##### 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, 2007.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
 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
 For the transition period from  to .
 Commission file number: 000-51242
 CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
  
 
 
 
   
 
 
  o þ
 o þ
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  US GAAP   þ
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board     o
    
    Other    o
 o þ
  o þ
 o þ
  o o




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##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    2PART I
    
    
    3Item 1. Identity of Directors, Senior Management and Advisers
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    13Item 4A. Unresolved Staff Comments
    
    
    21Item 5. Operating and Financial Review and Prospects
    
    
    21Item 6. Directors, Senior Management and Employees
    
    
    31Item 7. Major Shareholders and Related Party Transactions
    
    
    37Item 8. Financial Information
    
    
    39Item 9. The Offer and Listing
    
    
    39Item 10. Additional Information
    
    
    40Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 12. Description of Securities Other than Equity Securities
    
    
    45PART II
    
    
    45Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    45Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    45Item 15. Controls and Procedures
    
    
    45Item 16.A. Audit Committee Financial Expert
    
    
    47Item 16.B. Code of Ethics
    
    
    48Item 16.C. Principal Accountant Fees and Services
    
    
    48Item 16.D. Exemptions from the Listing Standards for Audit Committees
    
    
    48Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    48PART III
    
    
    49Item 17. Financial Statements
    
    
    49Item 18. Financial Statements
    
    
    49Item 19. Exhibits
    
    
    49EX-8.1 Subsidiaries of the RegistrantEX-12.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002EX-12.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002EX-13.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002EX-13.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002EX-15.1 Consent of Maples and CalderEX-15.2 Consent of Genland Law Firm
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INTRODUCTION
  
    
    we, us, our company, our, and TechFaith refer to China
Techfaith Wireless Communication Technology Limited and its
subsidiaries. Unless otherwise indicated, references in this
annual report on Form 20-F to references to TechFaith BVI are to
Techfaith Wireless Communication Technology Limited, our wholly
owned subsidiary in the British Virgin Islands, TechFaith China
are to Techfaith Wireless Communication Technology (Beijing)
Limited (formerly known as Beijing Techfaith R&D Co., Ltd.), our
wholly owned subsidiary in China, references to TechFaith
Beijing are to Techfaith Wireless Communication Technology
(Beijing) Limited II (formerly known as Beijing Centel Technology
R&D Co., Ltd.), our wholly owned subsidiary in China, references
to TechFaith Shanghai are to Techfaith Wireless Communication
Technology (Shanghai) Limited (formerly known as Leadtech
Communication Technology (Shanghai) Limited), our wholly owned
subsidiary in China, references to STEP Technologies are to STEP
Technologies (Beijing) Co., Ltd., our wholly owned subsidiary in
China, references to Techfaith Intelligent Handset Beijing are
to Techfaith Intelligent Handset Technology (Beijing) Limited, our
wholly owned subsidiary in China, references to Techsoft Holding
are to Techfaith Software (China) Holding Limited , our 70 percent
owned joint venture with QUALCOMM INCORPORATED in the Cayman
Islands, references to TechSoft are to TechFaith Software
(China) Limited, a wholly owned subsidiary of Techsoft Holding in
China, references to Techfaith Hangzhou are to Techfaith
Wireless Communication Technology (Hangzhou) Limited, our wholly
owned subsidiary in China, references to Techfaith Shenyang are
to Techfaith Wireless Communication Technology (Shenyang) Limited,
our wholly owned subsidiary in China, references to Techfaith Hong
Kong are to Techfaith Intelligent Handset Technology (Hong
Kong) Limited, our wholly owned subsidiary in Hong Kong, references
to Techfaith Shenzhen are to Techfaith Wireless
Communication Technology (Shenzhen) Limited, our wholly owned
subsidiary in China.
    
    shares or ordinary shares refers to our ordinary shares,
ADSs refers to our American depositary shares, each of which
represents 15 ordinary shares, and ADRs refers to the American
depositary receipts that evidence our ADSs;
    
    China or PRC refers to the Peoples Republic of China, and
solely for the purpose of this annual report, excludes Taiwan,
Hong Kong and Macau; and
    
