.hkbn.net”, a game point portal that sells various game providers’ cards and merchandises. We frequently alter our promotions in response to changing market conditions or as a way of attracting additional subscribers.

	•		Pricing.We currently offer broadband service for bb100 and FibreHome1000 at monthly fees ranging from HK$169 to HK$199 for unlimited service access. On August 19, 2010, we announced to the public that effective from September 1, 2010, we ended the promotional rate at HK$99 per month. By paying HK$199 per month, customers can choose 100 Mbps triple play service or HK$199 per month for 1000Mbps broadband Internet access service. Our strategy is to change from subscriber growth to revenue growth with a reasonable and acceptable pricing to our customers.

			In addition to the residential packages described above, we have also developed broadband and Metronet private network service plans that target corporate customers. We offer prepackaged plans that provide access at speeds of up to 1000 Mbps. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees ranging from HK$128 to HK$200,000 depending on bandwidth or solution selected. Our prepackaged plans include on-site training, on-site maintenance support, high capacity data transfer and e-mail services.

	•		Competition.There have been many new entrants to the Internet access business, but our main competitors are PCCW-HKT, i-Cable and HGC. PCCW-HKT has been offering broadband Internet access services since May 1998 and mainly uses asymmetric digital subscriber line technology, or ADSL, over its telephone network to provide asymmetric Internet access at speeds up to 6 Mbps/8 Mbps downstream and 640 Kbps/800 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 access speeds up to 100 Mbps.

			Our main 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 number of homes pass.

	•		Market share.We had approximately 526,000 broadband Internet access subscriptions as at August 31, 2010, which represented a market share of approximately 25% with respect to the total number of broadband Internet access subscribers in Hong Kong.

Local VoIP ~~subscriptions. Our market share with respect to local residential telephony services amounts to approximately 17% as of August 31, 2008.~~

• Scope of service.We offer our on-network local VoIP services in Hong Kong by installing IP-based voice switching equipment in locations covered by our Next Generation Network. Voice signals are transmitted through our Ethernet network by the VoIP switches installed in the subscriber’s building. The quality of our local VoIP service is comparable to traditional fixed line local telephony services, and customers are able to use their existing telephone equipment. In addition, with portability of fixed line numbers, fixed line telephony subscribers switching to our local VoIP services are able to retain their existing local telephone number.

			We also offer hardware-based off-network local VoIP services, or “Broadband Phone” services, via the broadband network of other operators. In October 2005, we launched our global software-based VoIP services under the brand “2b”. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market with higher tariff compared to the Hong Kong market. For HK$98 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 to/from Hong Kong. Moreover, we offer a full range of value added services, including call waiting, voice mail and conference call features.

	•		Pricing.We currently charge from HK$68 to HK$118 per month, on standalone basis, for our on-network 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. The majority of our new local VoIP is included in our triple play service offered at HK$199 per month for voice, IP-TV and broadband.

	•		Competition.PCCW-HKT is the incumbent and largest fixed telecommunications network operator in Hong Kong. Based on public information, PCCW-HKT had a market share of approximately 70% with respect to local telephony services as of June 30, 2010. 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.

	•		Market share.As of August 31, 2010, we had 431,000 local VoIP subscriptions. Our market share with respect to local residential and business telephony services was approximately 10% as of August 31, 2010.

IP-TV

	•		Scope of service.Our IP-TV services began in August 2003 and include the provision of standard definition and high definition video via our Next Generation Network to an IP set-top-box connected to the subscriber’s television set. In May 2007, we renamed our IP-TV services as “bbTV”. “bbTV” currently consists of more than 110 channels, including a self-produced 24-hour news channel and kids education and development channels and turnaround channels from various international content providers. 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.

	•		Pricing.We currently charge our IP-TV service together with our broadband and VoIP services at HK$199 per month for this subscription-based pay television service. Because of the scalability of our Next Generation Network infrastructure, the current cost of adding IP-TV services to an existing broadband Internet access or local VoIP subscriber is small.

	•		Competition.Our two main competitors in the pay-television business are i-Cable and PCCW-HKT. The pay-television services of i-Cable and PCCW-HKT include a significant amount of exclusive contents, such as Barclays Premier League Football until June 2013, HBO, Cinemax, ESPN and others. We target a different market than these competitors by offering a wide spectrum of content line-up and attractive pricing, both of which we consider critical for successful penetration in the residential mass market. We have also strengthened our English language contents over the past year to increase our competitiveness by adding Disney Channels, Discovery Channels, National Geographic, AXN, Bloomberg and other channels.

			TVB and ATV are indirect competitors of our pay-TV services. TVB and ATV account for a substantial proportion of Hong Kong’s television viewership and we market our services as supplemental to theirs. Because TVB and ATV offer primarily subscription-free television services supported by advertising revenues, we expect that their programming is designed 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.

	•		Market share. As of August 31, 2010, we had 153,000 IP-TV subscriptions, representing approximately 7% of the total pay-television subscription base in Hong Kong.

International telecommunications services

     In August 2003 we introduced our IP-TV service that provides DVD quality video delivered via our 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 88 channels consisting
• Scope 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.~~
     Because of the scalability of our 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, 2008, we had 156,000 subscriptions representing approximately 8% of the total pay-television subscription base in Hong Kong.
~~Competition~~
     Our two main competitors in the pay-television business are i-Cable and PCCW-HKT. The pay-television 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 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. Because TVB and ATV are supported by advertising revenues, we expect that their programming is designed 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.
~~International Telecommunications Services~~
We began providing international telecommunications services in 1992 and were among the first companies to be granted a PNETS License. Our international telecommunications services are offered to our FTNS business customers via our Next Generation Network 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 through our network, by paying us a usage charge.

We have greatly expanded our range of services over the years to include a variety of international direct dial services at competitive rates. 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.

We offer international telecommunications services to our FTNS customers via our network 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 through our network, allowing us to generate a usage charge.

We market our international telecommunications services under the IDD 1666 and IDD 0030 brand names. These two brands provide us with flexibility in our marketing strategies. 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~~code 1666 in Hong Kong.

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

Mobile ~~Call Forwarding Services~~call forwarding services		Allows call forwarding of Hong Kong mobile numbers to any overseas telephone number so that subscribers can receive calls while in overseas.

	•		Pricing.We charge our IDD 1666 and IDD 0030 users a per minute tariff rate that varies according ~~to the destination of the call and the calling prefix, with discounts depending on the time of day or day of the week when the call is placed.~~ 15 We experienced a reduction in total traffic volume of 16.4% to 659 million minutes in fiscal 2007 and a further reduction of 12.9% to 574 million minutes in fiscal 2008. 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 becoming more prevalent. We are proactively migrating our international telecommunications services to our “2b” services, which we believe carry higher margins and enjoy a wider addressable market. ~~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 2008. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2009. In our efforts to the destination of the call and the calling prefix, with discounts depending on the time of day or day of the week when the call is placed as well as monthly plans. To maintain our market share in a market segment with increasingly intense competition, 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.~~ To offset the effects of 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. Our employment of two separate brand names, IDD 1666 and IDD 0030, also provide us with flexibility in our marketing strategies.

	•		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 2010. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2011.

			Further, technology substitution from global VoIP providers such as Skype, which offers free PC-to-PC based international calls, is becoming more prevalent.

	•		Market share.We experienced a reduction in total traffic volume of 15.2% to 487 million minutes in fiscal 2009 and a further reduction of 4.7% to 464 million minutes in fiscal 2010. 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.

Our ~~Network Infrastructure~~network infrastructure

Fixed ~~Telecommunications Network~~telecommunications network

Our fixed telecommunications network services are delivered over our self-owned Next Generation Network, which allows us to deliver multiple services, including the triple play ~~services~~service of voice, broadband and IP-TV. The coverage of our Next Generation Network is concentrated in Hong Kong’s most densely populated areas, characterized by high-rise apartment buildings with multiple apartments on each floor. The network currently covers approximately ~~1.5~~1.77 million residential ~~home passes,~~homes pass, representing approximately ~~67%~~80% of Hong Kong’s ~~population.~~total households and also 1,430 commercial buildings. We plan to extend the coverage of our Next Generation Network to 2.0 million residential ~~home passes,~~homes pass, representing approximately 90% of Hong Kong’s population, and to 1,800 commercial buildings by ~~2010.~~the end of 2011. As we expand the reach and coverage of our Next Generation Network, we plan to continue introducing new services.

Our Next Generation Network is deployed by using Metro Ethernet technology. Metro Ethernet technology is highly cost-effective when access is to be provided to a large number of users in a single building or cluster of buildings and is typically used in commercial buildings in metropolitan areas in other geographical markets. 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. By keeping our Category-5e copper distance to less than 100 meters we are able to deliver bandwidth of up to ~~1,000Mbps~~1000Mbps to our ~~end users.~~subscribers.

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 the required access rights, we employ a combination of our full-time ~~staff~~Talents and contractors to begin installation of our in-building ~~Ethernet infrastructure.~~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 infrastructure 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.~~

Unlike many of our competitors, which use multiple platforms to provide comparable services, all of our fixed telecommunications network services are offered through a single IP platform. In addition, unlike many new entrants to the industry, 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. All the buildings covered by us are served by our self-owned infrastructure.

In November 2007, we ~~collaborated~~have been collaborating with one of the largest network solution providers for the deployment of our Next Generation Network using GPON ~~in Hong Kong.~~technology. As the reach of GPON is considerably more than 100 meters, it can be a more cost effective solution to expand our Next Generation Network than our Ethernet setup for lower density deployments.

~~In summary, our Next Generation Network allows us to deliver multiple services, including the triple play services of voice, broadband and IP-TV.~~

We incurred capital expenditures of approximately HK$286.7 million in fiscal 2009 and HK$344.8 million in fiscal 2010, substantially all of which were made in connection with the construction and upgrade of our infrastructure for ~~our~~the provision of fixed telecommunications network ~~infrastructure of approximately HK$132.3 million in fiscal 2007 and HK$211.7 million in fiscal 2008.~~services. In fiscal ~~2009 to fiscal 2010,~~2011, we plan to further incur total capital expenditures ofabout HK$~~650.0~~320 million to ~~continue increasing the capacity of our existing network coverage and extending the reach of our Next Generation Network.~~HK$350 million per year.

International ~~Telecommunications Network~~telecommunications network

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

	•		Undersea cables. In March 2002, we received our license to provide undersea cable-based FTNS. 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. Pursuant to the first contract, we completed the construction of a Japan-U.S. undersea cable 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 cable was completed in May 2002, and commercial operation began immediately thereafter. 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 telecommunications services.

			Having our own undersea cables and our fiber-based backbone have enabled us to better control international transmission quality, reduce the costs associated with international transmission and reduce our reliance on third party infrastructure. Our international telecommunications network currently has a monthly handling capacity of approximately 130 million minutes. We believe that the continuing improvement of our international telecommunications network is important in supporting the growth of 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 customers. We take into account a number of factors in choosing the local fixed network operators and overseas carriers with whom we cooperate, 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 10 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 five international telecommunications switching systems: three in Hong Kong and two in Canada, one in Vancouver and one in Toronto.

			Our three international telecommunications switching systems in Hong Kong handle telephone calls originating or terminating in Hong Kong as well as transit traffic. Our telecommunications network mainly consists of switching equipment by Nortel Networks Limited and compression units supplied by Cisco Systems, Inc. and ECI Telecom Ltd. These systems are programed 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.

			Because 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.

1624

~~Undersea Cables~~

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. Pursuant to the first contract, we completed the construction of a Japan-U.S. undersea cable 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 cable was completed in May 2002, and commercial operation began immediately thereafter. 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 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 140 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 customers. We take into account a number of factors in choosing the local fixed network operators and overseas carriers with whom we cooperate, 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 mainly denominated in U.S. dollars.

~~International Telecommunications Switching Systems~~

~~We own three international telecommunications switching systems in Hong Kong and two in Canada, one in Vancouver and the other in Toronto.~~

Our three international telecommunications switching systems in Hong Kong handle telephone calls originating or terminating in Hong Kong as well as transit traffic. Our telecommunications network mainly consists of switching equipment supplied by Nortel Networks Limited 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.

Sales and ~~Marketing~~marketing

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

As of August 31, 2010, we had 20 “Fibre Shops” and a customer service center. We have ~~developed~~planned to open more shops in the future. We believe these shops can offer our customers convenient access to our wide range of services.

We have 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~~our sales representatives ~~we use to promote~~in promoting City Telecom and HKBN. We provide ~~commission-based~~commission based incentives to our residential sales force ~~that sell~~for our ~~international and~~ fixed telecommunications network services and international telecommunications services.

We have a 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~~Talents 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 the public awareness of our various corporate offerings.

Maintenance and ~~Monitoring~~monitoring

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

	•		~~a year round, 24-hour~~two separate network operation centers in two different locations that operate 24 hours a day, 7 days a week, network operation center providing real-time service monitoring and maintenance services and supported by about ~~120~~133 operational and field ~~staff;~~Talents;

	•		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 rectify the problem remotely or dispatch field ~~staff~~Talents to that location should physical interaction be required. After the problem 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~~development activities

As of August 31, ~~2008,~~2010, our research and development department in Hong Kong consisted of approximately ~~27 staff members~~21 Talents 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 Next Generation Network. To identify and develop new market opportunities, our research and development department ~~assesses~~evaluates new services offered by telecommunications and Internet companies in the United States and elsewhere and works closely with our marketing ~~department.~~department for product development. Our research and development expenditures were approximately HK$9.6 million, HK$~~5.0~~10.8 million and HK$~~9.6~~11.2 million for fiscal ~~2006, 2007~~2008, 2009 and ~~2008,~~2010, respectively.

Customer ~~Service~~service

We believe that ~~providing~~ excellent customer service and support is essential to our building and retaining of a large and loyal ~~subscriber~~subscription 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 subscribers of ~~our international~~FTNS business and ~~fixed telecommunications network services.~~IDD business. 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.

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, ~~2008,~~2010, our Guangzhou customer service facility had ~~1,489 employees.~~1,620 Talents.

Billing and ~~Collection~~collection

Our credit and collection 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~~A variety of payment methods are ~~used for payment collection,~~made available to our subscribers, 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 ~~1.5%~~1.1%, ~~0.6%~~0.8% and ~~1.1%~~0.9% of our revenue for each of fiscal ~~2006, 2007~~2008, 2009 and ~~2008,~~2010, respectively. 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 by the Telecommunications Authority of its final determination on mobile interconnection charges. For more information regarding our provision for mobile interconnection charges, see “Factors Affecting our Results of Operations—Our Revenues” below in this annual report.

We maintain tight collection procedures, including periodic reminder notices, and impose a charge of HK$10 or a fee of 1.5% to 2.5% per month on outstanding overdue amount for late payment. We have the right to charge the outstanding overdue amount to the subscriber’s pre-registered credit card account for any amount overdue or if applicable, deduct such amount from the subscriber’s application deposit. Moreover, we generally suspend an account ~~if the~~when amount overdue is not settled within our prescribed period. If payment is still not settled after we suspend the account, further recovery actions including court proceedings and/or the use of collection agencies will be taken.

Seasonality

Our operations are not ~~generally~~ subject to significant seasonal ~~fluctuations.~~fluctuations generally. Our ~~international telecommunications~~IDD business typically ~~experience~~experiences a slight decrease in revenue during the second ~~fiscal~~ quarter of each fiscal year ~~(December~~(i.e. 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.

Environmental ~~Matters~~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~~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.

C. Regulatory framework

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 access, local VoIP, IP-TV and international telecommunications services in Hong Kong, our operations are subject to the Telecommunications Ordinance and the Broadcasting 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~~issuance 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.

Telecommunications ~~Industry~~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 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.

Prior to August 1, ~~August~~ 2008 the operation of fixed and mobile services ~~was~~were regulated separately under four types of carrier ~~licence.~~license. Further, a number of other types of ~~licences~~licenses permitted a licensee to establish facilities or services of a similar kind.

However, in recognition of the convergence of fixed and mobile services 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 with the result that is becoming more difficult to classify a service as a “fixed” or “mobile”, amendment legislation has been passed to create a single ~~Unified Carrier~~UC License ~~or UCL,~~ encompassing both fixed and mobile carrier services. The ~~UCL~~UC License regime came into operation on August 1, 2008. After that date the Telecommunications Authority

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 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 Telecommunications Ordinance but none of the existing categories are applicable to the means of telecommunications or telecommunications service for which the license is required. With effect from November 30, 2009, the Telecommunications Authority no longer issue PNETS License to service-based providers using the network of a licensed carrier. As a replacement, all PNETS License will be gradually replaced by the modified Services-Based Operator License, i.e. Class 3 Services-Based Operator License. Holder of Class 1 & 2 Services-Based Operator License is allowed to provide Internet Protocol based telephony services making use of Hong Kong telephone numbers, while Class 3 Services-Based Operator is not allowed. Existing PNETS License will remain in force until their next anniversary date when they would be replaced by the Class 3 Services-Based Operator License.

A ~~PNETS~~Class 3 Services-Based Operator 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~~Since the expiry of PNETS License in December 2009, the Telecommunications Authority granted us a ~~PNETS ETS~~Class 3 Services-Based operator License. The Class 3 Services-Based Operator 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. Our subsidiary~~providers, the scope of service under the Class 3 Services-Based operator License is similar to the PNETS License previously granted to us by the Telecommunications Authority. HKBN also holds 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 Class 3 Services-Based Operator License, PNETS ETS and PNETS IVANS Licenses, we and ~~IDD 1600~~IDD1600 Company Limited, or ~~IDD 1600,~~IDD1600, our wholly owned subsidiary, are required to comply with certain license conditions relating to technical and reporting matters.

~~Fixed Telecommunications Network Services~~FTNS License

A FTNS License authorizes the licensee, among other things:

	•		to provide a public fixed 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.

A FTNS License is valid for a period of 15 years and is renewable for a further period of not exceeding 15 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 a 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 three times and presently, HKBN is authorized to operate both local fixed telecommunications networks (wireline and wireless based) and external telecommunications facilities.

Interconnection

The Telecommunications Authority divides interconnection into two main ~~types:~~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 allow 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 network services.~~FTNS. The Telecommunications Authority introduced the Type II interconnection policy in 1995 that the fixed carriers have obligation to provide Type II interconnection at regulated terms and conditions.

On July 6, 2004 the Hong Kong Government announced that the mandatory Type II Interconnection policy applicable to telephone exchanges for individual buildings covered by such exchanges, would be gradually withdrawn on a building-by-building basis, applying to buildings already connected to at least two self-built customer access networks, such withdrawal to be fully implemented by a final sunset date of June 30, ~~June~~ 2008. After that time, mandatory Type II Interconnection will be maintained only in buildings for which it is technically not feasible or economically not viable for an operator to roll out its customer access network.

On July 3, 2008, the Telecommunications Authority issued a statement to confirm that the mandatory Type II Interconnection policy has been successfully withdrawn as from July 1, 2008 as well as to set out the issues to be followed up after its withdrawal. After this date, interconnection terms including charges will be determined by commercial negotiation between carriers.

On April 27, 2009, the Telecommunications Authority issued a statement on “Carrier-to-Carrier Charging Principles (For Fixed Carrier Interconnections) providing guidance on carrier-to-carrier charging principles for fixed carrier interconnections that the Telecommunication Authority will rely on when making determination for interconnection between fixed telecommunications networks in Hong Kong.

Competition ~~Provisions~~provisions

Regulation of ~~Anti-Competitive Conduct~~anti-competitive conduct

Although Hong Kong has never had a general competition code, historically, holders of FTNS Licenses ~~were~~are 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 license 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~~mergers and ~~Acquisitions~~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 heit 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~~merger 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~~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,~~February 2010, the Telecommunications Authority issued a “Code of Practice for Communications Service Contracts” (the “Code”) which supersedes the “Code of Practice for the Service Contracts for the Provision of Public Telecommunications Services” ~~which~~issued in November 2004. The Code is a voluntary scheme intended to heighten customer satisfaction levels by improving the provisions used in communications customer contracts The Code sets out guidelines on, among other things, the ~~preparation~~style, format and structure of ~~service contracts.~~written contracts, the expiry of term contract, termination of contract etc. Besides, the Code requires that the contracts to provide a cooling-off period of not less than seven days during which the customers my cancel the contract without incurring any payment liability or any other obligation whatsoever. 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 codeCode is applicable to all providers of communications service which include the supply of telecommunications and ancillary services and customer equipment, as well as the supply of content services delivered through telecommunications. Service providers ~~(except mobile network operators which are subject~~pledging compliance with the Code shall publish on their respective website their pledges to ~~a separate code of practice) including holders of FTNS Licenses, such~~the Code and report about their compliance status

on annual or bi-annual basis as ~~HKBN, and holders of PNETS ETS Licenses and IVANS Licenses, such as ourselves and IDD 1600. Although~~they may decide. In the ~~guidelines are voluntary in nature,~~meantime, the Telecommunications Authority ~~has indicated that~~and providers of communications service are reviewing the ~~extent~~Code, and the majority of ~~a licensee’s~~providers, including HKBN, is not pledging compliance with the ~~guidelines will be taken into account in assessing if a licensee has complied with the statutory provision mentioned above.~~Code.

Apart from the Telecommunications Ordinance, like any ~~companies~~company 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), the Unconscionable Contracts Ordinance (Cap 458) , Personal Data (Privacy) Ordinance (Cap 486), and the Unsolicited Electronic Messages Ordinance (Cap 593).

Regulation of ~~Pricing~~pricing

Currently, the pricing of both ~~fixed telecommunications network services~~FTNS 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 Services-Based Operator License and 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~~FTNS markets.

Universal ~~Service Contribution~~service contribution and ~~Local Access Charge~~local access charge

Under the current regulatory regime, PCCW-HKT has a universal service obligation to provide good, efficient and continuous basic telecommunications services at reasonable cost on a non-discriminatory basis to 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.

On June 8, 2007, the Telecommunications Authority issued a Statement entitled “Review of the Regulatory Framework for Universal Service Arrangement”, which announced the new universal service contribution arrangement for funding the cost of Universal Service Obligation. Commencing from May 1, 2009, the USC sharing arrangement based on external traffic volume has been migrated to that based on the number of all telephone numbers allocated which may be assigned to customer for voice services, non-voice services or both voice and non-voice services. Under the new arrangement, local fixed carrier license, local fixed telecommunications network service licensee, mobile carrier licensee, unified carrier licensee authorized to provide local fixed or mobile services, mobile virtual network operator licensee and services-based operator licensee authorized to provide Class 1 or 2 services are the USC ~~Holders~~contributing parties. In respect of ~~FTNS Licenses~~the above, HKBN as a local fixed telecommunications network service licensee is classified as a USC contributing party and ~~PNETS ETS Licenses, including ourselves, HKBN, and IDD1600 are~~is required to pay ~~USC.~~USC under the new regime.

The level of USC is determined by the Telecommunications Authority and is 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. In accordance with a statement dated ~~December 28, 2007~~April 27, 2010 issued by the Telecommunications Authority, the level for the period from ~~January~~July 1, ~~2005~~2008 to ~~June~~April 30, ~~2007~~2009 is confirmed to be zero cent per ~~minute. In~~minute and the ~~circumstances, PCCW-HKT must refund to all~~Telecommunications Authority decided that USC contributing parties ~~HK 0.3 cent per minute already paid before and there will~~are not ~~be any interest payment for the adjustment of those USC. The level of~~required to pay provisional USC from ~~July~~May 1, ~~2007 onwards is to be determined by~~2009 onward until a further review of the ~~Telecommunications Authority.~~USC.

Additionally, providers of external telecommunications services, such as holders of Class 3 Services-Based Operator License and PNETS ETS Licenses, including ourselves and ~~IDD 1600,~~IDD1600, are required to pay a local access charge, or 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 and its arrangement is based on the statement dated November 25, 1998 issued by the 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 complete deregulation of the LAC.

Fixed ~~Mobile Interconnection Charge~~mobile interconnection charge

Cross ~~Media Ownership Restrictions~~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~~programme 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~~programme 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~~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~~programme service license. The restrictions do not prohibit the ownership of any voting shares in a domestic free television ~~program~~programme service licensee but rather take the form of prohibiting the exercise of any voting rights attached to such voting shares.

Competition ~~Provisions~~provisions

The Broadcasting Ordinance also 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~~programme service market.

The Broadcasting Ordinance provides that a breach of any of the competition statutory 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 by way of petition to the Chief Executive in Council.


		~~Percentage of interest~~
		~~held by City Telecom~~
		~~(%)~~
~~Name~~	~~Jurisdiction of Incorporation~~	~~Direct~~		~~Indirect~~
Credibility Holdings Limited	British Virgin Islands		100		—
CTI Guangzhou Customer Services ~~Company Limited~~⁽¹⁾ Co. Ltd. (note)	People’s Republic of 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		—
Hong Kong Broadband Digital TV 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⁾				Note: The ~~company~~Company has only registered its Chinese name. The English name is an unregistered translation.

D.E. Property, ~~Plants~~plant and ~~Equipment~~equipment

For the provision of fixed ~~telecommunications~~telecommunication 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 Next Generation Network. The majority of the fiber-based backbone connecting our services are under public road, highways and streets. In Hong Kong, we ~~own~~owned an aggregate of ~~136,900~~161,000 square feet predominately for self use as of August 31, ~~2008.~~2010.

For the provision of international telecommunications services, we own three switching systems in Hong Kong and two in Canada (one in Vancouver and the other in 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~~have leased properties in Hong Kong for ~~two~~20 retail shops and for a 3,500 square feet customer service center in Mongkok, Kowloon, Hong Kong.

We rely on suppliers to provide equipment, underground cables and other necessary components ~~in building~~for the construction and upgrade of our 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~~Item 5 Operating and financial review and prospects

You should read the following discussion together with the rest of this annual report, including the consolidated 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 Next Generation Network. Our network covered 1.77 million residential homes pass as of August 31, 2010, representing approximately 80% of the total households in Hong Kong, and is concentrated in Hong Kong’s most densely populated areas, which reduces our cost of network deployment per home pass. As of August 31, ~~2008, we~~2010, our FTNS business had a ~~total~~subscription base of approximately ~~801,000 subscriptions for our fixed telecommunications network services.~~1,110,000 subscriptions. In addition, we offer a variety of international telecommunications services, including direct dial services, international calling cards and mobile call forwarding services, in Hong Kong. As of August 31, ~~2008, the customer database~~2010, our IDD business had a subscription base of ~~our total international telecommunications services comprised~~ approximately ~~2.3~~2.4 million registered accounts.

Our Next Generation Network currently covers 1.5 million residential home passes, representing approximately 67% of the population in Hong Kong. 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.

A. Factors ~~Affecting Our Results~~affecting our results of ~~Operations~~operations

The preparation of our consolidated financial statements in conformity with Hong Kong Financial Reporting Standards and accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions about future events. These estimates and underlying assumptions affects the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.

Such estimates include the valuation of accounts receivable, goodwill, long-lived assets, and assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on our management’s best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Decreases in consumer spending or deterioration of the local economic conditions brought about by the global credit crisis have increased uncertainty inherent in such estimates and assumptions including our estimates of future operations. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Change in those estimates resulting from continuing changes in economic environment will be reflected in the consolidated financial statements in future periods.

Our ~~Revenues~~revenues

Our revenues are derived from two business segments: our FTNS business and our IDD business. Our FTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and corporate data services, while our IDD business primarily consists of direct dial services, international calling cards and mobile call forwarding services.

~~Fixed telecommunications network services.~~FTNS business.Revenues from our ~~fixed telecommunications network services~~FTNS business primarily consist of monthly service charges payable by our subscribers and interconnection charges payable by other telecommunications operators.

	•		Monthly service charges.We charge our ~~customers~~subscribers a monthly service charge, ~~for each type~~which generally varies by the number and nature of the fixed telecommunications network services ~~that we provide. After a customer has begun~~subscribed. Our strategy is to ~~use one of our services, we then try to up-sell~~market additional services to our subscribers by leveraging our broadband Internet access subscription base of 526,000 as of August 31, 2010 and the ~~customer to generate more revenues.~~scalability of our Next Generation Network.

	•		Interconnection charges.~~As a FTNS licensee, HKBN, a wholly-owned subsidiary~~We offer fixed telecommunications network services through our self-owned Next Generation Network. Under the terms of ~~the Company, is obliged~~HKBN’s fixed telecommunications network services license, we are required to provide interconnection services to ~~enable delivery of telecommunications service to customers of different~~other network operators, including mobile network operators.

Since HKBN was granted the FTNS license, we have been billing mobile network operators interconnection charges using the interconnection rates between fixed and mobile operators. The rates are computed based on a fully distributed cost model using the historical cost data of PCCW-HKT, the incumbent FTNS operator. We have recognized all such mobile interconnection charges as revenue.

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 date after which such interconnection charges shall be applicable.

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.

In March 2006, the Telecommunications Authority made a confidential preliminary analysis (the “2006 PA”) 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 the authority. As a result of the foregoing, in fiscal 2006, we recognized mobile interconnection charges of HK$22.0 million based on the 2006 PA.

In March 2007, the Telecommunications Authority issued a revised 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 Telecommunications Authority issued a final determination (the “2004 Determination”) which set out the rates of mobile interconnection charges payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by the Telecommunications Authority previously.

Based on the 2004 Determination, we recorded mobile interconnection charges of HK$40.9 million in fiscal 2007, which include charges for fiscal 2007 and additional charges for fiscal 2005 and 2006 previously measured based on the 2006 PA. We have also written back provision for doubtful accounts for mobile interconnection charges receivables of HK$9.4 million based on the amount we expected to collect for billings outstanding through August 31, 2007.

During fiscal 2008, HKBN entered into contractual agreements with additional mobile operators, which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and for the subsequent period at an interim rate stated in the agreements, which will be adjusted based on further determination to be issued by Telecommunications Authority.

In February 2008, HKBN requested the Telecommunications Authority to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, the authority indicated that it accepted HKBN’s request for a determination covering the mobile interconnection charges payable by the mobile operators for the period from April 1, 2002 to April 26, 2009 (for certain mobile operators who have reached the relevant contractual agreements with HKBN) or for the period from September 1, 2004 to April 26, 2009 (for certain other mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate thereon. As of January 9, 2009, the 2008 Determination is still in progress.

For fiscal 2008, we recognized revenue related to mobile interconnection charges of HK$29.6 million, representing the amount of mobile interconnection charges that our management expects to collect. As of August 31, 2008, certain amount of mobile interconnection charges billed to mobile network operators had not been collected.

~~International telecommunications services~~IDD business.

Substantially all of ~~our international telecommunications~~ revenues ~~are generated by the per minute tariff rate that we charge~~from our IDD ~~customers. We charge our IDD 1666 and IDD 0030 users a per minute tariff rate that~~business consists of tariffs, which generally varies ~~according to~~by the destination of the call and the calling prefix, with discounts depending on the time of the day or day of the week when the call is placed.

The customer database of our international telecommunications services comprised approximately 2.3 million registered accounts as of August 31, 2008. During fiscal 2008, we experienced a reduction in total traffic volume of 12.9% to 574 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 marginally offset by higher revenues per minute, our revenues decreased by 10.0% to HK$292.0 million in fiscal 2008.

Our ~~Operating 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 our 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 also 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 maintaining and operating our Next Generation Network.

~~Critical Accounting Policies~~

~~Introduction~~

Our operating expenses consist of network costs and other operating 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 our IP-TV services and interconnection charges payable to other local fixed network operators and international bandwidth providers. Network costs do not include depreciation charge, which is included in other operating expenses.

	•		Other operating expenses.Other operating expenses mainly consist of Talent costs, advertising and marketing expenses, depreciation of owned fixed assets.

	•		Talent costs. Salaries and related costs incurred for services rendered by Talents.

	•		Advertising and marketing expenses.Due to our efforts in promoting our FTNS services, our advertising and marketing expenses incurred in connection with 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 and to enhance our brand value.

•

Depreciation.Depreciation is calculated to write off the cost of fixed assets less their estimated residual value, if any, using straight line method over their estimated useful lives. We expect that we will continue to invest in our Next Generation Network to expand our network coverage. In addition, any technological advancement or obsolescence might affect the estimated useful lives of our fixed assets.

Critical accounting policies

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with ~~HKFRS. Accounting principles generally accepted in Hong Kong differ in certain significant respects from U.S. GAAP, details of which are set out in note~~IFRSs for the fiscal years ended August 31, ~~to our consolidated financial statements.~~2008, 2009 and 2010. Our significant accounting policies are more fully described in note 21 to our consolidated financial statements.

The preparation of our consolidated financial statements in conformity with ~~HKFRS~~IFRSs 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, 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~~Changes to accounting estimates are recognized in the period in which the estimate is ~~revised~~changed if the ~~revision~~change affects only that period or in the period of the ~~revision~~change and future periods if the ~~revision~~change affects both current and future periods.

Our accounting policies have been developed over many years as the telecommunications industry and generally accepted accounting principles have evolved. As our financial statements are prepared under ~~HKFRS,~~IFRSs, our accounting policies are necessarily compliant with all aspects of ~~HKFRS. HKFRS is~~IFRSs. IFRSs are 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 consolidated financial statements on that basis.

In developing accounting policies, in addition to HKFRS requirements, we also consider telecommunications industry practice in other countries. Where there is no conflict with HKFRS 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.

Revenue recognition

Revenue for the provision of telecommunications services is recognized when an arrangement exists, service is rendered, fee is fixed or determinable and collectability 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.

A portion of revenue from our FTNS business is derived from network interconnection charges. Network interconnection charges are recorded as revenue based on usage of our fixed telecommunications network 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.

Prior to April 27, 2009, mobile network operators were obliged to pay interconnection charges to us 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 us, certain amount of the mobile interconnection charges billed by us had not been collected as of December 14, 2010. 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. Specifically:

	•		The amount recognized for fiscal 2004 and before was determined using the available rates under the then-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. In May 2004, the Telecommunications Authority confirmed that mobile network operators are obliged to pay interconnection charges to us in accordance with the charging principles promulgated by the Telecommunications Authority. A number of mobile network operators, however, disputed the basis of our calculation. In August 2004, we requested the Telecommunications Authority to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile network operators to us and the effective date of the determined mobile interconnection charges.

	•		The amount recognized in fiscal 2005 reflected a discount from the amounts billed which was determined based on our assessment of the range of likely outcomes of the 2004 Determination. In November 2005, we entered into contractual agreements with one of the mobile network operators who agreed to pay 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 amount recognized in fiscal 2006 was based on the preliminary rates published by the Telecommunications Authority in March 2006 as we awaited a final ruling by the Telecommunications Authority on the 2004 Determination.

	•		The amount recognized in fiscal 2007 was based on the 2004 Determination issued by the Telecommunications Authority in June 2007, which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by us for the period from April 1, 2002 to August 31, 2004.

	•		The amount recognized in fiscal 2008 was based also on the 2004 Determination issued by the Telecommunications Authority in June 2007. In February 2008, we requested the Telecommunications Authority to make a new determination with four mobile operators on the rates of mobile interconnection charge and interest thereon. We subsequently entered into contractual agreements with some of these mobile operators, which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and with respect to the period after August 31, 2004 at the interim rates stated in the agreements, which will be adjusted based on further determination to be issued by the Telecommunications Authority.

	•		The amount recognized in fiscal 2009 and before was based on the 2004 Determination issued by the Telecommunications Authority in June 2007 which set out the rates of mobile interconnection charge payable by the mobile operators under dispute for interconnection services provided by us for the period from April 1, 2002 to August 31, 2004. In September 2008, the Telecommunications Authority indicated that it accepted our request for determination on the rate of mobile interconnection charge for the period from April 1, 2002 to April 26, 2009 payable by the mobile operators that have not reached contractual agreements with us, and the rate for period from September 1, 2004 to April 26, 2009 payable by those mobile operators that have reached contractual agreements with us and the interest thereon (the “2008 Determination”). On November 25, 2009, the Telecommunications Authority issued a Preliminary Analysis in relation to the 2008 Determination for the parties’ comments.

	•		In May 2010, the Telecommunications Authority issued its decision on the 2008 Determination, which set out the rates of mobile interconnection charges payable by the mobile operators involved in the dispute. Based on such decision on the 2008 Determination, we reversed approximately HK$19.7 million revenue related to mobile interconnection charges and recognized approximately HK$10.1 million interest income in fiscal 2010.

For a discussion of our revenue recognition of mobile interconnection charges, please refer to note 2(b) to our consolidated financial statements. Actual amounts realized could be different from our estimate.

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~~life of an asset is estimated at the time the asset is acquired based on historical experience, the expected usage, wear and tear of the ~~assets,~~asset, as well as technical

obsolescence arising from changes in the market demands or service output of the ~~assets.~~asset. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change.

We ~~started providing broadband Internet access service~~perform periodic reviews to confirm the appropriateness of estimated economic useful lives for each class of fixed assets. For the three years ended August 31, 2010, there were no changes in ~~2000 and substantially completed~~ the ~~construction of the fiber backbone network in fiscal 2005. With only a short history of operating the broadband business, we assessed the estimated~~ useful lives 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 networkfixed assets.

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 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 fiber network and related peripherals have 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 HK2.6 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 ~~HKFRS and U.S. GAAP,~~IFRSs, 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 ~~HKFRS,~~IFRSs, the recoverable amount is the ~~present~~greater of its net selling price and value ofin use. In assessing value in use, the estimated ~~net~~ future cash flows ~~which we expect~~are discounted to ~~recover from~~their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the ~~future use of~~risks specific to the assets. Where the asset ~~plus~~does not generate cash inflows largely independent of those from other assets, the ~~asset’s residual value on disposal, discounted at~~recoverable amount is determined for the ~~financial asset’s original effective interest rate.~~smallest group of assets that generates cash inflows independently (i.e. cash-generating-unit). 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 less costs to sell 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.~~use.

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~~subscription 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, ~~2008, except for investment property,~~2010, 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 hasfixed assets have been written down by HK$1.1 million for the year ended August 31, 2006. There was no difference between HKFRS 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.recognized.

Accounts ~~Receivable~~receivable

Under ~~HKFRS and U.S. GAAP,~~IFRSs, provision is made against accounts receivable to the extent they are considered to be doubtful. This provision requires judgment regarding the collectability of certain receivables both as they are incurred and as they age. We assess bad debt ~~provisions~~provision by type of customers, namely residential, corporate and carrier, 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 collectability of accounts receivable for which provisions are not made could affect our future results of operations.

Included in the accounts receivable balance (net of allowance for doubtful debts) ~~are~~were receivables for mobile interconnection charges of HK$~~62.1~~64.4 million, HK$~~103.8~~68.8 million and HK$~~71.9~~39.8 million as of August 31, ~~2006, 2007~~2008, 2009 and ~~2008~~2010, respectively. The balance represented mobile interconnection charges we billed to the local mobile network operators, and some of ~~which, however,~~these charges had not been collected.

~~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, certain amount of the mobile interconnection charges billed by HKBN had not been collected as of August 31, 2008. 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 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 in fiscal year 2006 is based on the preliminary rates from the Telecommunications Authority as we await a final ruling by the Telecommunications Authority on the level of charges payable by one of the operators. The amounts recognized in fiscal year 2007 and 2008 are based on the 2004 Determination issued by the Telecommunications Authority in June 2007 which sets out the rates payable by a mobile operator under dispute. For a discussion of our revenue recognition of mobile interconnection charges, please refer to “Factors Affecting Our Results of Operations — Our Revenues” above in this annual report and note 26(c) to our consolidated financial statements. Actual amounts realized could be different from our estimate.

