##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 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: 000-51242
 CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
  
 
 
 
  Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares, each representing 15
ordinary shares, par value 
US$0.00002 per share
    
    Nasdaq Global Market
 
 
  Yes o No þ
 o þ
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  US GAAP þ
    
    International Financial Reporting Standards as
 issued by the International Accounting Standards 
Board o
    
    Other o
 o o
 o þ
  Yes o No o




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##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    1PART I
    
    
    2ITEM 1. Identity of Directors, Senior Management and Advisers
    
    
    2ITEM 2. Offer Statistics and Expected Timetable
    
    
    2ITEM 3. Key Information
    
    
    2ITEM 4. Information on the Company
    
    
    15ITEM 4A. Unresolved Staff Comments
    
    
    26ITEM 5. Operating and Financial Review and Prospects
    
    
    26ITEM 6. Directors, Senior Management and Employees
    
    
    40ITEM 7. Major Shareholders and Related Party Transactions
    
    
    47ITEM 8. Financial Information
    
    
    48ITEM 9. The Offer and Listing
    
    
    48ITEM 10. Additional Information
    
    
    49ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    55ITEM 12. Description of Securities Other than Equity Securities
    
    
    56PART II
    
    
    56ITEM 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    56ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    56ITEM 15. Controls and Procedures
    
    
    56Item 16.A. Audit Committee Financial Expert
    
    
    59Item 16.B. Code of Ethics
    
    
    59Item 16.C. Principal Accountant Fees and Services
    
    
    59Item 16.D. Exemptions from the Listing Standards for Audit Committees
    
    
    60Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    60Item 16.F. Change in Registrants Certifying Accountant
    
    
    60Item 16.G. Corporate Governance
    
    
    60PART III
    
    
    61ITEM 17. Financial Statements
    
    
    61ITEM 18. Financial Statements
    
    
    61ITEM 19. Exhibits
    
    
    61Exhibit 4.8Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 13.2Exhibit 15.1Exhibit 15.2




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INTRODUCTION
  
 
 
 




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##### Table of Contents



PART I
 
 ITEM 1. Identity of Directors, Senior Management and Advisers
  
 ITEM 2. Offer Statistics and Expected Timetable
  
 ITEM 3. Key Information
 Selected Financial Data
  For the Year Ended December 31,2004
    
    
    2005(1)
    
    
    2006
    
    
    2007(2)
    
    
    2008(In thousands, except share, per share and per ADS data)Consolidated Statement of
Operations DataNet revenues
    
    $
    46,560
    
    
    $
    90,110
    
    
    $
    80,804
    
    
    $
    143,444
    
    
    $
    208,850Gross profit
    
    
    26,676
    
    
    
    55,049
    
    
    
    25,699
    
    
    
    38,649
    
    
    
    41,165Operating expenses
    
    
    (7,971
    )
    
    
    (14,290
    )
    
    
    (40,728
    )
    
    
    (47,440
    )
    
    
    (40,125
    )Government subsidy income
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    1,734
    
    
    
    3,081Other operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,443(Loss) income from operations
    
    
    18,705
    
    
    
    40,759
    
    
    
    (14,849
    )
    
    
    (7,057
    )
    
    
    6,564Net (loss) income
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001Net (loss) income per share Basic
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01 Diluted
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01Shares used in per share
computation Basic
    
    
    500,000,000
    
    
    
    604,011,009
    
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    649,972,306 Diluted
    
    
    551,823,942
    
    
    
    626,626,671
    
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    650,062,312
  (1)
    
    We adopted the fair value recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123(revised 2004), Share-Based Payment(SFAS 123(R)) for the year ended December
31, 2005.(2)
    
    We adopted FIN48 Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109 on January 1, 2007, prospectively.  2




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As of December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008(In thousands)Consolidated Balance Sheet DataCash and cash equivalents
    
    $
    35,086
    
    
    $
    137,207
    
    
    $
    113,172
    
    
    $
    84,754
    
    
    $
    78,926Accounts receivable
    
    $
    7,760
    
    
    $
    34,060
    
    
    $
    37,229
    
    
    $
    40,014
    
    
    $
    37,804Inventories
    
    $
    5,030
    
    
    $
    4,974
    
    
    $
    8,546
    
    
    $
    50,763
    
    
    $
    37,763Total assets
    
    $
    67,542
    
    
    $
    194,163
    
    
    $
    207,714
    
    
    $
    234,861
    
    
    $
    220,064Total current liabilities
    
    $
    23,869
    
    
    $
    15,335
    
    
    $
    37,123
    
    
    $
    60,739
    
    
    $
    28,248Total shareholders equity
    
    $
    28,090
    
    
    $
    175,853
    
    
    $
    166,350
    
    
    $
    172,009
    
    
    $
    190,808Number of ordinary shares issued
    
    
    500,000,000
    
    
    
    658,183,409
    
    
    
    649,692,954
    
    
    
    649,913,136
    
    
    
    650,034,590Treasury stock
    
    
    
    
    
    
    
    
    
    
    8,655,000
    
    
    
    8,655,000
    
    
    
    Total liabilities and
shareholders equity
    
    $
    67,542
    
    
    $
    194,163
    
    
    $
    207,714
    
    
    $
    234,861
    
    
    $
    220,064
   Noon Buying RatePeriod
    
    Period End
    
    
    Average(1)
    
    
    Low
    
    
    High(RMB per US$1.00)2004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.7800December
    
    
    6.8225
    
    
    
    6.8539
    
    
    
    6.8842
    
    
    
    6.82252009January
    
    
    6.8392
    
    
    
    6.8360
    
    
    
    6.8403
    
    
    
    6.8225February
    
    
    6.8395
    
    
    
    6.8363
    
    
    
    6.8470
    
    
    
    6.8241March
    
    
    6.8329
    
    
    
    6.8360
    
    
    
    6.8438
    
    
    
    6.8240April
    
    
    6.8180
    
    
    
    6.8306
    
    
    
    6.8361
    
    
    
    6.8180May
    
    
    6.8278
    
    
    
    6.8235
    
    
    
    6.8326
    
    
    
    6.8176June (through June 19)
    
    
    6.8360
    
    
    
    6.8337
    
    
    
    6.8371
    
    
    
    6.8264
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using the
average of the daily rates during the relevant period. Capitalization and Indebtedness
   3




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Reasons for the Offer and Use of Proceeds
  Risk Factors
 Risks Related to Our Business
 Our limited operating history makes evaluating our business and prospects difficult.
  
    
    achieve and maintain our profitability and margins;
    
    acquire and retain customers;
    
    attract, train and retain qualified personnel;
    
    maintain adequate control over our costs and expenses;
    
    keep up with evolving industry standards and market developments; or
    
    respond to competitive and changing market conditions.
  If we fail to timely and effectively meet market after our human resource restructuring, our
business may be materially and adversely affected.
  If our customers fail to achieve success in their business, our business and results of operations
may be materially and adversely affected.
   4




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We are exposed to the inventory risk and the credit risk of our customers.
   We are subject to product liability or product recall exposure and have limited insurance coverage.
    We may cease to be profitable and experience net losses in the future.
   5




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We are dependent on our suppliers and EMS providers for timely manufacturing and delivery of the
products sold to our customers.
  The mobile handset market in China is highly competitive, and we cannot assure you that we will be
able to compete successfully against our competitors.
    We are subject to risks from customers claims for refund and liquidated damages.
  We may not be able to prevent others from unauthorized use of our intellectual property, which
could harm our business and competitive position.
   6




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We may face intellectual property infringement and other claims that could be time-consuming and
costly to defend and result in our loss of significant rights.
  Our business depends substantially on the continuing efforts of our senior executives, and our
business may be severely disrupted if we lose their services.
   The global financial and economic crisis, particularly the slowdown in Chinas economy, may
adversely affect on our business, results of operations and financial conditions.
  Future acquisitions may have an adverse effect on our ability to manage our business.
   7




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We may incur losses due to business interruptions resulting from the occurrence of adverse public
health developments such as outbreak of epidemic, acts of terrorism, fires and natural catastrophes
such as earthquakes.
   Failure to achieve and maintain effective internal controls could have a material and adverse
effect on the trading price of our ADSs.
  If we lose our license for CDMA-related technology, we may not be able to obtain alternative
licenses in a timely manner.
   Defects in our designs could result in loss of customers and claims against us.
   8




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If we cannot keep up with industry standards and design or offer for sales new mobile handset
models in a timely and cost-efficient manner to meet our customers demand, the growth and success
of our business will be materially and adversely affected.
   Risks Related To Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
services and materially and adversely affect our competitive position.
  Our business benefits from certain tax incentives, and changes to these tax incentives could
adversely affect our operating results.
   9




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Our subsidiaries in China are subject to restrictions on dividend payments, or making other
payments to us or any other affiliated company.
  We may be treated as a resident enterprise for PRC tax purposes under the New Tax Law, which may
subject us to PRC income tax for our income originated both within and outside the PRC and PRC
income tax withholding for any dividends we pay to our non-PRC shareholders.
 de facto de facto
   Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
   10




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Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
    PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
inject capital into our PRC subsidiaries, limit our subsidiaries ability to distribute profits to
us, or otherwise adversely affect us.
   11




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Uncertainties with respect to the PRC legal system could adversely affect us.
  Risks Related to Shares and ADSs
 The future sales by our existing shareholders of a substantial number of our ADSs in the public
market could adversely affect the price of our ADSs.
   The market price for our ADSs has been and may continue to be volatile.
  
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    conditions in the mobile handset market;
    
    changes in the economic performance or market valuations of other mobile handset
design houses, original design product providers or manufacturers;
    
    performance of other China-based companies that are listed on Nasdaq;
    
    announcements by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    addition or departure of key personnel; and
    
    fluctuations of exchange rates between the RMB and U.S. dollar.
  12




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Our subsidiary has issued convertible notes to certain third-party investors, and the conversion of
such notes could result in substantial dilution to the holders of our ordinary shares and ADSs and
may depress the price of our ADSs.
  We may need additional capital, and the sale of additional ADSs or other equity securities could
result in additional dilution to our shareholders.
  You may face difficulties in protecting your interests, and our ability to protect our rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law.
   13




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Your ability to bring an action against us or against our directors and officers, or to enforce a
judgment against us or them, will be limited because we are incorporated in the Cayman Islands,
because we conduct a substantial portion of our operations in China and because the majority of our
directors and officers reside outside of the United States.
  You may not be able to exercise your right to vote.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
  You may not receive distributions on ordinary shares or any value for them if it is illegal or
impractical to make them available to you.
  You may be subject to limitations on transfer of your ADSs.
   14




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We are controlled by a small group of our existing shareholders, whose interests may differ from
other shareholders.
  We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. Holders.
  