    RMB refers to Renminbi, the legal currency of China, and $,
dollars, US$ and U.S. dollars refer to the legal currency of
the United States.
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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 31,2003
    
    2004
    
    2005
    
    2006
    
    2007(In thousands, except share, per share and per ADS data)Consolidated Statement of
Operations DataNet revenues
    
    $
    9,677
    
    
    $
    46,560
    
    
    $
    90,110
    
    
    $
    80,804
    
    
    $
    143,444Gross profit
    
    
    7,046
    
    
    
    26,676
    
    
    
    55,049
    
    
    
    25,699
    
    
    
    38,649Operating expenses
    
    
    (2,130
    )
    
    
    (7,971
    )
    
    
    (14,290
    )
    
    
    (40,728
    )
    
    
    (47,440
    )Government subsidy income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    1,734(Loss) income from operations
    
    
    4,916
    
    
    
    18,705
    
    
    
    40,759
    
    
    
    (14,849
    )
    
    
    (7,057
    )Net (loss) income
    
    $
    4,956
    
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Net (loss) income per share Basic
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    ) Diluted
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )Shares used in per share computation Basic
    
    
    242,465,753
    
    
    
    500,000,000
    
    
    
    604,011,009
    
    
    
    656,255,882
    
    
    
    649,807,421 Diluted
    
    
    243,074,581
    
    
    
    551,823,942
    
    
    
    626,626,671
    
    
    
    656,255,882
    
    
    
    649,807,421
 As of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007(In thousands)Consolidated Balance Sheet DataCash and cash equivalents
    
    $
    7,699
    
    
    $
    35,086
    
    
    $
    137,207
    
    
    $
    113,172
    
    
    $
    84,754Accounts receivable
    
    $
    5,230
    
    
    $
    7,760
    
    
    $
    34,060
    
    
    $
    37,229
    
    
    $
    40,014Inventories
    
    $
    732
    
    
    $
    5,030
    
    
    $
    4,974
    
    
    $
    8,546
    
    
    $
    50,763Total assets
    
    $
    23,911
    
    
    $
    67,542
    
    
    $
    194,163
    
    
    $
    207,714
    
    
    $
    234,861Total current liabilities
    
    $
    8,324
    
    
    $
    23,869
    
    
    $
    15,335
    
    
    $
    37,123
    
    
    $
    60,739Total shareholders equity
    
    $
    9,824
    
    
    $
    28,090
    
    
    $
    175,853
    
    
    $
    166,350
    
    
    $
    172,009Number of ordinary shares issued
    
    
    500,000,000
    
    
    
    500,000,000
    
    
    
    658,183,409
    
    
    
    649,692,954
    
    
    
    649,913,136Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,655,000
    
    
    
    8,655,000Total liabilities and shareholders equity
    
    $
    23,911
    
    
    $
    67,542
    
    
    $
    194,163
    
    
    $
    207,714
    
    
    $
    234,861
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Noon Buying RatePeriod
    
    Period End
    
    Average(1)
    
    Low
    
    High2003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2800
    
    
    
    8.27652004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007December
    
    
    7.2946
    
    
    
    7.3682
    
    
    
    7.4120
    
    
    
    7.2946Full year
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008January
    
    
    7.1818
    
    
    
    7.2405
    
    
    
    7.2946
    
    
    
    7.1818February
    
    
    7.1115
    
    
    
    7.1644
    
    
    
    7.1973
    
    
    
    7.1100March
    
    
    7.0120
    
    
    
    7.0722
    
    
    
    7.1110
    
    
    
    7.0105April
    
    
    6.9870
    
    
    
    6.9997
    
    
    
    7.0185
    
    
    
    6.9840May
    
    
    6.9400
    
    
    
    6.9725
    
    
    
    7.0000
    
    
    
    6.9377June
(through June 11)
    
    
    6.9095
    
    
    
    6.9320
    
    
    
    6.9633
    
    
    
    6.9095
 
 (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
  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.
  
    
    manage our growth effectively;
    
    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 effectively manage our rapid expansion, our business may be materially and adversely
affected.
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\

