CTEL Hong Kong Television Network Ltd. (MM)

SIGNATURE

Pursuant to the requirements of section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 28 ^th , 2007

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City Telecom (H.K.) Limited

Stock Code – SEHK: 1137;

NASDAQ: CTEL

:1137;

:CTEL

Innovating • Performing • Delivering

Annual Report 2007

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Established in 1992, City Telecom (HK) Limited (SEHK : 1137, NASDAQ : CTEL) is a fast growing and innovative provider of residential and corporate fixed telecommunications network and international telecommunications services in Hong Kong. Its wholly-owned subsidiary, Hong Kong Broadband Network Limited, is a major fixed telecommunications network services operator, providing broadband Internet access up to 1Gbps, telephony, IPTV, corporate and mobile data services with our self-built Metro Ethernet IP network. In addition to the operations in Hong Kong, the Group also has branch offices in Canada and Guangzhou.

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Corporate Information

Financial Calendar

Full-year Results

Announced on 22nd November, 2007

Annual General Meeting

24th December, 2007

Listing

City Telecom (H.K.) Limited’s shares are listed under the stock code “1137” on The Stock Exchange of Hong Kong Limited and in the form of American Depositary Receipts (each representing 20 ordinary shares of the Company) on the Nasdaq Stock Market in U.S. under the ticker symbol “CTEL”.

Directors

Mr WONG Wai Kay, Ricky (Chairman)

Mr CHEUNG Chi Kin, Paul (Chief Executive Officer)

Mr LAI Ni Quiaque (Chief Financial Officer and Head of Staff Engagement) ⁺

Mr CHENG Mo Chi, Moses ^{D +}

Mr LEE Hon Ying, John ^*#+

Dr CHAN Kin Man ^*#+

Mr PEH Jefferson Tun Lu ^*#+

Registered Office

Level 39, Tower 1, Metroplaza

No. 223 Hing Fong Road

Kwai Chung, N.T., Hong Kong

Authorised Representatives

Mr WONG Wai Kay, Ricky

Mr CHEUNG Chi Kin, Paul

Company Secretary

Mr TAI Kwok Hung

Legal Adviser to the Company as to U.S. and Hong Kong Laws

Jones Day

29th Floor, Edinburgh Tower

The Landmark

15 Queen’s Road Central

Hong Kong

Auditors

KPMG

Certified Public Accountants

8th Floor, Prince’s Building

10 Chater Road

Central, Hong Kong

Share Registrar

Computershare Hong Kong Investor Services Limited

46th Floor, Hopewell Centre

183 Queen’s Road East, Wanchai

Hong Kong

American Depositary Bank

The Bank of New York Mellon Corporation

101 Barclay Street, 22nd Floor

New York, NY 10286 USA

Principal Bankers

Citibank, N.A.

44th Floor, Citibank Tower

Citibank Plaza

3 Garden Road

Central, Hong Kong

The Hongkong and Shanghai Banking Corporation Limited

HSBC Main Building

No.1 Queen’s Road Central

Hong Kong

02   City Telecom (H.K.) Limited Annual Report 2007

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Corporate Structure

City Telecom (H.K.) Limited Annual Report 2007   03

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Statistical Review

04   City Telecom (H.K.) Limited Annual Report 2007

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Statistical Review

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06   City Telecom (H.K.) Limited Annual Report 2007

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Major Milestones and Events - Major Milestones and Events in 2007

City Telecom (H.K.) Limited Annual Report 2007   07

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Be the largest

IP provider in

Hong Kong by 2016.

Turning

EVERYTHING

POSSIBLE

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Chairman’s Statement

The only point I wish to highlight is “We will be the largest Next Generation Network (NGN) provider in Hong Kong by 2016”.

Dear Fellow Shareholders,

This year is one of the best years in our 15-year history, in terms of the strong cash flow brought by high level of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), largely driven by our well-defined strategies and the unmatched and unique performance capabilities of our broadband service.

While our competitors are still desperately spreading the messages to Hong Kong consumers that “100Mbps is no use”, “There is no genuine 100Mbps service in town”, “Why you need such a high bandwidth as 100Mbps” and “6Mbps or 8Mbps is good enough...”, our strong growth this year is the best evidence that more and more consumers have come to realise the need for high bandwidth, and understand the trend on broadband service development. Consumers are more willing to pay a premium to switch from the services offered by other Internet Service Providers to HKBN.

With such a strong network fundamentals, I expect that our competitive edge will leave our competitors 3 years to catch up, even if they made the decision to detract from their TV dream today. Despite this, we will continue to expand our next generation network, from the existing 1.4 million homes to 2.0 million homes coverage, which will have a substantial positive future impact.

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Chairman’s Statement

 

		This year’s EBITDA improvement is a result of the combined power from the increase in Average Revenue Per User (ARPU) of our broadband service and relentless operating cost containment efforts. With the uprising trend of bandwidth demand and our operation efficiency, we expect that the strong growth of our broadband service is here to stay and is set to expand even faster.
		The two co-founders of the company, Paul and myself, are preparing to shift away from the Hong Kong operations. On one hand, we are confident that our management team is now well ready to lead and further expand our business, and we prefer the company being run by a team of professional management members, rather than a two-men entrepreneurship. On the other hand, we are dedicating ourselves to the Singapore Next Generation National Broadband Network project, although the final tender document has yet to be released. We share and embrace the vision of the Singapore Government to have 1Gbps service connecting to a majority of the Singaporean homes. And with Hong Kong, Singapore, Korea and Japan rolling out Fiber-To-The- Home connectivity, we will be able to demonstrate to the world that, telecommunications infrastructures of Asia are more advanced than the rest of the developed world. We sincerely hope that our model can set an example for other Asian countries to follow.
		In early 2006, we launched our “Mini-CEO” decentralized management structure to empower the management team to innovate within clearly defined rules. The process involves converting “departments” into “Mini-companies”, each run by a Mini-CEO. As such, front line and supporting departments such as marketing, sales, finance, information technology, talent management etc, all become a Mini-Company with separate profit and loss. The full year budget is set by our Management Committee, after which the Mini-CEO has a lot of autonomy to take action within the defined resource allocation. We believe that the Mini-CEO structure delivers both increased scope for innovation and enhanced internal control as it upgrades our managers mindset from employees to business owners.
		Internally, after 18 months’ thorough discussion, we have developed our Vision Statement, with core purposes, core values, vivid descriptions and BHAG (Big, Hairy and Audacious Goal as proposed by James Collins and Jerry Porras in their Sep-Oct 1996 Harvard Business Review article titled “Building Your Company’s Vision”) being clearly set out. Full version of these can be found in latter pages of this annual report, so I shall not dwell on the details here. The only point I wish to highlight is “We will be the largest Next Generation Network (NGN) provider in Hong Kong by 2016”.
		Wong Wai Kay, Ricky
		Chairman
		22nd November 2007