 ITEM 4. Information on the Company
 History and Development of the Company
     15




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Business Overview
         16




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Products and Services
  Sales of products
      Feature phones
  Smart Phones
  17




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 Wireless modules and data card
  Other components
 Mobile Handset Design Services
    Mobile Handset Design Services Based on Existing Platforms
  Successor Model Design Services
  Mobile Handset Design Services Based on New Platforms
    18




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Wireless Software and Applications
  Customers
         19




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Sales and Marketing
   Technology
        20




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Research and Development
  
    
    to keep abreast of the advanced technologies in the mobile handset industry;
 
    
    to emphasize cost-effectiveness and manufacturability of our designs;
 
    
    to develop high-quality handsets based on various commonly adopted platforms and to
ensure flexibility of design and production modifications; and
 
    
    to make effective use of the technologies licensed from leading global technology
companies.
  Intellectual Property
   Competition
   21




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
    
    ability to effectively and efficiently provide know-how and support to our EMS
providers which manufacture handsets for our customers;
 
    
    ability to design and integrate many hardware and software functions and features
based on different platforms;
 
    
    product quality and reliability;
 
    
    cost-effectiveness;
 
    
    economies-of-scale;
 
    
    ability to rapidly complete a design;
 
    
    service and customer support capabilities; and
 
    
    customer base and customer loyalty.
  Regulation
  FTA Certification
  CTA Certification
   22




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Tax
        23




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Foreign Currency Exchange
   Dividend Distribution
    24




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Organizational Structure
  
 
 We conduct substantially all of our operations through the following subsidiaries in
China: 
    
    Techfaith Wireless Communication Technology (Beijing) Limited, or Techfaith China, which
primarily designs GSM-based mobile handsets;
 
    
    One Net Entertainment Limited , or One Net, formerly known as Techfaith Interactive
Technology (Beijing) Limited, and before then, Techfaith Wireless Communication Technology
(Beijing) Limited II and Beijing Centel Technology R&D Co., Ltd., which primarily designs
online games;
 
    
    Techfaith Wireless Communication Technology (Shanghai) Limited, or TechFaith Shanghai,
formerly known as Leadtech Communication Technology (Shanghai) Limited, which primarily
designs CDMA mobile handsets using technology licensed from QUALCOMM;
 
    
    STEP Technologies (Beijing) Co., Ltd., or STEP Technologies, which primarily designs
GSM-based mobile handsets based on a baseband platform licensed from Texas Instruments and
WCDMA mobile handsets using technology licensed from QUALCOMM;
 
    
    Techfaith Intelligent Handset Technology (Beijing) Limited, or Techfaith Intelligent
Handset Beijing, which focuses on smart phones and related products;
 
    
    TechFaith Software (China) Limited, or TechSoft, which primarily develops application
software for wireless devices;
 
    
    Techfaith Wireless Communication Technology (Hangzhou) Limited, or Techfaith Hangzhou,
which focuses on handsets and smart phones sales;
 
    
    Techfaith Wireless Communication Technology (Shenyang) Limited, or Techfaith Shenyang,
which focuses on materials;
 
    
    Techfaith Intelligent Handset Technology (Hong Kong) Limited, or Techfaith Hong Kong, which
focuses on smart phones and handsets sales; and
 
    
    Techfaith Wireless Communication Technology (Shenzhen) Limited, or Techfaith Shenzhen,
which focuses on component sales.
  25




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Property, Plant and Equipment
  
 ITEM 4A. Unresolved Staff Comments
  
 ITEM 5. Operating and Financial Review and Prospects
  Operating Results
   Major Factors Affecting Our Results of Operations
 Net Revenues.
  26




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Cost of Revenues.
  27




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Operating Expenses.
 General and Administrative.
 Research and Development.
 Selling and Marketing.
 Income Taxes.
  Critical Accounting Policies
   28




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Revenue Recognition.
   Design fee.
  Royalty income.
 Component sales related to design.
 Service income.
  Product sales.
  29




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Income taxes
   Goodwill
    Valuation of Long-lived assets and certain identifiable intangibles
    30




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Product warranty
  Results of Operations
  For the Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands)Consolidated Statement of Operations DataNet revenues:Handset design
    
    $
    42,860
    
    
    $
    41,721
    
    
    $
    19,123Product sales
    
    
    37,944
    
    
    
    101,723
    
    
    
    189,727Total net revenues
    
    $
    80,804
    
    
    $
    143,444
    
    
    $
    208,850Cost of revenues:Handset design
    
    $
    25,262
    
    
    $
    25,239
    
    
    $
    10,308Product sales
    
    
    29,843
    
    
    
    79,556
    
    
    
    157,377Total cost of revenues
    
    $
    55,105
    
    
    $
    104,795
    
    
    $
    167,685Gross profit:Handset design
    
    $
    17,598
    
    
    $
    16,482
    
    
    $
    8,815Product sales
    
    
    8,101
    
    
    
    22,167
    
    
    
    32,350Total gross profit
    
    $
    25,699
    
    
    $
    38,649
    
    
    $
    41,165Operating expenses:General and administrative
    
    $
    (15,110
    )
    
    $
    (13,142
    )
    
    $
    (15,553
    )Research and development
    
    
    (21,970
    )
    
    
    (30,876
    )
    
    
    (18,195
    )Selling and marketing
    
    
    (2,260
    )
    
    
    (3,422
    )
    
    
    (5,497
    )Impairment of long-lived assets
    
    
    (1,388
    )
    
    
    
    
    
    
    (880
    )Total operating expenses
    
    $
    (40,728
    )
    
    $
    (47,440
    )
    
    $
    (40,125
    )Government subsidy income
    
    
    180
    
    
    
    1,734
    
    
    
    3,081Other operating income
    
    
    
    
    
    
    
    
    
    
    2,443(Loss) income from operations
    
    $
    (14,849
    )
    
    $
    (7,057
    )
    
    $
    6,564Interest expense
    
    
    (18
    )
    
    
    (166
    )
    
    
    (47
    )Interest income
    
    
    4,879
    
    
    
    3,871
    
    
    
    1,616Other (expense)income
    
    
    149
    
    
    
    (220
    )
    
    
    (22
    )Change in fair value of put option
    
    
    (269
    )
    
    
    (43
    )
    
    
    (855
    )Income taxes
    
    
    (100
    )
    
    
    (6
    )
    
    
    93Minority interests
    
    
    1,808
    
    
    
    1,200
    
    
    
    652Equity in loss of an affiliate
    
    
    (393
    )
    
    
    (851
    )
    
    
    Net (loss) income
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001
  31




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Comparison of the Year Ended December 31, 2007 and the Year Ended December 31, 2008
 Net Revenues
  Handset design.
 Product Sales.
    32




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Cost of Revenue
  Handset design.
 Product sales.
 Gross Profit
  Operating Expenses
   General and Administrative.
 Research and Development.
 Selling and Marketing.
 Impairment loss.
 Government Subsidy Income
   33




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Net Income
  Comparison of the Year Ended December 31, 2006 and the Year Ended December 31, 2007
 Net Revenues
  Handset design.
 Product Sales.
  Cost of Revenues
  Handset design.
 Product sales.
 Gross Profit
   34




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Operating Expenses
  General and Administrative.
 Research and Development.
 Selling and Marketing.
 Impairment loss.
 Government Subsidy Income
    Net Income
  Recent Accounting Pronouncements
   35




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36




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Liquidity and Capital Resources
  Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands)Net cash provided by (used in) operating activities
    
    $
    5,434
    
    
    $
    (19,353
    )
    
    $
    1,496Net cash used in investing activities
    
    
    (30,212
    )
    
    
    (13,279
    )
    
    
    (11,409
    )Net cash used in financing activities
    
    
    (1,953
    )
    
    
    
    
    
    
    Effect of exchange rate changes
    
    
    2,696
    
    
    
    4,214
    
    
    
    4,085Net decrease in cash and cash equivalents
    
    
    (24,035
    )
    
    
    (28,418
    )
    
    
    (5,828
    )Cash and cash equivalents at beginning of period
    
    
    137,207
    
    
    
    113,172
    
    
    
    84,754Cash and cash equivalents at end of period
    
    $
    113,172
    
    
    $
    84,754
    
    
    $
    78,926
  37




---



##### Table of Contents



Operating Activities.
    38




---



##### Table of Contents



Investing Activities
 Financing Activities.
   Research and Development, Patents and Licenses, etc.
  Trend Information
  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payment Due by PeriodLess Than 1
    
    
    1-3
    
    
    3-5
    
    
    More Than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years(In thousands of $)Operating lease obligations(1)
    
    
    2,178
    
    
    
    995
    
    
    
    1,183
    
    
    
    
    
    
    
    Capital obligations(2)
    
    
    16,226
    
    
    
    16,226
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations(3)
    
    
    6,253
    
    
    
    6,253
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    24,657
    
    
    
    23,474
    
    
    
    1,183
    
    
    
    
    
    
    
    
 
 (1)
    
    Operating lease obligations arise from operating lease agreements principally for office
spaces in China.(2)
    
    Capital obligations represent commitments for construction of property, purchase of plant,
machinery and equipment.(3)
    
    Purchase obligations represent commitments under non-cancellable contracts we entered into
with certain EMS providers that allow them to procure inventory required to provide the
manufacturing services for our products.  39




---



##### Table of Contents



Safe Harbor
  
    
    our limited operating history as a mobile handset design and software solution provider,
and, to an even larger extent, as a seller of completed handsets;
 
    
    decrease in demand for completed handsets by mobile handset brand owners;
 
    
    our ability to acquire and retain additional international mobile handset brand owners as
our customers;
 
    
    our ability to timely and cost-efficiently sell completed handsets to meet our customers
demands; and
 
    
    other risks outlined in this annual report on Form 20-F.
  