If our customers fail to achieve success in their business, our mobile handset solution and product
sales business could be adversely affected.
  Defects in our designs could result in a loss of customers and claims against us.
  We are subject to product liability or product recall exposure and have limited insurance coverage.
    We may
continue to experience net losses.
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If we cannot keep up with industry standards and design 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.
   The mobile handset design market in China is highly competitive, and we cannot assure you that we
will be able to compete successfully against our competitors.
   If we lose our license for CDMA technology, we may not be able to obtain alternative licenses in a
timely manner.
   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.
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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.
   If we are unable to attract, train and retain skilled engineers, our business may be materially and
adversely affected.
  We experience fluctuations in quarterly operating results.
  Future acquisitions may have an adverse effect on our ability to manage our business.
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We have limited business insurance coverage in China.
  As we have commenced accounting for employee share options using the fair value method beginning
from 2005, such accounting treatment could continue to significantly reduce our net income.
  Failure to achieve and maintain effective internal controls could have a material and adverse
effect on the trading price of our ADSs.
  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.
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Our subsidiaries in China are subject to restrictions on dividend payments, making other payments
to us or any other affiliated company and borrowing or allocating tax losses among our
subsidiaries.
    Fluctuations in exchange rates could result in foreign currency exchange losses.
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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 subsidiary, limit our subsidiarys ability to distribute profits to us,
or otherwise adversely affect us.
   Uncertainties with respect to the PRC legal system could adversely affect us.
  We face risks related to health epidemics and other outbreaks of contagious diseases, including
avian influenza, or avian flu, and SARS.
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We may incur losses due to business interruptions resulting from the occurrence of natural
catastrophes such as earthquakes, fires and acts of terrorism.
  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;
    
    performance of other China-based companies that are quoted 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 RMB and U.S. dollar.
  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.
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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.
  We are controlled by a small group of our existing shareholders, whose interests may differ from
other shareholders.
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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
     Business Overview
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Products and Services
 Mobile Handset Design Services.
  
    
    Mobile Handset Design Services Based on Existing Platforms We
design a new model of mobile handset based on our existing design
platform.
    
    Successor Model Design Services We design a successor model of
an existing customers mobile handset previously designed by us to
incorporate additional functions and/or industrial design.
    
    Mobile Handset Design Services Based on New Platforms We design
a new model of mobile handset based on a new design platform
specified by the customer.
   Wireless Software and Applications
 Sales of components and products.
  
    
    Wireless modules and data cardWe have begun to develop wireless
solutions leveraging our knowledge and experience in designing
mobile handsets. Our wireless product lines include wireless
modules and data cards for wireless connections. Wireless modules
are devices that enable data communication through a cellular
network to be used in various applications, such as global
positioning systems, logistics management, wireless point-of-sale
systems, traffic navigation systems and wireless security systems.
We began to sell wireless modules in June 2004. Our wireless
modules consist of baseband and RF, the two important hardware
building blocks of a generic mobile handset, which we believe
represent a natural extension of our handset design business. By
adding a housing, we also provided data cards. In 2006 our
wireless module and data card business started to grow and the
revenue more than doubled from 2005. In 2007, revenue from our
wireless module was stable as compared to 2006. The data cards we
provided are in three forms, namely, PC cards, USB cards and
express cards.
    
    Feature phoneWe started our feature phone business in the fourth
quarter of 2006. Similar to the case for the smart phone business
described below, as more customers requested one-stop service, we
started to sell completed feature phone handsets that we designed.
We did not manufacture feature phones ourselves, but outsourced
the manufacturing to electronics manufacturing services (EMS)
providers.
    
    Smart PhonePrior to 2006, we only designed but did not sell
completed handsets. In response to customer demand, in 2006
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we
began selling completed smart phone handsets that we designed.
However, we do not manufacture smart phones ourselves, but instead
outsource the manufacturing to EMS providers. In 2007 we began to
launch a series of WiFi smart phones with additional capabilities
compared to our previous designs.
    