Operating Results

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

Year Ended August 31,
2006 2007 2008 2008
HK$ HK$ HK$ US$
(In thousands)
HKFRS

Revenues
Fixed telecommunications network services 716,600 816,800 1,011,038 129,561
International telecommunications 418,276 324,470 291,943 37,411

1,134,876 1,141,270 1,302,981 166,972

Operating Expenses:
Network costs (300,593 ) (214,591 ) (178,367 ) (22,857 )

Other operating expenses
Salaries and related costs (256,721 ) (221,102 ) (247,460 ) (31,711 )
Sales and marketing expenses (204,952 ) (203,673 ) (307,743 ) (39,436 )
Office, general and administrative expenses (164,208 ) (144,657 ) (186,547 ) (23,905 )
Depreciation and amortization (276,464 ) (258,103 ) (210,051 ) (26,917 )
Provision for doubtful accounts (17,450 ) (6,569 ) (14,293 ) (1,832 )

Total other operating expenses (919,795 ) (834,104 ) (966,094 ) (123,801 )

Total Operating Expenses (1,220,388 ) (1,048,695 ) (1,144,461 ) (146,658 )

(Loss)/income from operations (85,512 ) 92,575 158,520 20,314
Interest income 20,378 22,671 15,596 1,999
Interest expense (88,637 ) (87,504 ) (75,137 ) (9,629 )
Other income, net 4,465 3,149 9,393 1,204

(Loss)/income before taxation (149,306 ) 30,891 108,372 13,888
Income taxes (expense)/credit 7,244 (2,026 ) 16,818 2,155

Net (loss)/income (142,062 ) 28,865 125,190 16,043

For the year ended August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands)
Revenue
FTNS business 1,011,038 1,230,880 1,356,098 174,348
IDD business 291,943 247,359 218,589 28,103

1,302,981 1,478,239 1,574,687 202,451

Network costs (178,367 ) (175,129 ) (195,292 ) (25,108 )

Other operating expenses (966,094 ) (1,037,964 ) (1,105,604 ) (142,143 )

Other income, net 24,989 41,540 7,989 1,028

Finance costs (75,137 ) (55,127 ) (22,235 ) (2,859 )

Profit before taxation 108,372 251,559 259,545 33,369
Income taxes benefit/(expense) 16,818 (38,730 ) (42,679 ) (5,487 )

Net income 125,190 212,829 216,866 27,882

~~Year Ended August 31, 2008~~Fiscal 2010 Compared to ~~Year Ended August 31, 2007~~Fiscal 2009

Revenues.Revenues increased by ~~14.2%~~6.5% to HK$~~1,303.0~~1,574.7 million in fiscal ~~2008~~2010 from HK$~~1,141.3~~1,478.2 million in fiscal ~~2007,~~2009, reflecting an increase in revenue from ~~fixed telecommunications network services,~~our FTNS business, the effects of which were partially offset by a decrease in revenue from our ~~international communications services.~~IDD business and the change in the regulatory regime of mobile interconnection charges summarized below. Revenue contribution from our ~~fixed telecommunications network services~~FTNS business increased to ~~77.6%~~86.1% in fiscal ~~2008~~2010 from ~~71.6%~~83.3% in fiscal ~~2007.~~2009.

~~Fixed telecommunications network services.~~Revenues from fixed telecommunications network services increased by 23.8% to HK$1,011.0 million in fiscal 2008 from HK$816.8 million in fiscal 2007. The increase was primarily caused by an increase of 17.3% of our FTNS subscription base to 801,000 as of August 31,2008 from 683,000 as of August 31, 2007 and, to a lesser extent, an increase in the average revenue per user for our Internet access services. We believe that there is increasing market acceptance of premium pricing.
• FTNS business.Revenues from our FTNS business increased by 10.2% to HK$1,356.1 million in fiscal 2010 from HK$1,230.9 million in fiscal 2009. The increase was primarily caused by an increase of 17.7% of our FTNS subscription base to 1,110,000 as of August 31, 2010 from 943,000 as of August 31, 2009.

•

Broadband Internet access.~~Subscription~~The subscription base for our Internet access services ~~rose~~increased by ~~27.9%~~34.5%, to ~~316,000~~526,000 as of August 31, ~~2008~~2010 from ~~247,000~~391,000 as of August 31, ~~2007.~~2009. During fiscal ~~2008,~~2010, we are able to have a record growth of 135,000 net additions through our ~~average revenue per user increased, mainly because we focused on differentiating~~“Member-Get-Member” marketing campaigns which reduced the price of our symmetric 100Mbps broadband services by ~~emphasizing~~half to HK$99 per month if a customer introduces a new customer at HK$99 per month. Such marketing campaigns essentially allowed us to increase our ~~ultra high Internet access speed. Our strategy was~~revenues by converting one subscriber at HK$182 per month to ~~acquire and retain customers who~~two subscribers at a minimum rate of HK$99 per month.

As a result of the Telecommunications Authority’s decision on the 2008 Determination in May 2010 as stated above, revenue of HK$19.7 million related to mobile interconnection charges was reversed in fiscal 2010. In addition, prior to April 26, 2009, the mobile network operators were required to pay interconnection charges for all calls originating to and from the mobile users. After April 26, 2009, the chargeability of interconnection charges is subject to commercial negotiation. With the withdrawal of regulatory guidance on FMIC in favor of mobile network operators on April 27, 2009, only an insignificant amount of revenue related to mobile interconnection charges was recognized.

•

IDD business.Revenues from our IDD business decreased by 11.6% to HK$218.6 million in fiscal 2010 from HK$247.4 million in fiscal 2009. The decrease was primarily due to the reduction in IDD traffic volume and the decrease in the tariff rate we charged to our customers. Competition during fiscal 2010 intensified as some of our competitors offered international direct dial minutes for free or at significantly lower rates as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was becoming more prevalent.

Network costs.Network costs increased by 11.5% to HK$195.3 million in fiscal 2010 from HK$175.1 million in fiscal 2009 mainly due to the increase in the cost of purchasing international bandwidth as a result of the combined effect of the record growth in broadband subscription and the increasing demand of bandwidth from customers as well as the increase in program fees for IP-TV services to enhance the value of content to customers.

Other operating expenses.Other operating expenses increased by 6.5% to HK$1,105.6 million in fiscal 2010 from HK$1,038.0 million in fiscal 2009 mainly due to the following:

Set forth below is a table summarizing the details of our other operating expenses in fiscal 2009 and 2010:

For the year ended August 31,
2009 2010 2010
HK$ HK$ US$
(Amounts in thousands)
Talent costs (302,279 ) (301,760 ) (38,796 )
Advertising and marketing expenses (299,794 ) (372,727 ) (47,920 )
Depreciation (206,241 ) (199,029 ) (25,588 )
Others (229,650 ) (232,088 ) (29,839 )

Other operating expenses (1,037,964 ) (1,105,604 ) (142,143 )

	•		Talent costs.Talent costs decreased by 0.2% to HK$301.8 million in fiscal 2010 from HK$302.3 million in fiscal 2009.

	•		Advertising and marketing expenses.Advertising and marketing expenses increased by 24.3% to HK$372.7 million in fiscal 2010 from HK$299.8 million in fiscal 2009. Our salaries and commissions for our sales and marketing Talents increased by HK$28.5 million due to our growth in broadband subscription base. Moreover, our marketing campaigns resulted in an increase in mass media advertising costs of HK$21.6 million and other advertising costs of HK$14.9 million. In addition, the expansion of our sales channels through opening new shops resulted in an increase of advertising and marketing related expenses of HK$7.9 million.

	•		Depreciation.Depreciation decreased by 3.5% to HK$199.0 million in fiscal 2010 from HK$206.2 million in fiscal 2009. Notwithstanding our purchase of additional fixed assets for our network infrastructure as we increased the scale of operations in our FTNS business, a portion of our owned fixed assets were fully depreciated. As a result, we incurred lower depreciation expenses.

Other income, net.Other income, net decreased to HK$8.0 million in fiscal 2010 from HK$41.5 million in fiscal 2009. The decrease was mainly contributed by the loss on extinguishment of our 10-year senior notes of HK$9.7 million in fiscal 2010 compared to the gain on extinguishment of our 10-year senior notes of HK$31.4 million in fiscal 2009. The effect of which was partially offset by an increase in interest income of HK$10.1 million recognized in relation to mobile interconnection charges in fiscal 2010.

Finance costs.Finance costs decreased by 59.7% to HK$22.2 million in fiscal 2010 from HK$55.1 million in fiscal 2009. The decrease was mainly due to finance cost savings through repurchase and redemption of our 10-year senior notes and interest bearing bank borrowings at

a lower interest rate. The effect of which was partially offset by the change in fair value of derivative financial instrument that we did not have in fiscal 2009.

Income tax benefit/(expense).We recorded an income tax expense of HK$42.7 million, which included a non-cash deferred tax expenses of HK$40.1 million in fiscal 2010, compared to an income tax expense of HK$38.7 million in fiscal 2009, which included a non-cash deferred tax expenses of HK$37.1 million.

Net income.For the foregoing reasons, net income increased to HK$216.9 million in fiscal 2010 from HK$212.8 million in fiscal 2009. Net margin decreased to 13.8% in fiscal 2010 from 14.4% in fiscal 2009. The slight decrease in net margin was primarily due to a higher cost in acquiring new customers.

Fiscal 2009 Compared to Fiscal 2008

Revenues.Revenues increased by 13.4% to HK$1,478.2 million in fiscal 2009 from HK$1,303.0 million in fiscal 2008, reflecting an increase in revenue from our FTNS business, the effects of which were partially offset by a decrease in revenue from our IDD business. Revenue contribution from our FTNS business increased to 83.3% in fiscal 2009 from 77.6% in fiscal 2008.

•

FTNS business.Revenues from our FTNS business increased by 21.8% to HK$1,230.9 million in fiscal 2009 from HK$1,011.0 million in fiscal 2008. The increase was primarily caused by an increase of 17.7% of our FTNS subscription base to 943,000 as of August 31, 2009 from 801,000 as of August 31, 2008 and, to a lesser extent, an increase in the average revenue per user for our Internet access services. We believe that there was growing market acceptance of premium pricing in fiscal 2009.

	•		Broadband Internet access.The subscription base for our Internet access services increased by 23.7%, to 391,000 as of August 31, 2009 from 316,000 as of August 31, 2008. During fiscal 2009, partly as a result of our success in differentiating our services by emphasizing our ultra high Internet access speed, we were able to acquire and retain customers who are willing to enter into subscription contracts with a long service period. Revenues from our Internet access services increased as a result.

	•		Local VoIP.~~Subscription~~The subscription base for our local VoIP services rose by ~~6.8%~~16.1%, to 382,000 as of August 31, 2009 from 329,000 as of August 31, 2008, ~~from 308,000 as of August 31, 2007,~~ mainly due to improved branding and our greater success in cross selling our VoIP services to subscribers of our Internet access services.

	•		IP-TV.~~Subscription~~The subscription base for our IP-TV services increased by ~~21.9%~~9.0% to ~~156,000~~170,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services.

~~Included~~
Also as included in revenue from our FTNS business were mobile interconnection charges of HK$20.6 million in fiscal 2009. The mobile interconnection charges in fiscal 2009 decreased by 30.5% compared to fiscal 2008 due to the withdrawal of regulatory guidance on FMIC in favor of Mobile Party’s Network Pay on April 26, 2009. Prior to April 26, 2009, the mobile network operators were required to pay interconnection charges for all calls originating to and from the mobile users. After April 26, 2009, the chargeability of interconnection charges is subject to commercial negotiation.

•

IDD business.Revenues from our IDD business decreased by 15.3% to HK$247.4 million in fiscal 2009 from HK$292.0 million in fiscal 2008. The decrease was primarily due to the reduction in IDD traffic volume. Competition during the fiscal 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 shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was also becoming more prevalent.

Network costs.Network costs decreased by 1.8% to HK$175.1 million in ~~revenue~~fiscal 2009 from ~~fixed telecommunications network~~HK$178.4 million in fiscal 2008 mainly due to a reduction in carrier costs as IDD traffic decreased. The effects of the foregoing, however, were partially offset by the recovery of HK$7.6 million universal services ~~also~~contribution charges from PCCW-HK in fiscal 2008 pursuant to the TA Statement issued by the Telecommunications Authority on December 28, 2007. No similar recovery was ~~revenue related~~recorded in fiscal 2009.

Other operating expenses.Other operating expenses increased by 7.4% to ~~mobile interconnection charges~~HK$1,038.0 million in fiscal 2009 from HK$966.1 million in fiscal 2008 mainly due to the following:

Set forth below is a table summarizing the details of our other operating expenses in fiscal 2008 and 2009:

For the year ended August 31,
2008 2009 2009
HK$ HK$ US$
(Amounts in thousands)
Talent costs (247,460 ) (302,279 ) (39,001 )
Advertising and marketing expenses (307,743 ) (299,794 ) (38,681 )
Depreciation (210,051 ) (206,241 ) (26,610 )
Others (200,840 ) (229,650 ) (29,630 )

Other operating expenses (966,094 ) (1,037,964 ) (133,922 )

	•		Talent costs.Talent costs increased by 22.1% to HK$302.3 million in fiscal 2009 from HK$247.5 million in fiscal 2008. We increased our total work force by 4.0% to 3,173 Talents as of August 31, 2009 from 3,051 Talents as of August 31, 2008, primarily due to the increased scale of operations in our FTNS business and the increasing scope in investing and developing our Talents through Talents education partnership and Talent infinity program.

	•		Advertising and marketing expenses.Advertising and marketing expenses decreased by 2.6% to HK$299.8 million in fiscal 2009 from HK$307.7 million in fiscal 2008. Our salaries and commissions for our sales and marketing Talents were increased by HK$19.5 million due to an increase in total contract sum due to substantial growth in subscription base. Moreover, our opening of additional new shops caused shop related operating costs to increase by HK$11.4 million. The effects of the foregoing, however, were partially offset by a decrease in mass media advertising costs of HK$34.4 million.

	•		Depreciation.Depreciation decreased by 1.9% to HK$206.2 million in fiscal 2009. Notwithstanding our purchase of additional fixed assets for our network infrastructure as we increased the scale of operations in our FTNS business, a portion of our owned fixed assets were fully depreciated and a lower depreciation expenses was incurred as a result.

Other income, net.Other income, net increased to HK$~~29.6~~41.5 million in fiscal 2009 from HK$25.0 million in fiscal 2008. The ~~mobile interconnection charges in fiscal 2008 decreased~~increase was mainly contributed by ~~27.6% compared to fiscal 2007 because~~ the ~~amount recognized in fiscal 2007 included charges for fiscal 2007 and additional charges for fiscal 2005 and 2006 previously measured based~~gain on ~~the 2006 PA. For more information regarding mobile interconnection charges, see “Factors Affecting Our Results of Operations — Our Revenues”.~~

~~International telecommunications services.~~Revenues from our international telecommunications services decreased by 10.0% to HK$292.0 million in fiscal 2008 from HK$324.5 million in fiscal 2007. The decrease was primarily due to lower volumes, the effects of which were partially offset by higher revenue per minute. Competition during the fiscal year was intense as someextinguishment 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 shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was also becoming more prevalent.

~~Operating expenses.~~~~Operating expenses increased by 9.1% to~~10-year senior notes of HK$~~1,144.5~~31.4 million, ~~in fiscal 2008 from HK$1,048.7 million in fiscal 2007, reflecting an increase in other operating expenses,~~ the effects of which were partially offset by a decrease in ~~network costs.~~

~~Network costs.~~Network costs decreased by 16.9% to HK$178.4 million in fiscal 2008 from HK$214.6 million in fiscal 2007 mainly due to a reduction in international tariff volume and the recovery of HK$7.6 million Universal Services Contributions from PCCW-HK during fiscal 2008 pursuant to the TA Statement issued by the Telecommunications Authority. There was no recovery of Universal Services Contributions during fiscal 2007.

~~Other operating expenses~~.~~Other operating expenses increased by 15.8% to HK$966.1 million in fiscal 2008 from HK$834.1 million in fiscal 2007.~~

	•		~~Salaries and related costs.~~Salaries and related costs increased by 11.9% to HK247.5 million in fiscal 2008. We increased our total work force by 13.3% to 3,051 employees as of August 31, 2008 from 2,692 employees as of August 31, 2007, primarily due to the increased operating scale in fixed telecommunications network services.

	•		~~Sales and marketing expenses.~~Sales and marketing expenses increased by 51.1% to HK$307.7 million in fiscal 2008 from HK$203.7 million in fiscal 2007, as we increased our salaries and commissions for our sales and marketing employees of HK$59.9 million and the increased mass media advertising costs of HK$30.3 million. In fiscal 2008, we started a strategy of promoting the brand to a wider audience.

	•		~~Office, general and administrative expenses.~~Office, general and administrative expenses increased by 28.9% to HK$186.5 million in fiscal 2008 from HK$144.7 million in fiscal 2007, mainly due to the expanded operating scale of our fixed telecommunications network services.

	•		~~Depreciation and amortization.~~Depreciation and amortization expenses decreased by 18.6% to HK$210.1 million in fiscal 2008 from HK$258.1 million in fiscal 2007. Our management revised the estimated useful lives of our fiber network and related peripherals from 4-15 years to 6-20 years, and the revisions became effective from June 1, 2007. As a result, fiscal 2008 was the first full year in which the impact on depreciation charges resulting from such revision was realized. The effect of the decrease in depreciation expense for fiscal 2008 due to the changes in estimated useful lives which was estimated to be HK$63.6 million.

	•		~~Provision for doubtful accounts.~~Provision for doubtful accounts increased to HK$14.3 million in fiscal 2008 from HK$6.6 million in fiscal 2007. Included in the provision for fiscal 2007 was the reversal of HK$9.4 million of the allowance for doubtful debts previously recognized for mobile interconnection charges. If such effect was excluded, the provision for doubtful accounts decreased by HK$1.7 million due to better collection efforts. For more information regarding our provisions for mobile interconnection charges, see “Factors Affecting Our Results of Operations—Our Revenues” above in this annual report.

~~Income from operations.~~~~For the foregoing reasons,~~interest income from operations increased by 71.2% to HK$158.5 million in fiscal 2008 from HK$92.6 million in fiscal 2007. Operating margin increased to 12.2% in fiscal 2008 from 8.1% in fiscal 2007. The increase in operating margin was primarily due to higher revenue contribution from fixed telecommunications network services and the better margin achieved in our international telecommunications services as a result of the phasing out of lower margin customers.

~~Interest income and expense.~~~~Interest income decreased by 31.3% to~~ HK$15.6 million in fiscal 2008 ~~from~~to HK$~~22.7~~4.8 million in fiscal ~~2007. The decrease was primarily due to a decrease in our average outstanding cash balance,~~2009 as a ~~significant portion~~result of ~~our interest income was derived from our deposit of surplus capital in interest-bearing accounts at commercial banks. The~~the decrease in our average cash balance in fiscal ~~2008 was~~

2009 mainly due to ~~the repurchase of our 8.75%~~ senior notes ~~with~~buyback actions.

Finance costs.Finance costs decreased by 26.6% to HK$55.1 million in fiscal 2009 from HK$75.1 million in fiscal 2008 as a result of the redemption and cancellation of an aggregate principal amount of US$~~35.6~~68.0 million of our 10-year senior notes from the market ~~at a total consideration of US$35.3 million~~ in fiscal ~~2008. As a result of this, interest expense decreased by 14.1% to HK$75.1 million in fiscal 2008 from HK$87.5 million in fiscal 2007.~~

~~Other income, net.~~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 increased to HK$9.4 million in fiscal 2008 from HK$3.1 million in fiscal 2007. The increase mainly includes realized gain on early redemption of long term deposits of HK$1.2 million, realized and unrealized gain on other financial assets of HK$3.3 million, and gain on extinguishment of 8.75% senior notes of HK$2.6 million.2009.

Income tax benefit/(expense)~~/credit.~~.We recorded an income tax ~~credit~~expense of HK$38.8 million in fiscal 2009, compared to an income tax benefit of HK$16.8 million in fiscal ~~2008, compared to an~~2008. Included in the income tax ~~expense of HK$2.0 million in fiscal 2007. The income tax credit~~benefit in fiscal 2008 was ~~primarily~~a tax credit of HK$26.3 million related to ~~HK$26.3 million of~~the deferred tax assets recognized in respect of the tax loss carryforwards of our major operating subsidiary as ~~based~~at August 31, 2008. Based on the results of operations of our major operating subsidiary in recent years and our forecast for future years, we ~~conclude~~concluded it iswas probable that the subsidiary ~~will~~would generate sufficient taxable income to utilize the tax loss carryforwards. ~~The HK$26.3 million~~If such effect was ~~offset by~~excluded, the ~~current~~ income tax expenses ofincrease by HK$~~4.9~~29.3 million, ~~in respect of two~~which was primarily caused by the increase of our ~~subsidiaries and the reversal of HK$4.6 million of deferred tax assets upon utilization of tax loss carryforward by the Company.~~income before taxation.

Net income.For the foregoing reasons, net income increased to HK$212.8 million in fiscal 2009 from HK$125.2 million in fiscal ~~2008 from HK$28.9 million~~2008. Net margin increased to 14.4% in fiscal ~~2007.~~

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

~~Revenues.~~~~Revenues increased by 0.6% to HK$1,141.3 million~~2009 from 9.6% in fiscal ~~2007 from HK$1,134.9 million in fiscal 2006, reflecting an~~2008. The increase in revenue from fixed telecommunications network services, the effects of which were substantially offset by a decrease in revenue from our international telecommunications services. Revenue contribution from our fixed telecommunications network services increased to 71.6% in fiscal 2007 from 63.1% in fiscal 2006.

~~Fixed telecommunications network services.~~Revenues from fixed telecommunications network services increased by 14.0% to HK$816.8 million in fiscal 2007 from HK$716.6 million in fiscal 2006. The increase was primarily caused by an increase of 10.7% of our FTNS subscription base to 683,000 as of August 31, 2007 from 617,000 as of August 31, 2006 and an increase in the average revenue per user for our Internet access services. We believe that such increases suggested that there is increasing market acceptance of premium pricing.

	•		~~Internet access.~~Subscription base for our Internet access services rose by 12.3%, to 247,000 as of August 31, 2007 from 220,000 as of August 31, 2006. During fiscal 2007, we focused on differentiating our services by emphasizing our ultra high Internet access speed. 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 to higher price. This has significantly increased our revenue from Internet access services.

	•		~~Local VoIP.~~Subscription base for our local VoIP services rose by 9.6%, to 308,000 as of August 31, 2007 from 281,000 as of August 31, 2006, mainly due to improved branding and cross selling our VoIP services to subscribers of our Internet access services.

	•		~~IP-TV.~~Subscription base for our IP-TV services increased by 10.3% to 128,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services.

~~International telecommunications services.~~Revenues from our international telecommunications services decreased by 22.4% to HK$324.5 million in fiscal 2007 from HK$418.3 million in fiscal 2006. The decrease was primarily due to the combined effects of lower volumes and lower revenue per minute. Competition during the fiscal 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 shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent.

~~Operating expenses.~~~~Operating expenses decreased by 14.1% to HK$1,048.7 million in fiscal 2007 from HK$1,220.4 million in fiscal 2006, reflecting decreases in network costs and other operating increases.~~

~~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~~.~~Other operating expenses decreased by 9.3% to HK$834.1 million in fiscal 2007.~~

	•		~~Salaries and related costs.~~~~Salaries and related costs decreased by 13.9% to HK$221.1 million in fiscal 2007 from HK$256.7 million in fiscal 2006 mainly due to the benefits from streamlining the work force in fiscal 2006.~~

	•		~~Sales and marketing expenses.~~~~Sales and marketing expenses in fiscal 2007 was comparable to that in fiscal 2006.~~

	•		~~Office, general and administrative expenses.~~Office, general and administrative expenses decreased by 13.6% to HK$144.6 million in fiscal 2007 from HK$164.2 million in fiscal 2006, 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 from HK$276.5 million in fiscal 2006, mainly due to changes in the estimated useful lives of certain assets amounting to HK$15.9 million. Our management revised the estimated useful lives of our fiber network and related peripherals from 4-15 years to 6-20 years, effective on 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. This change does not have any effect on the total depreciation charges of those assets during their remaining useful lives.

	•		~~Provision for doubtful accounts.~~Provision for doubtful accounts decreased by 62.3% 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 collectability of these charges. In fiscal 2007, we reversed a portion of this provision by HK$9.4 million based on the rates set by the Telecommunications Authority in the 2004 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 “Factors Affecting our Results of Operations—Our Revenues” above in this annual report.

~~Income from operations.~~~~For the foregoing reasons, income from operations was HK$92.6 million in fiscal 2007, compared with a loss from operations of HK$85.5 million in fiscal 2006. Income from operations in fiscal 2007~~net margin was primarily due to higher revenue contribution from ~~fixed telecommunications network services~~our FTNS business and the better margin achieved in our ~~international telecommunications services~~IDD business as a result of ~~our gradual~~the phasing out of lower margin customers.

~~Interest income and expense.~~Interest income increased by 11.3% to HK$22.7 million in fiscal 2007 from 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, as a significant portion of our interest income was derived from our deposit of surplus capital in interest-bearing accounts at commercial banks. 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% senior notes.

~~Other income, net.~~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 decreased by 31.1% to HK$3.1 million in fiscal 2007 from HK$4.5 million in fiscal 2006. The other income, net in fiscal 2007 mainly includes net realized and unrealized gains on investment securities and derivative financial instruments of HK$1.8 million.

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

~~Net income.~~~~For the foregoing reasons, we recorded net income of HK$28.9 million in fiscal 2007, compared with net loss of HK$142.1 million in fiscal 2006.~~

~~U.S. GAAP Reconciliation~~Recent accounting pronouncements

~~Our financial statements are prepared in accordance with HKFRS, which differs in certain significant respects from U.S. GAAP.~~

There were no differences in the net (loss) / income determined under HKFRS and U.S. GAAP for the years ended August 31, 2006, 2007 and 2008. The following tables provide a comparison of our shareholders’ equity in accordance with HKFRS and U.S. GAAP.

As of and for the Year Ended August 31,
2006 2007 2008 2008
HK$ HK$ HK$ US$
(in thousands)

Shareholders’ Equity

HKFRS 891,654 903,882 1,032,607 132,324
U.S. GAAP 897,271 909,499 1,038,224 133,044

~~Differences between HKFRS and U.S. GAAP for the periods presented relate primarily to goodwill.~~

Disclosure relating to those differences can be found in note 31 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 31 to our consolidated financial statements to reflect the impact of the significant differences between HKFRS and U.S. GAAP.

Recent ~~Accounting Pronouncements~~

~~Recently~~ issued and adopted accounting pronouncements under ~~HKFRS and U.S. GAAP~~IFRSs have been included in note 3032 to our consolidated financial statements.

B. Liquidity and ~~Capital Resources~~capital resources

We expect cash ~~flows generated~~flow from ~~operations will~~operating activities to continue to be our principal source of liquidity. As of August 31, ~~2008,~~2010, we had cash and bank balance of HK$~~421.6 million and pledged bank deposit of HK$87.3~~588.7 million. Our day-to-day operations are also supported by HK$~~87.3~~353.8 million banking facilities and revolving loan facility, of which only HK$~~29.9~~133.3 million was ~~utilized.~~utilized as at August 31, 2010.

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 requirements, capital ~~expenditure,~~expenditures, repayment of our indebtedness when fall due and various contractual obligations, for at least the next 12 months. ~~However, if our~~Our cash flows from operations, however, may decrease due to lower customer demand ~~changes significantly due to~~resulting from rapid

technological changes, ~~if we are not able to successfully compete with~~increasing competition resulting from new local and foreign entrants into the market, or ~~if we fail~~our failure to ~~maintain~~obtain or ~~obtain~~renew the necessary ~~license renewals from the Telecommunications Authority, this~~telecommunication licenses. A decrease in our operating cash flow could ~~have a significant adverse impact on our cash flows from operations, which could effect~~adversely affect our ability to make planned capital expenditures, ~~as well as meet scheduled payments on the 8.75% senior notes,~~to comply with our obligations under various operating and capital leases ~~commitments~~ and to repay amounts due under banking facilities.

We obtained the rating of B+ (stable) from Standard & Poor’s Rating Services and the rating of B1(positive) from Moody’s Investors Services for our 8.75% senior notes. Generally speaking, the credit ratings on our company are impacted by our revenue and earnings growth as well as our cash position. As of January 9, 2009, we are not aware of any significant factors that would change our credit ratings.

Cash ~~Flow~~flow

The following table summarizes our cash flows for each of fiscal ~~2006, 2007~~2008, 2009 and ~~2008:~~2010:

Year Ended August 31,
2006 2007 2008 2008
HK$ HK$ HK$ US$
(In thousands)
Net cash flow from operating activities 184,151 383,999 378,529 48,507
Net cash (used in)/provided by investing activities (492,742 ) 114,053 (147,750 ) (18,934 )
Net cash used in financing activities (86,432 ) (109,504 ) (342,516 ) (43,892 )

(Decrease)/increase in cash and bank balances (395,023 ) 388,548 (111,737 ) (14,319 )
Cash and bank balances, at the beginning of year 539,591 144,917 532,894 68,289
Effect of foreign exchange rate changes on cash 349 (571 ) 453 58

Cash and bank balances, at the end of the year 144,917 532,894 421,610 54,028

For the year ended August 31,
2008 2009 2010 2010
HK$ HK$ HK$ US$
(Amounts in thousands)
Net cash inflow from operating activities 381,991 536,771 485,340 62,398
Net cash outflow from investing activities (147,750 ) (176,488 ) (306,254 ) (39,374 )
Net cash (outflow)/inflow from financing activities (345,978 ) (561,292 ) 178,307 22,924

(Decrease)/increase in cash and cash equivalents (111,737 ) (201,009 ) 357,393 45,948
Cash and cash equivalents, at the beginning of year 532,894 421,610 221,052 28,420
Effect of foreign exchange rate changes on cash 453 451 (270 ) (35 )

Cash and cash equivalents, at the end of the year 421,610 221,052 578,175 74,333

Analysis of the balances of cash and cash equivalents
Cash at bank and in hand 434,604 226,416 588,665 75,682
Bank overdrafts — unsecured (12,994 ) (5,364 ) (10,490 ) (1,349 )

421,610 221,052 578,175 74,333

Operating ~~Activities~~activities

Our principal source of cash was cash generated from our ~~fixed telecommunications network services and to a lesser extent, international telecommunications services.~~

~~The net decrease in~~FTNS business. Net cash inflow from operating ~~cash flows~~activities increased 40.5% from HK$382.0 million in fiscal 2008 ~~relates mainly~~ to ~~the increase of cash received from customer (exclude mobile operators) of~~ HK$~~142.8~~536.8 million ~~and recoveries of mobile interconnection charges of HK$53.4 million offset by~~in fiscal 2009, primarily reflecting the increase in our profit before taxation resulting from the continued expansion of our subscription base. Net cash inflow from operating activities decreased by 9.6% from HK$536.8 million in fiscal 2009 to HK$485.3 million in fiscal 2010, which was a reflection of a slight increase in our profit before taxation offsetting by our rather higher customer acquisition in fiscal 2010.

Investing activities

Net cash outflow ~~for the salaries and commission expenses of~~from investing activities in fiscal 2010 was HK$97.6 million, mass media advertising cost of HK$30.3 million and premium cost of HK$44.0 million, and operating expenses of HK$29.8 million due to the expansion of the operation scale of our fixed telecommunications network services. Apart from uncertainties about the effect of the current credit crisis, we are not aware of any material trends or uncertainties which may have material effects on our sources and uses of cash.

306.3 million. The net ~~increase in operating~~ cash ~~flow in fiscal 2007~~outflow was mainly due to ~~increased revenue~~our purchase of fixed assets in the amount of HK$349.1 million.

Net cash outflow from ~~our fixed telecommunications network services and lower network costs as a result of the decrease~~investing activities in our international telecommunications services. Moreover, leveraging on last year’s operating efficiency plan and decentralization of authority to individual department heads helped to increase our operating cash flow.

fiscal 2009 was HK$176.5 million. The net ~~increase in operating~~ cash ~~flow in fiscal 2006~~outflow was mainly due to ~~lower network costs as a result~~our purchase of fixed assets of HK$289.9 million, the ~~completion~~effect of ~~our fiber backbone network,~~ which ~~reduced our network costs paid to third party network operators. Moreover,~~were partially offset by ~~leveraging on the large scale sales~~an decrease in pledged bank deposits of HK$72.3 million and ~~marketing~~net proceeds from maturity of investment in debt securities of HK$28.1 million.

Net cash outflow from investing activities in fiscal ~~2005 which has enhanced brand image and improved customer experience, less sales and marketing expenses were incurred in fiscal 2006, which also helped to increase the operating cash flow.~~

Net cash outflow from financing activities in fiscal ~~2006.~~

~~In fiscal 2006, net cash used in investing activities~~2008 was HK$~~492.7~~346.0 million. The net cash outflow ~~consisted primarily of purchases of fixed assets of HK$382.2 million for the development of~~was mainly due to our Next Generation Network and upgrading of our international telecommunications facilities. An increase in term deposits of HK$144.6 million further increased the cash outflow for investing activities in 2006.

~~Financing Activities~~

~~Net cash used in financing activities in fiscal 2008 consisting mainly of considerations paid in the~~ repurchase of ~~8.75%~~10-year senior notes for an aggregate consideration of HK$269.4 million, payment of interest ~~paid~~ on ~~8.75%~~the 10-year senior notes of HK$70.0 million and ~~dividend~~payment of cash dividends of HK$17.3 million.

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

Indebtedness

As of August 31, ~~2008,~~2010, we had an outstanding ~~borrowings~~debt of HK$~~683.6 million. Our long term liability consists mainly~~134.7 million, most of which consisted of our ~~8.75%~~bank loans in the amount of HK$123.6 million stated at amortized cost and were classified as non-current debt.

10-year senior notes ~~due 2015, which amounted to HK$683.2 million.~~

~~8.75% Senior Notes~~

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.~~value and received net proceeds in the amount of US$121.0 million after deduction of expenses and commissions. The 10-year senior notes were rated BB- (stable) by Standard & Poor’s Rating Services and Ba3 (stable) by Moody’s Investors Services. A significant portion of the net proceeds were used to repay in full an existing bank loan in the outstanding amount of HK$196.7 million and to finance capital expenditures, including costs incurred in expanding and upgrading our Next Generation Network. As of August 31, 2009, the 10-year senior notes were stated at the amortized cost of US$21.0 million (HK$162.6 million), compared with the amortized costs of US$87.5 million (HK$683.2 million) as of August 31, 2008.

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 1.1 of each year. 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% senior notes in the event we have to pay additional amounts~~On June 17, 2009, as a result of ~~certain changes in taxation. Prior~~our tender offer and consent for amendments to ~~February 1, 2008, we may redeem up to a maximum of 35%~~the indenture, substantially all 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. On or after February 1, 2010, we may redeem the notes, in whole or in part, at the redemption prices set forthrestrictive covenants in the indenture ~~governing the notes. In all cases~~have been eliminated. Consequently, certain events that would have constituted a violation 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% senior notes contains~~such 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;~~

	•		~~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 certain transactions with affiliates or related persons; and~~

	•		~~enter into sale and lease back transactions.~~

~~The net proceeds of the 8.75% senior 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~~past will no longer constitute event 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 Next Generation Network in Hong Kong, and for additional working capital and general corporate purposes.

~~During December 2007, January 2008 and February 2008, we~~default. We also repurchased an aggregate principal amount of US$~~35.6~~68.0 million of the ~~8.75%~~10-year senior notes from the market for an aggregate consideration (including transaction cost and accrued interest) of US$65.1 million.

On December 4, 2009, we repurchased a portion of the 10-year senior notes with a cumulative principal amount of HK$11.6 million (US$1.5 million) from the open market. We paid a total consideration, ~~(including~~including accrued interest, ~~and/or broker’s commissions)~~ of ~~US$35.4 million. All of~~approximately HK$12.1 million (US$1.6 million). On February 1, 2010, we redeemed the

~~repurchased~~ then outstanding 10-year senior notes ~~have been cancelled. As of January 9, 2009, an aggregate~~with a cumulative principal amount of ~~US$89.4~~HK$153.9 million (US$19.9 million) at the redemption price equal to 104.375% of the ~~8.75%~~principal amount. We paid a total consideration, including accrued interest, of approximately HK$167.6 million (US$21.6 million). As of August 31, 2010, all the 10-year senior notes ~~remained outstanding.~~has been repurchased and redeemed.

Banking facilities

As of August 31, ~~2008, the 8.75% senior notes were stated at the amortized cost of US$87.5 million (HK$683.2 million), compared with the amortized costs of US$122.1 million (HK$952.6 million) as of August 31, 2007.~~

In August 2008, we launched a tender offer and consent solicitation for the cash purchase of up to US$125 million aggregate principal amount of the 8.75% senior notes. The terms and conditions of the offer were set forth in an Offer to Purchase and Consent Solicitation Statement dated July 9, 2008, as further extended. We terminated the tender offer and consent solicitation due to adverse market conditions and therefore we determined that the financing condition of the offer would not be satisfied. All notes previously tendered were promptly returned to holders.

~~Banking Facilities~~

~~As of August 31, 2008,~~2010, we had available banking facilities and revolving loan facility of HK$~~87.3~~353.8 million, of which HK$~~29.9~~133.3 million was utilized.

Capital ~~Expenditures~~expenditures

In order to further develop our Next Generation Network and ~~maintain~~continue to increase the scale of operations of our ~~international telecommunications~~FTNS business, we plan to make a total capital ~~expenditures of~~expenditure ranging from approximately HK$~~650~~320 million to HK$350 million in fiscal ~~2009 and 2010~~2011 to increase the coverage of our Next Generation ~~Network from 1.5 million residential home passes~~Network. Our plan is to reach 2.0 million residential ~~home passes~~homes pass and ~~from 697~~1,800 commercial buildings by the end of 2011. We expect to ~~1,800 commercial buildings. The~~finance our budgeted capital expenditures ~~will be financed by the company’s internally generated~~with cash ~~flow in the respective year.~~

~~Contractual Obligations and Commercial Commitments~~

~~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, 2008.~~

Payments due by period
More than 1 More than
year but 3 years but More
Within within 3 within 5 than
Contractual Obligations Total 1 year years years 5 years
(Thousands of HK$)
Capital expenditure items 143,888 143,888 — — —
Operating leases 87,000 55,095 21,077 3,444 7,384
8.75% senior notes 1,093,852 61,012 122,024 122,024 788,792
Obligation under finance leases 414 142 272
Other current liabilities 248,805 248,805 — — —
Programming fees (IP-TV) 6,862 6,583 219 60 —

Total 1,580,821 515,525 143,592 125,528 796,176

~~During December 2007, January 2008 and February 2008, we repurchased an aggregate principal amount of US$35.6 million of the 8.75% senior notes~~ from the market for a total consideration (including accrued interest) of US$35.4 million. All of the repurchased notes have been cancelled. As a result of the market repurchase of the notes, our contractual obligations in respect of the short-term and long-term debt (principal and interest payments) decreased by US$55.9 million (equivalent to HK$436.4 million).

We expect 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% senior notes, our various operating activities, bank loans and capital ~~leases commitments and amounts due under banking facilities.~~market transactions.

C. Research and development, patents and licenses

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, ~~2008,~~2010, our research and development team consisted of approximately ~~27 staff members~~21 Talents 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 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$9.6 million, HK$~~5.0~~10.8 million and HK$~~9.6~~11.2 million for fiscal ~~2006, 2007~~2008, 2009 and ~~2008,~~2010, respectively.

D. Trend information

~~During fiscal 2008,~~Revenue from our ~~international telecommunications~~IDD business ~~experienced a 12.9% decline in volume~~decreased by 11.6% to ~~574.0 million minutes, which marginally offset by higher revenue per minute, resulted in a 10.0% reduction in our international telecommunications revenues to~~ HK$~~292.0~~218.6 million in fiscal ~~2008.~~2010 from HK$247.4 million in fiscal 2009. The principal reason for this ~~decline~~decrease 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 toPartly as a ~~wider addressable market.~~result,

3642

~~Our revenues~~the traffic volume of our IDD business decreased by 4.7% to 464.0 million minutes in fiscal 2010 from 487.0 million minutes in fiscal 2009. We expect competition will continue to increase in the future, creating further pressure on our volume and pricing.