 ITEM 6. Directors, Senior Management and Employees
 Directors and Senior Management
  Directors and Executive Officers
    
    Age
    
    
    Position/TitleDefu Dong
    
    
    38
    
    
    Chairman and Chief Executive OfficerXiaonong Cai
    
    
    39
    
    
    Director and Deputy Chief Executive OfficerJy-Ber Gilbert Lee
    
    
    53
    
    
    DirectorHung Hsin (Robert) Chen
    
    
    63
    
    
    Independent DirectorKen Lu
    
    
    46
    
    
    Independent DirectorLing Sui
    
    
    53
    
    
    Independent DirectorHui (Tom) Zhang
    
    
    36
    
    
    Independent DirectorYuping Ouyang
    
    
    34
    
    
    Chief Financial OfficerChangke He
    
    
    47
    
    
    Chief Technology OfficerYibo Fang
    
    
    40
    
    
    Senior Vice PresidentShugang Li
    
    
    41
    
    
    President
 Executive Directors
 Mr. Defu Dong
  40




---



##### Table of Contents



Dr. Jy-Ber Gilbert Lee
 Mr. Xiaonong Cai
 Independent Directors
 Mr. Hung Hsin (Robert) Chen
 Dr. Ken Lu
 Ms. Ling Sui
 Dr. Hui (Tom) Zhang
  41




---



##### Table of Contents



Other Executive Officers
 Ms. Yuping Ouyang
 Mr. Changke He
 Mr. Yibo Fang
 Mr. Shugang Li
  Compensation of Directors and Executive Officers
  Share Incentives
   OrdinarySharesUnderlyingOptions
    
    
    Exercise Price
    
    
    Date of
    
    
    Date ofGranted
    
    
    (US$/Share)
    
    
    Grant
    
    
    ExpirationJy-Ber Gilbert Lee
    
    
    131,636
    
    
    
    1.083
    
    
    August 13, 2005
    
    
    August 13, 2015Total
    
    
    131,636
  42




---



##### Table of Contents



Number of Ordinary Shares
    
    PurchaseUnderlying the Nonvested Shares
    
    Price
    
    
    
    
    
    VestingGranted, as of the Date of Grant
    
    (US$/Share)
    
    Date of Grant

    
    ScheduleHung Hsin (Robert) Chen
    
    
    65,818
    
    
    
    
    
    
    August 12, 2006
    
    
    (1
    )Ying Han
    
    
    65,818
    
    
    
    
    
    
    August 12, 2006
    
    
    (2
    )Hui (Tom) Zhang
    
    
    65,818
    
    
    
    
    
    
    August 12, 2006
    
    
    (2
    )Ken Lu
    
    
    65,818
    
    
    
    
    
    
    November 11, 2006
    
    
    (3
    )Sui Ling
    
    
    65,818
    
    
    
    
    
    
    August 11, 2007
    
    
    (4
    )Total
    
    
    329,090
 
 (1)
    
    100% of the shares vested immediately on the grant date.(2)
    
    50% of the nonvested shares vested immediately on the grant date, and the remaining 50% of
the nonvested shares vested on April 1, 2007.(3)
    
    50% of the nonvested shares vested immediately on the grant date, and the remaining 50% of
the nonvested shares vested on November 1, 2007.(4)
    
    One quarter of the nonvested shares vested immediately on the grant date, and the remaining
three quarters to be vested on August 12, 2008, 2009 and 2010 averagely.  Types of Awards.
 
    
    our ordinary shares;
 
    
    options to purchase our ordinary shares;
 
    
    nonvested shares, which are non-transferable ordinary shares, subject to forfeiture upon
termination of a grantees employment or service;
 
    
    nonvested share units, which represent the right to receive our ordinary shares at a
specified date in the future, subject to forfeiture upon termination of a grantees employment
or service;
 
    
    share appreciation rights, which provide for the payment to the grantee based upon
increases in the price of our ordinary shares over a set base price; and
 
    
    dividend equivalent rights, which represent the value of the dividends per share that we
pay.
  Plan Administration.
 Award Agreement.
 Eligibility.
  43




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##### Table of Contents



Acceleration of Awards upon Corporate Transactions.
 Terms of Awards.
 Vesting Schedule.
 Amendment and Termination.
 Board Practices
  Committees of the Board of Directors
 Audit Committee
  Compensation Committee
  Corporate Governance and Nominating Committee
   44




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##### Table of Contents



Duties of Directors
  Terms of Directors and Officers
  Employees
  Share Ownership
    Ordinary Shares Beneficially Owned (1)Number
    
    
    %(2)Directors and Executive Officers:Defu Dong (3)
    
    
    249,250,000
    
    
    
    38.3
    %Jy-Ber Gilbert Lee (4)
    
    
    131,636
    
    
    
    *Hung Hsin (Robert) Chen (5)
    
    
    65,818
    
    
    
    *Hui (Tom) Zhang (6)
    
    
    65,818
    
    
    
    *Ken Lu (7)
    
    
    65,818
    
    
    
    *Sui Ling (8)
    
    
    32,909
    
    
    
    *All directors and executive officers as a group (10)
    
    
    249,611,999
    
    
    
    38.4
    %
 
 *
    
    Less than 1%.(1)
    
    Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission, or the SEC, and includes voting or investment power with respect to the
securities.(2)
    
    For each person and group included in this table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group by the sum of (1)
650,034,590, being the number of ordinary shares outstanding as of June 24, 2009, and (2) the
number of ordinary shares underlying share options held by such person or group, if any, that
were exercisable within 60 days after June 24, 2009, or the number of nonvested shares held
by such person or group, if any, that will fully vest within 60 days after June 24, 2009, or
the number of other securities of the company that such person or group otherwise has the
right to acquire, if any, within 60 days after June 24, 2009 by option or other agreement.(3)
    
    Includes 165,750,000 ordinary shares held by Oasis Land Limited, which is ultimately owned by
Dongs Family Trust, and 83,500,000 ordinary shares held by Helio Glaze Limited, which is
ultimately owned by Huos Offshore Trust. Mr. Defu Dong is the sole director of each of Oasis
Land Limited and Helio Glaze Limited, with the sole power to vote on behalf of Oasis Land
Limited and Helio Glaze Limited on all matters of TechFaith requiring shareholder approval.
The business address for Defu Dong is Building 1, No. 13, YongChang North Road, Beijing
Economic-Technological Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of
China.  45




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##### Table of Contents



(4)
    
    Includes 131,636 ordinary shares that were issuable upon exercise of options exercisable
within 60 days after June 24, 2009 held by Mr. Lee.(5)
    
    Includes 65,818 nonvested shares that were granted to Robert Chen on August 12, 2006, the
previous granted 131,636 share options were cancelled accordingly.(6)
    
    Includes 65,818 nonvested shares that were granted to Hui (Tom) Zhang on August 12, 2006.(7)
    
    Includes 65,818 nonvested shares that were granted to Ken Lu on November 11, 2006.(8)
    
    Includes 32,909 nonvested shares that were granted to Sui Ling on August 11, 2007.(9)
    
    Shares owned by all of our directors and executive officers as a group include shares
beneficially owned by Defu Dong, Christopher Patrick Holbert , Jy-Ber Gilbert Lee, Hung Hsin
(Robert) Chen, Sui Ling, Hui (Tom) Zhang and Ken Lu.  Ordinary Shares Beneficially Owned(1)Number
    
    
    %(2)Principal Shareholders:Hongmei Yue (3)
    
    
    55,410,820
    
    
    
    8.5Fidelity Management & Research Company (4)
    
    
    54,659,670
    
    
    
    8.4
 
 (1)
    
    Beneficial ownership is determined in accordance with the rules of the SEC, and includes
voting or investment power with respect to the securities.(2)
    
    For each person and group included in this table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group by the sum of (1)
650,034,590, being the number of ordinary shares outstanding as of June 24, 2009, and (2) the
number of ordinary shares underlying share options held by such person or group, if any, that
were exercisable within 60 days after June 24, 2009, or the number of nonvested shares held by
such person or group, if any, that will fully vest within 60 days after June 24, 2009, or the
number of other securities of the company that such person or group otherwise has the right to
acquire, if any, within 60 days after June 24, 2009 by option or other agreement.(3)
    
    Includes 44,540,820 ordinary shares held by Bright Garnet Limited, which is ultimately
98%-owned by The Faiths Trust and 2%-owned by Lius Offshore Trust, and 10,870,000 ordinary
shares held by Geranium Joy Limited, which is ultimately owned by Hes Offshore Trust. Ms.
Hongmei Yue is the sole director of each of Bright Garnet Limited and Geranium Joy Limited,
with the sole power to vote on behalf of Bright Garnet Limited and Geranium Joy Limited on all
matters of TechFaith requiring shareholder approval. The business address for Hongmei Yue is
c/o Raymond Song, Building 1, No. 13, YongChang North Road, Beijing Economic-Technological
Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of China.(4)
    
    Includes 54,659,670 ordinary shares held by Fidelity Management & Research Company, or
Fidelity Management, which is a wholly owned subsidiary of FMR LLC and an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940. The business address for
Fidelity Management & Research Company is 82 Devonshire Street, Boston, Massachusetts 02109.
According to the Schedule 13G, as amended, filed by FMR LLC and other reporting persons on
February 17, 2009, as of December 31, 2008, Fidelity Low Priced Stock Fund was interested in
37,500,000 ordinary shares, or 5.770% of the total outstanding ordinary shares of our company.
Each of Edward C. Johnson 3d, chairman of FMR LLC, and FMR LLC has sole power to dispose of
the 54,659,670 ordinary shares held by Fidelity Management. Members of the family of Edward C.
Johnson 3d are the predominant owners, directly or through trusts, of Series B voting common
shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group
and all other Series B shareholders have entered into a shareholders voting agreement under
which all Series B voting common shares will be voted in accordance with the majority vote of
Series B voting common shares. Accordingly, through their ownership of voting common shares
and the execution of the shareholders voting agreement, members of the Johnson family may be
deemed, under the Investment Company Act of 1940, to form a controlling group with respect to
FMR LLC. Neither FMR LLC nor Edward C. Johnson 3d has the sole power to vote or direct the
voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds
Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines
established by the Funds Boards of Trustees.  46




---



##### Table of Contents



ITEM 7. Major Shareholders and Related Party Transactions
 Major Shareholders
  Related Party Transactions
 Transactions with QUALCOMM
   Transactions with Techfaith Technology and De Ming
    Year ended December 31,2007
    
    
    2008(In thousands of US$)Techfaith Technology
    
    $
    1,047
    
    
    $
    5,537De Ming
    
    
    54
    
    
    
    $
    1,101
    
    
    $
    5,537
  47




---



##### Table of Contents



Year ended December 31,2007
    
    
    2008(In thousands of US$)De Ming
    
    $
    201
    
    
    $
    419
 Interests of Experts and Counsel
  
 ITEM 8. Financial Information
 Consolidated Statements and Other Financial Information
  Legal Proceedings
  Dividend Policy
   Significant Changes
  
 ITEM 9. The Offer and Listing
 Offer and Listing Details
    48




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##### Table of Contents



Sales PriceHigh
    
    
    LowAnnual High and Low2006
    
    
    18.00
    
    
    
    6.582007
    
    
    11.13
    
    
    
    4.012008
    
    
    6.98
    
    
    
    0.71Quarterly Highs and LowsFirst Quarter 2007
    
    
    11.13
    
    
    
    8.11Second Quarter 2007
    
    
    9.45
    
    
    
    5.30Third Quarter 2007
    
    
    8.45
    
    
    
    4.01Fourth Quarter 2007
    
    
    9.98
    
    
    
    5.16First Quarter 2008
    
    
    6.79
    
    
    
    3.40Second Quarter 2008
    
    
    6.98
    
    
    
    4.00Third Quarter 2008
    
    
    4.60
    
    
    
    0.85Fourth Quarter 2008
    
    
    1.33
    
    
    
    0.71First Quarter 2009
    
    
    1.94
    
    
    
    1.11Monthly Highs and LowsNovember 2008
    
    
    1.04
    
    
    
    0.71December 2008
    
    
    1.33
    
    
    
    0.80January 2009
    
    
    1.94
    
    
    
    1.21February 2009
    
    
    1.92
    
    
    
    1.23March 2009
    
    
    1.50
    
    
    
    1.11April 2009
    
    
    1.73
    
    
    
    1.31May 2009
    
    
    2.09
    
    
    
    1.50June 2009 (through June 22, 2009)
    
    
    2.69
    
    
    