 

City Telecom (H.K.) Limited Annual Report 2007   11

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Vision Statement

Core Purpose

To experience the emotion of competition, winning, and crushing competitors

To experience the joy of advancing and applying telecommunications technology for the benefit of the public

To fulfill the desire of Self-Actualization and “to become everything that one is capable of becoming”

Core Values

12   City Telecom (H.K.) Limited Annual Report 2007

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Vision Statement

Aspirational Values

BHAG

Be the largest IP provider in Hong Kong by 2016

Vivid Description

Today, no one believed we could do a better job than PCCW or HGC. They thought we were just crazy and hopeless. They thought we could at most only survive for a short period of time. Then, we would be forced to sell the Company and assets; and HKBN would disappear in the market. But, we have proved ourselves: they are all wrong! By 2016, our results will prove that, the 10-year investment and business strategy is correct. We shall prove that we are right!

Our team will be famous of “turning everything possible”. Parents and schools refer us as a demonstration of “Never give up”, “Attitude training”, “Volition” and “Hero”.

We will be the first choice of customers, employees and business partners. They will come to us before contacting other operators.

All our staff will be professionally developed and trained. We offer a career rather than a job. A strong service oriented culture is bred. Our management team will be mature, knowledgeable and experienced, and frequently being invited as speakers to teach and share their experience in university management courses and industry events.

Our families will share our pride on our achievement and contribution to this region. We will be respected by our competitors, customers and governments. The best up-and-coming university graduates will seek to work for us in earnest. They will be willingly to work passionately because they know the value we create for this world. They know besides financial reward, here is the place they will find fulfillment in life.

We will be one of the well known telecommunications companies in this region. Our products and services range from network infrastructure to customer’s software and hardware implanted in the human body. My children would say, “Dad, I love to have you as my Father.”

City Telecom (H.K.) Limited Annual Report 2007   13

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Team Work

To experience the emotion of competition, winning and crushing competitors

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Management’s Discussion and Analysis

Broadband remains our core service. We are the market leaders in terms of symmetric bandwidth.

Financial Highlights

In thousands of Hong Kong dollars except for per share amounts and ratios

16   City Telecom (H.K.) Limited Annual Report 2007

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Management’s Discussion and Analysis

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Management’s Discussion and Analysis

Our capital expenditure for this year was HK$132.2 million, lower than the HK$322.9 million incurred for last year. We are well within our stated intent to keep capital expenditure to below our EBITDA, hence driving up our gross cash balance. For FY07, the Group has generated a positive free cash flow of HK$221.6 million (2006: negative free cash flow of HK$77.7 million).

The requirement of on-going capital expenditure on our network development will be met by internally generated cash flow and the proceeds from senior notes issued in January 2005. We intend to limit our capital expenditure to below our EBITDA generation.

The debt maturity profiles of the Group as at 31 August 2007 and 31 August 2006 were as follows:

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Charge on Group Assets

As at 31 August 2007, the Group had bank facilities of US$9.0 million which was secured by a pledged deposit of US$9.9 million. In addition, certain bank guarantees provided to suppliers and to utility vendors in lieu of payment of utility deposits were secured by a pledged deposits of HK$10.0 million (compared to pledged deposits of US$9.9 million and HK$10.0 million as at 31 August 2006).

Exchange Rates

The Group’s foreign currency exposures mainly arise from its borrowings denominated in foreign currency and from purchase of goods and services of its overseas operations. The Group periodically reviews the potential costs and benefits of hedging, and when necessary, the Group mainly uses forward foreign exchange contracts to manage the currency exposure.

Contingent Liabilities

As at 31 August 2007, the Group had total contingent liabilities in respect of guarantees provided to suppliers of HK$5.9 million (31 August 2006: HK$6.3 million) and to utility vendors in lieu of payment of utility deposits of HK$5.3 million (31 August 2006: HK$5.3 million).

City Telecom (H.K.) Limited Annual Report 2007   19

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Management’s Discussion and Analysis

Business Review

Fixed Telecom Network Services (FTNS)

FTNS is the core business of the Group, generating 71.6% of our total revenues. Total FTNS subscription base, including all registered paid and free, on-net and off-net subscriptions, increased by 66,000 to 683,000 as of 31 August 2007. Of the total 66,000 net additions, 42,000 was achieved in the second half of the financial year. We believe this return to growth is an indicator that the market has now accepted a premium pricing positioning.

Broadband remains our core service. We are the market leaders in terms of symmetric bandwidth. During the year we raised our entry service level from 10Mbps to 25Mbps, such that our range of offerings now consist of bb25, bb50, bb100, bb200 and bb1000. As such, our entry level service of symmetric 25Mbps is already beyond mass capability of our competitors.

During the year, we formally launched “Special Duty Unit” (“SDU”) single point of contact customer care system, whereby every residential broadband customer is assigned a personal account executive, similar to the services offered by premium banks. In this process, we are upgrading our talent’s mindset from transaction based to customer ownership.

Due to our technology and customer service differentiation, we continue to push up our broadband ARPU. For new and renewal contracts, our monthly ARPU increased to HK$175/month in August 2007 versus HK$148/month in August 2006.

Following the previously established pool of word-of-mouth referral in August 2007, we started to drive a strategy of promoting the brand to a wider audience. A series of 1 minute mini program was broadcasted on television with the aim to educate the masses on why we need high bandwidth and why only HKBN’s network, not the incumbent network, can provide this bandwidth. The branding strategy will carry on to reinforce the needs on bandwidth of our existing subscribers and to change the mindset of potential subscribers.

International Telecom Services (IDD)

Our IDD business continued to decline over the year as a result of continued competition on pricing and lower traffic volume. This trend is mainly influenced by the other available calling options driven by the growth of Voice-Over-IP (VOIP) in the market place and also, the bundling of IDD minutes with other product offerings which continued to reduce its standalone profitability.