Revenue from our ~~fixed telecommunications network services~~FTNS business grew by ~~23.8%~~10.2% to HK$~~1,011~~1,356.1 million in fiscal ~~2008~~2010 from HK$1,230.9 million in fiscal 2009. The principal reason for this increase was due to ~~a rise in~~ the broadband subscription ~~base~~growth of ~~our fixed telecommunications network services of 17.3%~~34.5% to ~~801,000 subscriptions~~526,000 subscription accounts as of August 31, ~~2008. The~~2010 from 391,000 subscription accounts as of August 31, 2009, which was partially offset by a decrease in the average revenue ~~growth was also attributable~~per subscription account as part of our marketing campaigns to increase our ~~success in raising revenue yields per subscription.~~subscriber base.

The ~~current~~ global ~~credit crunch~~economic downturn has ~~already~~ had a dampening effect on consumer sentiment and business activities across the ~~globe. Although we~~globe in late 2008 and 2009 and the global economy continues to experience continued market volatility. The impact of the downturn on our operations has been limited because our FTNS and IDD services are ~~not immune from this macro economic downturn, our underlying broadband and voice services~~regarded as “semi-utility” ~~services should be relatively less impacted.~~services. However, if the global economic ~~conditions remain difficult~~downturn continues to experience significant volatility, demand for ~~a long period of time, we~~our services may ~~also face demand-size pressures.~~be adversely affected.

~~E Off-Balance Sheet Arrangements~~E. Off-balance sheet arrangements

Other than as described ~~above~~ in ~~“ Critical Accounting Policies” and~~ note 28 to our Consolidated Financial Statements, we have not entered into any off-balance-sheet arrangements with any entities or individuals.

F. Tabular disclosure of contractual ~~obligations.~~obligations

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, 2010.

Payments due by period
More than More than
1 year 3 years
Within but within but within More than
Total 1 year 3 years 5 years 5 years
Contractual obligations HK$ HK$ HK$ HK$ HK$
(Amounts in thousands)
Capital expenditure items 132,340 132,340 — — —
Operating leases 124,287 88,821 26,555 4,062 4,849
Long-term bank loan 133,996 1,829 4,326 127,841 —
Obligation under finance leases 677 242 243 192 —
Other current liabilities 264,904 264,904 — — —
Programming fees (IP-TV) 73,626 25,539 41,506 6,581 —

Total 729,830 513,675 72,630 138,676 4,849


Note:		The other current liabilities of HK$264.9 million is comprised of bank overdrafts — unsecured of HK$10.5 million, accounts payable of HK$35.1 million, other payables and accrued charges of HK$195.9 million, deposits received of HK$21.8 million and tax payable of HK$1.5 million. A detailed explanation of the nature of accounts payable and other payables and accrued charges is contained in Note 17 to the Company’s audited consolidated financial statements included in this Form 20-F.

G. Safe Harbor

See ~~“Liquidity and Capital Resources” above in Item 5.~~“Note regarding forward-looking statements”.

~~ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES~~Item 6 Directors, senior management and employees

A. Directors and ~~Senior Management~~senior management

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

The following table sets forth certain information concerning our directors and senior management as of ~~January 9, 2009.~~December 14, 2010.


										Date
				Date						joined
				Joined City						City
Name	Age		Position	Telecom			Age		Position	Telecom
Board of Directors :
Board of directors:

WONG Wai Kay, Ricky		47	Chairman		1992			49	Executive Director and Chairman		1992

CHEUNG Chi Kin, Paul		51	Vice Chairman		1992			53	Executive Director and Vice Chairman		1992

YEUNG Chu Kwong, William		48	Executive Director and Chief Executive Officer		2005			50	Executive Director and Chief Executive Officer		2005

LAI Ni Quiaque		39	Executive Director, Chief Financial Officer, Company Secretary and Head of Staff Engagement		2004			41	Executive Director, Chief Financial Officer, Company Secretary and Head of Talent Engagement		2004

CHENG Mo Chi, Moses		58	Non-Executive Director		1997			60	Non-Executive Director		1997

LEE Hon Ying, John		62	Independent Non-Executive Director		1997			64	Independent Non-Executive Director		1997

CHAN Kin Man		49	Independent Non-Executive Director		1997			51	Independent Non-Executive Director		1997

PEH Jefferson Tun Lu		49	Independent Non-Executive Director		2004			51	Independent Non-Executive Director		2004

Senior Management :
Senior management:
						��
CHONG Kin Chun, John		46	Director of Corporate Division		1996			48	Managing Director of Corporate Division		1996

LO Sui Lun		44	Director of Infrastructure Development		1998			46	Director of Corporate Affairs Department		1998

TAM Ming Chit		42	Chief Technology Officer		2008			45	Chief Technology Officer		2008

TO Wai Bing		46	Managing Director of Business Development		2007			48	Managing Director of Business Development		2007

telecommunications and computer industries. He had worked in several companies engaged in application software development and computer consultancy prior to co-founding of the ~~Company.~~Group. Mr. Cheung graduated with a Diploma of Advanced Programming and System Concepts Design from Herzing Institute, Canada. Mr. Cheung is a first cousin of Mr. Wong Wai Kay, Ricky, the Chairman of the ~~Company.~~Group.

Mr. YEUNG Chu Kwong, William, aged ~~48,~~50, was appointed as anour Executive Director and ~~the~~ Chief Executive Officer ~~of the Company on~~in November 1, 2008 with the responsibilities for developing corporate strategies and overseeing the operations of the ~~entire~~ Group. Before that, Mr. Yeung joined the ~~Company~~Group as Chief Operating Officer in October 2005. He was ~~responsible to head our~~in charge of the Customer Engagement Department ~~to oversee~~overseeing customer relationship ~~management. Mr. Yeung~~management and was also ~~responsible to head~~in charge of the Network Development Department. Mr. Yeung has more than 1719 years’ experience in the telecommunications industry. Prior to joining the ~~Company,~~Group, Mr. Yeung was the Director of Customers Division in Smartone-Vodafone, the General Manager of Personal Communications and Retail Division in Tricom Telecom Limited, and was also an Inspector of Police in the Hong Kong Police Force. HeMr. Yeung holds a Bachelor of Arts Degree from Hong Kong Baptist University, a Master of Business Administration Degree from University of Strathclyde, UKU.K. and a Master of Science Degree in Electronic Commerce and Internet Computing

from The University of Hong Kong. Mr. Yeung is also a graduate of the Senior Executive Program of the Columbia University Graduate School of Business in New York.

Mr. LAI Ni Quiaque, aged ~~39,~~41, is ~~an Executive Director of the Company. He is also~~ the Chief Financial Officer, Company Secretary and Head of ~~Staff Engagement.~~Talent Engagement of the Group. Mr. Lai joined the ~~Company~~Group in May 2004. Mr. Lai has extensive experience in telecommunications industry, research and finance, being highly rated in this field. Prior to joining the ~~Company,~~Group, Mr. Lai was a Director and Head of Asia Telecom Research for Credit Suisse heand was involved in global fund raisings for a wide range of Asian Telecom ~~carries~~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 an Executive Master of Business Administration Degree from Kellogg-HKUST. Mr. Lai is a Fellow member of HKICPA and CPA Australia and is a Member of the Hong Kong Institute of Directors. Mr. Lai has also been ~~currently in~~appointed as a member of the ~~Kellogg-HKUST EMBA program~~Remuneration Committee of the Company.

Non-executive director

Dr. CHENG Mo Chi, Moses, aged 60, was appointed as the Independent Non-executive Director of the Group since 17 June 1997 and has been re-designated as a Non-executive Director of the Group with ~~expected completion in 2009. Mr. Lai~~effect from 30 September 2004. Dr. Cheng has also been appointed as a member of the ~~remuneration committee~~Remuneration Committee of the Company.

~~Non-Executive Director~~

~~Mr. CHENG Mo Chi, Moses, aged 58, was re-designated as~~ Dr. Cheng is a ~~Non-executive Director of the Company with effect from September 30, 2004. He was appointed as an Independent Non-executive Director of the Company since June 17, 1997. Mr. Cheng is~~practicing solicitor and the senior partner of Messrs. P.C. Woo & Co., and was a ~~firm~~member of ~~solicitors and notaries in~~the Legislative Council of Hong ~~Kong,~~Kong. He is the Founder Chairman of the Hong Kong Institute of Directors of which he is now the Honorary President and Chairman Emeritus and the ~~Chairman~~President of ~~the Betting and Lotteries Commission. Mr. Cheng was appointed as a member~~International Association of ~~the Legislative Council of Hong Kong from 1991 to 1995. Mr.~~Practicing Lawyers. Dr. Cheng currently ~~also serves as an independent non-executive director of another six companies listed on the Main Board, namely~~holds directorships in K. Wah International Holdings Limited, China COSCO Holdings Company Limited, China Mobile Limited, China Resources Enterprise, Limited, Towngas China Company Limited, Hong Kong Exchanges and Clearing Limited, Kader Holdings Company Limited, Liu Chong Hing Investment Limited, ~~and Towngas China Company Limited. He currently also serves as a non-executive director of another four companies listed on the Main Board, namely Galaxy Entertainment Group Limited,~~ Guangdong Investment ~~Limited, Kader Holdings Company~~ Limited and Tian An China Investments Company Limited, all being public listed companies in Hong Kong. Dr. Cheng is also an independent non-executive director of ARA Asset Management Limited, a company whose shares are listed on Singapore Exchange Limited. ~~Mr. Cheng has also been appointed~~His other directorships in public listed companies in the last 3 years include Beijing Capital International Airport Company Limited, Galaxy Entertainment Group Limited and Shui On Construction and Materials Limited, all being public listed companies in Hong Kong, and ARA Asset Management (Fortune) Limited (formerly known as ARA Asset Management (Singapore) Limited), as the manager of Fortune Real Estate Investment Trust, a ~~member of the remuneration committee of the Company.~~real estate investment trust listed on Singapore Exchange Limited.

Independent ~~Non-Executive Directors~~non-executive directors

Mr. LEE Hon Ying, John, aged ~~62,~~64, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the Regional Director, Asia Pacific of Northrop ~~Grumman — Canada,~~Grumman-Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable &and Wireless ~~HKT~~(HK) Limited and Hong Kong Telecom. He is a chartered engineer and a member of ~~each of~~ Institution of Engineering and 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 System from ~~the~~The Hong Kong Polytechnic University in 1992. In addition, he is the ~~Territory Vice-president~~Vice President and Board Member of the Society of St. Vincent de Paul, ~~of Asia and Oceania,~~Council General, which is an international charity ~~body.~~body with its head office in Paris, France. He is the Commission member of Catholic Diocese of Hong Kong Diocesan for Hospital Pastoral Care. Mr. Lee has been a Director of the Group since June 1997. Mr. Lee is also the chairman of the ~~audit committee~~Audit Committee and ~~remuneration committee~~Remuneration Committee of the Company.

Dr. CHAN Kin Man, aged ~~49,~~51, is Director of Centre for Civil Society Studies and Associate Professor of the Department of Sociology of The Chinese University of 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 the Group since June 1997. Dr. Chan has also been appointed as a member of the ~~audit committee~~Audit Committee and ~~remuneration committee~~Remuneration Committee of the Company.

Mr. PEH Jefferson Tun Lu, ~~,aged 49,~~aged 51, 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 Degree in Business from the University of Technology, Sydney. He has over 2628 years of experience in finance, accounting and management from listed and private companies in Hong Kong and Australia. Mr. Peh has been a Director of the ~~Company~~Group since September 2004. Mr. Peh has also been appointed as a member of the ~~audit committee~~Audit Committee and ~~remuneration committee~~Remuneration Committee of the Company.

3845

Senior ~~Management~~management

Mr. CHONG Kin Chun, John, aged ~~46,~~48, is the Managing Director of Corporate Division of the ~~Corporate Division.~~Group. He is responsible for sales, ~~marketing~~servicing and ~~servicing~~network expansion development of the ~~Company’s~~Group’s international telecommunications services and fixed telecommunications network services for business and corporate customers. Mr. Chong joined the ~~Company~~Group in February 1996 and holds a Bachelor’s Degree in Arts from 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 ~~44,~~46, is the Director of ~~HKBN, the wholly-owned subsidiary~~Corporate Affairs Department of the ~~Company.~~Group. He is ~~now in charge~~primarily responsible for regulatory and carrier relations matters of the ~~Company’s Infrastructure Development and~~Group. In addition, Mr. Lo is also responsible for ~~engaging in development~~overseeing the legal and company secretarial functions of the ~~Company’s infrastructure network.~~Group. Before ~~that,~~taking up his current position, Mr. Lo was in charge of regulatory, carrier business, international business, network operation and network development for ~~HKBN.~~Hong Kong Broadband Network Limited, the wholly-owned subsidiary of the Company. Mr. Lo joined the ~~Company~~Group in September 1998. Prior to that, Mr. Lo worked for PCCW (formerly known as “Hong Kong Telecom”) for 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 from the University of Strathclyde, U.K.

Dr. TAM Ming Chit, aged ~~42,~~45, is the Chief Technology Officer of the ~~Company.~~Group. He is responsible for the ~~Company’s~~Group’s network, information system development and operations including broadband networking, IPTV, wireless applications, as well as VoIP networks. Prior to joining the ~~Company~~Group in 2008, Dr. Tam held various technical positions in various institutions in Hong Kong and overseas, such as Alcatel-Lucent, Citibank and SRA. He has over 1517 years of operational experience in the information technologies and ~~telecom industry.~~telecommunications industries. Dr. ~~TAM~~Tam holds a Bachelor of Science (Hons) in Computer Science from Imperial College, University of London, U.K. and a Doctor of Philosophy in Computer Science from the University of Pennsylvania, U.S.A.

Ms. TO Wai Bing, aged ~~46,~~48, is the Managing Director of Business Development of the ~~Company.~~Group. Ms. To is also in charge of International Business Department, ~~and~~ Carrier Business Department and Pay TV Department. She is responsible for the control of cost of services, ~~carrier relations,~~ sales of carrier business, development of Pay TV business, explore and secure business partnerships to strengthen the ~~Company’s~~Group’s business operations and development. Before joining the ~~Company,~~Group, Ms. To had worked in the Hong Kong Telecom Group for 16 years after graduating from ~~the~~The Hong Kong Polytechnic University with a Diploma in Electronic Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the ~~Company~~Group in May 2007 after her previous service with the ~~Company~~Group from September 1998 to July 2006.

B. Compensation

Directors’ and ~~Senior Management’s Compensation~~senior management’s compensation

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. We also granted share options to various directors and members of our senior management. For more information regarding share options granted to directors and members of our senior management, see Item 56 “Directors, ~~Senior Management~~senior management and ~~Employees~~employees — Share ~~Ownership”~~ownership” below in this annual report.

Our senior management and ~~employees~~Talents are entitled to receive an annual discretionary bonus based on their individual performance and our financial performance during the year in question.

The aggregate amount of salaries or other compensation, housing allowances, other allowances and benefits in kind paid by us to our directors and senior management was approximately HK$~~32.5~~46.1 million for fiscal ~~2008,~~2010, compared with HK$~~31.2~~38.8 million for fiscal ~~2007.~~2009. The aggregate amount of contribution that we made to the retirement or similar benefits for our directors and members of our senior management was HK$~~2.4~~2.7 million for fiscal ~~2008,~~2010, compared with HK$~~2.2~~2.6 million for fiscal ~~2007~~.2009.

Except as discussed herein, no other payments have been paid or are payable, in respect of fiscal ~~2008,~~2010, by us or any of our subsidiaries to our directors and senior management.

C. Board ~~Practices~~practices

Service ~~Contracts~~contracts

We entered into service agreements with our four executive directors, Messrs. Wong Wai Kay, Ricky, Cheung Chi Kin, Paul, Yeung Chu Kwong, William and Lai Ni Quiaque, respectively. These service agreements include non-competition clauses under which our executive directors agree not to compete with us in accordance with the terms and conditions 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.

“Controlled ~~Company” Exemption~~company” exemption

We are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c) and IM-5615-5. More than 50.0% of the ~~NASDAQ Marketplace Rules, since~~voting power for the election of our directors is held by a group consisting of Top Group International Limited, ~~holds more than 50%~~Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul. Mr. Wong and Mr. Cheung are the controlling shareholders of ~~our~~Top Group International Limited and have entered into a voting ~~power. As such, we are exempt~~agreement pursuant to which they agreed to vote all of the shares held by Top Group International Limited, representing 44.22% of the voting power, all of the shares held by Mr. Wong individually, representing 0.93% of the voting power, and all of the shares held by Mr. Cheung individually, representing 5.50% of the voting power, collectively as a group.

We have elected to rely on the exemption from the ~~NASDAQ Marketplace Rules~~majority independent board requirement, ~~that a majority~~as set forth in Nasdaq Listing Rule 5615(b), except for the requirements of ~~a company’s board~~subsection (b)(2), which pertain to executive sessions of ~~directors must qualify as~~ independent directors, ~~within the meaning of the NASDAQ Marketplace Rules. We are also exempt~~and from the ~~NASDAQ Marketplace~~requirement for independent director oversight of executive officer compensation and director nominations, as set forth in Nasdaq Listing Rules ~~requirement regarding nominations~~5605(d) and ~~remuneration.~~5605(e).

In accordance with the laws of Hong Kong, ~~law,~~ the nomination and remuneration of our directors are governed by our Articles of Association. Pursuant to our Articles of Association, our directors are appointed by our shareholders in the annual general meeting, and

~~the~~ our directors’ fees ~~which~~ are recommended by the remuneration committee of our board of directors ~~are~~and determined by our shareholders at the annual general meeting.

Audit ~~Committee~~committee

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 Jefferson Tun Lu. 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 an 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 Company and the audits of the Company’s financial statements on behalf of our board of directors.~~following:

Additionally, the audit committee is directly responsible for the appointment, compensation, retention and oversight of the work of City 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.
• overseeing the accounting and financial reporting process of the Company and the audits of the Company’s consolidated financial statements on behalf of the board of directors; and
• the appointment, compensation, retention and oversight of the work of the Company’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 the Company.

As provided in our audit committee charter, the audit committee is required to meet in person or telephonically at least twice a year and has 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 four times in fiscal ~~2008.~~2010. The major works performed by the committee from September 1, ~~2007~~2009 to August 31, ~~2008~~2010 included the following:

	•		Reviewed ~~the Company’s~~our consolidated financial statements for the year ended August 31, ~~2007~~2009 and for the six months ended February ~~29, 2008;~~28, 2010;

	•		Reviewed the internal audit progress, ~~especially on the~~including procedures required for compliance ofwith the Sarbanes-Oxley Act;

	•		Reviewed the external auditor’s report on the review of ~~the Company’s~~our interim financial report for the six months ended February ~~29, 2008~~28, 2010 and ~~the Company’s~~our audited consolidated financial statements for the year ended August 31, ~~2007;~~2009; and

	•		Pre-approved the audit and non-audit services provided by KPMG, ~~the Company’s~~our external auditor.

Remuneration ~~Committee~~committee

Our board of directors established a remuneration committee in August 2001 to ~~manage our offer of~~oversee the Company’s remuneration packages tofor executive directors. Among others, each of our executive ~~director~~directors 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. The remuneration committee is comprised of six members with three independent non-executive directors, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, the non-executive director, ~~Mr.~~Dr. Cheng Mo Chi, Moses, Mr. Lai Ni Quiaque, the executive director, Chief Financial Officer, Company Secretary and Head of ~~Staff~~Talent Engagement and our director of Talent Management. The remuneration committee’s objectives are set out as follows:-

Establish formal, fair and transparent procedures for developing policy and structure of all remuneration of directors and senior management.


	~~Employees~~Talents
Information technology and engineering		~~380~~363
Sales and marketing, customer service and “Special Duty Unit”, or SDU		~~2,367~~2,499
General administration and others		~~304~~370


Total		~~3,051~~3,232

The following ~~chart~~table sets forth the number of our ~~employees~~Talents by geographical region as of August 31, ~~2008.~~2010.


	~~Employees~~Talents
Hong Kong		~~1,538~~1,593
Guangzhou		~~1,489~~1,620
Canada		2419


Total		~~3,051~~3,232

As of August 31, ~~2006, 2007~~2008, 2009 and ~~2008,~~2010, we had ~~2,565, 2,692~~3,051, 3,173 and ~~3,051 employees~~3,232 Talents, respectively. The increase in our total number of ~~employees~~Talents in fiscal ~~2008~~2010 was mainly due to the expansion in our ~~fixed telecommunications network~~FTNS business.

E. Share ~~Ownership~~ownership

Share ~~Ownership~~ownership

The following ~~chart~~table sets forth the share ownership of our directors and senior management as of ~~January 9, 2009.~~December 14, 2010.

Number of Shares Percentage of Outstanding
Beneficially Shares Beneficially Share
Title of Class Identity of Person or Group Owned ⁽⁴⁾ Owned (%) ⁽³⁾ Options
Ordinary Shares Wong Wai Kay, Ricky 332,688,495 ⁽¹⁾ 51.13 14,093,586
Ordinary Shares Cheung Chi Kin, Paul 366,983,820 ⁽²⁾ 56.40 14,093,586
Ordinary Shares Yeung Chu Kwong, William 3,000,000 Less than 1.0 7,029,678
Ordinary Shares Lai Ni Quiaque 10,142,446 1.56 8,029,678
Ordinary Shares Chong Kin Chun, John 2,271,364 Less than 1.0 2,516,710
Ordinary Shares Lo Sui Lun 700,000 Less than 1.0 2,013,369
Ordinary Shares Tam Ming Chit Nil Nil 1,002,718
Ordinary Shares To Wai Bing Nil Nil 1,002,718

Number Percentage
of shares of shares
beneficially beneficially Outstanding
Identity of person owned owned(note 3) share
Title of class or Group (note 4) % options
Ordinary shares Wong Wai Kay, Ricky 389,245,732
(note 1) 50.66 8,091,604

Ordinary shares Cheung Chi Kin, Paul 389,245,732
(note 1) 50.66 8,091,604

Ordinary shares Yeung Chu Kwong, William 2,306,000 Less than 1.0 11,542,956

Ordinary shares Lai Ni Quiaque 12,415,405 1.62 6,044,791

Number Percentage
of shares of shares
beneficially beneficially Outstanding
Identity of person owned owned(note 3) share
Title of class or Group (note 4) % options
Ordinary shares Chong Kin Chun, John 2,777,089 Less than 1.0 2,022,900

Ordinary shares Lo Sui Lun Nil Nil 1,638,901

Ordinary shares Tam Ming Chit Nil Nil 629,665

Ordinary shares To Wai Bing Nil Nil 302,239


⁽¹⁾Notes:		~~Of the 332,688,495 shares, 331,637,811~~

(1)		The 389,245,732 shares are ~~beneficially owned through Mr. Wong’s 42.12 % interest in~~held by a group consisting of Top Group International Limited, orMr. Wong Wai Kay, Ricky, our chairman, and Mr. Cheung Chi Kin, Paul, our vice chairman, Top Group International Limited is a special purpose vehicle incorporated in the British Virgin Islands. Its board of directors consists of Mr. Wong and ~~1,050,684~~Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares ~~are owned directly~~held by Top Group International Limited, the 7,145,289 shares held by Mr. ~~Wong.~~Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. The registered address of Top Group International Limited is Akara Bldg, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and Mr. Yau Ming Yan, Andrew, and their equity interests are 42.12%, 27.06%, 21.00% and 9.82%, respectively.

⁽²⁾		Of the 366,983,820 shares, 331,637,811 shares are beneficially owned through Mr. Cheung’s 27.06% interest in Top Group,11,021,389 shares are owned directly by Mr. Cheung and 24,324,620 shares are beneficially owned through Mr. Cheung’s 50% interest in Worship Limited.

⁽³⁾		Percentage ownership is based on ~~650,722,409~~768,410,429 shares issued as of ~~January 9, 2009.~~December 14, 2010.

⁽⁴⁾(3)		Beneficial ownership is determined in accordance with the rules of the SEC.

4149

Item 6 Directors, senior management and employees (continued)

Share ownership (continued)

The following table sets forth the share options for the details of the share options held by the ~~Directors~~directors and ~~Senior Management~~senior management of the Company as at ~~January 9, 2009:-~~December 14, 2010:


									Adjustment		Adjustment
						Options			to number		to number		Options		Options
				Balance		granted			of options		of options		exercised		cancelled/		Balance
				as at		during			for 2007		for 2008		during		lapsed		as at							Options			Options		Options
	Date of	Exercise		January		the		Exercise	Final		Interim		the		during		January					Balance		granted			exercised		cancelled/		Balance
	grant	price		21 ,2008		period		period	Dividend		Dividend		period		the period		9, 2009			Exercise		as at		during			during		lapsed		as at
		HK$							(note 1)		(note 2)								Date of	price		December 15,		the		Exercise	the		during		December 14,
Directors																			grant	HK$		2009		period		period	period		the period		2010

Mr. Wong Wai Kay, Ricky	January 5, 2005	1.5297 (note 5)			8,000,000		—	January 5, 2005 to October 20, 2014		31,646		21,832		—		—		8,053,478	January 5, 2005		1.5224		8,091,604		—	January 5, 2005 to October 20, 2014		—		—		8,091,604

	May 22, 2006	0.6554 (note 6)			6,000,000		—	May 22, 2007 to May 21, 2016		23,734		16,374		—		—		6,040,108

Mr. Cheung Chi Kin,Paul	January 5, 2005	1.5297 (note 5)			8,000,000		—	January 5, 2005 to October 20, 2014		31,646		21,832		—		—		8,053,478

	May 22, 2006	0.6554 (note 6)			6,000,000		—	May 22, 2007 to May 21, 2016		23,734		16,374		—		—		6,040,108

Mr. Cheung Chi Kin, Paul																			January 5, 2005		1.5224		8,091,604		—	January 5, 2005 to October 20, 2014		—		—		8,091,604
Mr. Yeung Chu Kwong, William	May 22, 2006	0.6554 (note 6)			2,000,000		—	May 22, 2007 to May 21, 2016		7,911		5,458		1,000,000		—		1,013,369	May 22, 2006		0.6523		1,018,165		—	May 22, 2007 to May 21, 2016		1,018,000		—		165

	February 6, 2008	1.7652 (note 7)			—		6,000,000	(note 3)		—		16,309		—		—		6,016,309	February 6, 2008		1.7568		6,044,791		—	(note 1)		502,000		—		5,542,791
																			February 5, 2010		4.2400		—		6,000,000	(note 2)		—		—		6,000,000
Mr. Lai Ni Quiaque	June 3, 2004		1.4700		6,000,000		—	May 1, 2005 to June 2,2014		—		—		6,000,000		—	—		May 22, 2006		0.6523		2,022,899		—	May 22, 2007 to May 21, 2016		2,022,899		—		—
																			February 11, 2008		1.8660		6,044,791		—	(note 3)		—		—		6,044,791
	May 22, 2006	0.6554 (note 6)			3,000,000		—	May 22, 2007 to May 21, 2016		7,911		5,458		1,000,000		—		2,013,369

	February 11, 2008	1.8749 (note 8)			—		6,000,000	(note 4)		—		16,309		—		—		6,016,309

Senior Management

Senior management
Mr. Chong Kin Chun, John	October 21, 2004	1.5297 (note 5)			2,000,000		—	January 1, 2005 to October 20, 2014		7,911		5,457		—		—		2,013,368	October 21, 2004		1.5224		2,022,900		—	January 1, 2005 to October 20, 2014		—		—		2,022,900

	May 22, 2006	0.6554 (note 6)			1,000,000		—	May 22, 2007 to May 21, 2016		3,956		1,364		501,978		—		503,342

Mr. Lo Sui Lun	October 21, 2004	1.5297 (note 5)			500,000		—	January 1, 2005 to October 20, 2014		1,978		1,365		—		—		503,343	October 21, 2004		1.5224		505,726		—	January 1, 2005 to October 20, 2014		—		—		505,726
																			May 22, 2006		0.6523		1,517,175		—	May 22, 2007 to May 21, 2016		384,000		—		1,133,175
	May 22, 2006	0.6554 (note 6)			1,500,000		—	May 22, 2007 to May 21, 2016		5,934		4,092		—		—		1,510,026

Dr. Tam Ming Chit	May 2, 2008	1.7951 (note 9)			—		1,000,000	(note 3)		—		2,718		—		—		1,002,718	May 2, 2008		1.7866		1,007,465		—	(note 4)		377,800		—		629,665

Ms. To Wai Bing	February 15, 2008	1.7652 (note 7)			—		4,000,000	(note 3)		—		10,873		—		3,008,155		1,002,718	February 15, 2008		1.7568		1,007,465		—	(note 4)		705,226		—		302,239


~~(5)~~(4)		~~Exercise price~~The exercise of the ~~share options was adjusted from HK$1.54~~Options is subject to ~~HK$1.5339 per ordinary share as a result of our payment of~~certain conditions that must be advanced by the ~~2007 Final Dividend (see Note 1). Exercise price of the share options was adjusted from HK$1.5339 to HK$1.5297 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).~~

~~(6)~~		Exercise price of the share options was adjusted from HK$0.66 to HK$0.6573 per ordinary share as a result of our payment of the 2007 Final Dividend (see Note 1). Exercise price of the share options was adjusted from HK$0.6573 to HK$0.6554 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).

~~(7)~~		~~Exercise price of the share options was adjusted from HK$1.77 to HK$1.7652 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).~~

~~(8)~~		~~Exercise price of the share options was adjusted from HK$1.88 to HK$1.8749 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).~~

~~(9)~~		~~Exercise price of the share options was adjusted from HK$1.80 to HK$1.7951 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).~~grantees. The Options shall be exercised not later than December 23, 2012.

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

Share Option Schemes

We adopted a second share option scheme, which we refer to as the 2002 Share Option Scheme, on December 23, 2002 and terminated the share option scheme adopted ~~and in effect since~~on July 12, 1997, which we refer to as the 1997 Share Option Scheme. Upon termination of the 1997 Share Option Scheme, no further options can be granted under the 1997 Share Option Scheme. Options granted under the 1997 Share Option Scheme that are not exercised ~~have~~ lapsed automatically on July 12, 2007. Under the terms of the 2002 Share Option Scheme, our board of directors 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 any ~~employee~~Talent or executive or officer of the Company or any of its subsidiaries (including executive, non-executive and independent non-executive directors of each of the abovementioned companies) and any suppliers or professional advisers who will or have provided services to the Company and/or its subsidiaries 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 Share Option 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~~on December 23, ~~2002 for the 2002 Scheme.~~2002. 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 24, 2007 up to a maximum limit equal to 10% of our total number of issued shares as at December 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 Share Option 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 Share Option Scheme and any of our other share option scheme(s) (including exercised, cancelled and outstanding options) to each eligible participant in any ~~12 month~~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 Share Option 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 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 Share Option 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~~our board of directors 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 Share Option 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:

	~~(i)~~(a)		the expiry date relevant to that option;

	~~(ii)~~(b)		one month following the date a grantee ceases to be an eligible participant for any reason other than death or termination of his relationship with us (or the relevant subsidiary, as the case may be) on any of the grounds specified in ~~(vii)~~(g) below;


	~~(iii)~~(c)		12 months, or such longer period as the Board may determine, following the death of a grantee whose relationship with us (or the relevant subsidiary, as the case may be) would not have been terminated on any of the grounds specified in ~~(vii)~~(g) below;

	~~(iv)~~(d)		21 days following the date an effective resolution is passed for our voluntary winding-up;

	~~(v)~~(e)		subject to ~~(iv)~~(d) above, the date of commencement of such winding-up;

	~~(vi)~~(f)		the date on which any compromise or arrangement between us and our members or creditors in connection with a scheme for our reconstruction or our amalgamation with any other company or companies becomes effective;

	~~(vii)~~(g)		the date on which the grantee ceases to be an eligible participant by reason of the termination of his or her relationship with us or the relevant subsidiary on any one or more of the grounds of serious misconduct or breach, bankruptcy, insolvency, composition with his or her creditors or conviction of any criminal offence involving his or her integrity or honesty or, in the case of a ~~grantee-employee~~grantee-Talent and if so determined by the Board, on any other common law, statutory or contractual ground on which an employer would be entitled to terminate such grantee’s employment;

	~~(viii)~~(h)		14 days following the date a general offer (which has been made to shareholders by way of take-over offer, share repurchase offer or scheme of arrangement or otherwise in like manner) becomes, or is declared unconstitutional; and

	~~(ix)~~(i)		the date on which we cancel the options by reason that the grantee in any way sells, transfers, charges, mortgages, encumbers or creates any interest in favor of any third party over or in relation to any of his or her options or attempt to do so.

As of ~~January 9, 2009,~~December 14, 2010, a total number of ~~90,962,393~~96,247,857 options were granted, ~~26,677,268~~41,108,732 options were exercised, ~~13,418,911~~13,902,353 options were lapsed and ~~60,581,214~~41,236,772 options remain outstanding and unexercised. ~~A total~~Total number of ~~47,413,203~~44,619,336 options are available for issue as of ~~January 9, 2009.~~December 14, 2010.

~~ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS~~Item 7 Major shareholders and related party transaction

A. Major ~~Shareholders~~shareholders

The following table sets forth certain information regarding ownership of our ordinary shares as of ~~January 9, 2009~~December 14, 2010 by all persons who are known to us to own beneficially 5% or more of our ordinary shares.

Percentages of Shares
Beneficially Beneficially Owned
Title of Class Identity of Person or Group Owned⁽⁵⁾ (%)⁽¹⁾
Ordinary Shares Wong Wai Kay, Ricky 332,688,495 ⁽²⁾ 51.13
Ordinary Shares Cheung Chi Kin, Paul 366,983,820 ⁽³⁾ 56.40
Ordinary Shares Top Group International Limited 331,637,811 50.96
Ordinary Shares Leung Ka Pak 331,637,811 ⁽⁴⁾ 50.96
Ordinary Shares Yau Ming Yan, Andrew 331,637,811 ⁽⁴⁾ 50.96
Percentages
of shares
Beneficially
beneficially owned
Identity of person owned (note 1)
Title of class or Group (note 4) %
Ordinary shares Wong Wai Kay, Ricky 389,245,732 (note 2) 50.66
Ordinary shares Cheung Chi Kin, Paul 389,245,732 (note 2) 50.66
Ordinary shares Top Group International Limited 389,245,732 (note 2) 50.66
Ordinary shares Leung Ka Pak 339,814,284 (note 3) 44.22
Ordinary shares Yau Ming Yan, Andrew 339,814,284 (note 3) 44.22


Notes:

(1)		Percentage ownership is based on ~~650,722,409~~768,410,429 shares issued as of ~~January 9, 2009.~~December 14, 2010.

(2)		~~Of the 332,688,495 shares, 331,637,811~~The 389,245,732 shares are ~~beneficially owned through Mr. Wong’s 42.12 % interest in~~held by a group consisting of Top Group International Limited, or Top Group, and 1,050,684 shares are owned directly by him. Top Group International Limited, Top Group 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 vice chairman 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.

4452


~~(3)~~		~~Of the 366,983,820 shares, 331,637,811 shares are beneficially owned through~~Kay, Ricky, our chairman, and Mr. ~~Cheung’s 27.06% interest in~~Cheung Chi Kin, Paul, our vice chairman, Top Group ~~11,021,389~~is a special purpose vehicle incorporated in the British Virgin Islands, and its board of directors consists of Mr. Wong and Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares ~~are owned directly~~held by Top Group International Limited, the 7,145,289 shares held by Mr. Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. The registered address of Top Group International Limited is Akara Bldg, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and ~~24,324,620 shares~~Mr. Yau Ming Yan, Andrew (See Note (3) below), and their equity interests are ~~beneficially owned through Mr. Cheung’s 50% interest in Worship Limited.~~42.12%, 27.06%, 21.00% and 9.82%, respectively.

~~(4)~~(3)		~~The 331,637,811 shares are beneficially owned through Mr. Leung’s 21.00% and Mr. Yau’s 9.82% interest in Top Group.~~ Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew may be deemed to have beneficial ownership in the 339,814,284 shares held by Top Group International Limited. Each of them expressly disclaims any beneficial ownership in such shares except to the extent of their respective pecuniary interest therein. Mr. Leung was a director and the president of all of ~~the Company’s~~our subsidiaries in Canada (other than City Telecom (Canada) ~~Inc.. He~~Inc.) and resigned as a director and president in October 2005. After Mr. ~~Leung resigned,~~Leung’s resignation, Mr. Yau ~~Ming Yan, Andrew was~~became a director and the president of all of our subsidiaries in Canada (other than City Telecom (Canada) Inc.). He resigned as a director and president in July 2006.

~~(5)~~(4)		Beneficial ownership is determined in accordance with the rules of the SEC.

As of ~~January 9, 2009,~~December 14, 2010, there were 1014 registered holders of ~~1,838,117~~11,046,440 American Depositary Shares in the United States, consisting of ~~5.65%~~28.75% of our outstanding shares.

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



		~~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.~~

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.

B. Related ~~Party Transactions~~party transactions

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.

Contracts with ~~Our Directors~~our directors and ~~Senior Management~~senior management

All of our directors and senior management have employment service agreements with us. Certain of our directors and senior management receive housing allowances, pensions, bonuses and commissions. 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”~~senior management” above inof this annual report for details concerning these arrangements.

C. Interests of ~~Experts~~experts and ~~Counsel~~counsel

Not applicable.

~~ITEM 8. FINANCIAL INFORMATION~~Item 8 Financial information

A. Consolidated ~~Statements~~statements and ~~Other Financial Information~~other financial information

Financial ~~Statements~~statements

See pages F-1 — ~~F-92~~F-64 following Item 19.

Legal and ~~Regulatory Proceedings~~regulatory proceedings

We are currently involved in ~~one~~a material legal or regulatory ~~proceedings~~proceeding relating to Fixed Mobile Interconnection Charges, or FMIC, as described below:

~~FMIC.~~In ~~March 2004,~~February 2008, our wholly owned subsidiary, HKBN, requested the Telecommunications Authority to make a determination, pursuant to section 36A of the Telecommunications Ordinance (Cap 106), in respect of the level of fixed-mobile interconnection charge, or FMIC, to be paid by four mobile operators including China ~~Resources Peoples~~Mobile Hong Kong Company Limited, CSL Limited, Hutchison Telephone Company Limited, ~~or Peoples,~~and SmarTone Mobile Communications Limited on the rate of FMIC and the ~~effective date of such charges.~~interest thereon. This FMIC is paid by a mobile network operator to the 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 Peoples and HKBN that mobile operators (in this case Peoples) should pay interconnection charges to fixed network operators (in this case HKBN) in accordance with the existing charging principles stated clearly in the relevant Statements issued by the Telecommunications Authority, particular in Statements No. 5 & 7. In August 2004, the Telecommunications Authority agreed to commence a determination regarding the level and effective date of FMIC payable to HKBN by 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. Finally, in June 2007, the Telecommunications Authority made a determination on the level of FMIC payable by Peoples to HKBN for the period from April 2002 to August 2004.

In February 2008, HKBN requested the Telecommunications Authority to make a new determination with four mobile network operators including Peoples, CSL Limited, Hutchison Telephone Company Limited, SmarTone Mobile Communications Limited & SmarTone 3G Limited (collectively “MNOs”) on the rate of FMIC and the interest thereon. In September 2008, the Telecommunications Authority indicated that it accepted HKBN’s request for ~~determination. The proceedings are still in progress.~~determination and on November 25, 2009 issued its Preliminary Analysis for the parties’ comments. In May 2010, the Telecommunications Authority issued its decision on the 2008 Determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute. Based on the

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 Hong Kong 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.

For fiscal ~~2008,~~2010, an interim dividend ~~with a scrip alternative~~ was declared at ~~HK4~~HK6.5 cents per ordinary share. ~~On July 23, 2008, the Company issued and allotted 8,838,938 New Shares to Shareholders who elected to receive the 2008 Interim Dividend in New Shares and the~~The total ~~amounts~~amount of HK$~~11,370,899.92~~49,724,827.45 was paid as cash ~~dividend.~~dividend on July 25, 2010.