    1.90
 Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  
 ITEM 10. Additional Information
 Share Capital
  Memorandum and Articles of Association
   49




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##### Table of Contents



Material Contracts
  Exchange Controls
     Taxation
  Cayman Islands Taxation
   50




---



##### Table of Contents



United States Federal Income Taxation
   
    
    banks;
 
    
    financial institutions;
 
    
    insurance companies;
 
    
    broker dealers;
 
    
    traders that elect to mark to market;
 
    
    tax-exempt entities;
 
    
    persons liable for alternative minimum tax;
 
    
    persons holding an ADS or ordinary share as part of a straddle, hedging, conversion
or integrated transaction;
 
    
    persons that actually or constructively own 10% or more of our voting shares;
 
    
    persons holding ADSs or ordinary shares through partnerships or other pass-through
entities; or
 
    
    persons who acquired ADSs or ordinary shares pursuant to the exercise of any
employee share option or otherwise as consideration.
 U.S. Holders are urged to consult their tax advisors about the application of the United States
federal tax rules to their particular circumstances as well as the state and local and foreign tax
consequences to them of the purchase, ownership and disposition of ADSs or ordinary shares.
  
    
    a citizen or individual resident of the United States;
 
    
    a corporation (or other entity taxable as a corporation for United States federal
income tax purposes) organized under the laws of the United States, any State or the
District of Columbia;
 
    
    an estate whose income is subject to United States federal income taxation
regardless of its source; or
 
    
    a trust that (1) is subject to the supervision of a court within the United States
and the control of one or more United States persons or (2) has a valid election in
effect under applicable United States Treasury regulations to be treated as a United
States person.
   51




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##### Table of Contents



Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
     Taxation of Disposition of Shares
   52




---



##### Table of Contents



Passive Foreign Investment Company
  
    
    at least 75% of its gross income is passive income (the income test), or
 
    
    at least 50% of the value of its assets (based on an average of the quarterly values
of the assets during a taxable year) is attributable to assets that produce or are held
for the production of passive income (the asset test).
   .
   53




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##### Table of Contents




    
    the excess distribution or gain will be allocated ratably over your holding period
for the ADSs or ordinary shares,
 
    
    the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we became a PFIC, will be treated as ordinary income, and
 
    
    the amount allocated to each other taxable year will be subject to the highest tax
rate in effect for that taxable year and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax attributable to each such
taxable year.
     Information Reporting and Backup Withholding
    54




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##### Table of Contents



Dividends and Paying Agents
  Statement by Experts
  Documents on Display
    Subsidiary Information
  
 ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk.
 Foreign Exchange Risk.
   55




---



##### Table of Contents



Inflation Risk.
 
 ITEM 12. Description of Securities Other than Equity Securities
  
 PART II
 
 ITEM 13. Defaults, Dividend Arrearages and Delinquencies
  
 ITEM 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
  
 ITEM 15. Controls and Procedures
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting
    56




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##### Table of Contents



(1)
    
    The lack of sufficient personnel with the necessary knowledge on internal control. This
material weakness had a pervasive impact on internal control over financial reporting.(2)
    
    Insufficient inventory management controls over sample phones which resulted in late
significant adjustments to the recording of inventory. We do not believe that this material
weakness had a pervasive impact on internal control over financial reporting. Upon identification
of the material weakness, our management re-performed physical count of the sample phone inventory,
examined all the shipment and procurements before and after the period end, and determined that no
material adjustment was required to the financial statements contained in this report.(3)
    
    Operating ineffectiveness of revenue contracts review and revenue recognition procedures which
resulted in late significant adjustments to the recording of revenue. We do not believe that this
material weakness had a pervasive impact on internal control over financial reporting. Upon
identification of the material weakness, our management examined all the material contracts entered
and revenue recognized before and after the year end, and determined that no material adjustment
was required to the financial statements contained in this report.
  (1)
    
    providing relevant trainings to the personnel who are in charge of internal control.(2)
    
    implementing quarterly inventory physical count and reconciliation with management
review procedures(3)
    
    requesting our business operation department to keep a log of all the contracts entered
into and our accounting department to review this log and reconciles with accounting
records at least monthly.
  Attestation Report of the Independent Registered Public Accounting Firm
 
    57




---



##### Table of Contents



1)
    
    The lack of sufficient personnel with the necessary knowledge on internal control.2)
    
    Insufficient inventory management controls over sample phones which resulted in
late significant adjustments to the Groups recording of inventory.3)
    
    Operating ineffectiveness of revenue contracts review and revenue
recognition procedures which resulted in late significant adjustments
to the Groups recognition of revenue.
     
  58




---



##### Table of Contents



Changes in internal control over financial reporting
   (1)
    
    In relation to the inventory management system, we implemented quarterly physical
inventory count control procedures in 2008. Meanwhile, our financial analysis of draft
financial information now includes a review of cost of goods sold and the level of
inventory to detect any irregularity and any potential misstatements. We have made
significant progress in inventory management control. During 2008, there was only one
deficiency detected, namely the insufficient inventory management controls over sample
phones.
 (2)
    
    In relation to the approval procedures for significant cash transactions, our internal
auditing department has provided additional training on the authorization control
procedures to the relevant management. Furthermore, the chief financial officer has now
taken steps in order to monitor that the designed procedures operate as intended. During
2008, there were not any additional deficiencies detected in this area.
   
 ITEM 16.A. Audit Committee Financial Expert
  
 ITEM 16.B. Code of Ethics
  
 ITEM 16.C. Principal Accountant Fees and Services
  For the Year Ended December 31,2007
    
    
    2008(In thousands of US$)Audit fees (1)
    
    
    1,361
    
    
    
    992Tax fees (2)
    
    
    48
    
    
    
    17
 
 (1)
    
    Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements.(2)
    
    Tax fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by the principal accountant for tax compliance, tax advice, and
tax planning.  59




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##### Table of Contents



ITEM 16.D. Exemptions from the Listing Standards for Audit Committees
  
 ITEM 16.E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
  (d) Maximum Number(c) Total Number of
    
    
    (or ApproximateShares (or Units)
    
    
    Dollar Value) ofPurchased as Part
    
    
    Shares (or Units)(a) Total Number of
    
    
    (b) Average Price
    
    
    of Publicly
    
    
    that may yet beShares (or Units)
    
    
    Paid per Share (or
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Units)
    
    
    Programs
    
    
    Plans or ProgramsSeptember 28-29, 2006
    
    77,000 ADSs
    
    US$
    7.8849
    
    
    77,000 ADSs
    
    77,000 ADSsOctober 2-18, 2006
    
    500,000 ADSs
    
    US$
    8.0838
    
    
    500,000 ADSs
    
    500,000 ADSs
  
 ITEM 16.F. Change in Registrants Certifying Accountant
  
 ITEM 16.G. Corporate Governance
     60




---



##### Table of Contents



PART III
 
 ITEM 17. Financial Statements
  
 ITEM 18. Financial Statements
  
 ITEM 19. Exhibits
 ExhibitNumber
    
    Document1.1
    
    
    Amended and Restated Memorandum and Articles of Association of the
Registrant (incorporated by reference to Exhibit 3.2 from our Registration
Statement on Form F-1 (file no. 333-123921) filed with the Securities and
Exchange Commission on April 20, 2005).2.1
    
    
    Registrants Specimen American Depositary Receipt (incorporated by
reference to Exhibit 4.1 from our Registration Statement on Form F-1 (file
no. 333-123921) filed with the Securities and Exchange Commission on
April 7, 2005).2.2
    
    
    Registrants Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file
no. 333-123921) filed with the Securities and Exchange Commission on
April 20, 2005).2.3
    
    
    Note Subscription and Rights Agreement, dated as of April 9, 2004, among
the Registrant and other parties therein (incorporated by reference to
Exhibit 4.4 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on April 7,
2005).2.4
    
    
    Transfer and Assumption Agreement dated November 9, 2004 among the
Registrant and other parties thereto (incorporated by reference to Exhibit
4.5 from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).2.5
    
    
    Share Swap Agreement dated November 9, 2004 among the Registrant and other
parties thereto (incorporated by reference to Exhibit 4.6 from our
Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).4.1
    
    
    2005 Share Incentive Plan (incorporated by reference to Exhibit 10.1 from
our Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 20, 2005).4.2
    
    
    Form of Indemnification Agreement with the Registrants directors
(incorporated by reference to Exhibit 10.2 from our Registration Statement
on Form F-1 (file no. 333-123921) filed with the Securities and Exchange
Commission on April 7, 2005).4.3
    
    
    Form of Employment Agreement between the Registrant and a Senior Executive
Officer of the Registrant (incorporated by reference to Exhibit 10.3 from
our Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).4.4
    
    
    Memorandum of Understanding dated December 24, 2003 between a subsidiary of
the Registrant and QUALCOMM (incorporated by reference to Exhibit 99.1 from
our Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).
  61




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##### Table of Contents



ExhibitNumber
    
    Document4.5
    
    
    CDMA Modem Card License Agreement dated March 9, 2004 between a subsidiary
of the Registrant and QUALCOMM (incorporated by reference to Exhibit 99.2
from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).4.6
    
    
    Joint Venture Agreement dated September 26, 2003 between the Registrant and
NEC (incorporated by reference to Exhibit 99.3 from our Registration
Statement on Form F-1 (file no. 333-123921) filed with the Securities and
Exchange Commission on April 7, 2005).4.7
    
    
    Lease Agreement dated July 31, 2003 between the Registrant and Beijing
Sino-Electronics Future Telecommunication R&D, Ltd. (incorporated by
reference to Exhibit 99.4 from our Registration Statement on Form F-1 (file
no. 333-123921) filed with the Securities and Exchange Commission on
April 7, 2005).4.8
    *
    
    Code of Business Conduct and Ethics of the Registrant, as amended.4.9
    
    
    Agreement dated June 29, 2004 between the Registrant and a PRC subsidiary
of NEC (translation) (incorporated by reference to Exhibit 99.6 from our
Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).4.10
    
    
    Agreement dated December 20, 2004 between the Registrant and a PRC
subsidiary of NEC (translation) (incorporated by reference to Exhibit 99.7
from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).4.11
    
    
    Series A Preferred Share Purchase and Sale Agreement dated March 22, 2006
among the Registrant, QUALCOMM and Techfaith Software (China) Holding
Limited (incorporated by reference to Exhibit 4.11 from our Registration
Statement on Form 20-F (file no. 000-51242) filed with the Securities and
Exchange Commission on June 29, 2006).4.12
    
    
    Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Wireless Communication Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.12 from our Registration Statement
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006).4.13
    
    
    Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Intelligent Handset Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.13 from our Registration Statement
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006).4.14
    
    
    Construction Contract dated February 11, 2007 between Techfaith Wireless
Communication Technology (Hangzhou) Limited and Hangzhou Jiang Qian
Construction Engineering Co., Ltd. (incorporated by reference to
Exhibit 4.14 from our Annual Report on Form 20-F (file no. 000-51242) filed
with the Securities and Exchange Commission on June 29, 2007.8.1
    *
    
    Subsidiaries of the Registrant.12.1
    *
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    *
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    *
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.13.2
    *
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.15.1
    *
    
    Consent of Maples and Calder.15.2
    *
    
    Consent of Genland Law Firm.
 