Our IDD traffic volume fell from 788.0 million minutes in FY06 to 659.0 million minutes in FY07 which partially due to our proactive migration from sunset IDD service to our long term sustainable FTNS international VOIP service, branded as “2b”.

20   City Telecom (H.K.) Limited Annual Report 2007

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Management’s Discussion and Analysis

Costs

Embraced by our next generation network foundation, last year’s operational efficiency plan and decentralization of authority to department heads, our operating costs declined from HK$1,195.3 million in FY06 to HK$1,048.7 million in FY07, representing a drop of 12.3%. Majority of the cost savings came from reduced “Network costs and cost of inventories” and “Staff costs”. As the bulk of the network costs of FTNS business is fixed up to a certain scale, the savings from this cost component has helped profit margin considerably. In addition, due to the change in accounting estimate on estimated useful lives of certain telecommunication equipments, depreciation expenses for the year decreased by HK$15.9 million. Such change has been accounted for prospectively from 1 June 2007.

Prospects

The market is polarizing with different business strategies being embraced by the incumbent and ourselves. Whereas the incumbent is investing heavily in exclusive contents, we continue to invest in our Metro Ethernet infrastructure. In September 2007, we launched our Fiber-To-The-Home service at commercially attractive rates to further extend our technology differentiation relative to the incumbent and other competitors. Even prior to us dropping the bb10 service offered to new customers, the fact that more than 60% of our current subscriptions were bb25 or above services confirmed that there is market demand for ultra-high bandwidth services, i.e. customers feel the need for speed.

Our strategy is to commoditise bandwidth, i.e. make symmetric 100Mbps broadband service as the standard in the territory over time. With this in mind, we have set a 3-year target to expand from our current home pass of 1.4 million to 2.0 million home pass (approximately 90% population coverage) by 2010. We expect that with increased economies of scale, we aim to push our profit margins north.

Employee Relations

As of 31 August 2007, the Group had 2,692 permanent full-time employees versus 2,565 as of 31 August 2006, the total staff related cost was HK$383.8 million in FY07 versus HK$420.5 million in FY06 which mainly benefited from streamlining the work force last year. We upgraded our focus from human resources to talent management with the objective of hiring only the best people - those who have common passion in the Group vision.

The Group offers remuneration packages consisting of basic salary, bonus and other benefits. Bonus payments are discretionary and dependent on performance of both the Group and the individual employee. In addition to the comprehensive medical and life insurance coverage, the Group provides share options as well as competitive retirement benefits.

City Telecom (H.K.) Limited Annual Report 2007   21

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Management’s Discussion and Analysis

Staff Engagement Supplement

Staff Engagement

In September 2006, the supporting functions of Talent Management, Learning & Development and Administration were restructured under a single group known as the Staff Engagement Department (SED). The primary objective of SED is to provide first class end-to-end service to our staff, working in direct partnership with our Customer Engagement Department (CED). Through the year, the SED implemented a series of enhancements to attract, develop and retain the best talent.

Executive Upgrade Plan

Our philosophy is to develop all-rounded business executives. As such, we highly value executives that are able to contribute on a total business basis rather than be limited to a vertical specialty, be it finance, engineering, marketing etc. During the past 12 months, the company has proactively sponsored 9 candidates in EMBA/MBA from institutions such as The Chinese University of Hong Kong, Kellogg-HKUST, Hong Kong University of Science and Technology, Hong Kong Baptist University, The Richard Ivey School of Business - The University of Western Ontario. Already, we are seeing the benefits of wider insight that these candidates bring to their daily operations.

Our goal is to have the far majority of our senior management be MBA qualified. We believe the business literacy for all our senior management, irrespective of their area of expertise, is a requisite for our long term success. Within our top senior management of 28 executives, more than 50% have or are in the process of sitting for postgraduate qualifications.

Education Partnership

We offer a company-wide Education Partnership that sponsor up to 80% of qualified courses chosen by the staff. The key objective for the Education Partnership is to cultivate a Continuous Learning culture. A wide range of courses are now being sponsored, including advanced diploma courses in finance and management, diploma course in web design, CPA modules, Cisco Certified certificate courses and workplace English etc.

GZ Executive Development Program

From Guangzhou, we invited 34 high potential future managers and top service executives to be groomed in Hong Kong under our 1-6 month executive development programs. Our goal is to upgrade the local management quality in Guangzhou for eventual deployment within the Group, be it in Guangzhou or Hong Kong.

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Management’s Discussion and Analysis

In-House Professional Development Series

In addition to sponsorship of external course, we run in-house Professional Development Series leveraging our internal subject matter experts. These courses range from highly technical to practical personal development and include subject matters such as interconnection regime, broadband technology evolution, finance for non-finance staff, leadership pipeline, wine appreciation and property basics, etc.

Company-Wide 5% Staff Exit Rule

Whilst we invest heavily in our staff, we recognize that some staff may have career objectives that differ to our corporate objectives. Initiated in 2006, we will continue to implement the annual company 5% staff exit rule. In a process similar to what GE’s former CEO Jack Welsh used, we rank our staff in terms of relative productivity and then request the bottom 5% to leave our company.

Work-Life Balance

We consider Work-Life Balance to be fundamental to our ability to attract and nurture talents. Whilst we have numerous initiatives to enhance Work-Life Balance within the Group, we would like to highlight our corporate participation in the Annual Standard Chartered Hong Kong Marathon. In 2007, we had 56 participants who successfully completed the event. This year, with full company sponsorship, including organized group training by professional running coaches twice a week, our corporate enrollment has reached 167 talents, which represents more than 10% of our Hong Kong based work force.