A final dividend of ~~HK2~~HK13.5 cents per ordinary share ~~together with a scrip alternative~~ was proposed on November ~~17, 2008,~~9, 2010, which ~~was subsequently~~will be approved by shareholders in the annual general meeting to be held on December ~~19, 2008.~~21, 2010. The ~~2008 Final Dividend~~2010 final dividend will be paid on or about ~~February 25, 2009.~~January 5, 2011.

B. Significant ~~Changes~~changes

None.

~~ITEM 9. THE OFFER AND LISTING~~Item 9 The offer and listing

A. Offer and ~~Listing Details~~listing details

Our ordinary shares ~~were~~have been listed under the number “1137” on The Stock Exchange of Hong Kong Limited, or the HKSE, onsince August 4, 1997. Our American depositary shares, each representing 20 ordinary shares, ~~were~~have been listed under the symbol “CTEL” on ~~the~~ Nasdaq onsince November 3, 1999. Our ~~8.75%~~10-year senior notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the Singapore Exchange Securities Trading Limited, or SGX-ST, on January 24, 2005. The ~~8.75%~~10-year senior 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.

On December 4, 2009, we repurchased a portion of the 10-year senior notes with a cumulative principal amount of HK$11.6 million (US$1.5 million) from the open market. We paid a total consideration, including accrued interest, of approximately HK$12.1 million (US$1.6 million). On February 1, 2010, we redeemed the then outstanding 10-year senior notes with a cumulative principal amount of HK$153.9 million (US$19.9 million) at the redemption price equal to 104.375% of the principal amount. We paid a total consideration, including accrued interest, of approximately HK$167.6 million (US$21.6 million). As of August 31, 2010, all the 10-year senior notes has been repurchased and redeemed.

In April 2010, we offered an aggregate of 4,025,000 ADSs representing 80,500,000 ordinary shares at the offer price of US$13.00 per ADS. The proceeds we received, after deduction of underwriters’ discount but before deduction of offering expenses, amounted to US$49.8 million.

The price of our ordinary shares on the HKSE as of its close of trading on ~~January 9, 2009~~December 14, 2010 was HK$~~1.04~~5.78 per share. The table below shows the high and low closing prices of the shares on the HKSE since listing.

Price
High Low
(In HK$)
2003 3.375 1.320
2004 2.975 1.310
2005 1.530 0.550
2006 0.830 0.570
2007 3.670 0.830

2006
January to March 0.770 0.570
April to June 0.820 0.600
July to September 0.710 0.630
October to December 0.830 0.600

2007
January to March 1.560 0.830
April to June 2.200 1.250
July to September 2.120 1.780
October to December 3.670 1.930

2008
January to March 2.170 1.620
April to June 2.090 1.670
July to September 1.950 1.340
October to December 1.360 0.750
2008
August 1.910 1.650
September 1.750 1.340
October 1.360 0.750
November 1.110 0.840
December 1.160 0.950

Price
High Low
(In HK$)
Annual Date

2005 1.530 0.550
2006 0.830 0.570
2007 3.670 0.830
2008 2.170 0.750
2009 3.950 2.500

4654

General

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

Directors’ ~~Interests~~interests

A director shall not vote on, or be counted in the quorum in relation to, any resolution of 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:

	(a)		the giving of any security or indemnity to him or his associates(s) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries;

	(b)		the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he or his associate(s) has himself/themselves assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;

	(c)		any proposal concerning an offer of shares, debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase in which offer he or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting thereof;

	(d)		any proposal concerning any other company in which he or his associate(s) is/are interested only, whether directly or indirectly, as an officer, executive or shareholder or in which he or his associate(s) is/are beneficially interested in shares of that ~~company,~~Company, provided that he and any of his associate(s) are not in aggregate beneficially interested in five per cent or more of the issued shares of any class of such ~~company~~Company (or of any third company through which his interest or that of his associate(s) is derived) or of the voting rights;

	(e)		any proposal or arrangement concerning the benefit of ~~employees~~Talents of the Company or its subsidiaries, including the adoption, modification or operation of any ~~employees’~~Talents’ share scheme or any share incentive or share option scheme under which the director or his associate(s) may benefit;

	(f)		any proposal or arrangement concerning the benefit of ~~employees~~Talents of the Company or its subsidiaries, including the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme which relates both to directors (or his associate(s)) and ~~employees~~Talents of the Company or any of its subsidiaries and does not provide in respect of any director or his associate(s), as such any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates; and

	(g)		any contract or arrangement in which he or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company.

Additionally, there is no shareholding qualification required to be a director.

Dividends

In accordance with our Articles, we may by ordinary resolution (being a resolution passed by a majority of those votes cast by the shareholders who attend and vote at a general meeting) 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 according to the amounts paid up on the shares in respect of which dividend is paid under pro rata basis during the period covered by the dividend.

In accordance with our Articles, our board of directors may pay such interim dividends that appear to be justified by our financial position and may also pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, whenever our financial position, in the opinion of our board of directors, justifies the payment.

In respect of any dividend proposed to be paid or declared, 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:

Liquidation

Subject to the requirements under the Hong Kong Companies Ordinance, in the event of a members’ winding up, the liquidator may, with the sanction of a special resolution of the Company:

	(a)		divide among the shareholders the whole or any part of the assets of the Company and set such value as the liquidator deems fair upon any property to be divided and determine how the division shall be carried out between the shareholders; or

	(b)		vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator shall think fit,

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

Annual and ~~Extraordinary General Meeting~~extraordinary general meeting of ~~Shareholders~~shareholders

The Hong Kong Companies Ordinance requires our board of directors to hold an annual general meeting of our shareholders once every 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~~shareholder held for the passing of a special resolution (being a resolution passed by not less than 75% of those votes cast by the shareholders who attend and vote at a general meeting) 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 not less than 2120 clear business days’ notice if it is agreed by all shareholders entitled to attend and vote at the meeting. The business of the annual general meeting will include:

	(a)		the declaration and sanctioning of dividends;

	(b)		the consideration and adoption of the accounts, balance sheet and reports of the directors and auditors and other documents required to be attached to the financial statements;

	(c)		the appointment of directors in place of those retiring (by rotation or otherwise);

	(d)		the appointment of auditors; and

	(e)		the fixing of, or the determining of the method of fixing, the remuneration of the directors and of the auditors.

Our board of directors may convene an extraordinary general meeting (which is any general meeting of the shareholders other than the 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 a general meeting. All extraordinary general meetings (other than those convened for the passing of a special resolution referred to above) should be convened by at not less than 1410 clear business days’ notice in writing. Extraordinary general meetings may be called by less than 1410 clear business 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. Whilst no business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, 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.

The Nasdaq marketplace rules also provide that a foreign private issuer such as ourselves may be granted an exemption from such requirements if it follows the practice of its home country.

Restrictions on ~~Ownership~~ownership of ~~Shares~~shares

There are no restrictions, either pursuant to our Articles or 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.

Unless any shares have special terms as to voting, on a show of hands every shareholder who is present in person at a general meeting, shall have one vote irrespective of the number of shares he holds and on a poll every shareholder 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.

Pursuant to Rule 13.39(4) of the Listing Rules which became effective on January 1, 2009, any votes of the Shareholders at a general meeting must be taken by poll.

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 of the Company.

Issue of ~~Shares~~shares

Under the ~~Hong Kong~~ 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. Any such approval given in a general meeting shall continue in force until the earlier of: (1) the conclusion of the next 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. Where such shareholders’ approval is given, subject to the Listing Rules and any conditions attached to such approval, our unissued shares may 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.

Subject to the provisions of 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 instrument 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 executed 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 prevents 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.

Our board of directors may also decline to register any transfer unless:

	(a)		the instrument of transfer, duly stamped, is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the seller to make the transfer;

	(b)		such fee, not more than the maximum amount allowed by ~~the~~The Stock Exchange of Hong Kong Limited from time to time, as our board of directors may from time to time require is paid to us in respect of it;

	(c)		the instrument of transfer is in respect of only one class of share;

	(d)		in the case of a transfer of a share jointly held by two or more holders, the number of joint holders to whom the share is to be transferred does not exceed four; and

	(e)		the shares concerned are free of any lien in favor of us.

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 buyer notice of the refusal.

Shareholders

In accordance with 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 by giving notice by advertisement in a newspaper circulating generally in Hong Kong, but the register shall ~~not~~ be closed in any year for more than 30 days (excluding Sundays and public holidays) unless extended by ordinary resolution.

5059

C. Material ~~Contracts~~contracts

Other than such contracts as are described in our disclosure in Item 7 “Major ~~Shareholders~~shareholders and ~~Related Party Transactions~~related party transactions — ~~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.

D. Exchange ~~Controls~~controls

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.

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, or export or import capital.

E. Taxation

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.

Hong Kong Taxation

Tax on dividends

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

Profits tax

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

	(i)		such profits are derived from or arise in Hong Kong;

	(ii)		such profits are attributable to a trade, profession or business carried on in Hong Kong; and

	(iii)		the property in question, such as shares and American depositary shares, are not capital assets of that trade, profession or business.

Taxable profits are subject to Hong Kong profits tax on corporations at the rate of 16.5% and on unincorporated businesses or individuals at the rate of 15%.

Profits from the 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. Such profits are taxable if the shares are not held as capital assets and the profits are attributable to a business, trade or profession carried out in Hong Kong.

Profits from the 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 effected in Hong Kong. In the event that those persons dealing or trading in the American depositary shares are doing so as part of their trade, profession or business that is being carried out in Hong Kong and the shares are not capital assets of such trade of business, then such profits will be subject to Hong Kong profits tax. In any case of an exchange of any American depositary receipts evidencing American depositary shares for certificates representing shares, any profit gained 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.

Stamp duty

The sale and purchase of shares is subject to Hong Kong stamp duty which is payable by both the seller and ~~purchaser.~~purchase. Both seller and purchaser must pay stamp duty at a rate of 0.1% each, totaling 0.2%, of the total value of the greater of (i) the consideration paid or (ii) 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. If, in the case of a sale or purchase of shares effected 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 stamp the instrument of transfer and pay stamp duty on the instrument in an amount equal to the unpaid duty. If the instrument is not stamped before or within the time for stamping such instrument, 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.

be payable. 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.

Tax treaty

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

United States Taxation

Certain U.S. Federal Income Tax Considerations

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, regulated investment companies, real estate investment trusts, 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 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.

If a partnership or other entity or arrangement treated as a partnership for United States federal income tax purposes holds our shares or American depositary receipts, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. Holder that is a partner in a partnership holding our shares or American depositary receipts is urged to consult its own tax advisor concerning the United States federal income tax consequences of purchasing, owning and disposing of our shares or American depositary receipts by the partnership.

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 the fair market value of its assets are ~~passive~~“passive” for any taxable year. Based on our current and projected income, assets, and activities, we presently believe that we are not a PFIC in the current taxable year and do not anticipate becoming a PFIC in the future. The PFIC status of a foreign corporation for any taxable year, however, will not be determinable until after the end of that taxable year. 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.

U.S. Holders

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~~Dividends.. Any cash distributions paid by us out of our earnings and profits, as determined under United States federal income tax ~~principles,~~rules, 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 “spot” 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 ~~before~~prior to January 1, 2011 is subject to United States federal income tax rates lower than those applicable to ordinary income. The maximum 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% tax brackets. Based upon our existing and anticipated future operations and current assets, and the anticipation that our American depository shares are and will be listed on the NASDAQ, 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 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 U.S. 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 U.S. foreign tax credit for ~~federal~~foreign 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 U.S. foreign tax credits by the holders of American depositary shares. ~~Accordingly, the~~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~~.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. Certain non-corporate U.S. Holders (including individuals) may qualify for preferential rates of United States federal income taxation in respect of long-term capital gains for taxable years beginning before January 1, 2011. 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.

Medicare Tax

For taxable years beginning after December 31, 2012, a United States person that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the United States person’s “net investment income” for the relevant taxable year and (2) the excess of the United States person’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between US$125,000 and US$250,000, depending on the individual’s circumstances). A holder’s net investment income will generally include its gross dividend income and its net gains from the disposition of ADSs, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a United States person that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the ADSs.

PFIC ~~Considerations~~considerations

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.

Non-U.S. Holders

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~~U.S. — source capital gains exceed ~~non-U.S.-source~~non-U.S. — source capital losses.

Backup ~~Withholding~~withholding and ~~Information Reporting~~information reporting

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~~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~~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,~~payer, under penalties of perjury, on IRS Form W-8BEN.

Information with Respect to Foreign Financial Assets

Under recently enacted legislation, individuals that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 in taxable years beginning after March 18, 2010 will generally be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of ADSs.

THE ABOVE DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY, DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO OUR SHARES OR AMERICAN DEPOSITARY RECEIPTS AND IS NOT INTENDED TO BE CONSTRUED AS TAX ADVICE. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES OR AMERICAN DEPOSITARY RECEIPTS, INCLUDING THE APPLICABILITY AND EFFECT OF ANY UNITED STATES FEDERAL, STATE, LOCAL OR NON-UNITED STATES TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAW.

F. Dividends and paying agents

Not applicable.

G. Statement by experts

Not applicable.

H. Documents on ~~Display~~display

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.

The Company’s registration statements may be inspected and copied, including exhibits and schedules, and the reports and other information as filed with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934 at the public reference facilities maintained by the Securities and Exchange Commission at ~~Judiciary Plaza, 450 Fifth~~100F Street ~~Room 1024, N.W.,~~NE, Washington, D.C. 20549. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at ~~450 Fifth~~100F Street ~~N.W.,~~NE, Washington, D.C. 20549, at prescribed rates. Information may be obtained regarding the Washington D.C. Public Reference Room by calling the Securities

and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the Internet at its website at http://~~www.sec.gov.~~www.sec.gov/.

I. Subsidiary ~~Information~~information

Not applicable.

~~ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Item 11 Quantitative and qualitative disclosures about market risk

~~Our functional currency is the Hong Kong dollar, the currency in which the majority of our revenue~~Quantitative 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~~qualitative disclosures about market risk ~~from changes~~have been included in ~~currency exchange rates.~~

~~Foreign Currency Risk~~

~~The functional currency of~~note 24 to our ~~operations, and our~~consolidated financial statement reporting currency, is the Hong Kong dollar. Our monetary assets and liabilities are primarily denominated in Hong Kong dollars. However, we have certain financial assets and liabilities which are primarily denominated in U.S. dollars.

~~As of August 31, 2008, we had the following significant foreign currencies denominated account balances:~~


	~~As of August 31, 2008~~
	~~(Thousands of HK$)~~
~~Cash and bank balances:~~
~~Denominated in U.S. dollars~~		~~174,397~~
~~Denominated in Canadian dollars~~		~~1,311~~
~~Accounts payable and other payables:~~
~~Denominated in U.S. dollars~~		~~46,001~~

Further, our principal long-term debt obligations consist of the aggregate principal amount of US$125.0 million of 8.75% senior notes issued in January 2005, which are denominated in U.S. dollars. As of January 9, 2009, an aggregate principal amount of US$89.4 million of the notes were outstanding.

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=US$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% senior notes.statements.

~~ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES~~Item 12 Description of securities other than equity securities

Not applicable.

PART II

~~ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES~~Item 13 Defaults, dividend arrearages and delinquencies

None.

~~ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS~~Item 14 Material modifications to the rights of security holders and use of proceeds

None.

~~ITEM 15. CONTROLS AND PROCEDURES~~

~~Disclosure~~Item 15 Controls and ~~Procedures~~procedures

~~Within the 90-day period prior to the filing of this report, an~~A. Disclosure controls and procedures

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~~As of the end of the period covered by this annual report, based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and

procedures are ~~effective.~~effective to provide reasonable assurance that information the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. 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.

B. Management’s ~~Report~~report on ~~Internal Control Over Financial Reporting~~

As the Company is listed on Nasdaq, it is bound by the provision of the U.S. Sarbanes - Oxley Act 2002 (the “SOX Act”), which is a legislation seeking to enhance the transparency and accountability of the companies in the areas of corporate governance and financial reporting. Under Section 404(a) of the SOX Act, management of the Group is required to include its assessment of the effectiveness of the Group’s internal control ~~procedures~~ over financial reporting in the annual report on Form 20-F to be filed with the U.S. Securities and Exchange Commission beginning in the fiscal year ended 31 August 2008, while no external auditors’ report on such assessment is required in this fiscal year according to Section 404(b) of the SOX Act.

~~Management of the Company~~Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) ~~and 15d-15(f)~~ under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purpose in accordance with generally accepted accounting ~~principles (“GAAP”).~~principles. Under Section 404(a) of the Sarbanes-Oxley Act of 2002, our management is required to include its assessment of the effectiveness of our internal control procedures over financial reporting in our annual report on Form 20-F beginning in the fiscal year ended August 31, 2009. With the assistance of ~~the~~ Company’s internal audit department and external consultants, our management ~~of the Group organizes~~organized and ~~conducts~~conducted a comprehensive assessment of internal control over financial reporting based on the control criteria in COSO framework. ~~As of~~Based on this assessment, the ~~date of this annual report, management is not aware of any instances of material weaknesses on its~~Directors believe that, as at August 31, 2010, the internal control over financial ~~reporting.~~reporting is effective.

C. Changes in ~~Internal Control Over Financial Reporting~~internal control over financial reporting

The Company has performed an annual review of the effectiveness of its disclosure controls and procedures in 2008. Based on the review, management considers that the Group’s disclosure controls and procedures are effective in providing reasonable assurance that all material information is promptly recorded, processed and disclosed.

During fiscal 2010, the period covered by this annual report, no change has occurred in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

D. Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of City Telecom (H.K.) Limited:

We have audited City Telecom (H.K.) Limited and its subsidiaries’ internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”). The management of City Telecom (H.K.) Limited and its subsidiaries is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the City Telecom (H.K.) Limited and its subsidiaries’ internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, City Telecom (H.K.) Limited and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of City Telecom (H.K.) Limited and its subsidiaries as of August 31, 2009 and 2010, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements for each of the years in the three-year period ended August 31, 2010, and our report dated November 9, 2010 expressed an unqualified opinion on those consolidated financial statements.



	/s/ KPMG

	Hong Kong, China
	November 9, 2010

~~ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT~~Item 16A Audit committee financial expert

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 Jefferson Tun ~~Lu Jefferson.~~Lu. 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.

~~ITEM 16B. CODE OF ETHICS~~Item 16B Code of ethics

All of our ~~employees,~~Talents, officers and directors are bound by our code of business ethics and conduct. We adopted our code of ethics 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 http://www.ctigroup.com.hk and free of charge upon request made to our 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~~Talent of our ~~company~~Company or any of our subsidiaries.

			directors out of a total of eight directors. The standards for establishing independence under the HKSE Listing Rules also differ from those set forth in the Nasdaq Stock Market Rules.

	•		Nasdaq Stock Market Rule 5605(b)(2) requires a Nasdaq listed company to schedule regular executive sessions in which non-management directors meet without management participation. In this regard we have elected to adopt the practices of our home country. Under the applicable Hong Kong law, our board of directors is required to meet regularly and at least four times a year and we are required to ensure that there is active participation by a majority of the directors and afford all directors an opportunity to include matters on the agenda. In addition, when a board meeting considers a matter in which a substantial shareholder or a director has a conflict of interest, the independent directors with no material interest in such matter must be present. In compliance with our home country practices, we do not organize exclusive meetings for our independent non-executive directors on a regular basis.

	•		Nasdaq Stock Market Rule 5605(d)(1) requires a Nasdaq listed company to have the compensation of the chief executive officer and the other executive officers be determined, or recommended to the Board for determination, by a compensation committee comprised solely of independent directors. In this regard we have elected to adopt the practices of our home country. Under the HKSE Listing Rules, listed companies are required to establish a remuneration committee with a majority of independent non-executive directors. The compensation of our executive officers is determined by a remuneration committee consisting of six directors, three of whom are independent non-executive directors.

	•		Nasdaq Stock Market Rule 5605(e)(1) requires a Nasdaq listed company to have a nominations committee consisting solely of independent directors to select or recommend for selection director nominees. In this regard we have elected to adopt the practices of our home country and do not have a nominations committee consisting solely of independent directors. Under the HKSE Listing Rules, listed companies are recommended but not required to establish a nomination committee consisting of the independent non-executive directors with majority vote. Our director nominees are selected by or recommended for selection by the Board. Our current practice is not inconsistent with our home country practices.

Other than the above, we have followed and intend to continue to follow the applicable Nasdaq corporate governance standards.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
City Telecom (H.K.) Limited

We have audited the accompanying consolidated ~~balance sheets~~statements of financial position of City Telecom (H.K.) Limited and its subsidiaries ~~(collectively referred to as the~~(the “Group”) as of August 31, ~~2007~~2009 and ~~2008,~~2010, and the related consolidated income statements, consolidated statements of ~~operations,~~comprehensive income, consolidated statements of changes in ~~shareholders’~~ equity and the consolidated cash ~~flows~~flow statements for the each of the years in the three-year period ended August 31, ~~2008.~~2010. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our 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, ~~2007~~2009 and ~~2008,~~2010, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, ~~2008,~~2010, in conformity with ~~Hong Kong Financial Reporting Standards.~~

~~Hong Kong~~the International Financial Reporting Standards ~~vary~~as issued by the International Accounting Standards Board.

We have also audited, in ~~certain significant respects from accounting principles generally accepted~~accordance with the standards of the Public Company Accounting Oversight Board (United States), the City Telecom (H.K.) Limited and its subsidiaries’ internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the ~~United States~~Committee of ~~America. Information relating to~~Sponsoring Organizations of the ~~nature~~Treadway Commission (COSO), and ~~effect~~our report dated November 9, 2010 expressed an unqualified opinion on the effectiveness of ~~such differences is presented in note 31 to~~ the ~~consolidated~~internal control over financial ~~statements.~~reporting of City Telecom (H.K.) Limited and its subsidiaries.

/s/ KPMG

Hong Kong, China

November ~~17, 2008~~9, 2010

F-1

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

City Telecom (H.K.) Limited and its subsidiaries

Consolidated income statements ~~of operations~~
(Expressed in Hong Kong dollars)

~~(Amounts in thousands except per share data)~~

Year ended August 31,
Note 2006 2007 2008
HK$ HK$ HK$
Revenue
1,134,876 1,141,270 1,302,981

Operating expenses

Network costs, net 4 (300,593 ) (214,591 ) (178,367 )
Salaries and related costs (256,721 ) (221,102 ) (247,460 )
Sales and marketing expenses (204,952 ) (203,673 ) (307,743 )
General and administrative expenses (440,672 ) (402,760 ) (396,598 )
Provision for doubtful accounts (17,450 ) (6,569 ) (14,293 )

(Loss)/income from operations
(85,512 ) 92,575 158,520

Interest income 20,378 22,671 15,596
Interest expense 5 (88,637 ) (87,504 ) (75,137 )
Other income, net 5 4,465 3,149 9,393

(Loss)/income before taxation
5 (149,306 ) 30,891 108,372
Income tax credit/(expense) 6 7,244 (2,026 ) 16,818

Net (loss)/income
(142,062 ) 28,865 125,190

(Loss)/Earnings per share

Basic 7 (23.1) cents 4.7 cents 19.7 cents

Diluted 7 (23.1) cents 4.6 cents 19.0 cents

For the year ended August 31,
2010 2009 2008
Note HK$’000 HK$’000 HK $’000
Revenue
2 1,574,687 1,478,239 1,302,981
Network costs 3 (195,292 ) (175,129 ) (178,367 )
Other operating expenses 4 (a) (1,105,604 ) (1,037,964 ) (966,094 )
Other income, net 4 (b) 7,989 41,540 24,989
Finance costs 4 (c) (22,235 ) (55,127 ) (75,137 )

Profit before taxation
4 259,545 251,559 108,372
Income tax (expense)/benefit 5 (42,679 ) (38,730 ) 16,818

Profit attributable to shareholders
216,866 212,829 125,190

Basic earnings per share
7 HK30.7 cents HK32.4 cents HK19.7 cents

Diluted earnings per share
7 HK29.4 cents HK31.8 cents HK19.0 cents

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

F-2

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

~~City Telecom (H.K.) Limited and its subsidiaries~~
~~Consolidated balance sheets (continued)~~

~~(Amounts in thousands except number of shares and per share amounts)~~

August 31,
Note 2007 2008
HK$ HK$
Commitments and contingencies
15

Shareholders’ equity

Ordinary shares, par value HK$0.10 per share
— 2,000,000,000 shares authorized
— 616,503,404 and 650,621,823 shares issued and outstanding at August 31, 2007 and 2008, respectively 19 61,650 65,062
Share premium 622,433 670,717
Retained profits 200,519 275,025
Capital reserve 18,109 19,013
Translation reserve 1,171 2,790

Total shareholders’ equity
903,882 1,032,607

Total liabilities and shareholders’ equity
2,161,133 2,080,416

As at August 31,
2010 2009
Note HK$’000 HK$’000
Non-current assets

Goodwill 11 1,066 1,066
Fixed assets 12 1,431,813 1,302,380
Long term receivable and prepayment 5,174 6,091
Deferred expenditure 14 6,626 12,786

1,444,679 1,322,323

Current assets

Accounts receivable 15 99,729 120,192
Other receivables, deposits and prepayments 15 89,490 69,765
Deferred expenditure 14 28,986 36,674
Pledged bank deposits 27 — 15,038
Cash at bank and in hand 16 588,665 226,416

806,870 468,085

Current liabilities

Bank overdrafts — unsecured 10,490 5,364
Accounts payable 17 35,128 37,555
Other payables and accrued charges 17 195,931 206,487
Deposits received 21,822 16,385
Deferred service revenue 18 106,798 115,070
Tax payable 1,533 1,993
Current portion — obligations under finance leases 22 212 202

371,914 383,056

Net current assets
434,956 85,029

Total assets less current liabilities
1,879,635 1,407,352

Non-current liabilities

Deferred tax liabilities 20 55,843 15,709
Derivative financial instrument 21 11,293 —
Long-term debt and other liabilities 22 123,960 163,116

191,096 178,825

Net assets
1,688,539 1,228,527

Capital and reserves

Share capital 19 76,500 66,418
Reserves 19 1,612,039 1,162,109

Total equity attributable to equity shareholders of the Company
1,688,539 1,228,527

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

F-4

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

City Telecom (H.K.) Limited and its subsidiaries

Consolidated statements of changes in ~~shareholders’~~ equity
(Expressed in Hong Kong dollars)

~~(Amounts~~

Capital
Share Share Capital redemption Retained Exchange
capital premium reserve reserve profits reserve Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At September 1, 2009 66,418 681,208 23,232 7 454,802 2,860 1,228,527
Total comprehensive income for the year — — — — 216,866 (97 ) 216,769
Dividend paid in respect of previous year — — — — (108,735 ) — (108,735 )
Dividend paid in respect of current year — — — — (49,725 ) — (49,725 )
Shares issued upon exercise of share option 2,032 22,227 (7,515 ) — — — 16,744
Equity settled share-based transactions — — 5,347 — — — 5,347
Shares issued upon placement 8,050 371,562 — — — — 379,612

At August 31, 2010 76,500 1,074,997 21,064 7 513,208 2,763 1,688,539

Capital
Share Share Capital redemption Retained Exchange
capital premium reserve reserve profits reserve Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At September 1, 2008 65,062 670,717 19,013 — 275,025 2,790 1,032,607
Total comprehensive income for the year — — — — 212,829 70 212,899
Dividend paid in respect of previous year — — — — (3,108 ) — (3,108 )
Shares issued in respect of scrip dividend of previous year 1,221 8,685 — — (9,906 ) — —
Dividend paid in respect of current year — — — — (19,904 ) — (19,904 )
Shares issued upon exercise of share option 142 1,806 (549 ) — — — 1,399
Equity settled share-based transactions — — 4,768 — — — 4,768
Repurchase and cancellation of ordinary shares (7 ) — — 7 (134 ) — (134 )

At August 31, 2009 66,418 681,208 23,232 7 454,802 2,860 1,228,527

F-5

City Telecom (H.K.) Limited and its subsidiaries
Consolidated statements of changes in ~~thousands)~~equity (continued)
(Expressed in Hong Kong dollars)

Year ended August 31,
Note 2006 2007 2008
HK$ HK$ HK$
Total equity as of beginning of the year

As previously reported 1,020,454 891,654 903,882
Adjustment arising from adoption of HKAS 39 6,609 — —

After opening balance adjustment 1,027,063 891,654 903,882

Net (loss)/gain recognized directly in equity:

Foreign currency translation adjustment (183 ) 514 1,619

(Loss)/profit attributable to shareholders
(142,062 ) 28,865 125,190

Dividend paid in respect of the current year — (24,635 ) (11,371 )

Dividend paid in respect of the previous year — — (5,915 )

Movements in equity arising from capital transactions:

Equity settled share-based compensation 6,823 5,727 4,204
Shares issued upon exercise of options 13 1,757 14,998

Total equity as of the end of the year
19 891,654 903,882 1,032,607

Share Share Capital Retained Exchange
capital premium reserve profits reserve Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At September 1, 2007 61,650 622,433 18,109 200,519 1,171 903,882
Total comprehensive income for the year — — — 125,190 1,619 126,809
Dividend paid in respect of previous year — — — (5,915 ) — (5,915 )
Shares issued in respect of scrip dividend of previous year 1,123 18,044 — (19,167 ) — —
Dividend paid in respect of current year — — — (11,371 ) — (11,371 )
Shares issued in respect of scrip dividend of current year 884 13,347 — (14,231 ) — —
Shares issued upon exercise of share option 1,405 16,893 (3,300 ) — — 14,998
Equity settled share-based transactions — — 4,204 — — 4,204

At August 31, 2008 65,062 670,717 19,013 275,025 2,790 1,032,607

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

~~F-5~~F-6

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~Hong Kong dollars)

~~City Telecom (H.K.) Limited and its subsidiaries~~
~~Consolidated statements of cash flows (continued)~~

~~(Amounts in thousands)~~

Year ended August 31,
Note 2006 2007 2008
HK$ HK$ HK$
Cash flows from operating activities (continued)

Adjustments to reconcile (continued)

Changes in operating assets and liabilities:

— (Increase)/decrease in trade receivables, other receivables, deposits and prepayments (9,413 ) (11,742 ) 6,914
— Decrease in inventories 1,101 379 477
— Increase in deferred expenditure (5,287 ) (24,502 ) (68,505 )
— (Decrease)/increase in trade payables, other payables, accrued charges, and deposits received (23,652 ) 8,573 (12,567 )
— (Decrease)/increase in deferred service income (3,001 ) 30,459 46,247

Net cash inflow generated from operations
186,737 386,232 382,813

Interest element of finance leases (54 ) (62 ) (34 )
Hong Kong profits tax (paid)/recovered (961 ) (263 ) 42
Overseas tax paid (1,571 ) (1,908 ) (4,292 )

Net cash inflow from operating activities
184,151 383,999 378,529

Investing activities

Decrease/(Increase) in pledged bank deposits 3,425 (198 ) —
(Increase)/decrease in term bank deposits (144,646 ) 237,496 —
Purchases of fixed assets (382,214 ) (149,300 ) (189,903 )
Interest received 20,378 22,671 15,596
Proceeds from disposal of fixed assets 5,676 3,384 7,057
Net proceeds from maturity of derivative financial instruments 4,639 — 3,900
Net proceeds from redemption of long-term bank deposit — — 15,600

Net cash (outflow)/inflow from investing activities
(492,742 ) 114,053 (147,750 )

Net cash (outflow)/inflow before financing activities
(308,591 ) 498,052 230,779

~~F-7~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

~~City Telecom (H.K.) Limited and its subsidiaries~~
~~Consolidated statements of cash flows (continued)~~

~~(Amounts in thousands)~~

Year ended August 31,
Note 2006 2007 2008
HK$ HK$ HK$
Financing activities

Proceeds from exercise of share options 13 1,757 14,998
Interest paid on senior notes (85,235 ) (85,313 ) (70,010 )
Repayment of capital element of finance leases (1,210 ) (1,321 ) (834 )
Repurchase of senior notes — — (269,399 )
Dividends paid — (24,627 ) (17,271 )

Net cash outflow from financing activities
(86,432 ) (109,504 ) (342,516 )

(Decrease)/increase in cash and bank balances
(395,023 ) 388,548 (111,737 )

Cash and bank balances at the beginning of year
539,591 144,917 532,894

Effect of foreign exchange rate changes on cash and bank balances
349 (571 ) 453

Cash and bank balances at the end of year
19 144,917 532,894 421,610

For the year ended August 31,
2010 2009 2008
Note HK$’000 HK$’000 HK$’000
Net cash inflow from operations
23 (a) 488,353 538,503 386,241

Hong Kong profits tax (paid)/recovered (456 ) — 42
Overseas tax paid (2,557 ) (1,732 ) (4,292 )

Net cash inflow from operating activities
485,340 536,771 381,991

Investing activities

Increase in pledged bank deposits 15,038 72,281 —
Interest received 11,372 4,869 15,596
Purchases of fixed assets (349,076 ) (289,938 ) (189,903 )
Net proceeds from maturity of investment in debt securities — 28,051 3,900
Net proceeds from redemption of long-term bank deposit — — 15,600
Proceeds from disposal of fixed assets 16,412 8,249 7,057

Net cash outflow from investing activities
(306,254 ) (176,488 ) (147,750 )

Net cash inflow before financing activities
179,086 360,283 234,241

Financing activities

Repurchase of ordinary shares — (134 ) —
Proceeds from issuance of new shares 23 (b) 396,356 1,399 14,998
Proceeds from new bank loans 163,375 — —
Repayment of bank loan (40,000 ) — —
Repayment of capital element of finance leases 23 (b) (217 ) (138 ) (834 )
Interest element of finance leases (42 ) (27 ) (34 )
Interest paid on bank loans (1,166 ) — —
Other borrowing costs paid (3,260 ) (885 ) (3,428 )
Interest paid on 10-year senior notes (5,881 ) (52,670 ) (70,010 )
Repurchase of 10-year senior notes 23 (b) (172,423 ) (485,829 ) (269,399 )
Dividends paid (158,435 ) (23,008 ) (17,271 )

Net cash inflow/(outflow) from financing activities
178,307 (561,292 ) (345,978 )

Increase/(decrease) in cash and cash equivalent
357,393 (201,009 ) (111,737 )

Cash and cash equivalent at September 1
221,052 421,610 532,894

Effect of foreign exchange rate changes
(270 ) 451 453

Cash and cash equivalent at August 31
578,175 221,052 421,610

Analysis of the balances of cash and cash equivalents

Cash at bank and in hand 588,665 226,416 434,604
Bank overdrafts — unsecured (10,490 ) (5,364 ) (12,994 )

578,175 221,052 421,610

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

~~F-8~~F-7

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


1		~~Description~~Significant accounting policies

*(a)*		*Statement of ~~business and basis of presentation~~compliance*


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

		The ~~following is a list of principal subsidiaries which principally affect the results, assets or liabilities of the Group as of August 31, 2008:~~

~~Percentage~~

~~holding~~

~~Place and date of~~

~~Nature of~~

~~Name~~

~~establishment/ operation~~

~~Issued capital~~

~~Directly~~

~~Indirectly~~

~~Business~~

~~963673 Ontario Limited~~

~~Canada~~
~~November 12, 1991~~

~~Common 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 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~~

~~F-9~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


1		~~Description of business and basis of presentation (continued)~~

~~Place and~~

~~Percentage~~

~~date of establishment/~~

~~holding~~

~~Nature of~~

~~Name~~

~~operation~~

~~Issued capital~~

~~Directly~~

~~Indirectly~~

~~business~~

~~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~~

~~F-10~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


1		~~Description of business and basis of presentation (continued)~~

~~Place and~~

~~Percentage~~

~~date of establishment/~~

~~holding~~

~~Nature of~~

~~Name~~

~~operation~~

~~Issued capital~~

~~Directly~~

~~Indirectly~~

~~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~~

~~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~~


2		~~Basis of preparation and principal accounting policies~~

*~~(a)~~*		*~~Statement of compliance~~*

		~~The~~ accompanying consolidated financial statements have been prepared in accordance with all applicable ~~Hong Kong~~International Financial Reporting Standards (“~~HKFRSs”~~IFRSs”) issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable individual ~~Hong Kong~~International Financial Reporting Standards, ~~Hong Kong~~International Accounting Standards (“~~HKASs”~~IASs”) and Interpretations issued by the ~~Hong Kong Institute~~IASB.

		The IASB has issued a number a new or revised IFRSs that are first effective or available for early adoption for the current accounting period of ~~Certified Public Accountants (“HKICPA”), as well as accounting principles generally accepted in Hong Kong~~the Group and the ~~requirements~~Company. The equivalent new or revised HKFRSs consequently issued by HKICPA as a result of these developments have the same effective date as those issued by the IASB and are in all material respects identical to the pronouncements issued by the IASB. Of these, the following developments are relevant to the Group’s financial statements:

	•		IFRS/HKFRS 8,Operating segments

	•		IAS/HKAS1 (revised 2007),Presentation of financial statements

	•		Amendments to IFRS/HKFRS 7,Financial instruments: disclosure — improving disclosures about financial instruments

		The impact of these developments is as follows:

		IFRS/HKFRS 8 requires segment disclosure to be based on the way that the Group’s chief operating decision-maker regards and manages the Group, with the amounts reported for each reportable segment being the measures reported to the Group’s chief operating decision-marker for the purposes of assessing segment performance and making decisions about operating matters. The new requirement under IFRS/HKFRS 8 is consistent with the Group’s segment information presented in prior years. The adoption of HKFRS 8 had no material impact on the reportable segments being identified and disclosed.

		As a results of the ~~Hong Kong Companies Ordinance. HKFRSs differ in certain significant respects from accounting principles generally accepted in the United States~~adoption of ~~America (“U.S. GAAP”)~~IAS/HKAS 1 (revised 2007), details of changes in equity during the period arising from transactions with equity shareholders in their capacity as such have been presented separately from all other income and expenses in a revised consolidated statement of changes in equity. All other items of income an expense are presented in the consolidated income statement, if they are recognized as part of profit or loss for the period, or otherwise in a new primary statement, the consolidated statement of comprehensive income. Corresponding amounts have been restated to conform to the new presentation. The change in presentation has no effect on reported profit or loss, total income and expense or net assets for any period presented.

		As a result of the adoption of the amendments to IFRS/HKFRS 7, the financial statements include expanded disclosure in note 24(e)(i) about the fair value measurement of the Group’s financial instruments, categorizing these fair value measurements into a three-level fair value hierarchy accordingly to the extent to which they are based on observable market data.

		The Group has taken advantage of the transitional provisions set out in ~~note 31.~~the amendments to IFRS/HKFRS 7, under which comparative information for the newly required disclosures about the fair value measurements of financial instruments has not been provided.

~~F-11~~F-8

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


21		~~Basis of preparation and principal~~Significant accounting policies (continued)


*~~(b)~~(a)*		*~~Basis~~Statement of ~~preparation~~compliance (continued)*

		The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 32).

		The consolidated financial statements ~~consist~~were authorized for issue by the Board of Directors on November 9, 2010.

*(b)*		Basis of preparation of the ~~balance sheets of the Company and all its subsidiaries as of August 31, 2007, and 2008 and the related~~financial statements ~~of operations, cash flows and changes in shareholders’ equity for the years ended August 31, 2006, 2007 and 2008.~~

		The measurement basis used in the preparation of the ~~consolidated~~ financial statements is the historical cost basis except that certain financial assets are stated at their fair ~~value~~values or amortized ~~cost~~costs as explained in the accounting policies set out below (see notes ~~2(j)~~1(j), ~~2(k)~~1(l) and ~~2(s)~~1(r)).

		The preparation of financial statements in conformity with ~~HKFRSs~~IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and 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 judgments 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~~Judgments made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are ~~expressed~~discussed 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.~~note 31.


*(c)*		*Subsidiaries and controlled entities*


		Subsidiaries are entities controlled by the ~~Company.~~Group. Control exists when the ~~Company~~Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

~~F-12~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


2		~~Basis of preparation and principal accounting policies (continued)~~

*(d)*		*Group accounting*

(i)		Consolidation

		~~A controlled~~An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.