 *
    
    Filed with this annual report on Form 20-F.  62




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##### Table of Contents



SIGNATURES
  CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITEDBy:
    /s/ Defu DongName:
    Defu DongTitle:
    Chief Executive Officer




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-1CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2008
    
    
    F-2CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
    
    
    F-4CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
DECEMBER 31, 2006, 2007 AND 2008
    
    
    F-5CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
    
    
    F-6NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-8ADDITIONAL INFORMATION  FINANCIAL STATEMENT SCHEDULE I
    
    
    F-46




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
      /s/ Deloitte Touche Tohmatsu CPA Ltd.
  F-1




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2007
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    84,754
    
    
    $
    78,926Restricted cash
    
    
    3,389
    
    
    
    162Accounts receivable, net of allowances of $3,838 and $7,128
in 2007 and 2008, respectively
    
    
    40,014
    
    
    
    37,804Notes receivable
    
    
    4,020
    
    
    
    85Amounts due from related parties
    
    
    1,101
    
    
    
    5,537Inventories
    
    
    50,763
    
    
    
    37,763Prepaid expenses and other current assets
    
    
    10,116
    
    
    
    10,003Deferred tax assets-current
    
    
    
    
    
    
    83Total current assets
    
    
    194,157
    
    
    
    170,363Deposits for acquisition of plant, machinery, equipment
and leasehold improvement
    
    
    10,177
    
    
    
    Plant, machinery and equipment, net
    
    
    28,275
    
    
    
    48,125Acquired intangible assets, net
    
    
    1,646
    
    
    
    921Deferred tax assets-noncurrent
    
    
    
    
    
    
    49Goodwill
    
    
    606
    
    
    
    606TOTAL ASSETS
    
    $
    234,861
    
    
    $
    220,064LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term payable
    
    $
    1,358
    
    
    $
    1,211Accounts payable
    
    
    35,416
    
    
    
    9,214Amount due to related party
    
    
    201
    
    
    
    419Accrued expenses and other current liabilities
    
    
    14,251
    
    
    
    9,074Advance from customers
    
    
    7,512
    
    
    
    5,260Deferred revenue
    
    
    1,541
    
    
    
    1,748Income tax payable
    
    
    142
    
    
    
    149Put option liability
    
    
    318
    
    
    
    1,173Total current liabilities
    
    
    60,739
    
    
    
    28,248Long-term payable
    
    
    453
    
    
    
    Total liabilities
    
    
    61,192
    
    
    
    28,248
  F-2




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 CONSOLIDATED BALANCE SHEETS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2007
    
    
    2008Commitments (Note 18)Minority interests
    
    
    1,660
    
    
    
    1,008Shareholders equity:Ordinary shares of par value $0.00002: 50,000,000,000,000 shares authorized; shares issued and
outstanding, 649,913,136 in 2007 and 650,034,590 in 2008
    
    
    13
    
    
    
    13Additional paid-in capital
    
    
    110,327
    
    
    
    105,846Treasury stock, at cost (8,655,000 and nil shares as of
December 31, 2007 and 2008, respectively)
    
    
    (4,628
    )
    
    
    Accumulated other comprehensive income
    
    
    13,776
    
    
    
    24,427Statutory reserve
    
    
    6,813
    
    
    
    8,542Retained earnings
    
    
    45,708
    
    
    
    51,980Total shareholders equity
    
    
    172,009
    
    
    
    190,808TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS EQUITY
    
    $
    234,861
    
    
    $
    220,064
   F-3




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2006
    
    
    2007
    
    
    2008Revenues:Handset design
    
    $
    42,860
    
    
    $
    41,721
    
    
    $
    19,123Product sales
    
    
    37,944
    
    
    
    101,723
    
    
    
    189,727Total net revenues
    
    
    80,804
    
    
    
    143,444
    
    
    
    208,850Cost of revenues:Handset design
    
    
    25,262
    
    
    
    25,239
    
    
    
    10,308Product sales
    
    
    29,843
    
    
    
    79,556
    
    
    
    157,377Total cost of revenues
    
    
    55,105
    
    
    
    104,795
    
    
    
    167,685Gross profit
    
    
    25,699
    
    
    
    38,649
    
    
    
    41,165Operating expenses:General and administrative
    
    
    (15,110
    )
    
    
    (13,142
    )
    
    
    (15,553
    )Research and development
    
    
    (21,970
    )
    
    
    (30,876
    )
    
    
    (18,195
    )Selling and marketing
    
    
    (2,260
    )
    
    
    (3,422
    )
    
    
    (5,497
    )Impairment of long-lived assets
    
    
    (1,388
    )
    
    
    
    
    
    
    (880
    )Total operating expenses
    
    
    (40,728
    )
    
    
    (47,440
    )
    
    
    (40,125
    )Government subsidy income
    
    
    180
    
    
    
    1,734
    
    
    
    3,081Other operating income
    
    
    
    
    
    
    
    
    
    
    2,443Income (loss) from operations
    
    
    (14,849
    )
    
    
    (7,057
    )
    
    
    6,564Interest expense
    
    
    (18
    )
    
    
    (166
    )
    
    
    (47
    )Interest income
    
    
    4,879
    
    
    
    3,871
    
    
    
    1,616Other (expense) income
    
    
    149
    
    
    
    (220
    )
    
    
    (22
    )Change in fair value of put option
    
    
    (269
    )
    
    
    (43
    )
    
    
    (855
    )Income (loss) before income taxes
    
    
    (10,108
    )
    
    
    (3,615
    )
    
    
    7,256Income tax benefit (expenses)
    
    
    (100
    )
    
    
    (6
    )
    
    
    93Income (loss) before minority interests
    
    
    (10,208
    )
    
    
    (3,621
    )
    
    
    7,349Minority interests
    
    
    1,808
    
    
    
    1,200
    
    
    
    652Equity in loss of an affiliate
    
    
    (393
    )
    
    
    (851
    )
    
    
    Net income (loss)
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001Net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01Diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01Weighted average shares used in computation:Basic
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    649,972,306Diluted
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    650,062,312
   F-4




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Accumulated
    
    
    
    
    
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    
    other
    
    
    
    
    
    
    
    
    
    
    share
    
    
    Com-Ordinary shares
    
    
    paid-in
    
    
    Treasury
    
    
    comprehensive
    
    
    Retained
    
    
    Statutory
    
    
    holders
    
    
    prehensiveNumber
    
    
    Amount
    
    
    capital
    
    
    stock
    
    
    income
    
    
    earnings
    
    
    reserve
    
    
    equity
    
    
    income (loss)Balance at January 1, 2006
    
    
    658,183,409
    
    
    $
    13
    
    
    $
    109,798
    
    
    $
    
    
    
    $
    1,456
    
    
    $
    59,397
    
    
    $
    5,189
    
    
    $
    175,853Foreign Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,883
    
    
    
    
    
    
    
    
    
    
    
    3,883
    
    
    $
    3,883Share-based compensation
    
    
    164,545
    
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    Forfeiture of stock options
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    Repurchase of ordinary shares
    
    
    (8,655,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,793
    )
    
    
    
    
    
    
    (8,793
    )
    
    
    (8,793
    )Provision for statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (904
    )
    
    
    904
    
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    649,692,954
    
    
    
    13
    
    
    
    109,833
    
    
    
    (4,628
    )
    
    
    5,339
    
    
    
    49,700
    
    
    
    6,093
    
    
    
    166,350
    
    
    $
    (4,910
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,437
    
    
    
    
    
    
    
    
    
    
    
    8,437
    
    
    $
    8,437Share-based compensation
    
    
    220,182
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    Reduction in underwriters costs for the IPO*
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,272
    )
    
    
    
    
    
    
    (3,272
    )
    
    
    (3,272
    )Provision for statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (720
    )
    
    
    720
    
    
    
    
    
    
    
    Balance at December 31, 2007
    
    
    649,913,136
    
    
    
    13
    
    
    
    110,327
    
    
    
    (4,628
    )
    
    
    13,776
    
    
    
    45,708
    
    
    
    6,813
    
    
    
    172,009
    
    
    $
    5,165Cancellation of treasury stock
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    4,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,651
    
    
    
    
    
    
    
    
    
    
    
    10,651
    
    
    
    10,651Share-based compensation
    
    
    121,454
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,001
    
    
    
    
    
    
    
    8,001
    
    
    
    8,001Provision for statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,729
    )
    
    
    1,729
    
    
    
    
    
    
    
    Balance at December 31, 2008
    
    
    650,034,590
    
    
    $
    13
    
    
    $
    105,846
    
    
    $
    
    
    
    $
    24,427
    
    
    $
    51,980
    
    
    $
    8,542
    
    
    $
    190,808
    
    
    $
    18,652
 *
    
    The amount was the reversal of the accrual of IPO underwriter fee after the Group
confirmed in the first quarter of 2007 that this amount would not be paid.   F-5




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2006
    
    
    2007
    
    
    2008Operating activities:Net income (loss)
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Loss on disposal of plant, machinery and equipment
    
    
    138
    
    
    
    690
    
    
    
    73Loss on disposal of intangible assets
    
    
    110
    
    
    
    
    
    
    
    Impairment of long-lived assets
    
    
    1,388
    
    
    
    
    
    
    
    880Amortization of acquired intangible assets
    
    
    381
    
    
    
    276
    
    
    
    794Inventory provision
    
    
    54
    
    
    
    911
    
    
    
    648Warranty provision
    
    
    2,004
    
    
    
    1,103
    
    
    
    1,067Bad debts expense
    
    
    3,744
    
    
    
    44
    
    
    
    2,996Depreciation of plant, machinery and equipment
    
    
    7,163
    
    
    
    7,145
    
    
    
    6,103Minority interests
    
    
    (1,808
    )
    
    
    (1,200
    )
    
    
    (652
    )Equity in loss of an affiliate
    
    
    393
    
    
    
    851
    
    
    
    Change in fair value of put option
    
    
    269
    
    
    
    43
    
    
    
    855Amortization of share-based compensation
    
    
    116
    
    
    
    94
    
    
    
    147Reversal of share-based compensation
    
    
    (81
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,714
    )
    
    
    (200
    )
    
    
    (1,536
    )Notes receivable
    
    
    (1,131
    )
    
    
    (1,568
    )
    
    
    4,212Inventories
    
    
    (3,522
    )
    
    
    (41,096
    )
    
    
    15,877Prepaid expenses and other current assets
    
    
    (7,959
    )
    
    
    399
    
    
    
    (4,836
    )Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    129Accounts payable
    
    
    3,481
    
    
    
    26,677
    
    
    
    (27,747
    )Notes payable
    
    
    148
    
    
    
    (148
    )
    
    
    Accrued expenses and other current liabilities
    
    
    7,366
    
    
    
    (8,094
    )
    
    
    (3,198
    )Advance from customers
    
    
    4,932
    
    
    