Awards

We are pleased that our Staff Engagement efforts were recognized by a number of public awards:

City Telecom (H.K.) Limited Annual Report 2007   23

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People’s

LEADER and PIONEER

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To experience the

joy of advancing

and applying

telecommunications

technology for the

benefit of the public

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Profile of Directors and Senior Management

Executive Directors
Mr WONG Wai Kay, Ricky , aged 45, is the co-founder and Chairman of the Group. He is responsible for our overall strategic planning and management. Mr Wong holds a bachelor’s degree in science from The Chinese University of Hong Kong and has over 20 years’ experience in the telecommunications and computer industries. Mr Wong had worked at a major US-listed computer company as a marketing representative and was responsible for marketing and distribution of computer products in Hong Kong from 1985 to 1989. He was also a co-founder and director of a company principally engaged in import and distribution of computer systems in Canada prior to co-founding of the Group. Mr Wong is a first cousin of Mr Cheung Chi Kin, Paul, the Chief Executive Officer of the Group. Currently, he is a member of Commission on Youth, a member of Zhejiang Committee, Chinese People’s Political Consultative Conference, an independent non-executive director of Bossini International Holdings Limited and a member of the Board of Trustees, United College, The Chinese University of Hong Kong.
Mr CHEUNG Chi Kin, Paul , aged 50, is the co-founder and Chief Executive Officer of the Group. He is responsible for our day-to-day operations and technological research, development and support activities. Mr Cheung graduated with a diploma of advanced programming and system concepts design from Herzing Institute, Canada. He has more than 26 years’ experience in the telecommunications and computer industries. Mr Cheung had worked in companies engaged in application software development and computer consultancy prior to co-founding of the Group. Mr Cheung is a first cousin of Mr Wong Wai Kay, Ricky, the Chairman of the Group.
Mr LAI Ni Quiaque , aged 37, is Chief Financial Officer and Head of Staff Engagement. Mr Lai joined the Group in May 2004. Mr Lai has extensive experience in telecommunications industry research and finance, being highly rated in this field. Prior to joining City Telecom, Mr Lai was Director and Head of Asia Telecom Research for Credit Suisse, having spent 8 years with the firm. During his tenure with Credit Suisse, he was involved in global fund raisings for a wide range of Asian Telecom carriers such as China Mobile, China Telecom, China Unicom, China Netcom, SK Telecom, PCCW, Telekom Malaysia, etc. Before that, Mr Lai held positions with Hongkong Telecom and Kleinwort Benson Securities (Asia). Mr Lai holds a Bachelor of Commerce degree from the University of Western Australia, is a Fellow member of CPA Australia and is a Member of the Hong Kong Institute of Directors. Mr Lai has been accepted into the Kellogg-HKUST EMBA program commencing in January 2008.

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Profile of Directors and Senior Management

Non-Executive Director

Mr CHENG Mo Chi, Moses , aged 57, was re-designated as a non-executive director of the Group with effect from 30 September 2004. He was appointed as an independent non-executive director of the Group since 17 June 1997. He is the senior partner of P.C. Woo & Co., a firm of solicitors and notaries in Hong Kong, the Founder Chairman of the Hong Kong Institute of Directors of which he is now the Honorary President and Chairman Emeritus and the Chairman of the Betting and Lotteries Commission. Mr Cheng was appointed as a member of the Legislative Council of Hong Kong from 1991 to 1995.

Independent Non-Executive Directors

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

Mr LEE Hon Ying, John , aged 61, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the Regional Director, Asia Pacific of Northrop Grumman - Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable & Wireless HKT and Hong Kong Telecom. He is a chartered engineer and a member of each of 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 Hong Kong Polytechnic University in 1992. In addition, he is the Territory Vice-president of the Society of St. Vincent de Paul of Asia and Oceania, which is an international charity body. He is the Commission member of Catholic Diocese of Hong Kong Diocesan for Hospital Pastoral Care. Mr Lee has been a Director since June 1997.

Mr PEH Jefferson Tun Lu , aged 48, is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountant of CPA Australia. Mr Peh holds a Master degree in business from the University of Technology, Sydney. He has over 25 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 Group since September 2004.

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Profile of Directors and Senior Management

Senior Management
Mr CHANG Wing Fu, Stephen , is the Chief Technology Officer. Mr Chang joined the Group in July 2006 as Chief Information Officer and has taken up the additional role as the Group’s Chief Technology Officer since December 2006. He provides advice and assistance to the Group, to ensure that Information and Communications technologies are acquired and managed in a manner that is aligned with business strategy, supporting the goals and objectives of the Group and its various business units. Mr Chang graduated from Australia and holds a Masters in Information Systems Degree and a Bachelor of Science Degree from Monash University. Mr Chang has 19 years of experience in Systems Development, Project Management, Consulting and I.T. Management. Prior to joining the Group, Mr Chang was the Asia Pacific/Japan VP of Worldwide Support for a U.S. software company. Before that he was the General Manager of I.T. at Smartone-Vodafone.
Mr CHONG Kin Chun, John , is the director of the corporate division. He is responsible for sales, marketing and servicing development of the Group’s international telecommunications services and fixed telecommunications network services for business and corporate customers. Mr Chong joined the 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 , is the director of Hong Kong Broadband Network Limited (HKBN). He is now in charge of the company’s Next Generation National Broadband Network (NGNBN) project in Singapore. That project is to develop a FTTH network for the whole country. Before that, Mr Lo was in charge of regulatory, carrier business, international business, network operation and network development for HKBN. Mr Lo joined CTI 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, UK.

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Profile of Directors and Senior Management

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

Mr YEUNG Chu Kwong, William , is the Chief Operating Officer of the Group. Mr Yeung joined the Group in October 2005 and is responsible to head our customer engagement department to oversee customer relationship management. Mr Yeung is also responsible to head network development department. He holds a Bachelor of Arts degree from Hong Kong Baptist University, a master of business administration degree from University of Strathclyde, UK and a Master of Science degree in electronic commerce and internet computing from The University of Hong Kong. Mr Yeung has more than 15 years’ experience in the telecom industry. Prior to joining the 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.

Company Secretary

Mr TAI Kwok Hung , is the Head of the Legal, Regulatory and Company Secretarial Department of the Group and was appointed Company Secretary with effect from 7 August 2007. Mr Tai graduated from The University of Hong Kong with a bachelor’s degree in laws. Mr Tai is a solicitor admitted in Hong Kong, England and Wales and a legal practitioner admitted in New South Wales, Australia. Mr Tai has more than 10 years’ post admission experience both in private practice and as in-house counsel with listed companies.

City Telecom (H.K.) Limited Annual Report 2007   29

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To fulfill the desire of Self-Actualization and “to become everything that one is capable of becoming”

Encourage ATTEMPTS

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Financial Information

Pulling together with perseverance, the Group has strived to achieve greater heights, beyond our individual capabilities, against challenging market conditions. Through long term investments and aggressive business strategy, we are building a strong future and laying the foundation to become Hong Kong’s preeminent integrated telecommunications services provider.