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

(ii)		Translation of foreign currencies

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

		For consolidation purposes, the balance sheets of foreign subsidiaries ~~with functional~~denominated in foreign currencies ~~other than Hong Kong Dollars~~ are translated at the ~~rate~~rates of exchange ruling at the balance sheet ~~date. Revenues and expenses are~~date whilst the income statement is translated at ~~the~~an average rate ~~prevailing during~~for the year. ~~The resulting exchange~~Exchange differences are dealt with ~~in the consolidated statement of shareholders’ equity~~ as ~~translation~~a movement in reserves.

		The accompanying consolidated financial statements are presented in Hong Kong Dollars, which is the Group’s functional currency. All financial information have been rounded to the nearest thousand.

F-9

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


2		~~Basis of preparation and principal accounting policies (continued)~~

*(f)*		*Investment property*

		Investment properties are land and/or buildings which are owned and 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 ~~2(g)~~1(g)) and impairment losses (see note ~~2(i)~~1(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.~~income statement. Rental income from investment property is accounted for in accordance with the accounting policy as ~~described~~set out in note ~~2(u)(vi)~~1(s)(v).


*(g)*		*Fixed assets*


		Fixed assets are stated at cost less accumulated depreciation and accumulated 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:

Buildings situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives of 50 years


—	~~Buildings and investment property situated on leasehold land~~	~~over the shorter of the unexpired term of the leases and their estimated useful lives of 50 years~~

—•	Furniture, fixtures and fittings	4 years

—•	Telecommunications, computer and office equipment	4 -years — 20 years

—•	Motor vehicles	4 years

—	~~Leasehold improvements~~	~~over the shorter of the unexpired term of the leases and their estimated useful lives~~

Leasehold improvements are depreciated over the shorter of the unexpired term of the leases and their estimated useful lives.

		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.~~profit or loss. Major improvements are capitalized and depreciated over ~~the~~their expected useful lives ofto the ~~related asset.~~

~~F-14~~

1		Significant accounting policies (continued)
		~~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 10(d).~~

		Under certain circumstances, the 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.


*(h)*		*Assets held under leases*


		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.

(i)		Classification of assets leased ~~assets~~to the Group

		Assets that are held by Group under leases which transfer to the 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 Group are classified as operating leases.

		Land held for own use under an operating lease for 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 ~~2(h)~~1(h)(iii)).

(ii)		Finance leases

		Where the Group acquired the use of assets under finance leases, the amounts representing the ~~lower of the~~ fair value of the leased asset or, if lower, the present value of the minimum lease payments ~~is recorded~~of such assets, are included in fixed assets with the corresponding ~~liability,~~liabilities, net of finance charges, recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy as set out in note ~~2(g)~~1(g) and note ~~2(i)~~1(i). Finance charges implicit in the lease payments are charged to ~~the consolidated statement of operations~~profit or loss over the period of the leases so as to produce an ~~approximate~~approximately constant periodic rate of charge on the remaining balance of the ~~obligations.~~

~~F-15~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

2		~~Basis of preparation and principal~~obligations for each accounting ~~policies (continued)~~

*~~(h)~~*		*~~Assets held under leases (continued)~~*period.

(iii)		Operating leases

		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~~profit or loss on a straight-line basis over the lease periods.

*(i)*		*Impairment of assets*

(i)		Impairment of ~~investment~~investments in debt and equity securities and accounts and other receivables

		Investments in debt and equity securities and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:

	—•		significant financial difficulty of the debtor;

	—•		a breach of contract, such as a default or delinquency in interest or principal payments;

	—•		it becoming probable that a debtor will enter bankruptcy or other financial reorganization; and

	—•		a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

F-11

1		Significant accounting policies (continued)

*(i)*		*Impairment of assets (continued)*

(i)		Impairment of investments in debt and equity securities and accounts and other receivables (continued)

		If any such evidence exists, any impairment loss is determined and recognized as follows:

	—•		For ~~unquoted equity securities~~trade and other current receivables and non-current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset 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 current and non-current receivables that are carried at cost are reversed if in a subsequent period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed.

	—		~~For~~other financial assets 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). This assessment is made collectively where financial assets carried at amortized cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

~~F-16~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

2		~~Basis of preparation and principal accounting policies (continued)~~

*~~(i)~~*		*~~Impairment of assets (continued)~~*

~~(i)~~		~~Impairment of investment securities and other receivables (continued)~~

			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 ~~the consolidated statement of operations.~~profit or loss. 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 available-for-sale securities, the cumulative loss that has been recognized directly in equity is removed from equity and is recognized in ~~consolidated statement of operations.~~profit or loss. The amount of the cumulative loss that is recognized in ~~consolidated statement of operations~~profit or loss is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in ~~consolidated statement of operations.~~profit or loss.

			Impairment losses recognized in ~~consolidated statement of operations~~profit or loss in respect of available-for-sale equity securities are not reversed through ~~consolidated statement of operations.~~profit or loss. Any subsequent increase in the fair value of such assets is recognized directly in equity.

			Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was ~~recognised.~~recognized. Reversals of impairment losses in such circumstances are ~~recognised~~recognized in profit orand loss.

Impairment losses are written off against the corresponding assets directly, except for impairment losses ~~recognised~~recognized in respect of ~~trade debtors,~~accounts receivable, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against ~~trade debtors~~accounts receivable and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are ~~recognised~~recognized in profit or loss.


(ii)		Impairment of other assets

		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:~~decreased:

	—•		fixed assets;

	—•		investment property; and

	—•		goodwill.

~~F-17~~F-12

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

21		~~Basis of preparation and principal~~Significant accounting policies (continued)

*(i)*		*Impairment of assets (continued)*

(ii)		Impairment of other assets (continued)

		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 ~~consolidated statement of operations~~profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the 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~~In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the ~~estimate~~estimates 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 ~~consolidated statement of operations~~profit or loss in the year in which the reversals are recognized.

~~F-18~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

*(j)*		*~~Investment securities~~*

		~~The Group’s accounting policy for investments securities is as follows:~~

		Financial assets at fair value through profit or loss comprise of financial assets held for trading and those designated as of fair value through profit or loss at inception. They are initially stated at fair value and are classified as current assets, if they are 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 the consolidated statement of operations. The net gain or 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(u)(v).

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

		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 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 that are recognized directly in the consolidated statement of operations. Where these investments are interest-bearing, interest calculated using the effective interest method is recognized in the consolidated statement of operations. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the consolidated statement of operations.

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

	~~(i)~~		~~the contractual rights to the cash flows from the investment securities expire; or~~

	~~(ii)~~		~~the Group transfers the contractual rights to receive the cash flows of the investment securities.~~

*~~(k)~~*		*Derivative financial instruments*

		Derivative financial instruments ~~that are not designated as hedge~~ 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~~recognized immediately toin profit or loss, except where the derivatives qualify for cash flow hedge accounting or hedge of a 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. For the years presented in the consolidated ~~statement~~financial statements, none of ~~operations.~~the Group’s derivative financial instruments qualify as hedges or hedge accounting.

*~~(l)~~(k)*		*Deferred expenditure*

		Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a service 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.

~~F-19~~F-13

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

21		~~Basis of preparation and principal~~Significant accounting policies (continued)

*~~(m)~~(l)*		*Accounts ~~receivables~~receivable*

		Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less allowance for impairment ~~losses for~~of doubtful debts (see note ~~2(i)~~1(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~~of doubtful ~~debts.~~debts (see note 1(i)(i)).

*~~(n)~~*		*~~Inventories~~*

		~~Inventories are carried at the lower of cost or net realizable value.~~

		~~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 the inventory is recognized in the consolidated statement of operations as cost of inventories sold in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value is recognized as an expense in the period the write-down 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 of network costs in the period in which the reversal occurs.

		~~For the years ended August 31, 2006, 2007 and 2008, there was no write-down of inventories.~~

*~~(o)~~(m)*		*Cash, bank balances and pledged bank deposits*

		Cash and bank 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)~~27).

~~F-20~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


2		~~Basis of preparation and principal accounting policies (continued)~~

*~~(p)~~(n)*		*~~Provisions~~Financial guarantees issued, provisions and contingent liabilities*

(i)		Financial guarantees issued

		Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

		Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognized as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognized in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognized in profit or loss on initial recognition of any deferred income.

		The amount of the guarantee initially recognized as deferred income is amortized in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognized in accordance with note 1(n)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognized, less accumulated amortization.

(ii)		Other provisions and contingent liabilities

		Provisions are recognized for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate 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.

F-14

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


2		~~Basis of preparation and principal accounting policies (continued)~~

~~(q)~~		~~Employee benefits (continued)~~

(iii)		Retirement benefit costs

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

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

(iv)		Share-based payments

		The fair value of share options granted to ~~employees~~Talents is recognized as an ~~employee~~Talent 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 or Monte Carlo model, taking into account the terms and conditions upon which the options were granted. Where the ~~employees~~Talents 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 consolidated statement of operations in the year of the review,~~profit or loss, unless the original ~~employee cost qualified~~Talent expenses qualify 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 amount ~~relating~~related to share options expense is recorded in the capital reserve until either the option is exercised or the option expires.


*~~(r)~~(p)*		*Deferred taxation*


		Deferred ~~tax assets and liabilities arise from deductible and taxable~~taxation is provided, using the balance sheet liability method, on temporary ~~differences respectively, being the~~ differences between the ~~carrying amounts~~tax bases of assets and liabilities ~~for financial reporting purposes~~ and their ~~tax bases.~~carrying amounts in the financial statements. Deferred tax assets also arise from unused tax ~~losses~~losses. Taxation rates enacted or substantively enacted at the balance sheet date are used to measure deferred tax assets and ~~unused tax credits.~~liabilities.

		Deferred tax assets are recognized to the extent that it is probable that future taxable ~~profit~~profits 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.

~~F-22~~F-15

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


21		~~Basis of preparation and principal~~Significant accounting policies (continued)


*~~(s)~~(p)*		*~~Senior notes~~Deferred taxation (continued)*

		~~Senior notes~~The following temporary differences, of which deferred taxes are not provided for: initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the temporary differences will not be reversed in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

		Deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity.

*(q)*		*Interest-bearing borrowings*

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


*~~(t)~~(r)*		*Trade and other payables*


		Trade and other payables are initially recognized at fair ~~value~~value. Except for financial guarantee liabilities measured in accordance with note 1(n), trade and other payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

		~~As at August 31, 2007 and 2008, the Group’s trade and other payables are stated at cost as the effect of discounting is immaterial.~~


*~~(u)~~(s)*		*Revenue recognition*


(i)		Revenue for the provision of international telecommunications and fixed telecommunications network services is recognized, when an arrangement exists, service is rendered, the fee is fixed or determinable, and ~~collectability~~collectibility is probable.

(ii)		Tariff-free period granted to subscribers of fixed telecommunications network services are recognized in ~~the consolidated statement of operations ratably~~profit or loss rateably over the term of the service subscription agreement. Unbilled revenue represents revenue recognized in accordance with the ~~requirements~~requirement in ~~2(u)~~note 1(s)(i) that has not been billed to the subscriber.

(iii)		Amount received in advance for the provision of fixed telecommunications network services is deferred and included under deferred ~~services income,~~service revenue, and subsequently recognized as revenue on a straight-line basis over the related service period.

(iv)		Revenue from the sales of products is recognized upon the transfer of risks and rewards of ownership to the customer, which generally coincides with the time when the goods are delivered to the customer and title has passed.

~~F-23~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


2		~~Basis of preparation and principal accounting policies (continued)~~

*~~(u)~~*		*~~Revenue recognition (continued)~~*

~~(v)~~		Interest income is recognized as it accrues using the effective interest method.

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


*~~(v)~~(t)*		*Borrowing costs*


		Borrowing costs ~~are expensed in the consolidated statement of operations in the period 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 that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset.

		~~The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred,~~All other borrowing costs are ~~being incurred and activities that~~charged to profit or loss in the year in which they 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.incurred.

F-16

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


2		~~Basis of preparation and principal accounting policies (continued)~~

*~~(x)~~(v)*		*Accounting for barter transactions*

		When goods or services are exchanged 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 ~~consideration~~goods or services received, ~~or 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 ~~provided,~~rendered, adjusted by the amount of any cash or cash equivalents transferred.


*~~(y)~~(w)*		*Related parties*


		For the purposes of these financial statements, a party is considered to be related to the Group if:

	(i)		the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;

	(ii)		the Group and the party are subject to common control;

	(iii)		the party is an associate of the Group or a joint venture in which the Group is a venturer;

	(iv)		the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;

	(v)		the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or

	(vi)		the party is a post-employment benefit plan which is for the benefit of ~~employees~~Talents of the Group or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

~~F-25~~F-17

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


32		~~Changes in accounting policies~~Turnover and segment information

The ~~HKICPA has issued~~Group is principally engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada. Revenues recognized during the year are as follows:

2010 2009 2008
HK$’000 HK$’000 HK$’000
Turnover

International telecommunications services 218,589 247,359 291,943
Fixed telecommunications network services (note 2(b)) 1,356,098 1,230,880 1,011,038

1,574,687 1,478,239 1,302,981

*(a)*	*Primary reporting format — business segments*

	The Group is organized on a ~~number~~worldwide basis into two business segments:


•	International telecommunications	:	provision of ~~new and revised HKFRSs and Interpretations that are effective or available for early adoption for the current accounting period of the Group.~~international long distance calls services

~~There~~•	Fixed telecommunications network	:	provision of dial up and broadband Internet access services , local voice-over-IP services, IP-TV services and corporate data services

The Group’s inter-segment transactions mainly consist of provision of leased lines services. These transactions were entered into on similar terms as those contracted with third parties.

2010
International Fixed
tele- tele-
communications communications
services network services Elimination Group
HK$’000 HK$’000 HK$’000 HK$’000
Turnover
- External sales 218,589 1,356,098 — 1,574,687
- Inter-segment sales 5,673 16,673 (22,346 ) —

224,262 1,372,771 (22,346 ) 1,574,687

Segment results 54,173 219,618 273,791

Other income, net 7,989
Finance costs (22,235 )

Profit before taxation 259,545
Income tax expense (42,679 )

Net profit 216,866

F-18

Revenue and segment information (continued)

*(b)*		Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Company, is a Fixed Telecommunications Network Services (“FTNS”) licensee and provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the Telecommunication Authority (“TA”) and interconnection services have been ~~no significant changes to the accounting policies applied in these financial statements~~provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts to be collected. In prior years, ~~presented as~~majority of the mobile operators rejected HKBN’s demand for payment of the mobile interconnection charges. As a result of ~~adoption~~non-payment by certain mobile operators, in 2004, the Group requested the TA to make a determination (the “2004 Determination”) on the level of ~~these new standards. However, as a result~~mobile interconnection charges payable by one of the ~~adoption of HKFRS 7, Financial instruments: Disclosures~~mobile operators (“mobile operator under dispute”) to HKBN; and the ~~amendment to HKAS 1, Presentation~~effective date of ~~financial statements: Capital disclosures, there have been some additional disclosures provided as follows:~~the determined mobile interconnection charges.

		~~As a result~~In June 2007, TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the ~~adoption of HKFRS 7 and as compared with~~mobile operator under dispute for interconnection services provided by HKBN for the ~~information previously required~~period from April 1, 2002 to ~~be disclosed by HKAS 32, Financial instruments: Disclosure and presentation, the financial statements include expanded disclosure about the significance of the Group’s financial instruments~~August 31, 2004 and the ~~nature and extent of risks arising from those instruments. These disclosures are provided throughout these financial statements, in particular in note 27.~~mobile operator under dispute paid mobile interconnection charge for the relevant period accordingly.

		Subsequent to June 2007, HKBN entered into contractual agreements with several mobile operators which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and with respect to the period after August 31, 2004 at the interim rate stated in the contractual agreements. The ~~amendment~~interim rate is subject to ~~HKAS 1 introduces additional disclosure requirements~~adjustment based on further determination to ~~provide information about~~be issued by the ~~level of capital and the Group’s objectives, policies and processes for managing capital. These new disclosures are set out in note 19.~~TA.

		~~Both HKFRS 7 and the amendment~~In February 2008, since certain mobile operators had still not yet settled their mobile interconnection charges for interconnection services provided by HKBN, HKBN requested TA to ~~HKAS 1 do not have any material impact~~make a new determination on the ~~classification, recognition~~rate of mobile interconnection charge and ~~measurement of~~interest thereon with the ~~amounts recognized in the financial instruments.~~four mobile operators.

		~~The Group has not applied any new standard or interpretation that is not yet effective~~In September 2008, TA accepted HKBN’s request for determination on the rate of mobile interconnection charges for the ~~current accounting~~ period ~~(see note 30)~~from April 1, 2002 to April 26, 2009 payable by the mobile operators that have not reached contractual agreements with HKBN, and the rate for the period from September 1, 2004 to April 26, 2009 payable by those mobile operators that have reached contractual agreements with HKBN, and the interest rate thereon (the “2008 Determination”).

		In May 2010, TA issued its decision on the 2008 Determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute.

		Based on the 2008 determination, the Group reversed approximately HK$19,706,000 revenue related to mobile interconnection charges and recognized approximately HK$10,053,000 interest income during the year ended August 31, 2010.

		Included in the accounts receivable balance as at August 31, 2010 were receivable relating to mobile interconnection charges of HK$39,763,000 (August 31, 2009: HK$68,802,000) representing the amount of mobile interconnection charges management expects to collect.

F-21


43		Network costs

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

		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”) as compensation to PCCW-HKT Telephone Limited (“PCCW-HKT”) for the cost of network development in remote areas in Hong Kong.

		The Group estimates the ~~USC~~Universal Services Contributions (“USC”) payable to PCCW-HKT ~~based on~~to fund the ~~provisional rates announced by~~costs of network development in remote areas in Hong Kong and includes such estimated costs as part of the ~~Telecommunications Authority (“TA”). The~~network costs. TA periodically reviews the actual costs ~~incurred by PCCW-HKT in the network development~~of such developments and revises the amounts owed to PCCW-HKT or to be refunded by PCCW-HKT to the ~~respective~~ USC contributing parties, including the HKBN (“the Rate Revisions”). Accordingly, the estimate made by the HKBN’s management is subject to 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 Group. The Group adjusts such differences as an addition or reduction of the corresponding costs of services in that particular reporting period.parties.

		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 Group’s consolidated balance sheet.

		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 was recorded as a reduction against the network costs of the Group for the year ended August 31, 2006.

		As of the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes, the actual contribution level for calendar year 2005, 2006 and 2007 had not yet been confirmed by the TA. For the year ended August 31, 2007, the Group recorded USC charges based on the provisional rates set out in the 2006 TA. On December 28, 2007, TA issued a statement (the “2007 ~~TA”~~TA Statement”) on the USC and confirmed ~~that~~ the actual contribution level for the period from January 1, 2005 to June 30, 2007. Based on the 2007 TA ~~an amount of~~Statement, HK$7,617,000 was ~~recovered~~recorded as a reduction against the network ~~cost~~costs of the Group for the year ended August 31, 2008.

		~~The~~On April 8, 2009, TA issued a statement (the “2009 TA Statement”) on the USC and confirmed the actual contribution level for the period ~~subsequent~~from July 1, 2007 to June 30, ~~2007 has not yet been confirmed by the TA. Therefore, for the year ended August 31, 2008, the Group recorded USC charges based~~2008. Based on the ~~provisional rates set out in the 2007 TA.~~

~~F-26~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

6		~~Income tax credit/(expense)~~2009 TA Statement, no additional payment or refund of USC from PCCW-HKT was required.

		~~(Loss)/income before taxation by geographical location is as follows:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Hong Kong (loss)/income (150,624 ) 24,574 100,514
Overseas income 1,318 6,317 7,858

(Loss)/income before taxation (149,306 ) 30,891 108,372

~~Income tax credit/(expense) consist of~~On April 27, 2010, TA issued a statement (the “2010 TA Statement”) on the ~~following:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Hong Kong income tax
— current (note (a)) (24 ) (121 ) (391 )
— under-provision of current tax in prior years (552 ) — —
— deferred (note 12) 10,046 47 21,757
Overseas taxation
— current (note (b)) (2,367 ) (1,964 ) (1,929 )
— under-provision of current tax in prior years — — (2,552 )
— deferred (note 12) 141 12 (67 )

7,244 (2,026 ) 16,818


~~Notes:~~

~~(a)~~		~~The Company~~USC and ~~its subsidiaries operating in Hong Kong are subject to tax on an entity basis on income arising in or derived from Hong Kong. The rate of taxation of subsidiaries operating in Hong Kong~~confirmed the actual contribution level for the ~~years ended August 31, 2006 and 2007 was 17.5% and for the year ended August 31,~~period from July 1, 2008 ~~was 16.5%.~~

~~(b)~~		~~Taxation on overseas profits has been calculated~~to April 30, 2009. Based on the ~~estimated assessable profit for the year at the rate~~2010 TA Statement, no additional payment or refund of ~~taxation prevailing in the countries in which the foreign subsidiaries operate.~~

~~F-28~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~


8		~~Receivables~~

~~(a)~~

~~Trade receivables, net~~

August 31,
2007 2008
HK$’000 HK$’000
Trade receivables 192,943 152,227
Less: Allowance for doubtful debts (22,392 ) (11,944 )

170,551 140,283

~~The aging analysis of accounts receivable is as follows:~~

August 31,
2007 2008
HK$’000 HK$’000
Current - 30 days 50,282 45,462
31 - 60 days 15,619 17,507
61 - 90 days 8,876 7,249
Over 90 days 118,166 82,009

192,943 152,227

The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.


*~~(b)~~*		*~~Impairment of trade receivables~~*

		Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly.

		~~The movement in the allowance for doubtful debts during the year, including both specific and collective loss components is as follows:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Balance at beginning of the year 48,316 55,745 22,392
Additions 17,450 15,973 14,293
Reversals — (9,404 ) —
Write-off (10,021 ) (39,922 ) (24,741 )

Balance at the end of the year 55,745 22,392 11,944

Allowance for doubtful debts as of August 31, 2006 includes allowance for mobile interconnection charges receivables of HK$20,809,000. Following TA’s 2004 Determination issued in June 2007 (note 26(c)), the Group has reversed HK$9,404,000 of the allowance for mobile interconnection charges to the consolidated statement of operations (note 26(c)) and has written off the remaining balance of the allowance of HK$11,405,000 against the related accounts receivable.

~~F-31~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

8		~~Receivables (continued)~~

*~~(c)~~*		*~~Trade receivables that are not impaired~~*

		~~The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows:~~

August 31,
2007 2008
HK$’000 HK$’000
Neither past due nor impaired 50,282 45,462
0-30 past due 15,619 17,507
31-60 past due 8,876 7,249
Over 60 past due 95,774 70,065

170,551 140,283

		~~Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.~~

		Trade receivables over 60 days past due for the Group include receivable relating to mobile interconnection charges of HK$64,407,000 as of August 31, 2008 (August 31, 2007: HK$92,383,000) (See note 26(c)).

		Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances.

~~(d)~~

~~Other receivables, deposits and prepayments~~

August 31,
2007 2008
HK$’000 HK$’000
Deposits for purchase of fixed assets 6,007 9,094
Deposits for lease of land and building 7,256 10,528
Interest receivable 1,344 757
Prepayments 19,895 30,635
Unbilled revenue 15,572 23,293
Others 9,298 8,419

59,372 82,726

~~F-32~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

~~Goodwill~~

August 31,
2007 2008
HK$’000 HK$’000
Cost and carrying amount:

Beginning of the year/at the end of the year 1,066 1,066

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

		Based on ~~management’s goodwill impairment test,~~ the ~~carrying amount~~2010 TA Statement, TA decided that USC contributing parties are not required to pay provisional USC from May 1, 2009 onwards until a further review of the fixed telecommunications network services CGU was lower than its recoverable amount. The recoverable amount was determined based on the value-in-use methodology. This methodology 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 1% to 14% and a pre-tax discount rate of 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 revenue of the fixed telecommunications network services CGU which is determined based on the past performance and management’s expectation for 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 assessment of the time value of money and the risks specific to the fixed telecommunications services CGU. Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.USC.

~~F-33~~F-22

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year ended August 31, 2008~~

104

~~Fixed assets~~

Furniture, Tele-
Leasehold fixtures communications,
Investment land and Leasehold and computer and Motor
property buildings improvements fittings office equipment vehicles Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Note (a)) (Note (a))
Cost:

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

At September 1, 2007 5,197 79,598 80,638 17,419 2,475,775 6,818 2,665,445
Exchange adjustments — — 1,470 445 2,840 — 4,755
Additions — 4,646 2,469 2,189 196,230 6,150 211,684
Disposals — — — (478 ) (30,564 ) (344 ) (31,386 )

At August 31, 2008 5,197 84,244 84,577 19,575 2,644,281 12,624 2,850,498

Accumulated depreciation:

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

At September 1, 2007 2,101 9,123 50,309 13,952 1,346,854 5,883 1,428,222
Exchange adjustments — — 1,334 313 2,077 — 3,724
Charge for the year 104 1,604 9,626 1,617 196,198 902 210,051
Disposals — — — (286 ) (22,390 ) (222 ) (22,898 )

At August 31, 2008 2,205 10,727 61,269 15,596 1,522,739 6,563 1,619,099

Net book value:

At August 31, 2008 2,992 73,517 23,308 3,979 1,121,542 6,061 1,231,399

At August 31, 2007 3,096 70,475 30,329 3,467 1,128,921 935 1,237,223

~~F-34~~

~~City Telecom (H.K.~~4 Profit before taxation (continued)

(d)

Talent costs

2010 2009 2008
HK$’000 HK$’000 HK$’000
Wages and salaries 277,883 278,905 226,097
Provision for annual leave 561 613 2,642
Equity settled share-based transaction 5,347 4,768 4,114
Retirement benefit costs — defined contribution plans (note 8) 38,820 34,614 29,738
Less: Talent costs capitalized as fixed assets (20,851 ) (16,621 ) (15,131 )

301,760 302,279 247,460

Talent costs include directors’ emoluments and research and development cost of HK$11,169,000 (2009: HK$10,824,000, 2008: HK$9,593,000) but exclude Talent costs of HK$11,098,000 (2009: HK$13,461,000, 2008: HK$14,482,000) recorded in network costs and HK$229,399,000 (2009: HK$214,272,000, 2008:HK$194,724,000) recorded in advertising and marketing expenses.

Talent costs include all compensation and benefits paid to and accrued for all individuals employed by the Group, including directors.

(e)

Other items

2010 2009 2008
HK$’000 HK$’000 HK$’000
Realized loss on derivative financial instruments — — 1,039
Realized gain on long-term bank deposit — — (1,185 )
Realized and unrealized gain on other financial assets — (189 ) (3,284 )

5 Income tax (expense)/benefit

Hong Kong profits tax has been provided at the rate of 16.5% (2009 and 2008: 16.5%) ~~Limited~~
~~Consolidated financial statements~~on the estimated assessable profit for the year. Taxation on other jurisdictions has been calculated on the estimated assessable profit for the year ~~ended August 31, 2008~~at the income tax rates prevailing in the other jurisdictions in which the Group operates.

~~Fixed assets (continued)~~

The amount of income tax (expense)/benefit in the consolidated income statement represents:

2010 2009 2008
HK$’000 HK$’000 HK$’000
Current taxation:

Hong Kong
- Provision for the year — — (391 )
- Over-provision in prior years 40 — —
Non-Hong Kong
- Provision for the year (2,585 ) (1,622 ) (1,929 )
- Under-provision in prior years — — (2,552 )

Deferred taxation:

- Origination and reversal of temporary differences (note 20) (40,134 ) (37,108 ) (4,645 )
- Recognition of previously unrecognized tax losses (note 20) — — 26,335

Income tax (expense)/benefit (42,679 ) (38,730 ) 16,818


~~Notes: (continued)~~

~~(c)~~		The Group leases telecommunications, computer and office equipment for terms ranging from one to five years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option and accordingly the lease arrangements have been classified as finance leases. None of the leases included contingent rental. The total cost of these assets and the related accumulated depreciation are as follows:

August 31,
2007 2008
HK$’000 HK$’000
Cost 4,236 4,236
Accumulated depreciation 2,238 2,825

1,998 1,411


~~(d)~~		Management reviews the estimated useful lives of fixed assets annually and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the estimate is changed to reflect the changed pattern. The depreciation expense for future period is adjusted if there are significant changes from previous estimates. Management determines the useful life of the Group’s fixed assets based on its historical experience with similar assets, expected usage of the assets and anticipated technological changes with respect to those assets. Estimates and assumptions used in setting depreciable lives require both judgment and estimation.

		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 fiber 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.

~~F-36~~F-24

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for~~5 Income tax (expense)/benefit (continued)

The Group’s income tax (expense)/benefit differs from the ~~year August 31, 2008~~theoretical amount that would arise using profits before taxation at applicable tax rates as follows:


11		~~Other payables and accrued charges~~

August 31,
2007 2008
HK$’000 HK$’000
Accrual for staff salaries and bonus 33,833 42,652
Accrual for customer reward program 6,567 7,608
Accrual for carrier fees and charges 11,264 7,495
Accrual for international call forwarding service charges 5,784 6,305
Payable for purchase of fixed assets 34,749 56,049
Payable for advertising and promotional expenses 15,972 10,043
Interest payable on senior notes 7,164 5,082
Others accrual (note) 29,934 42,880

145,267 178,114

2010 2009 2008
HK$’000 HK$’000 HK$’000
Profit before taxation 259,545 251,559 108,372

Notional tax on profit before taxation, calculated at the prevailing tax rates applicable to profit in the jurisdictions concerned (43,781 ) (42,240 ) (18,927 )
Effect of non-taxable income 4,692 1,466 3,452
Effect of (loss)/gain on extinguishment of 10-year senior notes not subject to taxation (1,592 ) 5,176 426
Effect of non-deductible expenses (2,367 ) (3,648 ) (6,353 )
Effect of recognition of prior year unrecognized tax losses (note) — — 26,335
Over/(under)-provision in prior years 40 — (2,552 )
Effect of utilization of prior year unrecognized tax losses — — 12,013
Effect of share based payment — — 2,324
Effect of tax losses not recognized — — (74 )
Others 329 516 174

Income tax (expense)/benefit (42,679 ) (38,730 ) 16,818


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


12		~~Deferred taxation~~

~~The components of deferred tax (liabilities)/assets recognized in the consolidated balance sheet and the movements of deferred tax assets/ (liabilities) are as follows:~~

August 31,
2007 2008
HK$’000 HK$’000
At the beginning of the year (353 ) (291 )
Exchange differences 3 (1 )
Deferred taxation credited/ (charged) to consolidated statement of operations
— relating to the origination and reversal of temporary differences 59 (4,645 )
— relating to the recognition of unrecognized tax losses in prior years — 26,335

At the end of the year (291 ) 21,398

Note:

Management projects future taxable income by considering all available information, including tax planning strategies, historical taxable income, and the expiration period of the unused tax losses carry forwards of each of the Company and its subsidiaries. During the year ended August 31, 2008, taking into consideration of the ~~current~~ results of operations, management assessed that it is probable that sufficient future taxable profits will be generated to utilize the unused tax losses of HK$159,606,000 which resulted in the recognition of deferred tax assets of HK$26,335,000.

~~F-37~~F-25

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


126		~~Deferred taxation (continued)~~

As of August 31, 2007 and 2008, the Group had accumulated tax losses amounting to HK$1,037,141,000 and HK$905,341,000, respectively that can be carried forward to reduce future taxable income derived in Hong Kong, Canada and the United States, as applicable. As of August 31, 2007 and 2008, the tax effect of the accumulated tax losses amounted to HK$182,739,000 and HK$150,234,000, respectively. These tax losses expire in the following periods:

August 31,
2007 2008
HK$’000 HK$’000
Within one year 737 —
In the second year 395 —
In the third year — —
In the fourth year — —
After five years 4,313 3,967
No expiry date 1,031,696 901,374

1,037,141 905,341

		The tax losses of the Company and its Hong Kong subsidiaries can be carried forward indefinitely while tax loss carryforwards period of subsidiaries in Canada and the United States range between 10 to 20 years under the respective tax laws.

		Deferred tax assets are recognized to the extent that realization of the related tax benefit is probable. The Group has unrecognized tax losses carried forward from prior years of HK$268,004,000 and HK$9,518,000 at August 31, 2007 and 2008 respectively which can offset against future taxable income. Accumulated tax losses for which deferred tax assets were not recognized expire in the following periods:

August 31,
2007 2008
HK$’000 HK$’000
Within one year 737 —
In the second year 395 —
In the third year — —
In the fourth year — —
After five years 4,313 3,810
No expiry date 262,559 5,708

268,004 9,518

~~F-38~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


12		~~Deferred taxation (continued)~~

~~The movements in deferred tax assets and (liabilities) (prior to offsetting of balances within the same taxation jurisdiction) during the years ended August 31, 2007 and 2008, are as follows:~~

Accelerated
depreciation allowances
2007 2008
HK$’000 HK$’000
Deferred tax liabilities

At the beginning of the year (154,678 ) (134,910 )
Credited to consolidated statement of operations 19,772 8,463
Exchange differences (4 ) —

At the end of the year (134,910 ) (126,447 )

Share-based payment Tax losses Total
2007 2008 2007 2008 2007 2008
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Deferred tax assets:

At the beginning of the year 123 — 154,202 134,619 154,325 134,619
(Charged)/ credited to consolidated statement of operations (123 ) — (19,590 ) 13,227 (19,713 ) 13,227
Exchange differences — — 7 (1 ) 7 (1 )

At the end of the year — — 134,619 147,845 134,619 147,845

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

August 31,
2007 2008
HK$’000 HK$’000
Deferred tax assets — 26,335
Deferred tax liabilities (291 ) (4,937 )

(291 ) 21,398

~~F-39~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


14		~~Long-term debt and other liabilities (continued)~~

		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 severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).

		The net proceeds of 10-year senior notes were approximately US$121 million after issuance costs and commission. The 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 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 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 at a redemption price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of redemption, the Company will pay principal at the redemption price specified plus accrued and unpaid interest through the date of redemption.

		~~The indenture governing the 10-year senior notes contains covenants that limit, among other things, the Group’s ability and the ability of certain of its existing and future subsidiaries to:~~

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

	~~(ii)~~		~~incur additional indebtedness or issue certain equity interests;~~

	~~(iii)~~		~~merge, consolidate or sell substantially all assets;~~

	~~(iv)~~		~~issue or sell capital stock of certain subsidiaries;~~

	~~(v)~~		~~sell or exchange assets or enter into new businesses;~~

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

	~~(vii)~~		~~create liens on assets;~~

	~~(viii)~~		~~enter into certain transactions with affiliates or relates persons; and~~

	~~(ix)~~		~~enter into sale and lease back transactions.~~

		During the year ended August 31, 2008, the Group repurchased a portion of the 10-year senior notes with a cumulative principal value of US$35,647,000 in the open market. The total consideration paid was approximately US$35,352,000. The gain on extinguishment of the 10-year senior notes was US$332,000 (equivalent to HK$2,582,000) which has been recorded as other income in the consolidated income statement.

		~~As of August 31, 2008, the remaining principal amount of the 10-year senior notes remaining in issued after the repurchase was US$89,353,000 (equivalent to HK$697,857,000).~~

		~~At August 31, 2007 and 2008, the 10-year senior notes were stated at the amortized cost of US$122,127,000 (equivalent to HK$952,593,000) and US$87,483,000 (equivalent to HK$683,242,000) respectively.~~

~~F-41~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for~~The final dividend proposed after the ~~year August 31, 2008~~


15		~~Commitments and contingencies (continued)~~

balance sheet date has not been recognized as a liability at the balance sheet date.

*(b)*		*~~Commitments under operating leases (continued)~~*

		~~At August 31, 2007~~Dividends attributable to the previous financial year, approved and ~~2008,~~paid during the ~~Group had future aggregate minimum lease payments under non-cancellable operating leases as follows: (continued)~~

August 31,
2007 2008
HK$’000 HK$’000
Leases in respect of telecommunications and computer equipment:
— within one year 31,004 38,623
— in the second year 6,258 7,567
— in the third year 5,016 1,865
— in the fourth year 4,946 1,722
— in the fifth year 4,946 1,722
— within sixth year to twelve years 16,384 7,384

68,554 58,883

83,600 87,000


*~~(c)~~*		*~~Program fee commitments~~year:*

~~The Group entered into several agreements with program content providers with respect to the Group’s IP-TV services. The amount of program fees payable by the Group is as follows:~~

2010 2009 2008
HK$’000 HK$’000 HK$’000
Final dividend in respect of the financial year ended August 31, 2009, approved and paid of HK16 cents per ordinary share (2009: HK2 cents per ordinary share in respect of financial year ended August 31, 2008, 2008:
HK4 cents per ordinary share in respect of financial year ended August 31, 2007) 108,735 13,014 25,082

August 31,
2007 2008
HK$’000 HK$’000
Program fee payable:
— within one year 10,345 6,583
— in the second year 3,633 219
— in the third year 3 60

13,981 6,862

During the year ended August 31, 2009, a scrip dividend option was offered to all shareholders of the Company, excluding shareholders with registered addresses outside Hong Kong, who were entitled to the final dividend in respect of the financial year ended August 31, 2008. 12,212,142 shares were issued during the year ended August 31, 2009 to the shareholders of the Company who had elected to receive all or part of their entitlement to dividends in the form of scrip.

~~F-43~~F-26

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~7 Earnings per share


15		~~Commitments and contingencies (continued)~~

~~(d)~~

~~Contingent liabilities~~

August 31,
2007 2008
HK$’000 HK$’000
Bank guarantees provided to suppliers (note 16(i) and (ii)) 5,903 24,671
Bank guarantee in lieu of payment of utility deposits (note 16(iii)) 5,272 5,272

11,175 29,943


16		~~Pledge of assets~~

As of August 31, 2007 and 2008, the Group had pledged bank deposits of US$9,900,000 (equivalent to HK$77,220,000 and HK$77,319,000, respectively) and HK$10,000,000 as security for the following banking facilities:

	~~(i)~~		bank facility of US$9,000,000 (equivalent to HK$70,200,000) and US$9,900,000 (equivalent to HK$77,319,000) respectively granted by the 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, 2007 and 2008, bank guarantees of HK$1,603,000 and HK$20,371,000, respectively were issued against this bank facility;

	~~(ii)~~		bank guarantees of HK$4,300,000 issued by a bank to third party suppliers of the Company and one of its subsidiaries as of August 31, 2007 and 2008 for payment of certain products and services procured by the Company from these third party suppliers; and

	~~(iii)~~		~~bank guarantees of HK$5,272,000 issued by a bank to certain utility vendors of the Company as of August 31, 2007 and 2008 in lieu of payment of utility deposits.~~

2010 2009 2008
HK$’000 HK$’000 HK$’000
Profit attributable to shareholders 216,866 212,829 125,190

Weighted average number of ordinary shares

2010 2009 2008
Number Number Number
of shares of shares of shares
’000 ’000 ’000
Issued ordinary shares at the beginning of the year 664,180 650,622 616,503
Effect of scrip dividend issued — 6,256 7,353
Effect of share options exercised 14,856 329 10,159
Effect of placement 27,569 — —
Effect of shares repurchased and cancelled — (6 ) —

Weighted average number of ordinary shares at the end of the year (basic) 706,605 657,201 634,015
Incremental shares from assumed exercise of share options 30,011 11,183 23,982

Weighted average number of ordinary shares at the end of the year (diluted) 736,616 668,384 657,997

Basic earnings per share HK30.7 cents HK32.4 cents HK19.7 cents

Diluted earnings per share HK29.4 cents HK31.8 cents HK19.0 cents

~~F-44~~F-27

8 Retirement benefit costs

The Group contributes to an Occupational Retirement Scheme (the “ORSO Scheme”), a defined contribution retirement scheme, which is available to some of its Talents in Hong Kong. Under the ORSO Scheme, the Talents are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management Talents and all other Talents respectively. The Talents are entitled to 100% of the employer’s contributions after 10 years of completed service, or at a reduced scale after completion of 3 to 9 years’ service. Contributions to the ORSO Scheme are reduced by contributions forfeited by those Talents who leave the ORSO Scheme prior to vesting fully in the Group’s contributions.