    2,071
    
    
    
    (2,423
    )Deferred revenue
    
    
    3,667
    
    
    
    (4,073
    )
    
    
    106Income tax payable
    
    
    88
    
    
    
    (6
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    5,434
    
    
    
    (19,353
    )
    
    
    1,496Investing activities:Investment in an affiliate
    
    
    (1,243
    )
    
    
    
    
    
    
    Deposits paid for acquisition of plant, machinery
and equipment, and acquired intangible assets
    
    
    (4,711
    )
    
    
    (4,271
    )
    
    
    Purchase of plant, machinery and equipment
    
    
    (19,082
    )
    
    
    (8,904
    )
    
    
    (13,389
    )Proceeds from sale of plant, machinery and equipment
    
    
    29
    
    
    
    85
    
    
    
    116Purchase of intangible assets
    
    
    
    
    
    
    (644
    )
    
    
    (1,364
    )Purchase of minority interest of STEP Technologies
    
    
    
    
    
    
    (1,361
    )
    
    
    Decrease (increase) in restricted cash
    
    
    (5,205
    )
    
    
    1,816
    
    
    
    3,228Net cash used in investing activities
    
    
    (30,212
    )
    
    
    (13,279
    )
    
    
    (11,409
    )
  F-6




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 CONSOLIDATED STATEMENTS OF CASH FLOWS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2006
    
    
    2007
    
    
    2008Financing activities:Proceeds from short-term bank borrowings
    
    
    
    
    
    
    10,952
    
    
    
    Repayment of short-term bank borrowings
    
    
    
    
    
    
    (10,952
    )
    
    
    Capital contribution by minority shareholder
    
    
    3,000
    
    
    
    
    
    
    
    Repurchase of ordinary shares from market
    
    
    (4,628
    )
    
    
    
    
    
    
    Dividend paid to minority shareholder
    
    
    (325
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (1,953
    )
    
    
    
    
    
    
    Effect of exchange rate changes on
cash and cash equivalents
    
    
    2,696
    
    
    
    4,214
    
    
    
    4,085Net decrease in cash and cash equivalents
    
    
    (24,035
    )
    
    
    (28,418
    )
    
    
    (5,828
    )Cash and cash equivalents at the beginning of the year
    
    
    137,207
    
    
    
    113,172
    
    
    
    84,754Cash and cash equivalents at the end of the year
    
    $
    113,172
    
    
    $
    84,754
    
    
    $
    78,926Supplemental cash flow information:Cash paid during the year for:Interest expenses
    
    $
    18
    
    
    $
    166
    
    
    $
    26Income taxes
    
    $
    15
    
    
    $
    6
    
    
    $
    36
   F-7




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 1.
    
    ORGANIZATION AND PRINCIPAL ACTIVITIES
  Date of
    
    
    Place of
    
    
    PercentageSubsidiaries
    
    incorporation/acquisition
    
    
    incorporation
    
    
    ownershipTechfaith Wireless Communication Technology
    
    July 26, 2002
    
    Peoples Republic of China
    
    
    100
    %(Beijing) Limited (Techfaith China)
    
    
    
    
    
    (the PRC)Techfaith Wireless Technology Group Limited
    
    July 8, 2003
    
    British Virgin Islands
    
    
    100
    %(Techfaith BVI) (formerly known as Techfaith
    
    
    
    
    
    (the BVI)Wireless Communication Technology Limited)Great Earnest Technology Limited (Great Earnest)
    
    August 8, 2003
    
    BVI
    
    
    100
    %One Net Entertainment Limited (One Net)(formerly known as Techfaith Wireless
    
    September 5, 2003
    
    PRC
    
    
    100
    %Communication Technology (Beijing) Limited II)Leo Technology Limited (Leo Technology)
    
    October 15, 2003
    
    BVI
    
    
    100
    %STEP Technologies (Beijing) Co., Ltd.
    
    November 20, 2003
    
    PRC
    
    
    100
    %(STEP Technologies)Techfaith Intelligent Handset Technology
(Hong Kong) Limited (Techfaith HK)
    
    December 29, 2003
    
    Hong Kong
    
    
    100
    %(formerly known as First Achieve Technology Ltd.)Finest Technology Limited (Finest Technology)
    
    January 8, 2004
    
    BVI
    
    
    100
    %Techfaith Wireless Communication Technology
    
    March 22, 2004
    
    PRC
    
    
    100
    %(Shanghai) Limited (Techfaith Shanghai)Infoexcel Technology Limited (Infoexcel Technology)
    
    April 18, 2005
    
    BVI
    
    
    100
    %Techfaith Wireless Corporation
    
    August 22, 2005
    
    United States of America
    
    
    100
    %(Techfaith U.S.)
    
    
    
    
    
    
    (U.S.)Boost Time Limited (Boost Time)
    
    August 25, 2005
    
    BVI
    
    
    100
    %Techfaith Wireless Communication Technology
    
    August 25, 2005
    
    PRC
    
    
    100
    %(Shenzhen) Limited (Techfaith Shenzhen)Techfaith Intelligent Handset Technology (Beijing)
    
    September 9, 2005
    
    PRC
    
    
    100
    %Limited (Techfaith Intelligent Handset Beijing)Charm Faith Limited (Charm Faith)
    
    November 21, 2005
    
    BVI
    
    
    100
    %Techfaith Wireless Communication Technology
    
    April 24, 2006
    
    PRC
    
    
    100
    %(Hangzhou) Limited (Techfaith Hangzhou)Fair Nice Limited (Fair Nice)
    
    February 26, 2007
    
    BVI
    
    
    100
    %Techfaith Wireless Communication Technology
    
    March 27, 2007
    
    PRC
    
    
    100
    %(Shenyang) Limited (Techfaith Shenyang)
  F-8




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 1.
    
    ORGANIZATION AND PRINCIPAL ACTIVITIES  continued
 Date of
    
    
    Place of
    
    
    PercentageVariable interest entity
    
    incorporation
    
    
    incorporation
    
    
    ownershipTechfaith Software (China) Holding Limited
(Techsoft Holding)
    
    March 17, 2006
    
    Cayman Islands
    
    
    70
    %
     F-9




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 1.
    
    ORGANIZATION AND PRINCIPAL ACTIVITIES  continued
  December 31,2007
    
    
    2008Total assets
    
    $
    6,575
    
    
    $
    5,216Total liabilities
    
    $
    483
    
    
    $
    895
 Years ended December 31,2006
    
    
    2007
    
    
    2008Net revenue
    
    $
    
    
    
    $
    
    
    
    $
    155Net loss
    
    $
    (1,452
    )
    
    $
    (3,137
    )
    
    $
    (2,172
    )
  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation
  Basis of consolidation
   F-10




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Use of estimates
  Cash and cash equivalents
  Restricted cash
  Fair value
   F-11




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Fair value
   Level 1
  Level 2
  Level 3
  Notes receivable
   F-12




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Inventories
  Plant, machinery and equipment, net
  Office building
    
    48 yearsPlant and machinery
    
    4 yearsFurniture, fixtures and equipment
    
    4 yearsMotor vehicles
    
    4 yearsSoftware
    
    3-4 yearsLeasehold improvements
    
    Shorter of the lease terms or 4  years
 Impairment of long-lived assets and certain identifiable intangibles
    F-13




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Impairment of long-lived assets and certain identifiable intangibles
   Other acquired intangible assets, net
  Goodwill
    F-14




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Goodwill
  Long-term investments
   Deferred revenue
   F-15




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Revenue recognition
  (1) Handset design services
 Design fee
   F-16




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Revenue recognition
 Design fee
  Royalty income
  Component sales related to design
  Service income
  (2) Product sales
   F-17




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Product warranty
  Year ended December 31,2006
    
    
    2007
    
    
    2008Balance at beginning of year
    
    $
    1,643
    
    
    $
    1,250
    
    
    $
    1,672Current period provision
    
    
    2,004
    
    
    
    1,103
    
    
    
    1,067Utilized during the year
    
    
    (2,401
    )
    
    
    (730
    )
    
    
    (1,061
    )Exchange difference
    
    
    4
    
    
    
    49
    
    
    
    55Balance at end of year
    
    $
    1,250
    
    
    $
    1,672
    
    
    $
    1,733
  F-18




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Government subsidies and grants
    Research and development costs
  Advertising costs
  Foreign currency translation
    F-19




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Income taxes
   Value added tax (VAT) and VAT refund
   Business taxes
  Comprehensive income (loss)
   F-20




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Financial instruments
  Concentration of credit risk
   Share-based compensation
  Net income (loss) per share
   F-21




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Recently issued accounting pronouncements
     F-22




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Recently issued accounting pronouncements
      F-23




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Recently issued accounting pronouncements
      F-24




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 3.
    
    ACQUISITION OF ADDITIONAL EQUITY INTEREST OF STEP TECHNOLOGIES
  Assets acquiredCurrent assets
    
    $
    693Non-current assets
    
    
    777Goodwill
    
    
    600Total assets acquired
    
    $
    2,070Liabilities assumedCurrent liability
    
    $
    623Non-current liability
    
    
    86Total liabilities assumed
    
    $
    709Net assets acquired
    
    $
    1,361
  December 31,2006
    
    
    2007(Unaudited)
    
    
    (Unaudited)Total revenue
    
    $
    80,804
    
    
    $
    143,444Net loss
    
    $
    (10,182
    )
    
    $
    (3,552
    )Net loss per share- Basic
    
    $
    (0.02
    )
    
    $
    (0.01
    )- Diluted
    
    $
    (0.02
    )
    
    $
    (0.01
    )
  F-25




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 4.
    
    ACCOUNTS RECEIVABLE
  December 31,2007
    
    
    2008Billed receivables
    
    $
    38,822
    
    
    $
    31,628Unbilled receivables
    
    
    1,192
    
    
    
    6,176$
    40,014
    
    
    $
    37,804
   December 31,2006
    
    
    2007
    
    
    2008Balance at beginning of year
    
    $
    678
    
    
    $
    4,448
    
    
    $
    3,838Charge to expenses
    
    
    3,744
    
    
    
    44
    
    
    
    2,996Utilized during the year
    
    
    
    
    
    
    (946
    )
    
    
    Exchange difference
    
    
    26
    
    
    
    292
    
    
    
    294Balance at end of year
    
    $
    4,448
    
    
    $
    3,838
    
    
    $
    7,128
 5.
    
    INVENTORIES
  December 31,2007
    
    
    2008Work in progress
    
    $
    714
    
    
    $
    1,055Raw materials
    
    
    46,670
    
    
    
    31,037Finished goods
    
    
    3,379
    
    
    
    5,671Inventories, net
    
    $
    50,763
    
    
    $
    37,763
  F-26




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 6.
    