    Other Products and ServicesWe also sell printed circuit boards,
or PCBs, and other electronic components. We have historically
sold PCBs that others produced for us to our Chinese customers at
our request as a means to track the royalty payments to which we
are entitled. The sale of PCBs is not our core business; we
generated only 2.1% of our total revenues from those sales in
2007, and do not intend to generate significant profit from PCBs
in the future.
 Design Process
  Responsibilities of Engineering Teams
 Industrial Design.
 Mechanical Design.
 Hardware Design.
 Software Design.
 Project Management.
 Quality Assurance.
 Sourcing.
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Production Support.
 Customers
       Sales and Marketing
   Technology
  16




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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
   
    
    ability to design and integrate many hardware and software functions and features based on different platforms;
    
    product quality and reliability;
    
    cost-effectiveness;
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
    
    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
  Tax
   18




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,
 Foreign Currency Exchange
   Dividend Distribution
 19




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Organizational Structure
  
   
    
    Techfaith Wireless Communication Technology (Beijing) Limited, or TechFaith China, which primarily designs
GSM-based mobile handsets;
    
    Techfaith Wireless Communication Technology (Beijing) Limited II, or TechFaith Beijing, formerly known as Beijing
Centel Technology R&D Co., Ltd., which primarily designs GSM-based mobile handsets;
    
    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
primarily focuses on smart phones and related products; and
    
    TechFaith Software (China) Limited, or TechSoft, which primarily develops application software for wireless devices.
    
    Techfaith Wireless Communication Technology (Hangzhou) Limited, or Techfaith Hangzhou, which primarily focus on
handsets and smart phones sales.
    
    Techfaith Wireless Communication Technology (Shenyang) Limited, or Techfaith Shenyang, which focus 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.
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Property, Plants 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.
 21




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Cost of Revenues.
 Operating Expenses.
 General and Administrative.
 Research and Development.
 22




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Selling and Marketing.
 Income Taxes.
  Critical Accounting Policies
  Revenue Recognition.
  Design fee.
 23




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Royalty.
 omponent and product sales.
 Service income.
 Income taxes
   Goodwill
  Results of Operations
  24




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For the Year Ended December 31,2005
    
    2006
    
    2007(In thousands)Consolidated Statement of Operations DataNet revenues:Design fees
    
    $
    63,020
    
    
    $
    29,864
    
    
    $
    26,042Royalty income
    
    
    15,651
    
    
    
    7,674
    
    
    
    7,772Component and product sales
    
    
    11,439
    
    
    
    43,266
    
    
    
    109,577Service income
    
    
    
    
    
    
    
    
    
    
    53Total net revenues
    
    $
    90,110
    
    
    $
    80,804
    
    
    $
    143,444Cost of revenues:Design fees
    
    $
    26,258
    
    
    $
    19,998
    
    
    $
    16,882Royalty income
    
    
    
    
    
    
    
    
    
    
    Component and product sales
    
    
    8,803
    
    
    
    35,107
    
    
    
    87,884Service cost
    
    
    
    
    
    
    
    
    
    
    29Total cost of revenues
    
    $
    35,061
    
    
    $
    55,105
    
    
    $
    104,795Gross profit:Design fees
    
    $
    36,762
    
    
    $
    9,866
    
    
    $
    9,160Royalty income
    
    
    15,651
    
    
    
    7,674
    
    
    
    7,772Component and product sales
    
    
    2,636
    
    
    
    8,159
    
    
    
    21,693Service income
    
    
    
    
    
    
    
    
    
    
    24Total gross profit
    
    $
    55,049
    
    
    $
    25,699
    
    
    $
    38,649Operating expenses:General and administrative
    
    $
    (9,574
    )
    
    $
    (15,110
    )
    
    $
    (13,142
    )Research and development
    
    
    (3,447
    )
    
    
    (21,970
    )
    
    
    (30,876
    )Selling and marketing
    
    
    (1,269
    )
    
    
    (2,260
    )
    
    
    (3,422
    )Leasehold improvement impairment
    
    
    
    
    
    
    (1,388
    )
    
    
    Total operating expenses
    
    $
    (14,290
    )
    
    $
    (40,728
    )
    
    $
    (47,440
    )Government subsidy income
    
    
    
    
    
    
    180
    
    
    
    1,734(Loss) income from operations
    
    $
    40,759
    
    
    $
    (14,849
    )
    
    $
    (7,057
    )Total other income, net
    
    
    2,149
    
    
    
    4,741
    
    
    