A mandatory provident fund scheme (the “MPF Scheme”) has been established under the Hong Kong Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing Talents of the Group in Hong Kong could elect to join the MPF Scheme, while all new Talents joining the Group in Hong Kong from then onwards are required to join the MPF Scheme. Both the Group and the Talents are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the Talents as soon as they are paid to the MPF Scheme. Senior Talents may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the Talent, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme.

Pursuant to the relevant regulations in People’s Republic of China (the “PRC”), the Group contributes to a defined contribution retirement scheme organized by the local social security bureau for each Talent of the subsidiary in PRC at the rate of 20% of a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these Talents.

The retirement schemes for Talents of the Group in other countries follow the local statutory requirements of the respective countries.

The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated income statement during the year are as follows:

2010 2009 2008
HK$’000 HK$’000 HK$’000
Gross contributions 38,820 34,614 29,738

At August 31, 2010, there was no forfeited contribution available to offset future contributions by the Group to the ORSO Scheme (2009 and 2008: Nil).

9 Directors’ and senior management’s emoluments

(a)

Directors’ remuneration

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements~~The remuneration of each director for the year ended August 31, ~~2008~~2010 is set out below:

Employer's
contribution
to defined
Discretionary Share-based contribution
Fee Salary bonuses payment scheme Total
Name of director HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Wong Wai Kay, Ricky — 6,707 1,800 — 670 9,177
Cheung Chi Kin, Paul — 6,709 1,800 — 670 9,179
Yeung Chu Kwong, William — 8,264 2,400 2,526 456 13,646
Lai Ni Quiaque — 2,642 750 2,455 264 6,111
Cheng Mo Chi, Moses 168 — — — — 168
Lee Hon Ying, John 185 — — — — 185
Chan Kin Man 174 — — — — 174
Peh Jefferson Tun Lu 174 — — — — 174

Total 701 24,322 6,750 4,981 2,060 38,814

F-28

9 Directors’ and senior management’s emoluments (continued)


17(a)		~~Investment securities~~*Directors’ remuneration (continued)*

August 31,
2007 2008
HK$’000 HK$’000
Debt securities, at fair value and unlisted outside Hong Kong (note (a)) 28,577 27,997
Long term bank deposit, at amortized cost (note (b)) 14,415 —

42,992 27,997

Less: Current portion (3,779 ) (27,997 )

39,213 —

The remuneration of each director for the year ended August 31, 2009 is set out below:

Employer’s
contribution
to defined
Discretionary Share-based contribution
Fee Salary bonuses payment scheme Total
Name of director HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Wong Wai Kay, Ricky — 6,712 1,500 193 670 9,075
Cheung Chi Kin, Paul — 6,714 1,500 193 670 9,077
Yeung Chu Kwong, William — 7,049 1,000 1,764 456 10,269
Lai Ni Quiaque — 2,403 550 1,141 240 4,334
Cheng Mo Chi, Moses 160 — — — — 160
Lee Hon Ying, John 176 — — — — 176
Chan Kin Man 165 — — — — 165
Peh Jefferson Tun Lu 165 — — — — 165

Total 666 22,878 4,550 3,291 2,036 33,421

No director waived any emoluments in respect of the years ended August 31, 2009 and 2010.

The share-based payment represents the expenses determined based on the fair value of share options granted to certain directors under the Company’s share option scheme. Fair value of share options is estimated in accordance with the Group’s significant accounting policies in note 1. The details of the share-based payment are disclosed in note 10.


~~Notes:~~

~~(a)~~*(b)*		~~The Group maintained an investment portfolio of HK$28,577,000 and HK$27,997,000 as of August 31, 2007 and 2008, respectively, which primarily consisted of equity-linked mutual fund securities.~~

		For the years ended August 31, 2006, 2007 and 2008 the net unrealized investment gains were HK$698,000, HK1,887,000 and HK$3,163,000 respectively. No realized investment gains or losses were recognized during the years ended August 31, 2006 and 2007. During the year ended August 31, 2008, a debt security with principal amount of US$500,000 (equivalent to HK$3,900,000) matured with a realized gain of HK$121,000.

~~(b)~~		Represents a ten-year US$2 million (equivalent to HK$15,600,000 at August 31, 2007) deposit placed with a bank for which the Group receives a floating rate deposit interest. The deposit has a 10-year term maturing on August 22, 2013. An interest rate of 10% per annum has been guaranteed for the first year from the inception date on August 22, 2003. The deposit will terminate or mature once the cumulative interest reaches the predetermined accrued interest cap at 13% of the principal amount or an aggregate sum of US$260,000 (equivalent to HK$2,028,000 at August 31, 2007). During the year ended August 31, 2008, the Group early redeemed the deposit and recognized a gain of HK$1,185,000 in the consolidated statement of operations.Five highest paid individuals


18		~~Derivative financial instrument~~

The five individuals whose emoluments were the highest in the Group for the year include four (2009: four) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one (2009: one) individual during the year are as follows:

2010 2009
HK$’000 HK$’000
Basic salaries, other allowances and benefits in kind 2,492 2,515
Discretionary bonuses 300 150
Share-based payments — 332
Retirement benefit costs — defined contribution plans 181 106

2,973 3,103

The emoluments fell within the following band:


	*~~August 31,~~Number of individual*
	2010		2009
HK$2,500,001 — HK$3,000,000		1		—
HK$3,000,001 — HK$3,500,000		—		1

F-29

10 Equity settled share-based transactions

The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of the Company on December 23, 2002 whereby the directors may, at their discretion, invite eligible participants to receive options to subscribe for shares subject to the terms and conditions stipulated therein.

Under the 2002 Share Option Scheme, the Company may grant options to Talents (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for shares of the Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject to any other executive and Talent share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant.

~~2007~~(a)

~~2008~~The terms and conditions of the options

Options that existed during the year ended August 31, 2010 are as follows, whereby all options are settled by physical delivery of shares:


	~~HK$’000~~Number		~~HK$’000~~	Vesting		Exercisable
	of option			conditions		period
~~Non-current assets~~2002 Share Option Scheme
~~Interest rate swap, at fair value through profit or loss~~		~~1,039~~			—
Options granted to directors:

-January 5, 2005		16,183,208		Condition 1		On or prior to October 20, 2014
-May 22, 2006		15,178,466		Condition 1		On or prior to May 21, 2016
-February 6, 2008		6,044,791		Condition 3		On or prior to December 23, 2012
-February 11, 2008		6,044,791		Condition 2		On or prior to December 23, 2012
-February 5, 2010		6,000,000		Condition 4		On or prior to February 4, 2020

Options granted to Talents:

-October 21, 2004		6,909,527		Condition 1		On or prior to October 20, 2014
-May 22, 2006		6,414,433		Condition 1		On or prior to May 21, 2016
-August 3, 2006		40,540		Condition 1		On or prior to August 2, 2016
-November 22, 2006		136,545		Condition 1		On or prior to November 14, 2016
-February 15, 2008		1,007,465		Condition 5		On or prior to December 23, 2012
-May 2, 2008		1,007,465		Condition 5		On or prior to December 23, 2012


Total share options		64,967,231

F-30

Equity settled share-based transactions (continued)

*(a)*		*The terms and conditions of the options (continued)*

		Options that existed during the year ended August 31, 2009 are as follows, whereby all options are settled by physical delivery of shares:

Number

Vesting

Exercisable

of option

conditions

period

2002 Share Option Scheme

Options granted to directors:

-January 5, 2005

16,183,208

Condition 1

On or prior to October 20, 2014

-May 22, 2006

15,178,466

Condition 1

On or prior to May 21, 2016

-February 6, 2008

6,044,791

Condition 3

On or prior to December 23, 2012

-February 11, 2008

6,044,791

Condition 2

On or prior to December 23, 2012

Options granted to Talents:

-October 21, 2004

7,606,712

Condition 1

On or prior to October 20, 2014

-May 22, 2006

7,314,455

Condition 1

On or prior to May 21, 2016

-August 3, 2006

40,540

Condition 1

On or prior to August 2, 2016

-November 22, 2006

136,545

Condition 1

On or prior to November 14, 2016

-February 15, 2008

1,007,465

Condition 5

On or prior to December 23, 2012

-March 11, 2008

302,240

Condition 1

On or prior to December 23, 2012

-May 2, 2008

1,007,465

Condition 5

On or prior to December 23, 2012

Total share options

60,866,678

		As of August 31, 2007, the Group has an outstanding interest rate swap contract with notional principal amount of HK$46,666,667. Under this arrangement, the Group pays a fixed rate interest of 2.675% per annum on the notional amount on a monthly basis, and receives a floating interest rate based on HIBOR rate. The ~~maturity date~~vesting conditions of the ~~contract~~respective share option grant are as follows:

		Condition 1

		Options granted will be vested in one year or evenly vested over a period of two to three years. Options are awarded without performance conditions and are exercisable provided the participants have remained employed by the end of respective vesting periods.

		Condition 2

		Vesting of the options is ~~December 1, 2009.~~conditional upon the performance of the Company’s shares over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010.

		Upon fulfillment of the market conditions, certain options granted vest immediately, while other options affected by the same market conditions vest evenly over a period of three years.

		During the year ended August 31, ~~2008,~~2010, one of the ~~Group early terminated the interest rate swap contract and recognized a loss of HK$1,039,000~~clauses in the ~~consolidated statement~~option agreement has been modified. As a result of ~~operations.~~this modification, vesting of certain options is now conditional upon the Company reaching a non-market performance condition. Upon fulfillment of this non-market performance condition, a portion of the options affected by this condition vest immediately, while other options affected by this condition vest evenly over a period of three years.

		The Group has accounted for the modification in accordance with IFRS/HKFRS 2 “Share-based payment” by measuring the incremental fair value which is the difference between the fair value of the modified share options and that of the original share options, both estimated as at the date of the modification, and recognizing the incremental fair value over the period from the modification date until the date when the modified share options vest. The balance of the original grant-date fair value as at the date of modification continues to be recognized over remaining original vesting period. For the year ended August 31, 2010, the amount of incremental fair value recognized in respect of the modification was HK$1,977,000.

~~F-45~~F-31

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

Equity settled share-based transactions (continued)

*(a)*		*The terms and conditions of the options (continued)*

		The vesting conditions of the respective share option grant are as follows: (continued)

		Condition 3

		Vesting of the options is conditional upon the performance of the participants. Options granted are vested over a period of three to four years from the date of fulfillment of certain key performance indicators.

		During the year ended August 31, 2010, one of the performance conditions has been modified. Such modification does not result in any incremental fair value, and therefore, there is no financial impact in the financial statements.

		Condition 4

		Vesting of the options is conditional upon the performance of the participants. Options granted are vested immediately from the date of fulfillment of the certain key performance indicators.

		Condition 5

		Vesting of the options is conditional upon the performance of the participants. Options granted are vested over a period of three to four years from the date of fulfillment of certain key performance indicators.

(b)

The number and weighted average exercise prices of share options are as follows:

2010 2009
Weighted Weighted
average average
exercise exercise
price Number of price Number of
HK$ options HK$ options
2002 Share Option Scheme

Outstanding at the beginning of the year 1.27 58,967,231 1.27 60,581,214
Adjustment to number of options for 2008 Final Dividend (note) — — 1.27 285,464
Granted during the year 4.24 6,000,000 — —
Exercised during the year 0.82 (20,317,374 ) 0.99 (1,416,005 )
Lapsed during the year — — 1.65 (483,442 )

Outstanding at the end of the year 1.87 44,649,857 1.27 58,967,231

Exercisable at the end of the year 1.35 25,603,183 1.12 45,849,756

		The weighted average share price at the date of exercise for the share options exercised during the year was HK$3.85 (2009: HK$1.82).

		The options outstanding at August 31, 2010 had a weighted exercise price of HK$1.87 (2009: HK$1.27) and a weighted average remaining contractual life of 4 years (2009: 5 years).

Note:

As a result of allotment of 12,212,142 new shares to shareholders who elected to receive the 2008 Final Dividend in shares on February 25, 2009, the exercise price of and the number of share subject to the 60,299,426 share options outstanding on December 19, 2008 (being the Record Date for determining the entitlement of 2008 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 25, 2009. The closing price per ordinary share immediately before the date of the grant of the options was HK$0.88.

F-32

Equity settled share-based transactions (continued)

*(c)*		*Fair value of share options and assumptions*

		In determining the value of the share options granted during the year ended August 31, 2010, the 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. The variables of the Black-Scholes Model includes expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company.

		In determining the value of the share options granted during the year, the following variables have been applied to the Black-Scholes Model:


*Measurement date*	*February 5, 2010*
Variables
-Expected life	8 years
-Risk-free rate		2.33	%
-Expected volatility		61.49	%
-Expected dividend yield		2.99	%

The above variables were determined as follows:

	(i)		The expected life is estimated to be 8 years from the date of grant (the “Measurement date”).

	(ii)		The risk-fee rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as at the Measurement date.

	(iii)		The expected volatility represents the annualized standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).

	(iv)		The expected dividend yield is based on the historical dividend yield over the last eight years.

The fair value of the options granted during the year is estimated as below:


Date of grant		February 5, 2010
Fair value per share option		HK$1.94

		The Group recognizes the fair value of share options as an expense in the income statement over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of the share options is measured at the date of grant.

		The Black-Scholes Model applied for the determination of the estimated value of the options granted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.

F-33

Fixed assets

Telecom-
munications,
Leasehold Furniture, computer
Investment land and Leasehold fixtures and office Motor
property buildings improvements and fittings equipment vehicles Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Cost:

At September 1, 2009 5,197 90,911 100,447 19,885 2,850,444 12,773 3,079,657
Additions — — 12,885 1,343 330,441 175 344,844
Disposals — — (212 ) (109 ) (51,906 ) — (52,227 )
Exchange adjustments — — 166 72 1,230 — 1,468

At August 31, 2010 5,197 90,911 113,286 21,191 3,130,209 12,948 3,373,742

Accumulated depreciation:

At September 1, 2009 2,309 12,466 69,102 17,017 1,668,160 8,223 1,777,277
Charge for the year 104 1,818 11,270 1,166 183,052 1,619 199,029
Disposals — — (212 ) (109 ) (35,344 ) — (35,665 )
Exchange adjustments — — 156 58 1,074 — 1,288
��

At August 31, 2010 2,413 14,284 80,316 18,132 1,816,942 9,842 1,941,929

Net book value:

At August 31, 2010 2,784 76,627 32,970 3,059 1,313,267 3,106 1,431,813

Cost:

At September 1, 2008 5,197 84,244 84,577 19,575 2,644,281 12,624 2,850,498
Additions — 6,667 16,663 416 262,796 192 286,734
Disposals — — (630 ) (30 ) (55,118 ) (43 ) (55,821 )
Exchange adjustments — — (163 ) (76 ) (1,515 ) — (1,754 )

At August 31, 2009 5,197 90,911 100,447 19,885 2,850,444 12,773 3,079,657

Accumulated depreciation:

At September 1, 2008 2,205 10,727 61,269 15,596 1,522,739 6,563 1,619,099
Charge for the year 104 1,739 8,286 1,508 192,925 1,679 206,241
Disposals — — (294 ) (29 ) (46,214 ) (19 ) (46,556 )
Exchange adjustments — — (159 ) (58 ) (1,290 ) — (1,507 )

At August 31, 2009 2,309 12,466 69,102 17,017 1,668,160 8,223 1,777,277

Net book value:

At August 31, 2009 2,888 78,445 31,345 2,868 1,182,284 4,550 1,302,380

F-35

Fixed assets (continued)

(a)

The Group’s total future aggregate lease income receivable under non-cancellable operating lease are as follows:

2010 2009
HK$’000 HK$’000
Leases in respect of investment property which are receivable:
- Within 1 year 108 258
- After 1 year but within 5 years — —

108 258

Leases in respect of telecommunications facilities and computer equipment which are receivable:
- Within 1 year 2,335 1,566
- After 1 year but within 5 years 607 1,071

2,942 2,637

3,050 2,895

*(b)*		At August 31, 2010, the fair value of the investment property is HK$5,300,000. Management estimated the fair value of the investment property based on its open market value.

*(c)*		The net book value of interests in leasehold land and buildings and investment property situated in Hong Kong are analyzed as follows:

2010 2009
HK$’000 HK$’000
Leases of between 10 to 50 years 79,411 81,333

Representing:

Leasehold land and building carried at cost 76,627 78,445
Investment property carried at cost less impairment loss 2,784 2,888

79,411 81,333

*(d)*		In addition to the leasehold land and buildings classified as being held under a finance lease, the Group leases telecommunications, computer and office equipment under finance leases expiring from one to five years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option. None of the leases included contingent rental.

		At August 31, 2010, the net book value of telecommunications, computer and office equipment under finance lease held by the Group amounted to HK$674,000 (2009: HK$1,289,000).

F-36

13		Principal subsidiaries (continued)

		The following is a list of the principal subsidiaries which principally affected the results, assets or liabilities of the Group at August 31, 2010: (continued)


		Principal
		activities	Particulars
	Place of	and place of	of issued	Percentage of
Name	incorporation	operations	share capital	interest held
CTI Guangzhou Customer Services Co. Ltd. (translated from the registered name in Chinese)#	PRC	Provision of administrative support services in the PRC	Paid in capital of HK$8,000,000		* 100

CTI Marketing Company Limited	Hong Kong	Inactive	Ordinary HK$10,000		100

Golden Trinity Holdings Limited	British Virgin Islands	Investment holding in Hong Kong	Ordinary US$1		* 100

Hong Kong Broadband Network Limited	Hong Kong	Provision of international telecommunications and fixed telecommunications network services in Hong Kong	Ordinary HK$383,049		100

IDD1600 Company Limited	Hong Kong	Provision of international telecommunications services in Hong Kong	Ordinary HK$2		100

SGBN Singapore Broadband Network Pte. Limited	Singapore	Inactive	Ordinary Singapore dollar (“SG$”) 1		* 100


*		Shares held directly by the Company.

#		Subsidiaries not audited by KPMG

14 Deferred expenditure

2010 2009
HK$’000 HK$’000
Balance as at the beginning of the year 49,460 56,095
Additions during the year 34,773 46,525
Less: amortization charge for the year (note 4(a)) (48,621 ) (53,160 )

35,612 49,460
Current portion (28,986 ) (36,674 )

Balance as at the end of the year 6,626 12,786

Deferred expenditure represents costs incurred to acquire subscribers of the services offered by the Group, which is treated as customer acquisition costs and are amortized over the period of the underlying service subscription agreements.

F-38

Capital and reserves

(a)

~~Capital and reserves~~Share capital

Issued and fully paid (ordinary shares of HK$0.10 each)
Number of Total
shares Amount Share Capital Translation Retained shareholders’
outstanding outstanding premium reserve reserve profits equity
HK$ HK$ HK$ HK$ HK$ HK$
(Amounts in thousands, except number of shares)
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 (note (i)) 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
Dividend paid in respect of previous year — — — — — (24,635 ) (24,635 )
Shares issued upon exercise of share options (note (i)) 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
Dividend paid in respect of previous year — — — — — (5,915 ) (5,915 )
Shares issued in respect of scrip dividend of previous year (note (ii)) 11,227,213 1,123 18,044 — — (19,167 ) —
Dividend paid in respect of current year — — — — — (11,371 ) (11,371 )
Shares issued in respect of scrip dividend of current year (note (iii)) 8,838,938 884 13,347 — — (14,231 ) —
Shares issued upon exercise of share options (note (i)) 14,052,268 1,405 16,893 (3,300 ) — — 14,998
Equity settled share-based compensation — — — 4,204 — — 4,204
Net income — — — — — 125,190 125,190
Foreign currency translation adjustment — — — — 1,619 — 1,619

Balance at August 31, 2008 650,621,823 65,062 670,717 19,013 2,790 275,025 1,032,607

2010 2009
No. of Amount No. of Amount
Shares HK$’000 shares HK$’000
Authorized:

Ordinary shares of HK$0.10 each 2,000,000,000 200,000 2,000,000,000 200,000

Issued and fully paid:

Ordinary shares of HK$0.10 each
At the beginning of the year 664,179,970 66,418 650,621,823 65,062
Shares issued in respect of scrip dividend of the previous year (note (i)) — — 12,212,142 1,221
Shares issued upon exercise of share options (note (ii)) 20,317,374 2,032 1,416,005 142
Shares issued upon placement (note (iii)) 80,500,000 8,050 — —
Repurchase and cancellation of ordinary shares — — (70,000 ) (7 )

At the end of the year 764,997,344 76,500 664,179,970 66,418

~~F-46~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for~~The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per ordinary share at meetings of the ~~year August 31, 2008~~Company. All ordinary shares rank equally with regard to the Company’s residual assets.


19Notes:		~~Capital and reserves (continued)~~

~~(a)~~

~~Capital and reserves (continued)~~

Authorized ordinary shares
of HK$0.10 each
No. of
Shares Amount
HK$’000
At August 31, 2007 and August 31, 2008 2,000,000,000 200,000


~~Notes:~~

(i)		During the years ended August 31, 2006, 2007 and 2008, 50,000, 2,328,000 and 14,052,268 ordinary shares were issued at a weighted average price of HK$0.26 per share, HK$0.75 per share and HK$1.07 per share respectively, to share option holders who had exercised their subscription rights. These shares issued rank pari passu with the then existing ordinary shares in issue.

~~(ii)~~		On 4 February ~~2008,~~25, 2009, the Company issued and allotted ~~11,227,213~~12,212,142 ordinary shares to shareholders who elected to receive the ~~2007~~2008 final dividend in ~~new~~ shares pursuant to the scrip dividend scheme announced by the Company on 4 January ~~2008 under which shareholders may elect to receive the dividend in new shares in lieu of cash.~~9, 2009. These ~~new~~ shares rank pari passu with the existing shares of the Company in all respects.

~~(iii)~~	(ii)		~~On 23 July 2008,~~During the ~~Company issued and allotted 8,838,938~~year ended August 31, 2010, 20,317,374 ordinary shares (2009: 1,416,005 ordinary shares) were issued at a weighted average exercise price of HK$0.82 per ordinary share (2009: HK$0.99 per ordinary share) to ~~shareholder,~~share option holders who ~~elected to receive the 2008 interim dividend in new~~had exercised their options. These shares ~~pursuant to the scrip dividend scheme announced by the Company on 19 June 2008 under which shareholders may elect to receive the dividend in new shares in lieu of cash. These new shares~~so issued rank pari passu with the then existing ordinary shares in issue.

	(iii)		On April 28, 2010, the Company completed its public offering of 4,025,000 American Depositary Shares (ADSs). An aggregate of 80,500,000 ordinary shares (4,025,000 ADSs) were issued at a price of HK$5.0455 per ordinary share (US$13.00 per ADS) to independent professional, institutional and private investors. The Company raised net proceeds of approximately HK$379,612,000 from the ADS offering.

Capital and reserves (continued)

(a) Share capital (continued)

Notes: (continued)


	(iv)		The movement of outstanding share options during the year was as follows:

Number of Number of
share options share options
Exercise outstanding at outstanding
price September 1, at August 31,
Date of grant per share 2009 Granted Exercised Lapsed 2010
October 21, 2004 HK$1.5224 6,909,527 — 2,750,847 — 4,158,680
January 5, 2005 HK$1.5224 16,183,208 — — — 16,183,208
May 22, 2006 HK$0.6523 21,592,899 — 16,409,456 — 5,183,443
August 3, 2006 HK$0.7018 40,540 — 40,540 — —
November 22, 2006 HK$0.7216 136,545 — 136,545 — —
February 6, 2008 HK$1.7568 6,044,791 — 502,000 — 5,542,791
February 11, 2008 HK$1.8660 6,044,791 — — — 6,044,791
February 15, 2008 HK$1.7568 1,007,465 — 402,986 — 604,479
May 2, 2008 HK$1.7866 1,007,465 — 75,000 — 932,465
February 5, 2010 HK$4.2400 — 6,000,000 — — 6,000,000

58,967,231 6,000,000 20,317,374 — 44,649,857

		During the year ended August 31, 2010, options were granted under the 2002 Share Option Scheme to eligible participant for the subscription of 6,000,000 shares of the Company ~~in all respects.~~at an exercise price of HK$4.24 each.

~~(iv)~~		~~Details~~Each option entitles the holder to subscribe for one share of HK$0.10 each in the ~~share option scheme of the Group, the share options granted by the Group during the relevant years and options outstanding~~Company at ~~August 31, 2006, 2007 and 2008 are set out in note 25.~~a predetermined exercise price.


*(b)*		*Nature and purpose of reserves*


(i)		Share premium

		The application of the share premium account is governed by Sections 48B of the Hong Kong Companies Ordinance.

(ii)		Capital reserve

		The capital reserve ~~which~~ comprises the fair value of the actual or estimated number of unexercised share options granted to ~~employees~~Talents of the Group that was ~~recognised~~recognized in accordance with the accounting policy adopted for share based payment in note ~~2(q)~~1(o).

(iii)		PRC statutory reserve

		In accordance with Accounting Regulations for Business Enterprises, foreign investment enterprises in the PRC are required to transfer at least 10% of their profit after taxation, as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to the general reserve until the balance of the general reserve is equal to 50% of their registered capital.

		For the year ended August 31, ~~2007 and August 31, 2008,~~2010, CTI Guangzhou Customer Services ~~Company Limited~~Co Ltd (“CTIGZ”), a ~~wholly owned~~wholly-owned subsidiary of the Group, made appropriation to the statutory reserve of ~~RMB379,000 and RMB324,000, respectively.~~RMB597,000 (2009: RMB510,000). The accumulated balance of the statutory reserve maintained at the CTIGZ as ofat August 31, ~~2007 and August 31, 2008 were RMB581,000 and RMB905,000, respectively.~~2010 was RMB2,012,000 (2009: RMB1,415,000). The statutory reserve can be used to reduce previous years’ losses and to increase the capital of the subsidiary.

(iv)		Exchange reserve

		The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note ~~2(d)~~1(d)(ii).

~~F-47~~F-43

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


19		Capital and reserves (continued)


*(c)*		*Capital management*

		The Group’s primary objectives when managing capital are to maintain a reasonable capital structure, ~~and~~ safeguard the Group’s ability to continue as a going concern, ~~in order~~and to provide returns for shareholders.

		The Group manages the amount of capital in proportion to risk, and makes adjustments to its capital structure through the amount of dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow requirements, taking into account its future financial obligations and commitments.

		The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio. For this purpose, the Group defines net debt as total loans less cash at bank and in hand and long-term bank deposits.

		The net debt to net asset gearing ratio as ofat August 31, ~~2007~~2010 and ~~2008~~2009 are as follows:


	*August 31,*
	*2007*			*2008*			2010			2009
	HK$’000			HK$’000			HK$’000			HK$’000
Unsecured
8.75% senior notes due 2015		952,593			683,242
Obligation under finance lease		1,210			376
- 10-year senior notes								—			162,586
- Long-term bank loan								123,567			—
- Obligations under finance leases								605			732


Total loans		953,803			683,618			124,172			163,318
Less: Cash at bank and in hand		(532,894	)		(421,610	)		(588,665	)		(226,416	)
Less: Long-term bank loan		(14,415	)		—
Add: Bank overdrafts — unsecured								10,490			5,364


Net debt		406,494			262,008
Net cash								(454,003	)		(57,734	)
Net asset		903,882			1,032,607			1,688,539			1,228,527


Net debt to net asset gearing ratio		0.45			0.25			—			—

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


2120		~~Dividends~~Deferred taxation (continued)

		As at August 31, 2010, the Group has not recognized deferred tax assets in respect of unused tax losses of HK$8,242,000 (2009: HK$8,154,000) because it is not probable that future taxable profits can be generated to utilize the tax losses.

~~(a)~~

~~Dividends payable to equity shareholders of the Company attributable to the year~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Interim dividend, declared and paid, of HK4 cents (2007: HK4 cents, 2006: HK$Nil) per ordinary share — 24,635 25,602
Final dividend proposed after the balance sheet date of HK2 cents (2007: HK4 cents, 2006: HK$Nil) per ordinary shares — 24,660 13,012

— 49,295 38,614

2010 2009
HK$’000 HK$’000
After 5 years 2,553 2,455
No expiry date 5,689 5,699

8,242 8,154

		~~During~~According to the ~~year ended~~Corporate Income Tax (“CIT”) law and its relevant regulations, PRC-resident enterprises are levied withholding tax at 10% on dividends to their non-PRC-resident corporate investors for earnings accumulated beginning on January 1, 2008, and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. In addition, under theArrangement between the Mainland of China and Hong Kong Special Administration Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasionand its related regulations, a qualified Hong Kong Company will be liable for withholding tax at the rate of 5% for the dividend income derived from the PRC, if the Hong Kong company is the “beneficial owner” and holds 25% of equity interest or more of the PRC company directly. At August 31, ~~2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to~~2010, the ~~interim dividend~~Group has not recognized deferred tax liabilities in respect of temporary differences relating to the ~~six-month period ended February 29, 2008. 8,838,938 shares were issued during~~undistributed earnings of its PRC subsidiary approximately amounting HK$12,283,000 (2009: HK$5,393,000) as the ~~year ended August 31, 2008 to shareholders who had elected to receive all or part~~Group controls the dividend policy of ~~their entitlement to dividends~~the subsidiary and it does not consider that it is probable that profits will not be distributed in ~~form of scrip.~~the foreseeable future.

		The ~~final dividend proposed after~~components in deferred tax assets and liabilities recognized in the balance sheet ~~date has not been recognized~~and the related movements during the year are as ~~a liability at August 31, 2007 and August 31, 2008.~~follows:


*~~(b)~~*		*~~Dividends attributable to the previous financial year, approved and paid during the year~~*

Accelerated depreciation allowance
2010 2009 2008
HK$’000 HK$’000 HK$’000
Deferred tax liabilities

At the beginning of the year (131,766 ) (126,447 ) (134,910 )
Charged to consolidated income statement (15,027 ) (5,326 ) 8,463
Exchange differences (6 ) 7 —

At the end of the year (146,799 ) (131,766 ) (126,447 )

Tax losses
2010 2009 2008
HK$’000 HK$’000 HK$’000
Deferred tax assets

At the beginning of the year 116,057 147,845 134,619
Charged to consolidated income statement (25,107 ) (31,782 ) 13,227
Exchange differences 6 (6 ) (1 )

At the end of the year 90,956 116,057 147,845

The following amounts, determined after appropriate offsetting, are shown in the balance sheet:

2010 2009
HK$’000 HK$’000
Deferred tax assets — —
Deferred tax liabilities (55,843 ) (15,709 )

(55,843 ) (15,709 )

F-45

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


22		~~Banking facilities~~

~~The Group’s banking facilities were denominated in Hong Kong dollars as follows:~~

Terms of facilities as
Amount available Amount utilized at August 31, 2008
August 31, August 31, Interest rate
2007 2008 2007 2008
HK$’000 HK$’000 HK$’000 HK$’000
Bank overdrafts/ bank loans 80,200 87,319 1,603 29,943 HIBOR or cost
of Funds + 0.8% per annum

The amounts utilized as of August 31, 2007 and 2008 represented bank guarantees and letter of credit issued against the banking facilities (see note 16) which the Group has not drawn upon. The utilized banking facilities as of August 31, 2007 and 2008 were denominated in Hong Kong dollar and Singaporean dollar.


23		~~Related party transactions~~

		~~In addition to the transactions and balances disclosed elsewhere in these financial statements,~~2010, the Group entered into a 5-year interest rate swap contract with a HK$175,000,000 notional amount to hedge against interest rate risk. Under this arrangement, the ~~following material related party transactions.~~

		*~~Key management personnel remuneration~~*

		~~Remuneration for key management personnel, including amounts paid to~~Group will pay a fixed rate interest on the ~~Group’s directors~~notional amount on a quarterly basis, and ~~certain of the highest paid employees,~~receive a floating interest rate at HIBOR rate. The contract is ~~as follows:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Short-term employee benefits 21,443 26,791 28,850
Post-employment benefits 1,916 2,197 2,425
Equity compensation benefits 4,571 4,388 3,664

27,930 33,376 34,939

~~F-50~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

24		~~Retirement schemes~~recognized initially at fair value and is remeasured at each balance sheet date.

		The ~~Group contributes to an Occupational Retirement Scheme (the “ORSO Scheme”)~~Interest rate swap does not quality for hedge accounting under IAS/HKAS 39,Financial instruments: Recognition and measurement, ~~a defined contribution retirement scheme, which~~and therefore changes in its fair value is ~~available to some of its employees~~recognized immediately in Hong Kong. Under the ORSO Scheme, the employees are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management staff and all other staff respectively. The employees are entitled to 100% of the employer’s contributions after 10 years of completed service,profit or at a reduced scale after completion of 3 to 9 years’ service. Contributions to the ORSO Scheme are reduced by contributions forfeited by those employees who leave the ORSO Scheme prior to vesting fully in the Group’s contributions.loss.

22		A mandatory provident fund scheme (the “MPF Scheme”) has been established under the Hong Kong Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing employees of the Group in Hong Kong could elect to join the MPF Scheme, while all new employees joining the Group in Hong Kong from then onwards are required to join the MPF Scheme. Both the GroupLong-term debt and the employees are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the employee, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme.other liabilities

2010 2009
HK$’000 HK$’000
10-year senior notes (note (a)) — 162,586
Long-term bank loan — unsecured (note (b)) 123,567 —
Obligations under finance leases (note (c)) 605 732

124,172 163,318

Current portion of — obligations under finance leases (212 ) (202 )

123,960 163,116

~~Pursuant~~At August 31, 2010, the Group’s long-term debt and other liabilities were repayable as follows:

2010 2009
HK$’000 HK$’000
Long-term debt
- after 2 years but within 5 years 123,567 —
- after 5 years — 162,586

Obligations under finance leases
- Within 1 year 212 202
- After 1 year but within 2 years 105 197
- After 2 years but within 5 years 288 263
- After 5 years — 70

605 732

Less: Current portion of obligations under finance leases (212 ) (202 )

393 530

123,960 163,116

F-46

Long-term debt and other liabilities (continued)

Notes:

(a)		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 an issue price equal to the relevant regulations in the People’s Republic of China (the “PRC”), the Group contributes to the defined contribution retirement scheme organised by the local social security bureau for each employee100 per cent of the ~~subsidiary in~~principal amount. The 10-year senior notes have a maturity date on February 1, 2015 and bear interest at the ~~PRC at a~~fixed rate of ~~20%~~8.75% per annum payable semi-annually on February 1 and August 1 of ~~a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these employees.~~each year, commencing August 1, 2005.

		The ~~retirement schemes for staff of~~10-year senior notes are unconditionally and irrevocably guaranteed on a joint and several basis by the ~~Group in other countries follow the local statutory requirements of the respective countries.~~Company’s subsidiaries (other than CTI Guangzhou Customer Services Co. Ltd.) as subsidiary guarantors.

		~~The aggregate employer’s contributions, net~~On December 4, 2009, the Group repurchased a portion of ~~forfeited contributions, which have been dealt~~the 10-year senior notes with a cumulative principal value of US$1,500,000 (equivalent to HK$11,625,000) in the ~~consolidated statement~~open market. The total consideration paid including accrued interest was approximately US$1,562,000 (equivalent to HK$12,103,000). The loss on extinguishment of ~~operations during~~ the ~~year are as follows:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Gross contributions 28,912 24,545 29,738
Less: Forfeited contributions utilized to offset the Group’s contributions during the year (956 ) (612 ) —

Net contributions charged to the consolidated statement of operations 27,956 23,933 29,738

~~At August 31, 2008, there is no forfeited contribution available~~senior notes was US$41,000 (equivalent to ~~offset future contributions by the Group to the ORSO scheme and the Mutual Plan.~~

~~Equity settled share-based transactions~~

		*~~2002 Share Option Scheme~~*HK$318,000) which has been recorded in other income, net.

		~~The~~On February 1, 2010, the Company ~~operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by~~redeemed the ~~shareholders~~then outstanding 10-year senior notes with principal value of US$19,863,000 (equivalent to HK$153,948,000) with the redemption price equal to 104.375% of the ~~Company~~principal amount. The total consideration paid including accrued interest was approximately US$21,601,000 (equivalent to HK$167,624,000). The loss on ~~December 23, 2002 and where the directors may, at their discretion, invite eligible participants to take up options to subscribe for shares subject to the terms and conditions stipulated therein.~~

		Under the 2002 Share Option Scheme, the Company may grant options to employees (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for sharesextinguishment of the ~~Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject~~10-year senior notes was US$1,203,000 (equivalent to ~~any~~HK$9,332,000) which has been recorded in other executive and employee share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant. During the year ended August 31, 2008, options were granted under the 2002 Share Option Scheme to eligible participants for the subscription of 18,300,000 shares (2007: 300,000 shares) of the Company at a weighted average exercise price of HK$1.84 (2007: HK$1.16) each.

~~F-51~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Equity settled share-based transactions (continued)~~

~~1997 Share Option Scheme~~

		The Company also had a previous share option scheme (the “1997 Share Option Scheme”) adopted by shareholders on July 12, 1997 which was terminated on December 23, 2002 upon the adoption of the 2002 Share Option Scheme. Unexercised options granted under the 1997 Share Option Scheme lapsed automatically on 12 July 2007.

		~~Each option issued under the 2002 Share Option Scheme or the 1997 Share Option Scheme entitles the holder to subscribe for one ordinary share in the Company at a predetermined exercise price.~~

		Prior to September 1, 2005, under Hong Kong GAAP, no compensation cost was required to be recognized in respect of the grant of share options. At the time of exercise of the options, proceeds from issue of shares were credited to share capital and share premium account.

		Effective from September 1, 2005, upon the adoption of HKFRS 2 “Share-based payment”, the Group recognizes the fair value of share options granted over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of share option is measured at the date of grant. The Group 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:

	~~(i)~~		~~share options granted under the 1997 Share Option Scheme since all options were granted to employees before November 7, 2002; and~~

	~~(ii)~~		~~share options granted under the 2002 Share Option Scheme and vested before September 1, 2005.~~

~~Details of share options granted pursuant to the 2002 Share Option Scheme and 1997 Share Option Scheme that were outstanding at August 31, 2006, 2007 and 2008, are as follows:~~

~~1997 Share Option Scheme~~

September 3, September 10, October 20,
Date of grant 1998 1999 2000
Exercise price per share (HK$) at date of grant 0.26 2.10 0.58

Market price per share (HK$) at date of grant 0.26 2.10 0.58

Outstanding at August 31, 2005 190,000 60,000 298,000
Exercised (50,000 ) — —
Lapsed upon resignation of employees — (20,000 ) (20,000 )

Outstanding at August 31, 2006 140,000 40,000 278,000
Exercised (140,000 ) — (278,000 )
Lapsed upon expiry of the options — (40,000 ) —

Outstanding at August 31, 2007 and August 31, 2008 — — —

~~F-52~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Equity settled share-based transactions (continued)~~

~~2002 Share Option Scheme~~

November
June 3, October 21, January 5, October 3, May 22, July 3, August 3, 22, May 23, December February 6, February February 15, March May 2,
Date of grant 2004 2004 2005 2005 2006 2006 2006 2006 2007 12, 2007 2008 11, 2008 2008 11, 2008 2008
(note (a)) (note (b)) (note (c)) (note (d)) (note (e)) (note (f)) (note(g)) (note(h)) (note(i)) (note (j)) (note (k)) (note(l)) (note (m)) (note (n)) (note(o))
Exercise price per share (HK$) at date of grant 1.47 1.54 1.54 0.81 0.66 0.68 0.71 0.73 2.03 2.45 1.77 1.88 1.77 1.83 1.80

Market price per share (HK$) at date of grant 1.47 1.49 1.48 0.81 0.64 0.68 0.71 0.73 2.10 2.40 1.86 1.76 1.80 1.70 1.75

Outstanding at August 31, 2005 6,000,000 14,670,000 16,000,000 — — — — — — — — — — — —
Granted — — — 1,000,000 32,210,000 1,000,000 100,000 — — — — — — — —
Lapsed upon resignation of employees — (5,220,000 ) — — — — — — — — — — — — —

Outstanding at August 31, 2006 6,000,000 9,450,000 16,000,000 1,000,000 32,210,000 1,000,000 100,000 — — — — — — — —
Granted — — — — — — — 200,000 100,000 — — — — — —
Exercised — (330,000 ) — — (1,250,000 ) (300,000 ) (30,000 ) — — — — — — — —
Lapsed upon resignation of employees — (780,000 ) — — (2,020,000 ) — — — — — — — — — —

Outstanding at August 31, 2007 6,000,000 8,340,000 16,000,000 1,000,000 28,940,000 700,000 70,000 200,000 100,000 — — — — — —
Adjustment to the number of options for 2007 Final Dividend (note p) — 32,397 63,292 — 101,301 2,769 277 534 396 3,956 — — — — —
Adjustment to the number of options for 2008 Interim Dividend (note q) — 21,002 43,664 — 65,221 — 191 368 — — 16,309 16,309 10,873 816 2,718
Granted — — — — — — — — — 1,000,000 6,000,000 6,000,000 4,000,000 300,000 1,000,000
Exercised (6,000,000 ) (821,344 ) — (1,000,000 ) (6,135,805 ) — (30,119 ) (65,000 ) — — — — — — —
Lapsed upon resignation of employees — (473 ) — — (583,162 ) (702,769 ) — — (100,396 ) (1,003,956 ) — — (3,008,155 ) — —

Outstanding at August 31, 2008 — 7,571,582 16,106,956 — 22,387,555 — 40,349 135,902 — — 6,016,309 6,016,309 1,002,718 300,816 1,002,718

~~F-53~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Equity settled share-based transactions (continued)~~

~~2002 Share Option Scheme~~


~~Notes:~~

~~(a)~~		~~On June 3, 2004, an employee was granted options to subscribe for 6,000,000 shares at a price of HK$1.47 per share. The vesting period for the options is June 3, 2004 to April 30, 2006.~~income, net.