    PREPAID EXPENSES AND OTHER CURRENT ASSETS
  December 31,2007
    
    
    2008Prepaid testing and tooling fee
    
    $
    465
    
    
    $
    716Prepaid software license fee
    
    
    660
    
    
    
    514Prepaid commercial insurance
    
    
    100
    
    
    
    68Interest receivable
    
    
    522
    
    
    
    403Staff advances
    
    
    464
    
    
    
    437Deposits
    
    
    819
    
    
    
    621Social insurance borne by employees
    
    
    712
    
    
    
    Value added taxes recoverable
    
    
    2,788
    
    
    
    4,207Advance to EMS providers
    
    
    3,204
    
    
    
    2,257Other prepaid and current assets
    
    
    382
    
    
    
    780$
    10,116
    
    
    $
    10,003
 7.
    
    PLANT, MACHINERY AND EQUIPMENT, NET
  December 31,2007
    
    
    2008Construction in progress
    
    $
    
    
    
    $
    23,458Office building
    
    
    17,602
    
    
    
    19,245Leasehold improvements
    
    
    2,605
    
    
    
    2,716Motor vehicles
    
    
    775
    
    
    
    721Plant and machinery
    
    
    12,563
    
    
    
    13,500Furniture, fixtures and equipment
    
    
    5,712
    
    
    
    5,504Software
    
    
    6,930
    
    
    
    7,58746,187
    
    
    
    72,731Less: Accumulated depreciation
    
    
    (17,912
    )
    
    
    (24,353
    )28,275
    
    
    
    48,378Less: Impairment of long-lived assets
    
    
    
    
    
    
    (253
    )Plant, machinery and equipment, net
    
    $
    28,275
    
    
    $
    48,125
   F-27




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 8.
    
    ACQUIRED INTANGIBLE ASSETS, NET
  December 31,2007
    
    
    2008Cost
    
    $
    2,494
    
    
    $
    3,134Accumulated amortization
    
    
    (848
    )
    
    
    (1,586
    )1,646
    
    
    
    1,548Less: impairment of long-lived assets
    
    
    
    
    
    
    (627
    )Acquired intangible assets, net
    
    $
    1,646
    
    
    $
    921
    9.
    
    LONG-TERM INVESTMENT
     F-28




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 9.
    
    LONG-TERM INVESTMENT  continued
    As of December
    
    
    As of May 1, 200731, 2006
    
    
    (Note 1)Current assets
    
    $
    1,272
    
    
    $
    Non-current assets
    
    
    622
    
    
    
    Total assets
    
    $
    1,894
    
    
    $
    Current liabilities
    
    $
    1
    
    
    $
    Non-current liabilities
    
    
    
    
    
    
    Total liabilities
    
    $
    1
    
    
    $
    
 For 4For the year ended
    
    
    months endedDecember 31, 2006
    
    
    May 1, 2007Net sales
    
    $
    
    
    
    $
    R&D expense
    
    
    872
    
    
    
    1,340Impairment of know-how
    
    
    
    
    
    
    553Total expenses
    
    
    (872
    )
    
    
    (1,893
    )Net loss
    
    $
    (872
    )
    
    $
    (1,893
    )
   F-29




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 9.
    
    LONG-TERM INVESTMENT  continued
 Long-term investment in an affiliate  CK Techfaith
 Balance as of January 1, 2007
    
    $
    850Exchange difference
    
    
    1Investment cost
    
    
    Less: equity in loss of an affiliate
    
    
    (851
    )Balance as of December 31, 2007
    
    $
    
   10.
    
    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
  December 31,2007
    
    
    2008Accrued professional fees
    
    $
    1,122
    
    
    $
    620Accrued facility fee
    
    
    346
    
    
    
    299Accrued wages
    
    
    2,404
    
    
    
    822Warranty provision
    
    
    1,672
    
    
    
    1,733Business tax, value added tax and other tax payables
    
    
    474
    
    
    
    1,584Accrued testing fee
    
    
    1,367
    
    
    
    1,325Government grants
    
    
    746
    
    
    
    246Rental payable
    
    
    114
    
    
    
    80Social insurance payables
    
    
    3,319
    
    
    
    162Customer deposits for minimum purchase
    
    
    294
    
    
    
    315Accrued royalty and license fee
    
    
    1,755
    
    
    
    992Others
    
    
    638
    
    
    
    896$
    14,251
    
    
    $
    9,074
  F-30




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 11.
    
    RESTRUCTURE PLAN
  12.
    
    INCOME TAXES
         F-31




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 12.
    
    INCOME TAXES  continued
         F-32




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 12.
    
    INCOME TAXES  continued
    Year ended December 31,2006
    
    
    2007
    
    
    2008Current tax
    
    $
    100
    
    
    $
    6
    
    
    $
    36Deferred tax
    
    
    
    
    
    
    
    
    
    
    (129
    )$
    100
    
    
    $
    6
    
    
    $
    (93
    )
  Year ended December 31,2007
    
    
    2008Deferred tax assets:Depreciation and amortization
    
    $
    754
    
    
    $
    827Expenditure deductible for tax purpose in future years- warranty provision
    
    
    72
    
    
    
    91- bad debts provision
    
    
    194
    
    
    
    705- inventory provision
    
    
    36
    
    
    
    120Deferred revenue
    
    
    991
    
    
    
    219Net operating loss carry forwards
    
    
    6,872
    
    
    
    7,077Total gross deferred tax assets
    
    
    8,919
    
    
    
    9,039Valuation allowance
    
    
    (8,919
    )
    
    
    (8,907
    )Total net deferred tax assets
    
    $
    
    
    
    $
    132
  F-33




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 12.
    
    INCOME TAXES  continued
 Year ended December 31,2007
    
    
    2008Current deferred tax assets
    
    $
    
    
    
    $
    83Non-current deferred tax assets
    
    
    
    
    
    
    49Total net deferred tax assets
    
    $
    
    
    
    $
    132
   Year ended December 31,2006
    
    
    2007
    
    
    2008Tax provision at PRC enterprise
income tax rate of 25% or 33%
    
    $
    (3,336
    )
    
    $
    (1,477
    )
    
    $
    1,846Expenses not deductible for tax purposes
    
    
    245
    
    
    
    71
    
    
    
    1,262Tax exemption granted to PRC subsidiaries
    
    
    (2,331
    )
    
    
    (3,339
    )
    
    
    (6,701
    )Effect of the different income tax rates
in other jurisdiction
    
    
    (2,322
    )
    
    
    597
    
    
    
    2,235Tax effect of income tax at different rates
    
    
    9,058
    
    
    
    11,616
    
    
    
    1,253Changes in valuation allowances
    
    
    (1,214
    )
    
    
    (7,462
    )
    
    
    12$
    100
    
    
    $
    6
    
    
    $
    (93
    )
   F-34




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 13.
    
    PUT OPTION LIABILITY
      Balance at beginning of 2008
    
    $
    318Change in fair value of put option
    
    
    855Balance at end of 2008
    
    $
    1,173
 14.
    
    SHARE-BASED COMPENSATION
     F-35




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 14.
    
    SHARE-BASED COMPENSATION  continued
 Stock option
     2005
    
    
    2006Average risk-free rate of return
    
    
    4.1
    %
    
    
    4.7
    %Expected dividend yield
    
    Nil
    
    NilExpected volatility
    
    
    35
    %
    
    
    69.2
    %Expected life (years)
    
    
    10
    
    
    
    5
     F-36




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 14.
    
    SHARE-BASED COMPENSATION  continued
 Nonvested stock
 Number ofnonvested stockUnvested at January 1, 2008
    
    
    259,363Granted during the year
    
    
    Vested during the year
    
    
    121,454Forfeited during the year
    
    
    105,000Unvested at December 31, 2008
    
    
    32,909
       F-37




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 15.
    
    CANCELLATION OF TREASURY STOCK
  16.
    
    RELATED PARTY TRANSACTIONS
     Year ended December 31,2007
    
    
    2008Techfaith Technology
    
    $
    1,047
    
    
    $
    5,537De Ming
    
    
    54
    
    
    
    $
    1,101
    
    
    $
    5,537
  Year ended December 31,2007
    
    
    2008De Ming
    
    $
    201
    
    
    $
    419
  F-38




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 17.
    
    OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
   1
 Year ended December 31,2007
    
    
    2008AssetsHandset design
    
    $
    61,527
    
    
    $
    19,563Products sales
    
    
    150,014
    
    
    
    194,089Wireless software and applications
    
    
    
    
    
    
    489Reconciling amounts
    
    
    23,320
    
    
    
    5,923Total assets
    
    $
    234,861
    
    
    $
    220,064Reconciling assets:Corporate assets
    
    $
    23,320
    
    
    $
    5,923Investment in equity method investees
    
    $
    
    
    
    $
    
 1
    
    The Groups chief operating decision maker only reviews revenue and cost for
each operating segment. Expenses are not allocated to each segment.  F-39




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 17.
    
    OPERATING SEGMENT AND GEOGRAPHIC INFORMATION  continued
 Year ended December 312006
    
    
    2007
    
    
    2008Total expenditures for additions to
long-lived assetsHandset design
    
    $
    12,620
    
    
    $
    4,019
    
    
    $
    1,350Product sales
    
    
    11,173
    
    
    
    9,800
    
    
    
    13,398Wireless software and application
    
    
    
    
    
    
    
    
    
    
    5Total capital expenditure
    
    $
    23,793
    
    
    $
    13,819
    
    
    $
    14,753
 Year ended December 312006
    
    
    2007
    
    
    2008RevenueHandset design
    
    $
    42,860
    
    
    $
    41,721
    
    
    $
    19,123Products sales
    
    
    37,944
    
    
    
    101,723
    
    
    
    189,727Wireless software and application
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    
    80,804
    
    
    
    143,444
    
    
    
    208,850Cost of salesHandset design
    
    
    25,262
    
    
    
    25,239
    
    
    
    10,308Products sales
    
    
    29,843
    
    
    
    79,556
    
    
    
    157,377Wireless software and application
    
    
    
    
    
    
    
    
    
    
    Total cost of revenue
    
    
    55,105
    
    
    
    104,795
    
    
    
    167,685Gross profit
    
    $
    25,699
    
    
    $
    38,649
    
    
    $
    41,165
  Year ended December 31,2006
    
    
    2007
    
    
    2008Net revenuesDesign fees
    
    $
    29,864
    
    
    $
    26,042
    
    
    $
    15,488Royalty income
    
    
    7,674
    
    
    
    7,772
    
    
    
    1,158Component sales related to design
    
    
    5,322
    
    
    
    7,854
    
    
    
    2,260Service income
    
    
    
    
    
    
    53
    
    
    
    217Revenue related to handset design
    
    
    42,860
    
    
    
    41,721
    
    
    
    19,123Smart phones
    
    
    18,035
    
    
    
    36,444
    
    
    
    99,952Feature phones
    
    
    452
    
    
    
    47,424
    
    
    
    82,335Wireless Module
    
    
    12,926
    
    
    
    12,513
    
    
    
    7,331Other components
    
    
    6,531
    
    
    
    5,342
    
    
    
    109Product sales
    
    
    37,944
    
    
    
    101,723
    
    
    
    189,727Total net revenue
    
    $
    80,804
    
    
    $
    143,444
    
    
    $
    208,850
  F-40




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 17.
    