Corporate Governance Report		33
Report of the Directors		41
Auditor’s Report		51
Consolidated Profit and Loss Account		53
Balance Sheet		54
Consolidated Statement of Changes in Equity		55
Consolidated Cash Flow Statement		56
Notes to the Financial Statements		57
Five Year Financial Summary		96

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Corporate Governance Report

The Group is committed to ensuring high standards of corporate governance in the interests of the shareholders and in maintaining high level of business ethics and corporate governance practices.

The Board supports the principles of corporate governance as stated in the Code on Corporate Governance Practices (the “CG Code”). Details of the CG Code are set out in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”). Below is the Group’s report on the application of the principles contained in the CG Code for the year under review. The Company has complied throughout the year ended 31 August 2007 with the Code Provisions except that Mr Wong Wai Kay, Ricky (as Chairman of the Board and executive director) did not attend the last Annual General Meeting on 29 December 2006 due to other engagements. Mr Lai Ni Quiaque (as executive director, Chief Financial Officer and member of the Remuneration Committee) and Mr Lee Hon Ying, John (as independent non-executive director, Chairman of both the Audit Committee and Remuneration Committee) attended that Annual General Meeting.

Model Code for Securities Transactions by Directors of Listed Issuers ( “Model Code “)

The Company has adopted the Model Code of the Listing Rules as the code of conduct for securities transactions by directors of the Company (the “Company Code”). Having made specific enquiry of all directors, the Directors confirmed that they have complied with the required standards as set out in the Company Code throughout the year from 1 September 2006 to 31 August 2007. On 21 November 2005, the Company has also extended the Company Code for securities transactions by the senior management of the Company.

The Board

The Board is responsible to the shareholders for the management of the Group and has adopted a committee structure which enables the Board to concentrate its efforts on establishing the strategic direction of the Company, setting objectives of and monitoring the performance of the Management.

Directors

The Board currently comprises a total of 7 directors, with three executive directors, one non-executive director and three independent non-executive directors. In this respect, the Company complies with the requirement of the Listing Rules which requires every board of directors of a listed issuer to have at least three independent non-executive directors.

The names and biographical details of the directors of the Company are given on pages 26 to 29 in the Profile of Directors and Senior Management. All directors served the Board throughout the financial year.

The Company does not have a nomination committee or a formal written Board evaluation process for nomination of members to the Board. Generally, decisions on nominations for members to the Board would result from consultations among the Chairman, Chief Executive Officer and other Directors as they consider appropriate.

Every newly appointed director of the Company will receive a comprehensive, formal and tailored induction on the first occasion of his appointment to ensure that he has a proper understanding of the operations and business of the Company, and that he is fully aware of his responsibilities under statute and common law, the Listing Rules, applicable legal requirements and other regulatory requirements and the business and governance policies of the Company.

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Corporate Governance Report

Appointment, re-election and removal of directors

Pursuant to the Articles of Association of the Company, any director appointed by the Board for filling a casual vacancy or as an addition to the existing Board shall hold office only until the next following general meeting of the Company, and shall be eligible for re-election.

At every annual general meeting, one third of the Directors shall retire from office and every of them (including those appointed for a specific term) shall be subject to retirement by rotation at least once every three years.

The term of appointment of the non-executive directors of the Company is renewable every year subject to retirement by rotation at least once every three years.

For compliance with the provisions of the Articles of Association of the Company, Mr Lee Hon Ying, John and Mr Peh Jefferson Tun Lu shall retire by rotation at the coming 2007 Annual General Meeting and, being eligible, will offer themselves for re-election.

Composition and role

In terms of the composition of the Board, the Board’s preference is to maintain a smaller size for efficiency and to encourage active dialogue among the members. It believes that the balance between executive and non-executive directors is reasonable and adequate to provide check and balance that safeguard the interests of shareholders and the Group.

Pursuant to Rule 3.13 of the Listing Rules, each of the independent non-executive directors has made a written confirmation of independence and the Company is of the view that all the independent non-executive directors meet the independence guidelines set out in Rule 3.13 of the Listing Rules.

The Board’s principal focus is on the overall strategic direction, development and control of the Group. In support of this, the following functions are reserved to the Board:

The Board also delegates to the Management the functions of (1) implementing of the strategy and direction set by the Board; and (2) preparing the annual operating budget and presenting the same to the Board for approval.

The roles of the Chairman and the Chief Executive Officer are segregated. They are set out in written job descriptions, and were approved by the Board on 4 April 2006. The positions of the Chairman and Chief Executive Officer are held by separate individuals. Although Mr Wong Wai Kay, Ricky, Chairman of the Company, is a first cousin of Mr Cheung Chi Kin, Paul, Chief Executive Officer of the Company, the written job descriptions reinforce a segregation of duties in order that a balance of power and authority is achieved.

Other than the above, none of the members of the Board has any relationship (including financial, business, family or other material or relevant relationships) between each other.

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Board Proceedings

The Board meets regularly at approximately quarterly intervals. All Board members have full and timely access to relevant information and may take independent professional advice at the Company’s expense, if necessary. The Company Secretary will dispatch to all members of the Board the notice at least before 14 days of each of regular board meetings to ensure that all directors are given an opportunity to include matters in the agenda for regular board meetings.

Representatives from Finance Department and Internal Audit Department would be invited whenever appropriate, reporting to the Board on their business including the operations, financial performance and internal audit progress. The Company Secretary also reports to the Board on the corporate governance issues, where necessary. These reports and the discussions at Board meetings enable all Board members to make informed decisions in the interests of the Company. The finalized agenda and full set of board papers were sent at least 3 days before the intended dates of the Board meetings.

All directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that proper board procedures are followed and advising the Board on all corporate governance matters.

All the minutes of Board meetings are prepared by the Company Secretary with sufficient details of the matters considered by the Board and decisions reached, including any concerns raised by directors or dissenting views expressed. The draft minutes of board meetings are circulated to the Board members for comment and the final version of Board minutes are formally adopted at the subsequent meeting. Minutes of Board Meetings are kept by the Company Secretary and open for inspection by all Board members at the Company’s registered office.