    3,442Income taxes
    
    
    (54
    )
    
    
    (100
    )
    
    
    (6
    )Minority interests
    
    
    (1,469
    )
    
    
    1,808
    
    
    
    1,200Equity in loss of an affiliate
    
    
    
    
    
    
    (393
    )
    
    
    (851
    )Net (loss) income
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )
 Comparison of the Year Ended December 31, 2006 and the Year Ended December 31, 2007
 Net Revenues
 25




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##### Table of Contents



Design Fees.
 Royalty Income.
 Component and Product Sales.
 Cost of Revenues
  Design Fees.
 Royalty Income.
 Component and Product Sales.
 Gross Profit
  Design Fees.
 Royalty Income.
 Component and Product Sales.
 Operating Expenses
  General and Administrative.
 Research and Development.
 Selling and Marketing.
 Leasehold Improvement Impairment.
 Government Subsidy Income
 26




---



##### Table of Contents



Other Income, Net
  Net Income
  Comparison of the Year Ended December 31, 2005 and the Year Ended December 31, 2006
 Net Revenues
  Design Fees.
 Royalty Income.
 Component and Product Sales.
 Cost of Revenues
  Design Fees.
 Royalty Income.
 Component and Product Sales.
 Gross Profit
  Design Fees.
 Royalty Income.
 Component and Product Sales.
 Operating Expenses
 27




---



##### Table of Contents



General and Administrative.
 Research and Development.
 Selling and Marketing.
 Leasehold Improvement Impairment.
 Government Subsidy Income
  Other Income, Net
  Net Income
  Liquidity and Capital Resources
  Year Ended December 31,2005
    
    2006
    
    2007(In thousands)Net cash (used in) provided by operating activities
    
    $
    16,950
    
    
    $
    5,434
    
    
    $
    (19,353
    )Net cash used in investing activities
    
    
    (5,529
    )
    
    
    (30,212
    )
    
    
    (13,279
    )Net cash
provided by (used in) financing activities
    
    
    89,259
    
    
    
    (1,953
    )
    
    
    Effect of exchange rate changes
    
    
    1,441
    
    
    
    2,696
    
    
    
    4,214Net (decrease) increase in cash and cash equivalents
    
    
    102,121
    
    
    
    (24,035
    )
    
    
    (28,418
    )Cash and cash equivalents at beginning of period
    
    
    35,086
    
    
    
    137,207
    
    
    
    113,172Cash and cash equivalents at end of period
    
    $
    137,207
    
    
    $
    113,172
    
    
    $
    84,754
   28




---



##### Table of Contents



Operating Activities.
    Investing Activities
 Financing Activities.
   Research and Development, Patents and Licenses, etc.
 
 Trend Information
  Off-Balance Sheet Arrangements
  29




---



##### Table of Contents



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
    
    
    532
    
    
    
    532
    
    
    
    
    
    
    
    
    
    
    
    License fee
payment obligations
    
    
    2,176
    
    
    
    1,676
    
    
    
    500
    
    
    
    
    
    
    
    Purchase obligations (1)
    
    
    1,964
    
    
    
    1,511
    
    
    
    453
    
    
    
    
    
    
    
    Total
    
    
    4,672
    
    
    
    3,719
    
    
    
    953
    
    
    
    
    
    
    
    
 
 (1)
    
    Purchase obligations relating to the purchase of plant, machinery and equipment.Other than the contractual obligations set forth above, we do not have any long-term commitments. Safe Harbor
  
    
    our limited operating history as a mobile handset design and software solution provider;
    
    our ability to effectively manage our growth;
    
    decrease in demand for pure design services by mobile handset brand owners;
    
    our ability to acquire and retain additional international mobile handset brand owners as our customers;
    
    our ability to design new mobile handset models and provide software solutions in a timely and
cost-efficient manner to meet our customers demands; and
    
    other risks outlined in this annual report on Form 20-F.
     30




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##### Table of Contents



Item 6. Directors, Senior Management and Employees
 Directors and Senior Management
  Directors and Executive Officers
    