    OPERATING SEGMENT AND GEOGRAPHIC INFORMATION  continued
 Geographic information
  Year ended December 31,2006
    
    
    2007
    
    
    2008Revenue from countries other
than the PRC: (1)Egypt
    
    $
    4,001
    
    
    $
    1,954
    
    
    $
    1,275India
    
    
    
    
    
    
    
    
    
    
    3,608Japan
    
    
    5,447
    
    
    
    11,641
    
    
    
    6,783Nigeria
    
    
    
    
    
    
    4,080
    
    
    
    2,470Russia
    
    
    3,968
    
    
    
    4,746
    
    
    
    5,715South Africa
    
    
    
    
    
    
    
    
    
    
    5,745Thailand
    
    
    
    
    
    
    4,452
    
    
    
    4,662Turkey
    
    
    
    
    
    
    
    
    
    
    4,379United States
    
    
    1,533
    
    
    
    2,526
    
    
    
    3,911United Arab Emirates
    
    
    12,636
    
    
    
    
    
    
    
    Other countries
    
    
    7,765
    
    
    
    15,567
    
    
    
    12,891Total revenue from countries
other than PRC
    
    
    35,350
    
    
    
    44,966
    
    
    
    51,439Revenue from PRC (2)
    
    
    45,454
    
    
    
    98,478
    
    
    
    157,411Total revenue
    
    $
    80,804
    
    
    $
    143,444
    
    
    $
    208,850
 (1)
    
    For design contract related revenue, includes revenue generated from contracts
for which the contract party is incorporated outside the PRC. For product sale
revenue, includes shipments to customers outside the PRC.(2)
    
    For design contract related revenue, includes revenue generated from contracts
for which the contract party is incorporated in the PRC. For product sale revenue,
includes shipments to customers in the PRC.  F-41




---



##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 18.
    
    COMMITMENTS
 (a)
    
    Purchase commitments
  (b)
    
    Operating lease as lessee
   2009
    
    $
    9952010
    
    
    9522011
    
    
    231$
    2,178
 (c)
    
    Capital commitments
  19.
    
    MAJOR CUSTOMERS AND CREDIT CONCENTRATION
  Net revenuesYear ended December 31,2006
    
    
    2007
    
    
    2008A
    
    
    15.6
    %
    
    
    N/A
    
    
    
    N/AB
    
    
    N/A
    
    
    
    11.0
    %
    
    
    N/AC
    
    
    N/A
    
    
    
    N/A
    
    
    
    12.3
    %15.6
    %
    
    
    11.0
    %
    
    
    12.3
    %
   F-42




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 19.
    
    MAJOR CUSTOMERS  continued
 Accounts receivableAs of December 31,2007
    
    
    2008A
    
    
    25.1
    %
    
    
    22.0
    %B
    
    
    N/A
    
    
    
    14.2
    %25.1
    %
    
    
    36.2
    %
 20.
    
    NET (LOSS) INCOME PER SHARE
  Year ended December 31,2006
    
    
    2007
    
    
    2008Net income (loss) (numerator), basic and diluted
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001Shares (denominator):Weighted average ordinary shares outstanding used
in computing basic net income per share
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    649,972,306Effect of dilutive securities:Weighted average shares from assumed vest of
nonvested shares
    
    
    
    
    
    
    
    
    
    
    90,006Weighted average shares used in computing
diluted net income per share
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    650,062,312Net income (loss) per share, basic
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01Net income (loss) per share, diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01
    F-43




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 21.
    
    MAINLAND CHINA CONTRIBUTION AND PROFIT APPROPRIATION
    22.
    
    STATUTORY RESERVES
   F-44




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 23.
    
    SUBSEQUENT EVENT
    F-45




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 
 ADDITIONAL INFORMATION  SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2007
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,010
    
    
    $
    5,633Amounts due from subsidiaries
    
    
    78,414
    
    
    
    96,060Prepaid expenses and other current assets
    
    
    164
    
    
    
    136Total current assets
    
    
    101,588
    
    
    
    101,829Goodwill
    
    
    6
    
    
    
    6Investment in subsidiaries
    
    
    70,734
    
    
    
    90,153TOTAL ASSETS
    
    $
    172,328
    
    
    $
    191,988LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued expenses and other current liabilities
    
    $
    319
    
    
    $
    1,180Total current liabilities
    
    
    319
    
    
    
    1,180Shareholders equity:Ordinary shares of par value $0.00002:50,000,000,000,000 shares authorized; shares issued and
outstanding, 649,913,136 in 2007 and 650,034,590 in 2008
    
    
    13
    
    
    
    13Additional paid-in capital
    
    
    110,327
    
    
    
    105,846Treasury stock, at cost (8,655,000 and nil shares as of
December 31, 2007 and 2008, respectively)
    
    
    (4,628
    )
    
    
    Accumulated other comprehensive income
    
    
    13,776
    
    
    
    24,427Retained earnings
    
    
    52,521
    
    
    
    60,522Total shareholders equity
    
    
    172,009
    
    
    
    190,808TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    172,328
    
    
    $
    191,988
  F-46




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 ADDITIONAL INFORMATION  SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2006
    
    
    2007
    
    
    2008Net revenues
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses:General and administrative
    
    
    (239
    )
    
    
    (131
    )
    
    
    (250
    )Total operating expenses
    
    
    (239
    )
    
    
    (131
    )
    
    
    (250
    )Loss from operations
    
    
    (239
    )
    
    
    (131
    )
    
    
    (250
    )Interest income
    
    
    3,077
    
    
    
    1,800
    
    
    
    346Equity in earnings (loss) of subsidiaries
    
    
    (11,362
    )
    
    
    (4,898
    )
    
    
    8,760Change in fair value of put option
    
    
    (269
    )
    
    
    (43
    )
    
    
    (855
    )Income (loss) before income taxes
    
    
    (8,793
    )
    
    
    (3,272
    )
    
    
    8,001Income taxes
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001Net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01Diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    0.01Weighted average shares used in computation:Basic
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    649,972,306Diluted
    
    
    656,255,882
    
    
    
    649,807,421
    
    
    
    650,062,312
  F-47




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 ADDITIONAL INFORMATION  SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Accumulated
    
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    
    other
    
    
    
    
    
    
    share
    
    
    Com-Ordinary shares
    
    
    paid-in
    
    
    Treasury
    
    
    comprehensive
    
    
    Retained
    
    
    holders
    
    
    prehensiveNumber
    
    
    Amount
    
    
    capital
    
    
    stock
    
    
    income
    
    
    earnings
    
    
    equity
    
    
    Income (loss)Balance at January 1, 2006
    
    
    658,183,409
    
    
    $
    13
    
    
    $
    109,798
    
    
    $
    
    
    
    $
    1,456
    
    
    $
    64,586
    
    
    $
    175,853Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,883
    
    
    
    
    
    
    
    3,883
    
    
    $
    3,883Share-based compensation
    
    
    164,545
    
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    Forfeiture of stock options
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    Repurchase of ordinary shares
    
    
    (8,655,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,793
    )
    
    
    (8,793
    )
    
    
    (8,793
    )Balance at December 31, 2006
    
    
    649,692,954
    
    
    
    13
    
    
    
    109,833
    
    
    
    (4,628
    )
    
    
    5,339
    
    
    
    55,793
    
    
    
    166,350
    
    
    $
    (4,910
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,437
    
    
    
    
    
    
    
    8,437
    
    
    $
    8,437Share-based compensation
    
    
    220,182
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    Reduction in underwriters cost for the IPO*
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,272
    )
    
    
    (3,272
    )
    
    
    (3,272
    )Balance at December 31, 2007
    
    
    649,913,136
    
    
    
    13
    
    
    
    110,327
    
    
    
    (4,628
    )
    
    
    13,776
    
    
    
    52,521
    
    
    
    172,009
    
    
    $
    5,165Cancellation of treasury stock
    
    
    
    
    
    
    
    
    
    
    (4,628
    )
    
    
    4,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,651
    
    
    
    
    
    
    
    10,651
    
    
    
    10,651Share-based compensation
    
    
    121,454
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,001
    
    
    
    8,001
    
    
    
    8,001Balance at December 31, 2008
    
    
    650,034,590
    
    
    $
    13
    
    
    $
    105,846
    
    
    $
    
    
    
    $
    24,427
    
    
    $
    60,522
    
    
    $
    190,808
    
    
    $
    18,652
 *
    
    The amount was the reversal of the accrual of IPO underwriter fee after the Group
confirmed in the first quarter of 2007 that this amount would not be paid.  F-48




---



##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 ADDITIONAL INFORMATION  SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2006
    
    
    2007
    
    
    2008Operating activities:Net income (loss)
    
    $
    (8,793
    )
    
    $
    (3,272
    )
    
    $
    8,001Adjustments to reconcile net income to net cash
provided by operating activities:Amortization of share-based compensation
    
    
    116
    
    
    
    94
    
    
    
    147Reversal of share-based compensation
    
    
    (81
    )
    
    
    
    
    
    
    Change in fair value of put option
    
    
    269
    
    
    
    43
    
    
    
    855Gain or loss from long term investment
    
    
    11,640
    
    
    
    4,788
    
    
    
    (8,768
    )Change in operating assets and liabilities:Amounts due from subsidiaries
    
    
    (41,380
    )
    
    
    (20,400
    )
    
    
    (17,646
    )Prepaid expenses and other current assets
    
    
    (98
    )
    
    
    10
    
    
    
    28Accrued expenses and other current liabilities
    
    
    (175
    )
    
    
    401
    
    
    
    6Net cash used in by operating activities
    
    
    (38,502
    )
    
    
    (18,336
    )
    
    
    (17,377
    )Investing activities:Investment in a subsidiary
    
    
    (7,000
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (7,000
    )
    
    
    
    
    
    
    Financing activitiesProceeds from issuance of shares upon
initial public offering
    
    
    
    
    
    
    
    
    
    
    Repurchase of ordinary shares from market
    
    
    (4,628
    )
    
    
    
    
    
    
    Net cash used in by financing activities
    
    
    (4,628
    )
    
    
    
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (50,130
    )
    
    
    (18,336
    )
    
    
    (17,377
    )Cash and cash equivalents at the beginning of the year
    
    
    91,476
    
    
    
    41,346
    
    
    
    23,010Cash and cash equivalents at the end of the year
    
    $
    41,346
    
    
    $
    23,010
    
    
    $
    5,633
  F-49




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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 ADDITIONAL INFORMATION  SCHEDULE 1
 Note:
 1.
    
    BASIS FOR PREPARATION
  2.
    
    INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
  3.
    
    INCOME TAXES
   F-50




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber

    Document4.8*
    

    Code of Business Conduct and Ethics of the Registrant, as amended.8.1*
    

    Subsidiaries of the Registrant.12.1*
    

    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2*
    

    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1*
    

    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.13.2*
    

    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.15.1*
    

    Consent of Maples and Calder.15.2*
    

    Consent of Genland Law Firm.
 
 *
    
    Filed with this annual report on Form 20-F.