The Board met five times in this year, together with twenty-one written resolutions approved by all the members. The attendance of individual directors/ members at these Board meetings and at two other committees meetings (the Audit Committee and the Remuneration Committee) is set out in the following table:

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Corporate Governance Report

Directors’ Responsibilities for the Financial Statements

The Board, supported by the Finance Department, is responsible for the preparation of the financial statements of the Group. In preparing the financial statements, the generally accepted accounting standards in Hong Kong have been adopted and the Group has complied with accounting standards issued by the Hong Kong Institute of Certified Public Accountants. Appropriate accounting policies have also been used and applied consistently. The Board acknowledges their responsibility for preparing the financial statements of the Company that they are prepared on a going concern basis and give a true and fair view of the state of affairs of the Company as at the year ended 31 August 2007, and every profit and loss account of the Company shall give a true and fair view of the profit or loss of the Company for this financial year ended 31 August 2007.

Directors’ and Officers’ Liability Insurance and Indemnity

The Company has purchased insurance to cover the Directors’ and Officers’ liability. The insurance policy contains the following separate insurance contracts: Directors’ and Officers’ Liability Contract; Company Reimbursement Contract; and Legal Representation Expenses Contract. Throughout the financial year 2007, no claim has been made against the directors and officers.

Board Committees

Remuneration Committee

The Group’s Remuneration Committee was established in August 2001. The Remuneration Committee comprises six members with three independent non-executive directors, the non-executive director, the chief financial officer and the Director, Talent Management. The Chairman of the Remuneration Committee is Mr Lee Hon Ying, John. The terms of reference of the Committee as adopted by the Board are published on the Group’s website. The Remuneration Committee’s objectives are to:

The main responsibilities of the Remuneration Committee are set out as follows:

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The remuneration of directors and senior management is determined with reference to the salaries paid by comparable companies, time commitment and responsibilities of the directors and senior management, employee conditions elsewhere in the Company and desirability of performance-based remuneration.

The remuneration structure of the Company for its employees, including executive directors and senior management, comprises fixed salary, discretionary bonus and employer’s contribution to pension scheme. Directors and employees also participate in bonus arrangements determined by the performance of the Group and the individual’s performance. Details of the directors’ remuneration are set out in Note 10 of the financial statements.

During this year, the Remuneration Committee met two times to discuss remuneration related matters together with one written resolutions approved by all committee members. Matters discussed included the followings:

Audit Committee

The Group established its Audit Committee in March 1999. The Audit Committee comprises Mr Lee Hon Ying, John (the Chairman of the Audit Committee), Dr Chan Kin Man, Mr Peh Jefferson Tun Lu who are all independent non-executive directors of the Company.

The main responsibilities of the Audit Committee are to oversee the accounting and financial reporting processes of the Group and the audits of the Group’s financial statements on behalf of the Board of Directors; and to review and discuss the internal audit plans and reports of the audit activities, examinations and results thereof of the internal audit department of the Company.

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The Audit Committee is also directly responsible for the appointment, compensation, retention and oversight of the work of the Group’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 Group. It shall have the resources and authority appropriate to discharge its responsibilities as required by the law, including the authority to engage independent counsel and other advisors as the Audit Committee deems necessary to carry out its duties.

For the year ended 31 August 2007, KPMG, the external auditor of the Company, and its subsidiaries received approximately HK$2,600,000 (31 August 2006: HK$2,143,000) for audit services and HK$Nil (31 August 2006: HK$675,000) for non-audit services.

The Audit Committee met three times in this year together with three written resolutions approved by all the committee members. The major works performed by the Committee from 1 September 2006 to 31 August 2007 included:

Other than all the Audit Committee members, representatives of the external auditor, executive directors and representative of Internal Audit Department would be invited to attend the meetings for reporting and answering questions about their work whenever necessary.

The minutes of the Audit Committee meetings are prepared by the Company Secretary who acted as the secretary of the meetings with details of the matters considered by the committee members and decisions reached, including any concerns raised by the committee members or dissenting view expressed. The final version of the minutes are approved by the committee members at the subsequent meeting. The minutes are kept by Company Secretary and are open for inspection by the committee members at the Company’s registered office. To enable the committee members making conversant decision, the agenda and the relevant meeting papers are dispatched at least one week before the meetings.

Internal Controls

The Board is responsible for maintaining and reviewing the effectiveness of the Group’s internal control system. This system is designed to help the achievement of business objectives, safeguard assets against unauthorized use or disposition, ensure the maintenance of proper accounting records for the provision of reliable financial information for internal use or for publication, and ensure compliance with relevant legislation and regulations. Moreover, this system is designed to provide reasonable, but not absolute, assurance against material misstatements, losses and fraud.

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Internal Audit department was established to conduct independent reviews on the Group’s internal control. The audit plan is discussed and agreed every year with the Audit Committee. In addition to its agreed schedule of work, the Internal Audit Department conducts other review and investigates work as may be required. The significant audit findings and corrective action plans are reported to the Chairman and Audit Committee at least twice a year. Copies of Internal Audit Reports are sent to the Chief Financial Officer and external auditors.

The internal control assessment was conducted with reference to the COSO framework (The Committee of Sponsoring Organization), namely, control environment, risk assessment, control activities, communication and monitoring. These include systems for identifying, monitoring and management of risks associated with its business activities as follows:

For the year under review, the Directors have conducted a review of the effectiveness of the system of internal control of the Group and consider the Group’s internal control system is reasonably effective and adequate. The review covered all material controls including financial, operational and compliance controls and risk management functions.

To assist the continuous professional development of the management of the Group, a workshop on global best practices on internal control and how such control can improve operational performance of the Group was held in September 2006.

Company Policies

The Group has adopted a number of company policies to ensure good corporate governance practices and high standard of business conducts and ethics of the Group, including Company Policies and Procedures, Code of Business Conduct and Ethics and individual departmental charters. The Group will conduct and review regularly an evaluation of the adequacy of these Company policies.

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Investor Relations

The Group is committed to fostering productive and long-term relationships with shareholders and investors through open and prompt communication. The Group adopts a policy of disclosing relevant information to shareholders in a timely manner. The Group’s annual general meeting allows the directors to meet and communicate with shareholders. For strengthening the communication with the shareholders and investors, Mr Lai Ni Quiaque (as executive director, Chief Financial Officer and member of the Remuneration Committee) and Mr Lee Hon Ying, John (as independent non-executive director and Chairman of both the Audit Committee and Remuneration Committee) attended the last Annual General Meeting on 29 December 2006.