(b)		~~On October 21, 2004, employees, including executive directors,~~As at August 31, 2010, HK$125,000,000 was drawn which bears floating interest rate and is repayable on December 23, 2014. The borrowing is subject to the fulfillment of covenants relating to certain of the Group’s balance sheet ratios, as are commonly found in lending arrangements with financial institutions. If the Group were ~~granted options~~ to ~~subscribe for 14,670,000 shares~~breach the covenants the drawn down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. As at ~~a price~~August 31, 2010, none of ~~HK$1.54 per share. The vesting period for~~ the ~~options is October 21, 2004~~covenants relating to ~~December 31, 2006.~~drawn down facilities had been breached.

(c)		On January 5, 2005, executive directors were granted options to subscribe for 16,000,000 shares at a price of HK$1.54 per share. The vesting period for the options is January 5, 2005 to December 31, 2006.

~~(d)~~		~~On October 3, 2005, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$0.81 per share. The vesting period for the options is October 3, 2005 to September 30, 2006.~~

~~(e)~~		On May 22, 2006, employees, including executive directors, were granted options to subscribe for 32,210,000 shares at a price of HK$0.66 per share. The vesting period for the options is May 22, 2006 to May 21, 2009.

~~(f)~~		~~On July 3, 2006, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$0.68 per share. The vesting period for the options is July 3, 2006 to July 2, 2009.~~

~~(g)~~		~~On August 3, 2006, an employee was granted options to subscribe for 100,000 shares at a price of HK$0.71 per share. The vesting period of the option is August 3, 2006 to August 2, 2009.~~

~~(h)~~		~~On November 22, 2006, an employee was granted options to subscribe for 200,000 shares at a price of HK$0.73 per share. The vesting period of the option is November 22, 2006 to November 14, 2009.~~

~~(i)~~		~~On May 23, 2007, an employee was granted options to subscribe for 100,000 shares at a price of HK$2.03 per share. The vesting period of the option is May 23, 2007 to June 11, 2010.~~

~~(j)~~		On December 12, 2007, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$2.45 per share. The vesting period for the options is December 12, 2007 to December 11, 2010.

~~(k)~~		On February 6, 2008, an employee was granted options to subscribe for 6,000,000 shares at a price of HK$1.77 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three to four years from the date of fulfillment of the performance condition.

~~(l)~~		On February 11, 2008, an executive director was granted options to subscribe for 6,000,000 shares at a price of HK$1.88 per share. Vesting of the options is conditional upon the performance of the Company’s shares over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010. Options granted will be evenly vested immediately and over a period of three years from the date of fulfillment of the performance condition.

~~(m)~~		On February 15, 2008, an employee was granted options to subscribe for 4,000,000 shares at a price of HK$1.77 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three years from the date of fulfillment of the performance condition.

~~(n)~~		~~On March 11, 2008, an employee was granted options to subscribe for 300,000 shares at a price of HK$1.83 per share. The vesting period for the options is March 11, 2008 to March 10, 2011.~~

~~(o)~~		On May 2, 2008, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$1.80 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three years from the date of fulfillment of the performance condition.

~~(p)~~		As a result of allotment of 11,227,213 new shares to shareholders of the Company who elected to receive the 2007 Final Dividend in shares on February 4, 2008, the exercise price of and the number of share subject to the 51,805,000 options outstanding on December 21, 2007 (being the Record Date for determining the entitlement of 2007 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 4, 2008. The closing price per ordinary share immediately before the date of the grant of the options was HK$1.70.

~~F-54~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Equity settled share-based transactions (continued)~~

~~2002 Share Option Scheme (continued)~~


~~Notes: (continued)~~

~~(q)~~		As a result of allotment of 8,838,938 new shares to shareholders of the Company who elected to receive the 2008 Interim Dividend in shares on 23 July 2008, the exercise price of and the number of share subject to the 65,296,047 options outstanding on 6 June 2008 (being the Record Date for determining the entitlement of 2008 Interim Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from 23 July 2008. The closing price per ordinary share immediately before the date of the grant of the options was HK$1.79.

~~(r)~~		~~The share options outstanding in respect of the 1997 Share Option Scheme and 2002 Share Options Scheme as of~~At August 31, ~~2006, 2007 and 2008 is summarized~~2010, the Group had obligations under finance leases repayable as follows:

Weighted Weighted
Number of average average
share exercise market price
options prices per at the date
outstanding share of grant
(thousands) HK$’000 HK$’000
Balance at August 31, 2005 37,218 1.51 1.46
Granted during the year 34,310 0.67 0.74
Exercised during the year (50 ) 0.26 N/A
Lapsed during the year (5,260 ) 1.54 N/A

Balance at August 31, 2006 66,218 1.08 1.04
Granted during the year 300 1.16 1.19
Exercised during the year (2,328 ) 0.76 0.74
Lapsed during the year (2,840 ) 0.93 0.89

Balance at August 31, 2007 61,350 1.09 1.06
Adjustment to the number of options for 2007 Final Dividend 205 1.10 1.07
Adjustment to the number of options for 2008 Interim Dividend 177 1.28 1.26
Granted during the year 18,300 1.84 1.83
Exercised during the year (14,052 ) 1.07 1.06
Lapsed during the year (5,399 ) 1.63 1.64

Balance at August 31, 2008 60,581 1.27 1.25

2010 2009
Present Present
value Interest value Interest
of the expense Total of the expense Total
minimum relating to minimum minimum relating to minimum
lease future lease lease future lease
payments periods payments payments periods payments
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Within 1 year 212 30 242 202 35 237

After 1 year but within 2 years 105 20 125 197 22 219
After 2 years but within 5 years 288 22 310 263 30 293
After 5 years — — — 70 1 71

393 42 435 530 53 583

605 72 677 732 88 820

~~F-55~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


2523		~~Equity settled share-based transactions (continued)~~

~~2002 Share Option Scheme (continued)~~


~~Notes: (continued)~~

~~(t)~~		~~Fair value of share options and assumptions: (continued)~~

		~~In determining the value of the share options granted during the year, the following variables have been applied~~Notes to the ~~models:~~

June 3, October 21, January 5, October 3, May 22, July 3, August 3, November 22, May 23, December 12, February 6, February 11, February 15, March 11, May 2,
Measurement date 2004 2004 2005 2005 2006 2006 2006 2006 2007 2007 2008 2008 2008 2008 2008
Variables
— Expected life (i) 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years Average
4 years 3 years 5 years 5 years
— Risk-free rate (ii) 3.78 % 2.65 % 2.75 % 4.41 % 4.63 % 4.45 % 4.06 % 3.76 % 4.45 % 3.10 % 2.16 % 2.16 % 2.16 % 2.04 % 2.88 %
— Expected volatility (iii) 59.04 % 72.06 % 69.37 % 58.29 % 55.04 % 53.56 % 52.71 % 51.02 % 56.01 % 61.86 % 63.22 % 63.32 % 63.22 % 63.35 % 63.56 %
— Expected dividend yield (iv) 1 % 1 % 1 % 0 % 0 % 0 % 0 % 0 % 0 % 2 % 2 % 2 % 2 % 2 % 2 %

~~The above variables were determined as follows:~~

~~(i)~~		~~The expected life is estimated to be 3 to 5 years from the date of grant (the “Measurement Date”).~~

~~(ii)~~		~~The risk-free rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as of the Measurement Date.~~

~~(iii)~~		The expected volatility represents the annualized standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).

~~(iv)~~		~~The expected dividend yield is based on the historical dividend yield over the last five years.~~

~~F-57~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Revenues and segmental information (continued)~~cash flow statement

(a)

~~Primary reporting format — business segments (continued)~~Reconciliation of profit before taxation to net cash inflow from operations

Year ended August 31, 2007
International Fixed tele-
tele- communications
communications network
services services Elimination Group
HK$’000 HK$’000 HK$’000 HK$’000
Revenue (note (c))
— External sales 324,470 816,800 — 1,141,270
— Inter-segment sales 5,699 27,633 (33,332 ) —

330,169 844,433 (33,332 ) 1,141,270

Segment results 49,702 42,873 92,575

Interest income 15,032 7,639 — 22,671
Interest expense (87,504 )
Other income 3,149

Profit before taxation 30,891

Segment assets 541,502 1,619,631 — 2,161,133
Unallocated assets —

Total assets 2,161,133

Segment liabilities 101,148 201,738 — 302,886
Unallocated liabilities 954,365

Total liabilities 1,257,251

Capital expenditure 4,060 128,190 — 132,250
Depreciation 21,707 236,396 — 258,103

2010 2009 2008
HK$’000 HK$’000 HK$’000
Profit before taxation 259,545 251,559 108,372
Depreciation of owned fixed assets 198,323 205,624 209,464
Depreciation of fixed assets held under finance lease 706 617 587
Amortization of deferred expenditure 48,621 53,160 33,777
Interest income (11,372 ) (4,869 ) (15,596 )
Interest element of finance lease 42 27 34
(Gain)/loss on disposal of fixed assets (1,375 ) 1,016 1,431
Realized and unrealized gain on other financial assets — (189 ) (3,284 )
Realized gain on long term bank deposit — — (1,185 )
Realized loss on derivative financial instrument — — 1,039
Equity settled share-based transactions 5,347 4,768 4,204
Loss/(gain) on extinguishment of 10-year senior notes 9,650 (31,371 ) (2,582 )
Change in fair value of derivative financial instruments 11,293 — —
Interest, amortization and exchange difference on 10-year senior notes 6,069 49,214 72,640
Interest on other borrowings 3,260 885 3,428
Amortization of upfront cost on bank loans 192 — —
Interest expenses on bank loans 1,379 — —

Net cash inflow before working capital changes 531,680 530,441 412,329
Decrease/(increase) in long-term receivable and prepayment 917 (505 ) 1,346
Decrease in accounts receivable, other receivables, deposits and prepayments 738 33,052 6,914
Decrease in inventories — — 477
Increase in deferred expenditure (34,773 ) (46,525 ) (68,505 )
(Decrease)/increase in accounts payable, other payables, accrued charges and deposits received (1,937 ) 17,419 (12,567 )
(Decrease)/increase in deferred service revenue (8,272 ) 4,621 46,247

Net cash inflow generated from operations 488,353 538,503 386,241

~~F-61~~F-48

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the~~ year ~~August 31, 2008~~

~~Revenues and segmental information (continued)~~

~~(b)~~

~~Geographical segments (continued)~~

August 31, 2008
Total Capital Fixed
Revenue assets expenditure assets, net
HK$’000 HK$’000 HK$’000 HK$’000
Hong Kong 1,281,069 2,040,496 211,482 1,227,907
Canada 21,912 13,585 202 3,492

1,302,981 2,054,081 211,684 1,231,399

Unallocated assets 26,335

2,080,416

*~~(c)~~*		Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a FTNS licensee, provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the TA and interconnection services have been provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts it expected to collect. In prior years, majority of the mobile operators, however, rejected HKBN’s demand for payment. As a result of non-payment by certain mobile operators, in 2004, the Group asked TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators to HKBN; and the effective date of the determined mobile interconnection charges.

		In March 2006, TA issued a preliminary analysis (the “2006 PA”) on the 2004 Determination with respect to the rates of mobile interconnection charges payable by the mobile operator under dispute. However, as of August 31, 2006, the final level of mobile interconnection charges was still subject to the 2004 Determination to be issued by TA.

		~~For the year ended August 31, 2006, the Group recognized mobile interconnection charges of HK$22,037,000 based on the 2006 PA.~~

Share capital
(including share Obligations
premium and under finance 10-year
capital reserve) leases senior notes
HK$’000 HK$’000 HK$’000
Balance at September 1, 2007 702,192 1,210 952,593
Share issued upon exercise of share options 14,998 — —
Share issued in respect of scrip dividend 33,398 — —
Repayment of capital element of finance lease — (834 ) —
Repurchase of 10-year senior notes — — (269,399 )
Gain on extinguishment of 10-year senior notes — — (2,582 )
Amortization of incidental issuance costs — — 1,665
Equity settled share-based transactions 4,204 — —
Effect of foreign exchange rate changes — — 965

Balance at August 31, 2008 754,792 376 683,242

Balance at September 1, 2008 754,792 376 683,242
Share issued upon exercise of share options 1,399 — —
Repurchase and cancellation of ordinary shares (7 ) — —
Share issued in respect of scrip dividend 9,906 — —
Purchase of fixed assets under finance lease — 494 —
Repayment of capital element of finance lease — (138 ) —
Repurchase of 10-year senior notes — — (485,829 )
Gain on extinguishment of 10-year senior notes — — (31,371 )
Amortization of incidental issuance costs — — 1,545
Equity settled share-based transactions 4,768 — —
Effect of foreign exchange rate changes — — (5,001 )

Balance at August 31, 2009 770,858 732 162,586

Balance at September 1, 2009 770,858 732 162,586
Share issued upon exercise of share options 16,744 — —
Shares issued upon placement 379,612 — —
Purchase of fixed assets under finance lease — 90 —
Repayment of capital element of finance lease — (217 ) —
Repurchase and redemption of 10-year senior notes — — (172,423 )
Loss on extinguishment of 10-year senior notes — — 9,650
Amortization of incidental issuance costs — — 188
Equity settled share-based transactions 5,347 — —
Effect of foreign exchange rate changes — — (1 )

Balance at August 31, 2010 1,172,561 605 —

~~F-64~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Revenues and segmental information (continued)~~

*~~(c)~~*		~~(continued)~~

		In March 2007, TA issued a revised 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, TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by TA previously.

		For the year ended August 31, 2007, the Group recognized revenue related to mobile interconnection charges of HK$40,877,000 based on the 2004 Determination which included charges for the year ended August 31, 2007 and additional charges for the years ended August 31, 2005 and 2006 previously measured based on the 2006 PA. The Group has also written back bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the consolidated statement of operations based on the amount it expected to collect for billings outstanding through that date.

		During the year ended August 31, 2008, HKBN entered into contractual agreements with additional mobile operators which agreed to pay mobile interconnection charges based on the 2004 determination for period from April 1, 2002 to August 31, 2004 and for the subsequent period at an interim rate stated in the agreements which will be adjusted based on further determination to be issued by TA.

		In February 2008, HKBN requested TA to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, TA indicated that it accepted HKBN’s request for determination, which covers the mobile interconnection charges payable by the mobile operators under the determination, for the period from April 1, 2002 to April 26, 2009 (for those mobile operators who have not reached the relevant contractual agreements with HKBN) or for the period from September 1, 2004 to April 26, 2009 (for those mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate thereon.

		For the year ended August 31, 2008, the Group recognized revenue related to mobile interconnection charges of HK$29,568,000 representing the amount of mobile interconnection charges management expects to collect.

~~F-65~~F-49

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

2724		Financial instruments

Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management policies and practices described below.


*(a)*		*Credit risk*

		The Group’s credit risk is primarily attributable to ~~trade~~accounts receivable and other ~~receivables, and debt investments.~~receivables. Management has a credit policy in place and the exposure to the credit risk is monitored on an ongoing basis.

		In respect of ~~trade~~accounts receivable and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer locates. These receivables are due within 30 days from the date of billing. Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers.

		The Group’s exposure to credit risk is influenced mainly by individual characteristics of each customer. The default risk of the country in which customer locates also has an influence on credit risk but to a lesser extent. Concentrations of credit risk with respect to accounts receivable are limited due to the Group’s customer base being large and unrelated. As such, management does not expect any significant losses of accounts receivable that have not been provided for by way of allowances as disclosed in note 8.15.

		The maximum exposure to credit risk is represented by the carrying amount of each financial asset after deducting any impairment allowance, in the balance sheet. Except for the financial guarantee given by the Group as disclosed in note ~~15(d),~~25, the Group does not provide any other guarantees which expose the Group to credit risk. The maximum exposure to credit risk in respect of these financial guarantees at the balance sheet date is disclosed in note ~~15 (d).~~25.

		Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 8.15.

~~F-66~~F-50

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Financial instruments (continued)~~

*~~(b)~~*		*~~Liquidity risk (continued)~~*

	The following table details the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group are required to pay.


	2007												2008												2010												2009
			Total				More than		More than						Total				More than		More than						Total				More than		More than						Total				More than		More than
			contractual		Within		1 year but		2 years but						contractual		Within		1 year but		2 years but						contractual		Within		1 year but		2 years but						contractual		Within		1 year but		2 years but
	Carrying		undiscounted		1 year or		less than		less than		More than		Carrying		undiscounted		1 year or		less than		less than		More than		Carrying		undiscounted		1 year or		less than		less than		More than		Carrying		undiscounted		1 year or		less than		Less than		More than
	amount		cash flow		on demand		2 years		5 years		5 years		amount		cash flow		on demand		2 years		5 years		5 years		amount		cash flow		on demand		2 years		5 years		5 years		amount		cash flow		on demand		2 years		5 years		5 years
	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Current liabilities

Bank overdrafts - unsecured																										10,490		10,490		10,490		—		—		—		5,364		5,364		5,364		—		—		—
Accounts payable		76,019		76,019		76,019		—		—		—		52,324		52,324		52,324		—		—		—		35,128		35,128		35,128		—		—		—		37,555		37,555		37,555		—		—		—
Other payables and accrued charges		145,267		145,267		145,267		—		—		—		178,114		178,114		178,114		—		—		—		195,931		195,931		195,931		—		—		—		206,487		206,487		206,487		—		—		—
Deposits received		16,188		16,188		16,188		—		—		—		16,264		16,264		16,264		—		—		—		21,822		21,822		21,822		—		—		—		16,385		16,385		16,385		—		—		—
Obligations under finance leases		835		869		869		—		—		—		121		142		142		—		—		—		212		242		242		—		—		—		202		237		237		—		—		—
Tax payable		1,481		1,481		1,481		—		—		—		2,103		2,103		2,103		—		—		—		1,533		1,533		1,533		—		—		—		1,993		1,993		1,993		—		—		—
Non current liabilities

8.75% senior notes		952,593		1,614,184		85,278		85,278		255,834		1,187,794		683,242		1,093,852		61,012		61,012		183,036		788,792
Obligation under finance leases		375		414		—		142		272		—		255		272		—		142		130		—
*Non-current liabilities*

Long-term bank loan																										123,567		133,996		1,829		2,166		130,001		—		—		—		—		—		—		—
Derivative financial instrument																										11,293		11,435		4,580		3,441		3,414		—		—		—		—		—		—		—
10-year senior notes																										—		—		—		—		—		—		162,586		244,117		14,489		14,489		43,467		171,672
Obligations under finance leases																										393		435		—		125		310		—		530		583		—		219		293		71


		1,192,758		1,854,422		325,102		85,420		256,106		1,187,794		932,423		1,343,071		309,959		61,154		183,166		788,792		400,369		411,012		271,555		5,732		133,725		—		431,102		512,721		282,510		14,708		43,760		171,743

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

2724

Financial instruments (continued)


*(c)*		*Interest rate risk*

		The Group’s interest-rate risk arises mainly from ~~its 10-year 8.75% senior notes~~the HK$125,000,000 bank loan which ~~bear~~bears floating interest rate. Bank loans at ~~the fixed rate of 8.75% per annum. Borrowings issued at fixed rate~~variable rates expose the Group to ~~fair value interest-rate~~cash flow interest rate risk.


(i)	Interest rate profile

		The following table details the interest rate profile of the Group’s ~~net~~ borrowings at the balance sheet date.

August 31,
2008 2007
Effective Effective
interest rate interest rate
% HK$’000 % HK$’000
Fixed rate borrowings:
8.75% senior notes 9.2 952,593 9.2 683,242
Obligation under finance lease 6.8 1,210 6.8 376

953,803 683,618

2010 2009
Effective Effective
interest interest
rate rate
% HK$’000 % HK$’000
Fixed rate borrowings:

10-year senior notes — — 9.2 162,586
Obligations under finance leases 5.6 605 5.6 732

605 163,318

Floating rate borrowings:

Bank overdrafts — unsecured 5.3 10,490 5.3 5,364
Long-term bank loan 1.7 123,567 — —

	(ii)		Sensitivity analysis

			~~Management determines that the~~The Group’s ~~exposure of~~profit attributable to shareholders would decrease by approximately HK$1,250,000 in response to a 100 basis-points increase in market interest ~~rate risk was not significant and hence no sensitivity analysis is prepared.~~rates applicable as at August 31, 2010, with all other variables held constant.

F-52

24		Financial instruments (continued)

*(d)*		*Foreign currency risk*

		All the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two ~~currencies~~currencies.


	The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintained Renminbi cash balance that approximate two to three months’ of operating cash flows.

(i)	Exposure to currency risk

		The following table details the Group’s exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate.

August 31,
2007 2008
United United
States Japanese Canadian States Japanese Canadian
Dollars Yen Dollars Dollars Yen Dollars
’000 ’000 ’000 ’000 ’000 ’000
Cash at bank and in hand and pledged bank deposits 21,172 2,218 111 22,330 1,099 176
Accounts payable (4,781 ) — — (2,500 ) — —
Other payables and accrued charges (1,563 ) — — (3,390 ) — —
8.75% senior notes (122,127 ) — — (87,483 ) — —

Overall net exposure (107,299 ) 2,218 111 (71,043 ) 1,099 176

~~F-69~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


2724		Financial instruments (continued)

*(e)*		*Fair values ~~(continued)~~*

(i)		Financial instrument carried at fair value

		The following table presents the carrying value of financial instrument measured at fair value at the balance sheet date across the three levels of the fair value hierarchy defined in IFRS/HKFRS 7,Financial Instruments: Disclosures, with the fair value of each financial instrument categorized in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:

	—		Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments

	—		Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data

	—		Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data

2010

Level 1 Level 2 Level 3 Total
HK$’000 HK$’000 HK$’000 HK$’000
Liability

Derivative financial instrument:
- Interest rate swap — 11,293 — 11,293

The carrying amounts of the Group’s financial instruments carried at cost or amortized cost are not materially different from their fair values as at August 31, 2010 and 2009 except as follows:

2010 2009
Carrying Carrying
amount Fair value amount Fair value
HK$’000 HK$’000 HK$’000 HK$’000
The Group

10-year senior notes — — 162,586 157,285

*(f)*		*Estimation of fair values*

		Fair value of financial instruments is estimated as follows:

	(i)		The fair value of ~~financial instruments traded in active markets is based on quoted market prices at~~ the ~~balance sheet date. The fair value of the 8.75%~~10-year senior notes iswas determined based on quoted market ~~price. The fair value of the long term bank deposits are determined based on the issuer’s quoted~~ price.

	(ii)		The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.

	~~(iii)~~		Trade receivables less impairment provision and account payables are assumed to approximate their fair values.

	(iii)		The fair value of the long-term bank loan is estimated as the present value of future cash flows, discounted at current market interest rate for similar financial instruments.

	(iv)		The fair value of the interest rate swap is determined based on the discounted cash flow technique which takes into account estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date.

F-54

Contingent liabilities

2010 2009
HK$’000 HK$’000
Bank guarantees provided to suppliers (notes 27(i) and (ii)) 2,770 2,490
Bank guarantee in lieu of payment of utility deposits (note 27(iii)) 5,572 5,272

8,342 7,762

At August 31, 2010, HK$133,342,000 (2009: HK$7,762,000) of the HK$353,840,000 (2009: HK$205,038,000) total banking facility and revolving loan facility was utilized by the Company and its subsidiary.

Commitments

(a)

Capital commitments

2010 2009
HK$’000 HK$’000
Purchase of telecommunications, computer and office equipment - - contracted but not provided for 132,340 150,099

*(b)*		*Commitments under operating leases*

		At August 31, 2010 and 2009, the Group has future aggregate minimum lease payments under non-cancellable operating leases as follows:

2010 2009
HK$’000 HK$’000
Leases in respect of land and buildings which are payable:
- Within 1 year 24,873 21,387
- After 1 year but within 5 years 16,417 13,802

41,290 35,189

Leases in respect of telecommunications facilities and computer equipment which are payable
- Within 1 year 63,948 45,321
- After 1 year but within 5 years 14,200 9,600
- After 5 years 4,849 6,271

82,997 61,192

124,287 96,381

*(c)*		*Program fee commitments*

		The Group entered into several long-term agreements with program content providers for the rights to use certain program contents in the Group’s IP-TV services. Minimum amounts of program fees to be paid by the Group are as follows:

2010 2009
HK$’000 HK$’000
Program fee in respect of program rights which are payable:
- Within 1 year 25,539 9,094
- After 1 year but within 5 years 48,087 6,238

73,626 15,332

F-55

Pledge of assets

		As at August 31, 2010, the Group has no pledged bank deposits.

		As at August 31, 2009, the Group has pledged bank deposits of US$650,000 (equivalent to HK$5,038,000) and HK$10,000,000 as security for the following significant banking facilities:

	(i)		bank facility of US$650,000 (equivalent to HK$5,038,000) 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, 2009, bank guarantees of HK$500,000 were issued against this bank facility;

	(ii)		bank guarantees of HK$1,990,000 issued by the bank to third party suppliers of the Company and one of its subsidiaries for payment of certain products and services procured by the Group from these third party suppliers; and

	(iii)		bank guarantees of HK$5,272,000 issued by the bank to certain utility vendors of the Group in lieu of payment of utility deposits.

Barter transaction

		During the year ended August 31, ~~2004, Hong Kong Broadband Network (“HKBN”), a subsidiary of the Company~~2010, HKBN entered into ~~two agreements~~an agreement with a third party (the “Contract ~~Party 1”~~Party”). Pursuant to ~~first~~the agreement, ~~(“First Agreement”), the Contract Party 1 agreed to sell to~~ HKBN an telecommunications facility (the “Facility”) for cash consideration of approximately HK$42.4 million (the “Facility Consideration”), which was paid by HKBN during the year ended August 31, 2004. In conjunction with the First Agreement, HKBN also entered into an operations and maintenance agreement with the Contract Party 1 for the provision of ongoing operations and maintenance services for the Facility at a fee of approximately HK$1 million per annum, commencing September 1, 2007 onwards.

		~~A second agreement (“Second Agreement”) was entered into on the same date by both parties whereby HKBN agree to~~would provide ~~certain telecommunications services~~network capacity to the Contract Party ~~1 (the “Services”)~~ for ~~an amount equal to the unit~~a service ~~charges specified in the Second Agreement. The Contract Party 1 is required to pay to HKBN a guarantee minimum service fee~~term of ~~approximately HK$42.4 million over a period of three~~10 years commencing ~~September~~on May 1, ~~2004. A prepayment~~2010 or after the respective activation of the ~~service charges of HK$36.5 million (the “Prepaid Charges”) was paid by~~relevant network capacity, and in exchange, the Contract Party would provide HKBN the right to use telecommunications facilities for a term of 10 years commencing on May 1, ~~to HKBN during~~2010 or after the ~~year ended August 31, 2004.~~respective activation of the relevant network capacity. The transaction has been entered into on a barter basis at no consideration being exchange. The agreement expires on April 30, 2020.

		The ~~directors~~Directors of the ~~Group~~Company made an assessment and determined that since the arrangement above involves exchange of services of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. Accordingly, the network capacity of the ~~fair values of~~Contract Party under the ~~goods and services exchanged and concluded that no fair values could be assigned to them. Accordingly, the Facility was~~arrangement have not been recognized as an asset and no revenue or deferred revenue ~~was~~have been recognized in the ~~consolidated~~ financial statements ~~as of and for any~~ of the periods presented. The difference between the Facility Consideration and the Prepaid Charges, amounting to approximately HK$5.9 million, was included in long-term receivable balance, and other receivables, deposits and prepayments as of August 31, 2006 and 2007 respectively. In accordance with the terms of agreement, the unpaid portionGroup since inception of the HK$42.2 million guarantee minimum service fee, amounting to approximately HK$5.9 million has been billed to the Contract Party 1 upon the end of service period on September 1, 2007 and subsequently settled.arrangement.

~~F-71~~

Accounting estimates and judgments

(a)		*Key sources of estimation uncertainty*

		Notes 10 and 24 contain information about the assumptions and risk factors relating to fair value of share options and financial instruments. Other key sources of estimation uncertainty are as follows:

(b)		*Impairment loss for doubtful accounts*

		The Group maintains impairment loss for doubtful accounts based upon evaluation of the recoverability of the accounts receivable and other receivables which takes into account the historical write-off experience and recovery rates. If the financial condition of the customers were to deteriorate, additional impairment may be required.

(c)		*Depreciation*

		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. The Group reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and takes into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

(d)		*Income taxes*

		Determining income tax provisions involves judgment on the future tax treatment of certain transactions and interpretation of tax rules. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation and practices.

		Deferred tax assets are recognized for certain unused tax losses as set out in note 20. In assessing the recognition of deferred tax assets, management considers all available evidence, including available taxable temporary differences, projected future taxable income, tax planning strategies, historical taxable income, and the expiration periods of the tax losses. For certain subsidiaries, deferred tax assets can only be recognized to the extent that it is probable that future taxable profits will be available against which they can be utilized. Management’s judgment is thus required to assess the probability of future taxable profits and this assessment is constantly reviewed and additional deferred tax assets are recognized if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered.

F-57

Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended August 31, 2010

Up to the date of ~~issuance~~issue of ~~the accompanying consolidated~~these financial statements, the IASB/HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended August 31, ~~2008~~2010 and which have not been adopted in ~~the accompanying consolidated~~these financial statements.


		Effective for
		accounting periods
		beginning on or after
Amendment to IFRS/HKFRS 2	Share-based payment — Group cash-settled	January 1, 2010
	share-based payment transactions

IFRSs/HKFRSs (Amendments)	Improvements to IFRSs (2009)	January 1, 2010

Amendment to IAS/HKAS 32	Financial instruments: Presentation —	February 1, 2010
	Classification of rights issues

IFRIC/HK (IFRIC) — Int 19	Extinguishing financial liabilities with equity	July 1, 2010
	instruments

IFRSs/HKFRSs (Amendments)	Improvement to IFRSs/HKFRSs (2010)	July 1, 2010 or
		January 1, 2011

Amendments to	IAS/HKAS 19 — The limitation on a defined	January 1, 2011
IFRIC/HK (IFRIC) — Int 14	benefit asset, minimum funding requirements and
	their interaction — Prepayments of a minimum
	funding requirement

IAS/HKAS 24 (Revised)	Related party disclosures	January 1, 2011

Amendments to IFRS/HKFRS 7	Financial instruments: Disclosures — Transfer of	July 1, 2011
	financial assets

IFRS/HKFRS 9	Financial instruments	January 1, 2013

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far ~~it has concluded that the adoption of the following developments is unlikely to have significant impact on the Group’s results of operations and financial position:~~


		*~~Effective for~~*
		*~~accounting periods~~*
		*~~beginning on or after~~*

~~HK(IFRIC) Interpretation 13~~	~~Customer loyalty programmes~~	~~July 1, 2008~~

~~HKAS 1 (Revised)~~	~~Presentation of financial statements~~	~~January 1, 2009~~

~~HKAS 23 (Revised)~~	~~Borrowing costs~~	~~January 1, 2009~~

~~HKFRS 8~~	~~Operating segments~~	~~January 1, 2009~~

~~F-72~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


30		~~Recent accounting pronouncements (continued)~~

*~~(b)~~*		*~~U.S. GAAP~~*

		~~Statement of Financial Accounting Standards No. 157 (“SFAS 157”)~~

		In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosure required for fair value measurement. SFAS 157 applies to other accounting pronouncements that require fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is effective for the Group on September 1, 2008. However, FASB Staff Position FAS 157-2 delayed the adoption date until January 1, 2009 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair valueis not yet in ~~the financial statements on~~ a ~~recurring basis. Management does not expect the initial adoption of SFAS 157~~position to state whether they would have a ~~material~~significant impact on the Group’s results of operations and financial position.


		~~Statement of Financial Accounting Standards No. 159 (“SFAS 159”)~~

In February 2007, the FASB issued SFAS 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains or losses on items for which the fair value option has been elected be reported in earnings. Early adoption of SFAS 159 is permitted provided that the entity also adopts SFAS No. 157. Effective from September 1, 2008, management has elected not to adopt the fair value option for all the financial assets and financial liabilities held at September 1, 2008.

~~F-73~~F-58

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


3133		~~Summary of significant differences between HKFRSs and U.S. GAAP~~Supplemental guarantors consolidated financial information

The Group’s consolidated financial statements are prepared in accordance with HKFRSs, which differ in certain significant respects from U.S. GAAP. The following are significant differences between HKFRSs and U.S. GAAP which pertain to the Group:


		*~~Net income/(loss)~~*

Year ended 31 August,
Note 2006 2007 2008
HK$’000 HK$’000 HK$’000
As reported under HKFRSs and U.S. GAAP (142,062 ) 28,865 125,190

Basic weighted average common shares issued and outstanding (in 000’s) 614,134 614,840 634,015
Incremental shares from assumed exercise of share options (in 000’s) — 16,479 23,982

Diluted weighted average common and potential shares issued and outstanding (in 000’s) 614,134 631,319 657,997

Earnings/(loss) per share under U.S. GAAP (note)
— Basic (23.1) cents 4.7 cents 19.7 cents

— Diluted (23.1) cents 4.6 cents 19.0 cents


~~Note:~~		The number of incremental shares from assumed exercise of stock options is determined using the treasury stock method. At August 31, 2006, the number of shares used in the calculation of diluted loss per share is equal to the basic weighted average common shares issued and outstanding as the incremental effect of outstanding share options would be anti-dilutive in a loss making year.


		*~~Total shareholders’ equity~~*

Year ended August 31,
Note 2006 2007 2008
HK$’000 HK$’000 HK$’000
Total shareholders’ equity

As reported under HKFRSs 891,654 903,882 1,032,607

U.S. GAAP adjustments:
— Goodwill (a) 5,092 5,092 5,092
— Accumulated amortization of goodwill (a) (3,735 ) (3,735 ) (3,735 )
— Reversal of amortization of goodwill (a) 4,260 4,260 4,260

Total shareholders’ equity under U.S. GAAP 897,271 909,499 1,038,224

~~F-74~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


31		~~Summary of significant differences between HKFRSs and U.S. GAAP (continued)~~

~~Statement of changes in shareholders’ equity under US GAAP~~

Ordinary shares
Accumulated
Number of Additional other Total
shares Amount paid-in comprehensive Capital Retained shareholders’
outstanding outstanding capital income reserve profits equity
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at August 31, 2005 614,125,404 61,412 619,408 840 27,815 323,205 1,032,680
Shares issued upon exercise of share options 50,000 5 8 — — — 13
Compensation cost for share options — — 251 — 6,572 — 6,823
Net loss — — — — — (142,062 ) (142,062 )
Foreign currency translation adjustment — — — (183 ) — — (183 )

Balance at August 31, 2006 614,175,404 61,417 619,667 657 34,387 181,143 897,271
Shares issued upon exercise of share options 2,328,000 233 2,135 — (611 ) — 1,757
Compensation cost for share options — — — — 5,727 — 5,727
Net income — — — — — 28,865 28,865
Dividend paid in respect of previous year — — — — — (24,635 ) (24,635 )
Foreign currency translation adjustment — �� — — 514 — — 514

Balance at August 31, 2007 616,503,404 61,650 621,802 1,171 39,503 185,373 909,499
Shares issued upon exercise of share options 14,052,268 1,405 16,893 — (3,300 ) — 14,998
Compensation cost for share options — — — — 4,204 — 4,204
Net income — — — — — 125,190 125,190
Dividend paid in respect of previous year — — — — — (5,915 ) (5,915 )
Shares issued in respect of scrip dividend of previous year 11,227,213 1,123 18,044 — — (19,167 ) —
Dividend paid in respect of current year — — — — — (11,371 ) (11,371 )
Shares issued in respect of scrip dividend of current year 8,838,938 884 13,347 — — (14,231 ) —
Foreign currency translation adjustment — — — 1,619 — — 1,619

650,621,823 65,062 670,086 2,790 40,407 259,879 1,038,224

~~F-76~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


31		~~Summary of significant differences between HKFRSs and U.S. GAAP (continued)~~

		*~~Comprehensive (loss)/income under US GAAP~~*

		The comprehensive (loss)/income of the Group, determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income”, is set out as follows:

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
(Loss)/Net income under U.S. GAAP (142,062 ) 28,865 125,190
Foreign currency translation adjustment (net of nil tax) (183 ) 514 1,619

Comprehensive (loss)/income (142,245 ) 29,379 126,809


		*~~Condensed consolidated statement of cash flows~~*

		Under HKFRSs, in adopting HKAS 7, three categories of activities are reported: operating activities; investing activities and financing activities, which is similar to U.S. GAAP. However, under HKFRSs, the difference is that cash flows from interest income would be included in investing activities whereas under U.S. GAAP it would be included in operating activities.

		~~Summary cash flow information under U.S. GAAP is as follows:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Net cash provided by operating activities 204,583 406,732 394,159
Net cash (used in)/provided by investing activities (513,120 ) 91,382 (163,346 )
Net cash used in financing activities (86,486 ) (109,566 ) (342,550 )

Increase/(decrease) in cash and bank balances (395,023 ) 388,548 (111,737 )
Cash and bank balances at the beginning of year 539,591 144,917 532,894
Effect of foreign currency exchange rate changes on cash 349 (571 ) 453

Cash and bank balances at the end of year 144,917 532,894 421,610

~~F-77~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


31		~~Summary of differences between HKFRSs and U.S. GAAP (continued)~~

*~~(a)~~*		*~~Goodwill~~*

		Prior to September 1, 2001, goodwill arising from a business combination was charged against available reserves. In January 2001, HKICPA issued Statement of Standard Accounting Practice (“SSAP”) No. 30 “Business Combinations” which applied to business combinations for which the agreement date is on or after September 1, 2001. As a result of the adoption of this SSAP in the fiscal year ended August 31, 2002 and up to September 1, 2005, goodwill on acquisitions occurring on or after September 1, 2001 was shown separately on the consolidated balance sheet and amortized using the straight-line method over its estimated useful life.

		On September 1, 2005, the Group adopted HKFRS 3 “Business Combinations”. Under HKFRS 3, goodwill is recorded at cost less any accumulated impairment losses and is no longer amortized. Goodwill is subject to an annual impairment test and when there is an indication of impairment. An impairment loss is recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amounts. 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) is not recognized in the consolidated statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The adoption of HKFRS 3 did not result in any restatement in the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP adjustments of prior years.

		Under U.S. GAAP, goodwill arising from a business combination is not amortized and is required to be tested annually for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”.

		~~As a result of the adoption of HKFRS 3, there were no U.S. GAAP adjustments to the net loss/ income pertaining to goodwill for the years ended August 31, 2006 ,2007 and 2008.~~

~~F-78~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


31		~~Summary of differences between HKFRSs and U.S. GAAP (continued)~~

*~~(b)~~*		*~~Deferred taxes~~*

		Under HKFRSs, deferred taxes are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

		~~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.~~

		Under U.S. GAAP, the Group is required to recognize deferred tax assets and liabilities for the expected future tax consequences of all events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits in respect of tax loss carry forwards are also required to be recognized in full. A valuation allowance is required to be established for such assets if it is more likely than not that the Group will not be able to realize such benefits in the future.

		Under HKFRS, deferred tax assets and liabilities shall be classified as noncurrent assets or noncurrent liabilities. Under U.S. GAAP, deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax asset related to tax loss carryforwards, are classified according to the expected reversal date of the temporary difference. The valuation allowance for a particular tax jurisdiction shall be allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro rata basis.

		Except for the presentation differences, there were no differences in the amount of deferred tax assets recognized under HKFRSs and U.S. GAAP. For the years ended August 31, 2006, 2007 and 2008, no adjustment was made for tax effects of U.S. GAAP adjustments because the U.S. GAAP adjustments in those years had no tax consequences under Hong Kong tax laws.

		~~The following additional financial statements disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis.~~

August 31,
2007 2008
HK$’000 HK$’000
Deferred tax assets:

Tax loss carryforwards 182,739 150,234

Total gross deferred tax assets 182,739 150,234
Valuation allowance (48,120 ) (2,389 )

Net deferred tax assets 134,619 147,845

Deferred tax liabilities:

Accelerated depreciation allowance (134,910 ) (126,447 )

Total gross deferred tax liabilities (134,910 ) (126,447 )

Net deferred tax asset /(liability) (291 ) 21,398

Net current deferred tax assets — 11,399
Net non-current deferred tax assets — 16,630
Net non-current deferred tax liabilities (291 ) (6,631 )

Net deferred tax asset /(liability) (291 ) 21,398

~~F-79~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


31		~~Summary of differences between HKFRSs and U.S. GAAP (continued)~~

*~~(b)~~*		*~~Deferred taxes (continued)~~*

		The valuation allowance for deferred tax assets as August 31, 2006, 2007 and 2008 was HK$52,404,000, HK$48,120,000 and HK$2,389,000 respectively. The valuation allowance as at August 31, 2006, 2007 and 2008 was primarily related to tax loss carryforwards that, in the judgement of management, are not more likely than not to be realized.

		In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary difference are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryforward periods) and projected taxable income in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax rules. Based on the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences, net of existing valuation allowance at August 31, 2008. The amount of the deferred tax asset considered realizable; however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

		~~Changes in the valuation allowance consist of:~~

Year ended August 31,
2006 2007 2008
HK$’000 HK$’000 HK$’000
Balance at beginning of the year 29,804 52,404 48,120
Addition/(reduction) to income tax expense 22,600 (1,979 ) (37,834 )
Valuation allowance written off — (2,305 ) (7,897 )

Balance at end of the year 52,404 48,120 2,389

The net change in the total valuation allowance for the year ended August 31, 2008 was a decrease of HK$45,731,000 which primarily relates to the release of the valuation allowance of HK$12,013,000 due to the utilization of tax loss carryforwards during the year ended August 31, 2008 and the release of valuation allowance of HK$26,335,000 due to the changes in estimate of future taxable income of the Company’s major operating subsidiary. As at August 31, 2008, considering the operating results of this major operating subsidiary during the year ended August 31, 2008 and the previous years as well as the Company’s forecast for future years, management reassessed that it is more likely than not that this subsidiary will be able to generate sufficient future taxable income to realize the tax benefit of its tax loss carryforwards, which resulted in the release of the valuation allowance of HK$26,335,000. In addition, the write-off of the valuation allowance in the amount of HK$7,897,000 during the fiscal year ended August 31, 2008 was offset by a corresponding reduction in the gross deferred tax asset relating to tax loss carryforwards since management assessed that certain tax positions are not more likely than not sustainable upon examination by the relevant tax authority.

~~F-80~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Summary of differences between HKFRSs and U.S. GAAP (continued)~~

*~~(b)~~*		*~~Deferred taxes (continued)~~*

		Effective September 1, 2007, the Group adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. The Interpretation prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold. The benefit to be recognized is the largest amount that is more likely than not to be realized upon settlement.

		~~The adoption of FIN 48 did not result in a change to the Group’s retained earnings. The aggregate changes in the balance of the Company’s gross unrecognized tax benefits were as follows:~~


	~~HK$’000~~
~~Balance at September 1, 2007~~		~~7,897~~
~~Additions based on tax positions related to the current year~~		~~1,797~~


~~Balance at August 31, 2008~~		~~9,694~~

		All of these unrecognized tax benefits, if recognized, would affect the Group’s effective tax rate. As of August 31, 2008, the Group did not have any accrued interest and penalties related to the unrecognized tax benefits. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in financial expense and other operating expense, respectively.

		The Group files income tax returns in Hong Kong, PRC, Canada and USA. The open tax years for the Company and its subsidiaries range between fiscal 2002 and fiscal 2008. The provisions made as a result of these open tax years are subject to the final agreement with the tax authorities. However, management does not believe there will be any material changes in the unrecognized tax benefits within the next 12 months.

~~F-81~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

~~Summary of differences between HKFRSs and U.S. GAAP (continued)~~

*~~(c)~~*		*~~Investment securities~~*

		~~The Group’s investment securities consist of equity-indexed mutual fund securities and long-term bank deposits.~~

		Under HKFRSs, the equity-linked mutual fund securities have been designated as financial asset at fair value through profit or loss as permitted under HKAS 39 “Financial Instruments: Recognition and Measurement”.

		Under U.S. GAAP, the Group follows SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” which requires the embedded derivative in the equity-linked mutual fund securities to be separated and accounted for as a derivative instrument, and the host contract to be accounted for based on generally accepted accounting principles applicable to the instruments of that type that do not contain derivative instruments. Accordingly, the host contracts of the equity-linked mutual fund securities are classified as held-to-maturity securities under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and measured at amortized cost while the embedded derivatives are accounted for in accordance with SFAS No. 133 and measured at fair value.

		For the periods presented, there were no differences between i) the fair value of the equity-indexed debt securities; and ii) the aggregate of the amortized cost of the host contracts and the fair value of the embedded derivative instruments.

*~~(d)~~*		*~~Deposits for purchase of fixed assets and lease of land and building~~*

		Under HKFRSs, deposits for purchase of fixed assets and lease of land and buildings are classified as current assets if the amounts are expected to be realized within twelve months after the balance sheet date. Under U.S. GAAP, such deposits are classified as non-current assets. As of August 31, 2007 and 2008, deposits for purchase of fixed assets and lease of land and building were HK$13,263,000 and HK$19,622,000, respectively.

*~~(e)~~*		*~~Debt issue costs~~*

		Under HKFRSs, debt issue costs are reported as a reduction against the related debt proceeds and amortized over the life of the related debt using effective interest method. Under U.S. GAAP, such costs are disclosed separately as non-current asset and are similarly amortized. As of August 31, 2007 and 2008, the unamortized debt issue costs were HK$22,336,000 and HK$14,605,000, respectively.

~~F-82~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~

32		~~Supplemental guarantors consolidated financial information~~

		~~The~~10-year senior notes ~~described~~mentioned above in note 1322 are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).

		The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under ~~HKFRSs.~~IFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the Notes on a joint and several basis. ~~Reconciliations~~

		On February 1, 2010, we redeemed all the outstanding 10-year senior notes with a cumulative principal amount of HK$153.9 million (US$19.9 million) at the redemption price equal to ~~U.S. GAAP are not presented because the majority~~104.375% of the ~~reconciling items relate~~principal amount.

		Since as of August 31, 2010, all the outstanding 10-year senior notes has been fully redeemed, the following condensed consolidated financial information is limited to ~~City Telecom (H.K.) Limited~~the years ended August 31, 2009 and ~~Guarantor Subsidiaries are already disclosed and explained in Note 29.~~2008.

		The following condensed consolidated financial information presents the ~~condensed~~ consolidated balance sheets as of August 31, ~~2007~~2008 and ~~2008~~2009 and the related ~~condensed~~ consolidated income statements ~~of operations~~ and ~~statements of~~ cash ~~flows~~flow statements for the years ended August 31, ~~2006, 2007~~2008 and ~~2008~~2009 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts.

~~F-83~~F-59

~~City Telecom (H.K.) Limited~~
~~Consolidated~~33 Supplemental guarantors consolidated financial ~~statements for the year August 31, 2008~~information (continued)

32		~~Supplemental guarantors consolidated financial information (continued)~~

		*~~Condensed consolidated~~Consolidated balance sheet as of August 31, ~~2008~~2009*

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Current assets

Cash and bank balances 90,386 263,386 67,838 — 421,610
Pledged bank deposits 87,319 — — 87,319
Trade receivables, net 11,418 128,865 — 140,283
Other receivables, deposits and prepayments 3,378 80,293 2,759 (3,704 ) 82,726
Investment securities 27,997 — — 27,997
Deferred expenditure — 40,704 — 40,704

Total current assets 220,498 513,248 70,597 800,639
Fixed assets, net 87,483 1,135,394 8,522 1,231,399
Investments in subsidiaries (note) 1,499,437 260,399 — (1,759,836 ) —
Other long-term assets — 61,499 — (13,121 ) 48,378

Total assets 1,807,418 1,970,540 79,119 2,080,416

Current liabilities

Amounts due to subsidiaries/ fellow subsidiaries 10,830 1,316,410 51,059 (1,378,299 ) —
Trade payables 26,440 25,884 — 52,324
Deposits received 7,943 8,321 — 16,264
Current portion of deferred service income 11,172 102,678 — (3,401 ) 110,449
Other payables and accrued charges 17,831 149,548 10,735 178,114
Income tax payable 356 496 1,251 2,103
Current portion of obligation under finance leases 112 9 — 121

Total current liabilities 74,684 1,603,346 63,045 359,375
Long-term liabilities 702,917 17 — (14,500 ) 688,434

Total liabilities 777,601 1,603,363 63,045 1,047,809

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Non-current assets

Investments in subsidiaries (note) 1,258,726 228,875 — (1,487,601 ) —
Goodwill — — — 1,066 1,066
Fixed assets 74,688 1,221,172 6,520 1,302,380
Long term receivable and prepayment — 16,573 — (10,482 ) 6,091
Deferred expenditure — 12,786 — 12,786

1,333,414 1,479,406 6,520 1,322,323

Current assets

Accounts receivable 9,220 110,972 — 120,192
Other receivables, deposits and prepayments 3,393 67,584 2,492 (3,704 ) 69,765
Deferred expenditure — 36,674 — 36,674
Pledged bank deposits 15,038 — — 15,038
Cash at bank and in hand 120,315 78,665 27,436 226,416

147,966 293,895 29,928 468,085

Current liabilities

Bank overdrafts — unsecured 896 4,468 — 5,364
Amounts due to subsidiaries/ fellow subsidiaries 10,830 905,460 4,427 (920,717 ) —
Accounts payable 20,484 17,071 — 37,555
Other payables and accrued charges 23,530 172,676 10,281 206,487
Deposits received 7,886 8,499 — 16,385
Deferred service revenue 10,848 107,904 — (3,682 ) 115,070
Tax payable 356 496 1,141 1,993
Current portion — obligation under finance leases 193 9 — 202

75,023 1,216,583 15,849 383,056

Net current assets/(liabilities)
72,943 (922,688 ) 14,079 85,029

~~F-84~~F-60

~~City Telecom (H.K.) Limited~~
~~Consolidated~~33 Supplemental guarantors consolidated financial ~~statements for the year August 31, 2008~~information (continued)

32		~~Supplemental guarantors consolidated financial information (continued)~~

		*~~Condensed consolidated~~Consolidated balance sheet as of August 31, ~~2008(continued)~~2009 (continued)*


Note:		The amounts of investment in subsidiaries and retained profits at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting.

~~F-85~~F-61

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


32		~~Supplemental guarantors consolidated financial information (continued)~~

~~Condensed consolidated balance sheet as of August 31, 2007~~

~~F-86~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


32		~~Supplemental guarantors consolidated financial information (continued)~~

~~Condensed consolidated~~Consolidated income statement ~~of operations~~ for the year ended August 31, ~~2008~~2009

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 116,130 1,283,296 135,374 (231,819 ) 1,302,981
Network costs (28,398 ) (184,851 ) — 34,882 (178,367 )
Operating expenses:
— Salaries and related costs (35,057 ) (231,196 ) (102,067 ) 120,860 (247,460 )
— Sales and marketing expenses (5,743 ) (403,425 ) — 101,425 (307,743 )
— General and administrative expenses (45,797 ) (331,030 ) (28,414 ) 8,643 (396,598 )
— Provision for doubtful accounts (954 ) (13,339 ) — (14,293 )

Income from operations 181 119,455 4,893 158,520
Interest income 6,817 7,518 1,261 15,596
Interest expense (71,702 ) (71,753 ) — 68,318 (75,137 )
Other income, net 86,677 30,234 75 (107,593 ) 9,393
Share of net income from subsidiaries (note) 108,154 — — (108,154 ) —

Income before taxation 130,127 85,454 6,229 108,372
Income tax (expense)/credit (4,937 ) 26,306 (4,551 ) 16,818

Net income 125,190 111,760 1,678 125,190

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 95,386 1,390,697 142,603 (150,447 ) 1,478,239
Network costs (29,973 ) (177,655 ) — 32,499 (175,129 )
Other operating expenses (90,557 ) (959,960 ) (136,750 ) 149,303 (1,037,964 )
Other income, net 108,933 31,684 576 (99,653 ) 41,540
Finance costs (54,241 ) (69,017 ) — 68,131 (55,127 )
Share of net profit from subsidiaries (note) 185,391 — — (185,391 ) —

Profit before taxation 214,939 215,749 6,429 251,559
Income tax expense (2,110 ) (34,998 ) (1,622 ) (38,730 )

Net profit 212,829 180,751 4,807 212,829


Note:		The net ~~income~~profit amounts at City Telecom (H.K.) Limited level have included the share of net ~~income/(losses)~~profit of its subsidiaries using the equity method of accounting.

~~F-88~~

~~City Telecom (H.K.) Limited~~
~~Consolidated financial statements for the year August 31, 2008~~


32		~~Supplemental guarantors consolidated financial information (continued)~~

~~Condensed consolidated~~Consolidated income statement ~~of operations~~ for the year ended August 31, ~~2007~~2008

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 124,017 1,186,356 108,692 (277,795 ) 1,141,270
Network costs (50,522 ) (203,506 ) — 39,437 (214,591 )
Operating expenses:
— Salaries and related costs (30,475 ) (209,065 ) (77,594 ) 96,032 (221,102 )
— Sales and marketing expenses (12,601 ) (362,975 ) — 171,903 (203,673 )
— General and administrative expenses (43,149 ) (344,162 ) (26,050 ) 10,601 (402,760 )
— Provision for doubtful accounts (796 ) (5,773 ) — (6,569 )

Income/(loss) from operations (13,526 ) 60,875 5,048 92,575
Interest income 13,390 8,606 675 22,671
Interest expense (87,474 ) (68,161 ) — 68,131 (87,504 )
Other income, net 50,031 59,200 43 (106,125 ) 3,149
Share of net losses from subsidiaries (note) 66,444 — — (66,444 ) —

Income before taxation 28,865 60,520 5,766 30,891
Income tax credit — (75 ) (1,951 ) (2,026 )

Net income 28,865 60,445 3,815 28,865

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 116,130 1,283,296 135,374 (231,819 ) 1,302,981
Network costs (28,398 ) (184,851 ) — 34,882 (178,367 )
Other operating expenses (87,551 ) (978,990 ) (130,481 ) 230,928 (966,094 )
Other income, net 93,494 37,752 1,336 (107,593 ) 24,989
Finance costs (71,702 ) (71,753 ) — 68,318 (75,137 )
Share of net profit from subsidiaries (note) 108,154 — — (108,154 ) —

Profit before taxation 130,127 85,454 6,229 108,372
Income tax (expense)/benefit (4,937 ) 26,306 (4,551 ) 16,818

Net profit 125,190 111,760 1,678 125,190


Note:		The net ~~income~~profit amounts at City Telecom (H.K.) Limited level have included the share of net ~~income/(losses)~~profit of its subsidiaries using the equity method of accounting.

~~F-89~~F-62

~~City Telecom (H.K.) Limited~~
~~Consolidated~~33 Supplemental guarantors consolidated financial ~~statements for the year August 31, 2008~~


32		~~Supplemental guarantors consolidated financial information (continued)~~

information (continued)

Condensed consolidated cash flow statement ~~of operations~~ for the year ended August 31, ~~2006~~2009

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 174,113 1,110,256 116,355 (265,848 ) 1,134,876
Network costs (87,849 ) (254,740 ) — 41,996 (300,593 )
Operating expenses:
— Salaries and related costs (44,254 ) (233,105 ) (81,887 ) 102,525 (256,721 )
— Sales and marketing expenses (20,567 ) (336,985 ) — 152,600 (204,952 )
— General and administrative expenses (56,366 ) (366,635 ) (30,353 ) 12,682 (440,672 )
— Provision for doubtful accounts (1,090 ) (16,360 ) — (17,450 )

(Loss)/income from operations (36,013 ) (97,569 ) 4,115 (85,512 )
Interest income 16,594 2,946 838 20,378
Interest expense (88,584 ) (60,454 ) — 60,401 (88,637 )
Other income, net 67,672 39,201 2,245 (104,653 ) 4,465
Share of net losses from subsidiaries (note) (111,171 ) — — 111,171 —

(Loss)/income before taxation (151,502 ) (115,876 ) 7,198 (149,306 )
Income tax expense/(credit) 9,440 11 (2,207 ) 7,244

Net (loss)/income (142,062 ) (115,865 ) 4,991 (142,062 )

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net cash inflow/(outflow) from operating activities 487,691 88,243 (38,930 ) (233 ) 536,771
Net cash inflow/(outflow) from investing activities 101,605 (276,843 ) (1,250 ) (176,488 )
Net cash outflow from financing activities (560,397 ) (895 ) — (561,292 )

Increase/(decrease) in cash at bank and in hand 28,899 (189,495 ) (40,180 ) (201,009 )
Cash at bank in hand at September 1, 2008 90,386 263,386 67,838 421,610
Effects of foreign exchange rates changes 134 306 (222 ) 233 451

Cash at bank and in hand at August 31, 2009 119,419 74,197 27,436 221,052

Analysis of the balances of cash and cash equivalent:

Cash at bank and in hand 120,315 78,665 27,436 226,416
Bank overdrafts — unsecured (896 ) (4,468 ) — (5,364 )

119,419 74,197 27,436 221,052


~~Note:~~		~~The net loss amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses) of its subsidiaries using the equity method of accounting.~~

~~F-90~~F-63

~~City Telecom (H.K.) Limited~~
~~Consolidated~~33 Supplemental guarantors consolidated financial ~~statements for the year August 31, 2008~~


32		~~Supplemental guarantors consolidated financial information (continued)~~

information (continued)

Condensed consolidated ~~statement of~~ cash ~~flows~~flow statement for the year ended August 31, 2008

~~Condensed consolidated statement of cash flows for the year ended August 31, 2007~~

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net cash provided/(used in) by operating activities 110,190 342,627 (69,035 ) 217 383,999
Net cash generated from/ (used in) investing activities 132,039 (69,197 ) 51,211 114,053
Net cash used in financing activities (108,277 ) (1,227 ) — (109,504 )

Net increase/(decrease) in cash and bank balances 133,952 272,203 (17,824 ) 388,548
Cash and bank balances at beginning of year 86,670 31,349 26,898 144,917
Effects of foreign exchange rates changes (91 ) (325 ) 62 (217 ) (571 )

Cash and bank balances at end of year 220,531 303,227 9,136 532,894

City
Telecom Non-
(H.K.) Guarantor guarantor Eliminating Consolidated
Limited subsidiaries subsidiary entries total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net cash inflow from operating activities 193,028 128,939 59,866 158 381,991
Net cash inflow/(outflow) from investing activities 18,775 (164,222 ) (2,303 ) (147,750 )
Net cash outflow from financing activities (341,813 ) (4,165 ) — (345,978 )

(Decrease)/increase in cash at bank and in hand (130,010 ) (39,448 ) 57,563 (111,737 )
Cash at bank and in hand at September 1, 2007 220,531 303,227 9,136 532,894
Effects of foreign exchange rates changes (135 ) (393 ) 1,139 (158 ) 453

Cash at bank and in hand at August 31, 2008 90,386 263,386 67,838 421,610

Analysis of the balances of cash and cash equivalent:

Cash at bank and in hand 91,764 275,002 67,838 434,604
Bank overdrafts — unsecured (1,378 ) (11,616 ) — (12,994 )

90,386 263,386 67,838 421,610

~~F-91~~


~~USE OF DEFINED AND TECHNICAL TERMS~~Use of defined and technical terms			1
~~CURRENCY TRANSLATION~~Currency translation			1
~~FORWARD-LOOKING STATEMENTS~~Note regarding forward-looking statements			12
Special note on our financial information presented in this annual report			3

PART I			2
~~ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS~~Item 1 Identity of directors, senior management and advisers			24
~~ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE~~Item 2 Offer statistics and expected timetable			24
~~ITEM 3. KEY INFORMATION~~Item 3 Key information			24-18
~~ITEM 4. INFORMATION ON THE COMPANY~~Item 4 Information on the Company			1118-33
~~ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS~~Item 5 Operating and financial review and prospects			2533-43
~~ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES~~Item 6 Directors, senior management and employees			3743-52
~~ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS~~Item 7 Major shareholders and related party transactions			4452-53
~~ITEM 8. FINANCIAL INFORMATION~~Item 8 Financial information			4553-54
~~ITEM 9. THE OFFER AND LISTING~~Item 9 The offer and listing			4654-56
~~ITEM 10. ADDITIONAL INFORMATION~~Item 10 Additional information			4856-64
~~ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Item 11 Quantitative and qualitative disclosures about market risk			5464
~~ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES~~Item 12 Description of securities other than equity securities			5464

PART II			54
~~ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES~~Item 13 Defaults, dividend arrearages and delinquencies			5464
~~ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS~~Item 14 Material modifications to the rights of security holders and use of proceeds			5464
~~ITEM 15. CONTROLS AND PROCEDURES~~Item 15 Controls and procedures			5464-65
~~ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT~~Report of Independent Registered Public Accounting Firm			55
~~ITEM 16B. CODE OF ETHICS~~Item 16A Audit committee financial expert			5565
~~ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES~~Item 16B Code of ethics			5565
~~ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES~~Item 16C Principal accountant fees and services			5666
~~ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS~~Item 16D Exemptions from the listing standards for audit committees			5666
Item 16E Purchase of equity securities by the issuer and affiliated purchasers			66
Item 16F Change in Registrant’s Certifying Accountant			66
Item 16G Corporate Governance			66-67

PART III			56
~~ITEM 17. FINANCIAL STATEMENTS~~Item 17 Financial statements			5668
~~ITEM 18. FINANCIAL STATEMENTS~~Item 18 Financial statements			5668
~~ITEM 19. EXHIBITS~~Item 19 Exhibits			5668
EX-12.1
EX-12.2
EX-13


US GAAPo	International Financial Reporting Standards as issuedþ	Othero
	by the International Accounting Standards Board


	As of August 31,
	2008			2009			2010			2010
	HK$			HK$			HK$			US$
	(Amounts in thousands)
Total assets		2,093,410			1,790,408			2,251,549			289,473

Long-term debt and other liabilities		(683,242	)		(162,586	)		(134,860	)		(17,338	)
Finance lease obligations		(376	)		(732	)		(605	)		(78	)
Other liabilities		(377,185	)		(398,563	)		(427,545	)		(54,969	)


Total liabilities		(1,060,803	)		(561,881	)		(563,010	)		(72,385	)


Net assets		1,032,607			1,228,527			1,688,539			217,088


Share capital		65,062			66,418			76,500			9,835
Share premium		670,717			681,208			1,074,997			138,208
Reserves		296,828			480,901			537,042			69,045


Total shareholders’ equity		1,032,607			1,228,527			1,688,539			217,088


	Average⁽¹⁾		High		Low		Period-End
	HK$		HK$		HK$		HK$

Fiscal 2004		7.7821		7.8010		7.7085		7.8000
Fiscal 2005		7.7869		7.8002		7.7684		7.7718
Fiscal 2006		7.7601		7.7796		7.7506		7.7767
Fiscal 2007		7.8029		7.8289		7.7665		7.7968
Fiscal 2008		7.7915		7.8159		7.7497		7.8036
July 2008		7.8001		7.8039		7.7959		7.8017
August 2008		7.8076		7.8142		7.8036		7.8036
September 2008		7.7854		7.8094		7.7582		7.7659
October 2008		7.7589		7.7736		7.7503		7.7503
November 2008		7.7507		7.7560		7.7497		7.7501
December 2008		7.7504		7.7522		7.7497		7.7499
January 2009 (through January 9, 2009)		7.7533		7.7572		7.7504		7.7572


	Average		High		Low		Period-end
	(note)
	HK$		HK$		HK$		HK$
Fiscal 2006		7.7601		7.7796		7.7506		7.7767
Fiscal 2007		7.8029		7.8289		7.7665		7.7968
Fiscal 2008		7.7915		7.8159		7.7497		7.8036
Fiscal 2009		7.7550		7.8094		7.7495		7.7505
Fiscal 2010		7.7646		7.8040		7.7495		7.7781
June 2010		7.7880		7.8040		7.7690		7.7865
July 2010		7.7753		7.7962		7.7651		7.7672
August 2010		7.7702		7.7788		7.7605		7.7781
September 2010		7.7643		7.7738		7.7561		7.7599
October 2010		7.7580		7.7642		7.7513		7.7513
November 2010		7.7547		7.7656		7.7506		7.7649
December 2010 (through December 10, 2010)		7.7666		7.7737		7.7612		7.7737

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

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


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

	•		high-speed broadband Internet access services at symmetric upstream and downstream access speeds of 25 Mbps to ~~1,000~~1000 Mbps;

	•		fixed line local telephony services using VoIP technology;

	•		pay television services consisting of more than 88110 channels, including self-produced news, children’s ~~programming,~~program, international drama, movies and documentary and local interest programming, using our IP platform; and

	•		corporate data services, including the provision of dedicated bandwidth to corporate customers.

			As of August 31, 2010, we had a total of approximately 1,110,000 subscriptions for our fixed telecommunications network services, consisting of 526,000 broadband Internet access, 431,000 local VoIP and 153,000 IP-TV services subscriptions.

	•		IDD business.Our IDD business involves the provision of international telecommunications services. Such services include direct dial services, international calling cards and mobile call forwarding services in Hong Kong and Canada. As of August 31, 2010, the customer base for our total international telecommunications services consisted of approximately 2.4 million registered accounts.


	As of August 31,
	2006		2007		2008
Broadband Internet Access		220,000		247,000		316,000
Local VoIP		281,000		308,000		329,000
IP-TV		116,000		128,000		156,000


Total Subscriptions		617,000		683,000		801,000


	As of August 31,
	2008		2009		2010
Broadband Internet access		316,000		391,000		526,000
Local VoIP		329,000		382,000		431,000
IP-TV		156,000		170,000		153,000


Total FTNS subscriptions		801,000		943,000		1,110,000


Notes:

(1)		The other immediate subsidiaries of City Telecom (H.K.) Limited are SGBN Singapore Broadband Network Pte. Limited and Golden Trinity Holdings Limited. The immediate subsidiaries of Golden Trinity Holdings Limited are Warwick Gold Enterprises Limited and Attitude Holdings Limited.

(2)		The ~~company~~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, CTI International Limited, BBTV Company Limited, City Telecom (U.S.A.) Inc., City Telecom (Vancouver) Inc. and City Telecom (Toronto) Inc.

(4)		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, Hong Kong Broadband Phone Limited and Hong Kong Broadband Digital TV Limited.


			Percentage of interest
			held by City Telecom
	Jurisdiction of		~~(%)~~
~~Name~~Direct	~~Jurisdiction of Incorporation~~	Indirect
Name	~~Direct~~incorporation		~~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.	United States of America			—		100
City Telecom (Vancouver) Inc.	Canada			—		100
City Telecom Inc.	Canada			—		100
City Telecom International Limited	British Virgin Islands			100		—


~~(1)~~		Allowance for doubtful debts as at August 31, 2006 includes allowance for mobile interconnection charges receivables of HK$20.8 million (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 2004 Determination issued in June 2007, in fiscal 2007 the Company has reversed HK$9.4 million of the allowance for doubtful debts previously recognized for mobile interconnection charges to the consolidated statement of operations and has written off the remaining balance of the allowance of HK$11.4 million against the accounts receivable relating to mobile interconnection charges.


	•		~~are willing~~Local VoIP.The subscription base for our local VoIP services increased by 12.8%, to ~~enter into subscription contracts with a longer service period and~~431,000 as of August 31, 2010 from 382,000 as of August 31, 2009, mainly due to ~~pay higher prices in return for a more stable and higher speed broadband service and a reliable customer support. This strategy was proven successful as evidenced by the~~improved branding that allowed us to increase ~~in revenues from~~sales of our VoIP services to subscribers of our Internet access services.

	•		IP-TV.The subscription base for our IP-TV services decreased by 10.0% to 153,000 subscriptions as of August 31, 2010 from 170,000 as of August 31, 2009 because we proactively churned off free or low paying IP-TV subscribers and redeployed the set-top-boxes to higher yielding customers. We continued to enhance our channel variety so as to increase the content value to our customers. We currently offer more than 110 channels to our customers.


	Payments due by period
					More than 1		More than
					year but		3 years but		More
			Within		within 3		within 5		than
Contractual Obligations	Total		1 year		years		years		5 years
	(Thousands of HK$)
Capital expenditure items		143,888		143,888		—		—		—
Operating leases		87,000		55,095		21,077		3,444		7,384
8.75% senior notes		1,093,852		61,012		122,024		122,024		788,792
Obligation under finance leases		414		142		272
Other current liabilities		248,805		248,805		—		—		—
Programming fees (IP-TV)		6,862		6,583		219		60		—


Total		1,580,821		515,525		143,592		125,528		796,176


	Payments due by period
					More than		More than
					1 year		3 years
			Within		but within		but within		More than
	Total		1 year		3 years		5 years		5 years
Contractual obligations	HK$		HK$		HK$		HK$		HK$
	(Amounts in thousands)
Capital expenditure items		132,340		132,340		—		—		—
Operating leases		124,287		88,821		26,555		4,062		4,849
Long-term bank loan		133,996		1,829		4,326		127,841		—
Obligation under finance leases		677		242		243		192		—
Other current liabilities		264,904		264,904		—		—		—
Programming fees (IP-TV)		73,626		25,539		41,506		6,581		—


Total		729,830		513,675		72,630		138,676		4,849

	•		overseeing the accounting and financial reporting process of the Company and the audits of the Company’s consolidated financial statements on behalf of the board of directors; and

	•		the appointment, compensation, retention and oversight of the work of the Company’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 the Company.

	•		~~Establish formal, fair and transparent procedures for developing policy and structure of all remuneration of directors and senior management.~~

	•		Review and consider the Company’s policy for remuneration of directors and senior management.

	•		Recommend the remuneration packages of non-executive directors (including independent non-executive directors).

	•		Reviewed and approved the ~~proposed~~ discretionary performance bonus for the management committee ~~members.~~members;

	•		Reviewed and approved the remuneration packages for management committee ~~members.~~members; and

	•		Reviewed and approved the remuneration packages for the ~~Directors.~~directors.


					Percentages of Shares
		Beneficially			Beneficially Owned
Title of Class	Identity of Person or Group	Owned⁽⁵⁾			(%)⁽¹⁾
Ordinary Shares	Wong Wai Kay, Ricky		332,688,495	⁽²⁾		51.13
Ordinary Shares	Cheung Chi Kin, Paul		366,983,820	⁽³⁾		56.40
Ordinary Shares	Top Group International Limited		331,637,811			50.96
Ordinary Shares	Leung Ka Pak		331,637,811	⁽⁴⁾		50.96
Ordinary Shares	Yau Ming Yan, Andrew		331,637,811	⁽⁴⁾		50.96


	Price
	High		Low
	(In HK$)
2003		3.375		1.320
2004		2.975		1.310
2005		1.530		0.550
2006		0.830		0.570
2007		3.670		0.830

2006
January to March		0.770		0.570
April to June		0.820		0.600
July to September		0.710		0.630
October to December		0.830		0.600

2007
January to March		1.560		0.830
April to June		2.200		1.250
July to September		2.120		1.780
October to December		3.670		1.930

2008
January to March		2.170		1.620
April to June		2.090		1.670
July to September		1.950		1.340
October to December		1.360		0.750
2008
August		1.910		1.650
September		1.750		1.340
October		1.360		0.750
November		1.110		0.840
December		1.160		0.950

	(a)		such dividend be satisfied in whole or in part in the form of an allotment of shares to the shareholders, credited as being fully paid up, provided that all the shareholders entitled to receive the dividend will also be entitled to choose to receive the dividend (or a part of it) in ~~cash ;~~cash; or

	(b)		the shareholders entitled to such dividend are entitled to elect to receive an allotment of shares credited as fully paid up instead of the whole or part of the cash dividend our board of directors may decide upon.


					2010		2009
Nature of the service	2007		2008		HK$ million		HK$ million
	(HK$ million)		(HK$ million)
Audit fees		2.2		2.8		2.3		2.6
Audit-related fees		0.4		0.4		0.2		0.4
Non-audit services fees						0.3		—


Total		2.6		3.2		2.8		3.0

	*(a)*		Exhibit 12.1 — Section 302 Certifications of the Chief Executive Officer.

	*(b)*		Exhibit 12.2 — Section 302 Certifications of the Chief Financial Officer.

	*(c)*		Exhibit 13 — Section 906 Certification of Chief Executive Officer and Chief Financial Officer.


Audited Consolidated Financial Statements		Pages
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Income Statements ~~of Operations~~		F-2
Consolidated Statement of Comprehensive Income		F-3
Consolidated Balance Sheets		~~F-3, 4~~F-4
Consolidated Statements of Changes in ~~Shareholders’~~ Equity		F-5
Consolidated ~~Statements of~~ Cash ~~Flows~~Flow Statements		~~F-6, 7, 8~~F-7
Notes to the Consolidated Financial Statements		~~F-9~~F-8


		*Year ended August 31,*
	*Note*	*2006*			*2007*			*2008*
		HK$			HK$			HK$
Revenue			1,134,876			1,141,270			1,302,981

Operating expenses

Network costs, net	4		(300,593	)		(214,591	)		(178,367	)
Salaries and related costs			(256,721	)		(221,102	)		(247,460	)
Sales and marketing expenses			(204,952	)		(203,673	)		(307,743	)
General and administrative expenses			(440,672	)		(402,760	)		(396,598	)
Provision for doubtful accounts			(17,450	)		(6,569	)		(14,293	)


(Loss)/income from operations			(85,512	)		92,575			158,520

Interest income			20,378			22,671			15,596
Interest expense	5		(88,637	)		(87,504	)		(75,137	)
Other income, net	5		4,465			3,149			9,393


(Loss)/income before taxation	5		(149,306	)		30,891			108,372
Income tax credit/(expense)	6		7,244			(2,026	)		16,818


Net (loss)/income			(142,062	)		28,865			125,190


(Loss)/Earnings per share
Basic	7		(23.1) cents			4.7 cents			19.7 cents


Diluted	7		(23.1) cents			4.6 cents			19.0 cents


			As at August 31,
			2010		2009
	Note		HK$’000		HK$’000
Non-current assets

Goodwill		11		1,066		1,066
Fixed assets		12		1,431,813		1,302,380
Long term receivable and prepayment				5,174		6,091
Deferred expenditure		14		6,626		12,786


				1,444,679		1,322,323


Current assets

Accounts receivable		15		99,729		120,192
Other receivables, deposits and prepayments		15		89,490		69,765
Deferred expenditure		14		28,986		36,674
Pledged bank deposits		27		—		15,038
Cash at bank and in hand		16		588,665		226,416


				806,870		468,085


Current liabilities

Bank overdrafts — unsecured				10,490		5,364
Accounts payable		17		35,128		37,555
Other payables and accrued charges		17		195,931		206,487
Deposits received				21,822		16,385
Deferred service revenue		18		106,798		115,070
Tax payable				1,533		1,993
Current portion — obligations under finance leases		22		212		202


				371,914		383,056


Net current assets				434,956		85,029


Total assets less current liabilities				1,879,635		1,407,352


Non-current liabilities

Deferred tax liabilities		20		55,843		15,709
Derivative financial instrument		21		11,293		—
Long-term debt and other liabilities		22		123,960		163,116


				191,096		178,825


Net assets				1,688,539		1,228,527


Capital and reserves

Share capital		19		76,500		66,418
Reserves		19		1,612,039		1,162,109


Total equity attributable to equity shareholders of the Company				1,688,539		1,228,527


									Capital
	Share			Share		Capital			redemption		Retained			Exchange
	capital			premium		reserve			reserve		profits			reserve			Total
	HK$’000			HK$’000		HK$’000			HK$’000		HK$’000			HK$’000			HK$’000
At September 1, 2009		66,418			681,208		23,232			7		454,802			2,860			1,228,527
Total comprehensive income for the year		—			—		—			—		216,866			(97	)		216,769
Dividend paid in respect of previous year		—			—		—			—		(108,735	)		—			(108,735	)
Dividend paid in respect of current year		—			—		—			—		(49,725	)		—			(49,725	)
Shares issued upon exercise of share option		2,032			22,227		(7,515	)		—		—			—			16,744
Equity settled share-based transactions		—			—		5,347			—		—			—			5,347
Shares issued upon placement		8,050			371,562		—			—		—			—			379,612


At August 31, 2010		76,500			1,074,997		21,064			7		513,208			2,763			1,688,539


									Capital
	Share			Share		Capital			redemption		Retained			Exchange
	capital			premium		reserve			reserve		profits			reserve			Total
	HK$’000			HK$’000		HK$’000			HK$’000		HK$’000			HK$’000			HK$’000
At September 1, 2008		65,062			670,717		19,013			—		275,025			2,790			1,032,607
Total comprehensive income for the year		—			—		—			—		212,829			70			212,899
Dividend paid in respect of previous year		—			—		—			—		(3,108	)		—			(3,108	)
Shares issued in respect of scrip dividend of previous year		1,221			8,685		—			—		(9,906	)		—			—
Dividend paid in respect of current year		—			—		—			—		(19,904	)		—			(19,904	)
Shares issued upon exercise of share option		142			1,806		(549	)		—		—			—			1,399
Equity settled share-based transactions		—			—		4,768			—		—			—			4,768
Repurchase and cancellation of ordinary shares		(7	)		—		—			7		(134	)		—			(134	)


At August 31, 2009		66,418			681,208		23,232			7		454,802			2,860			1,228,527

1		Significant accounting policies (continued)

*(e)*		*Goodwill*


		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 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 entity is recognized immediately in the consolidated statement of operations.liabilities.

		Goodwill is stated at cost less accumulated impairment ~~losses, if any.~~losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note ~~2(i)~~1(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.

		Any excess of the 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 or a jointly controlled entity is recognized immediately in profit or loss.

		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.