Various channels are established to facilities transparency. Our Group website which contains corporate and financial information of the Group, interim and annual reports issued by the Group as well as recent development of the Group enable shareholders and investors to have timely and updated information of the Group.

During this year, the Board confirmed that there were no significant changes made in the Company’s Articles of Association.

US Sarbanes-Oxley Act 2002

As the Company is listed on the Nasdaq Stock Market in the U.S., it is also bound by the provisions of the U.S. Sarbanes – Oxley Act 2002, which is a legislation seeking to enhance the transparency and accountability of companies in the areas of corporate governance and financial reporting.

The Group has been, and will continue its process of, reviewing its internal control systems and practices and implementing new requirements under this legislation in line with applicable compliance dates, in particular Section 404 of the Sarbanes – Oxley 2002 regarding the internal control over financial reporting.

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Report of the Directors

The directors have pleasure in submitting their report together with the audited financial statements for the year ended 31 August 2007.

Principal Activities and Geographical Analysis of Operations

The principal activities of the Company and its subsidiaries (the “Group”) are the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.

An analysis of the Group’s performance for the year by business and geographical segments is set out in note 3 to the financial statements.

Results and Appropriations

The results of the Group for the year are set out in the consolidated profit and loss account on page 53 of the annual report.

Reserves

Movements in the reserves of the Group and the Company during the year are set out in note 22 to the financial statements.

An interim dividend of HK4 cents per share (2006: Nil) was paid on 14 June 2007. At a Board meeting held on 22 November 2007, the Board has recommended to pay a final dividend of HK4 cents per share with a scrip dividend option offered to all shareholders excluding shareholders with registered addresses outside Hong Kong (whom the Company upon proper enquiries considers such exclusion necessary or expedient on account either of the legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place). Subject to the approval of the shareholders at the forthcoming Annual General Meeting, the final dividend will be distributed on or about 4 February 2008 to shareholders whose names appear on the register of members of the Company as at the close of business on 21 December 2007.

Donations

Charitable and other donations made by the Group during the year amounted to HK$43,000 (2006: HK$149,500).

Fixed Assets

Details of the movements in fixed assets of the Group are set out in note 13 to the financial statements.

Share Capital and Share Options

Details of the movements in share capital and share options of the Company are set out in note 22 to the financial statements.

Distributable Reserves

Distributable reserves of the Company as at 31 August 2007, calculated in accordance with section 79B of the Hong Kong Companies Ordinance, amounted to approximately HK$193,047,000 (2006: HK$230,627,000).

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Report of the Directors

Five Year Financial Summary

A summary of the results and of the assets and liabilities of the Group for the last five financial years is set out on page 96 of the annual report.

Purchase, Sale or Redemption of Listed Securities

The Company has not redeemed any of its listed securities during the year. Neither the Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities during the year.

Group’s Borrowings

The Group’s borrowings as at 31 August 2007 are repayable in the following periods:

Directors

The directors during the year and up to the date of this report were:

Executive directors

Mr Wong Wai Kay, Ricky (Chairman)

Mr Cheung Chi Kin, Paul (Chief Executive Officer)

Mr Lai Ni Quiaque* (Chief Financial Officer)

Non-executive director

Mr Cheng Mo Chi, Moses*

Independent non-executive directors

Mr Lee Hon Ying, John ^# *

Dr Chan Kin Man ^# *

Mr Peh Jefferson Tun Lu ^# *

In accordance with Articles 96 and 99 of the Company’s Articles of Association, Mr Lee Hon Ying, John and Mr Peh Jefferson Tun Lu shall retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting.

The Company received confirmation of independence from each of the independent non-executive directors pursuant to Rule 3.13 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the Company still considers the independent non-executive directors to be independent.

Directors’ Service Contracts

There is no unexpired service contract which is not determinable by the Company within one year without payment of compensation (other than statutory compensation) of the directors proposed for re-election and re-appointment at the forthcoming annual general meeting.

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Report of the Directors

Directors’ Interests in Contracts of Significance

No contract of significance in relation to the Group’s business to which the Company or any of its subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

Biographical Details of Directors and Senior Management

Brief biographical details of the directors and senior management are set out on page 26 to page 29 of the annual report.

Directors’ Interests in Shares and Underlying Shares

Directors’ interests or short positions in shares and in share options

As at 31 August 2007, the interests of the Directors and chief executive of the Company and their associates, of the Company in the shares and underlying shares of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the register maintained by the Company required to be kept under Section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers adopted by the Company (the “Model Code”) were as follows:–

Long position in ordinary shares and underlying shares of the Company

Notes:

Details of the directors’ interests in share options granted by the Company are set out in page 46 of this report.

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Report of the Directors

Save as disclosed above, as at 31 August 2007, none of the directors or chief executive (including their spouse and children under 18 years of age) had any interests or short positions in the shares, underlying shares and derivative to ordinary shares of the Company and its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.

Share Option Schemes

The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of the Company on 23 December 2002 which 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.

The Company had an old share option scheme adopted by shareholders on 12 July 1997 (the “1997 Share Option Scheme”). Options granted under the 1997 Share Option Scheme that are not exercised have lapsed automatically on 12 July 2007. The 1997 Share Option Scheme was terminated on 23 December 2002 upon the adoption of the 2002 Share Option Scheme. Upon its termination, no further options can be granted under the 1997 Share Option Scheme.

A summary of each of the share option schemes operated by the Company is as follows:

To grant options to the eligible participants as incentives and rewards for their contribution to the Company or its subsidiaries.

Eligible participants include employees, executives or officers (including executive, non-executive and independent non-executive directors) of the Company or any of its subsidiaries, suppliers and professional advisers of the Group.

The total number of shares which may be issued upon exercise of options to be granted under the scheme shall not exceed 10% of the shares in issue as at the date of adoption of the 2002 Share Option Scheme on 23 December 2002 (i.e. 50,302,066 shares). Such limit was refreshed by the shareholders in the general meeting held on 29 December 2004 so that the total number of shares which may be issued shall be 10% of the shares in issue as at the date of the said general meeting (i.e. 61,407,340 shares). As at the date of this annual report, the number of shares available for issue in respect thereof is 12,817,340 shares, representing approximately 2.1% of the issued share capital of the Company as at the date of the annual report.

The shares which may be issued upon exercise of all outstanding options to be granted and yet to be exercised under the 2002 Share Option Scheme and any other share option scheme(s) of the Company at any time shall not exceed 30% of the shares in issue from time to time. No options shall be granted under any scheme(s) of the Company or any of its subsidiaries if this will result in the 30% limit being exceeded.

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The total number of shares shall be issued upon exercise of the options granted under the 2002 Share Option Scheme and any other share option scheme(s) of the Company (including exercised, cancelled and outstanding options) to each participant in any 12-month period up to and including the date of grant shall not exceed 1% of the shares in issue as at the date of grant.

Any further grant of options in excess of this 1% limit shall be subject to the issue of a circular by the Company and the approval of the shareholders in general meeting with such grantee and his associates abstaining from voting and/or other requirements prescribed under the Listing Rules from time to time.

The period during which an option may be exercised will be determined by the board of directors at its absolute discretion and no option may be exercised more than 10 years from the date of grant.

The board of directors is empowered to impose, at its discretion, any minimum period that an option must be held at the time of grant of any particular option.

Acceptance of the option must be made within 30 days after the date of offer and HK$1.00 must be paid as a consideration for the grant of option.

The board of directors shall determine the exercise price of each option offered but in any event shall not be less than the highest of: (a) the official closing price of the shares of the Company on the date of offer as quoted in the Stock Exchange quotation sheet; (b) the average of the closing price of the shares of the Company for the 5 business days immediately preceding the date of offer as quoted in the Stock Exchange quotation sheet; and (c) the nominal value of the shares of the Company.

The 2002 Share Option Scheme is valid and effective from 23 December 2002, being the date of adoption, and shall end on the tenth anniversary of such date (both days inclusive).

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The above variables were determined as follows:

Using the Black-Scholes Model in assessing the value of share options granted during the year, the fair value is estimated as below:

Effective from 1 September 2005, upon the adoption of Hong Kong Financial Reporting Standard 2 Share-based payment, the Group recognizes the fair value of share options as an expense in the profit and loss account 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 determination of the estimated value of the share options granted under the 2002 Share Option Scheme, was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Such option pricing model requires 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.

As mentioned in page 44, the 1997 Share Option Scheme was terminated on 23 December 2002 and options granted under that scheme that are not exercised have lapsed automatically on 12 July 2007.

To grant options to the employees as incentives for their contribution to the Company or its subsidiaries.

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Report of the Directors

Eligible participants include employees of the Company or any of its subsidiaries including (without limitation) any executive director of the Company or any of its subsidiaries.

The total number of shares which may be issued upon exercise of options which may be granted under the scheme and any other share option scheme(s) should not exceed 10% of the shares in issue (excluding any shares allotted and issued pursuant to this scheme) from time to time.

No option may be granted to any one employee which, if exercised in full, would result in such employee becoming entitled to subscribe, and in aggregate with the total number of shares already issued and issuable to him, over 25% of the aggregate number of shares issued and issuable under the 1997 Share Option Scheme.

The period during which an option may be exercised will be determined by the board of directors and such period may commence on a day after the date of acceptance and in any event shall end not later than 10 years from 12 July 1997, being the date of adoption.

There was no minimum period for which an option must be held before it can be exercised as specified in the 1997 Share Option Scheme but the board of directors may determine that the employees are required to undertake to hold the option based on the terms on which the option is to be granted.

Acceptance of the option must be made within 28 days after the date of offer and HK$1.00 must be paid as a consideration for the grant of option.

The board of directors shall determine the exercise price which will be the higher of: (a) a price being not less than 80% of the average closing price of the shares of the Company for the 5 trading days immediately preceding the date of offer; and (b) the nominal value of the shares of the Company.

The 1997 Share Option Scheme was originally established to have a term of ten years commencing from the date of its adoption on 12 July 1997. The 1997 Share Option Scheme was terminated on 23 December 2002 upon the adoption of the 2002 Share Option Scheme. Upon its termination, no further options can be granted under the 1997 Share Option Scheme.

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Directors’ Rights to Acquire Shares or Debentures

Save as disclosed under the section “Share Option Schemes” in this report, at no time during the year was the Company or any of its subsidiaries a party to any arrangements to enable the directors and/or the chief executive of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

Substantial Shareholders

As at 31 August 2007, the interests and short positions of the persons, other than the directors or chief executive of the Company, in the shares and underlying shares of the Company as recorded in the register maintained by the Company required to be kept under Section 336 of the SFO were as follows:–

Note: This percentage is based on 616,503,404 shares of the Company issued as at 31 August 2007.

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Report of the Directors

Save as disclosed above, as at 31 August 2007, the Company had not been notified of any persons (other than the directors and chief executive of the Company) having any interest or short position in the shares and underlying shares of the Company as recorded in the register required to be kept under Section 336 of the SFO.

Management Contracts

No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year.

Major Customers and Suppliers

The aggregate percentage of sales for the year attributable to the Group’s five largest customers is less than 30% of total sales for the year and therefore no disclosure with regard to major customers are made. The percentage of purchases for the year attributable to the Group’s major suppliers are as follows:

None of the directors, their associates or any shareholder (which to the knowledge of the directors own more than 5% of the Company’s issued share capital) had an interest in the major suppliers noted above.

Sufficiency of Public Float

On the basis of information that is publicly available to the Company and within the knowledge of the directors as at the date of this annual report, the Company has maintained a sufficient public float as required under the Listing Rules during the year.

Corporate Governance

Corporate Governance practices adopted by the Company are set out in the Corporate Governance Report on pages 33 to 40.

Auditors

The financial statements have been audited by KPMG who shall retire, and being eligible, offer themselves for re-appointment at the forthcoming annual general meeting of the Company.

On behalf of the Board

Wong Wai Kay, Ricky

Chairman

Hong Kong, 22 November 2007

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Auditor’s Report

Independent auditor’s report to the shareholders of City Telecom (H.K.) Limited

(Incorporated in Hong Kong with limited liability)

We have audited the consolidated financial statements of City Telecom (H.K.) Limited (the “Company”) set out on pages 53 to 95, which comprise the consolidated and Company balance sheets as at 31 August 2007, and the consolidated profit and loss account, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Opinion

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 August 2007 and of the group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the Hong Kong Companies Ordinance.

KPMG

Certified Public Accountants

8th Floor, Prince’s Building

10 Chater Road

Central, Hong Kong

22 November 2007

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The notes on pages 57 to 95 form part of these financial statements.

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