    Age
    
    Position/TitleDefu Dong
    
    
    37
    
    
    Chairman and Chief Executive OfficerJy-Ber Gilbert Lee
    
    
    52
    
    
    Director, President and Chief Operating OfficerBaozhuang (Bob) Huo
    
    
    37
    
    
    Director, Deputy Chief Executive OfficerHung Hsin (Robert) Chen
    
    
    62
    
    
    Independent DirectorKen Lu
    
    
    45
    
    
    Independent DirectorSui
Ling
    
    
    52
    
    
    Independent DirectorHui (Tom) Zhang
    
    
    35
    
    
    Independent DirectorChristopher Patrick Holbert
    
    
    37
    
    
    Chief Financial OfficerChangke He
    
    
    46
    
    
    Chief Technology OfficerYibo Fang
    
    
    39
    
    
    President of STEP TechnologiesXiaonong Cai
    
    
    38
    
    
    Vice President
 Executive Directors
 Mr. Defu Dong
 Dr. Jy-Ber Gilbert Lee
 31




---



##### Table of Contents



Mr. Baozhuang (Bob) Huo
 Independent Directors
 Mr. Hung Hsin (Robert) Chen
 Dr. Ken Lu
 Ms. Sui
Ling
 Dr. Hui (Tom) Zhang
 Other Executive Officers
 Mr. Christopher Patrick Holbert
 Mr. Changke He
 Mr. Yibo Fang
 Mr.
Xiaonong Cai
 32




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##### Table of Contents



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
  OrdinarySharesUnderlyingthe Restricted
    
    PurchaseShares
    
    Price
    
    
    
    
    
    VestingGranted
    
    (US$/Share)
    
    Date of Grant
    
    ScheduleChristopher Patrick Holbert
    
    
    315,000
    
    
    
    
    
    
    July 1, 2006
    
    
    (1
    )Hung Hsin (Robert) Chen
    
    
    65,818
    
    
    
    
    
    
    August 12, 2006
    
    
    (2
    )Ying Han
    
    
    65,818
    
    
    
    
    
    
    August 12, 2006
    
    
    (3
    )Hui (Tom) Zhang
    
    
    65,818
    
    
    
    
    
    
    August 12, 2006
    
    
    (3
    )Ken Lu
    
    
    65,818
    
    
    
    
    
    
    November 11, 2006
    
    
    (4
    )Sui Ling
    
    
    65,818
    
    
    
    
    
    
    August 11, 2007
    
    
    (5
    )Total
    
    
    644,090
 
 (1)
    
    One third of the restricted shares will vest every twelve months after the grant date;(2)
    
    100% of the restricted shares vested immediately on the grant date;(3)
    
    50% of the restricted shares vested immediately on the grant date, and the remaining
50% of the restricted shares vested on April 1, 2007;(4)
    
    50% of the restricted shares vested immediately on the grant date, and the remaining
50% of the restricted shares vested on November 1, 2007.(5)
    
    One quarter of the restricted shares vested immediately on the grant date, and the
remaining three quarters to be vested on August 12, 2008, 2009 and 2010 averagely. 33




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##### Table of Contents



Types of Awards.
 
    
    our ordinary shares;
    
    options to purchase our ordinary shares;
    
    restricted shares, which are non-transferable ordinary shares, subject to forfeiture upon
termination of a grantees employment or service;
    
    restricted 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.
 Acceleration of Awards upon Corporate Transactions.
 Terms of Awards.
 Vesting Schedule.
 Amendment and Termination.
 Board Practices
  Committees of the Board of Directors
 Audit Committee
 34




---



##### Table of Contents



Compensation Committee
  Corporate Governance and Nominating Committee
  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
    
    
    
    38.4
    %Christopher Patrick Holbert (4)
    
    
    210,000
    
    
    
    *Jy-Ber Gilbert Lee (5)
    
    
    131,636
    
    
    
    *Hung Hsin (Robert) Chen (6)
    
    
    65,818
    
    
    
    *
 35




---



##### Table of Contents



Ordinary Shares Beneficially Owned(1)Number
    
    %(2)Hui (Tom) Zhang (7)
    
    
    65,818
    
    
    
    *Ken Lu (8)
    
    
    65,818
    
    
    
    *Sui Ling (9)
    
    
    16,455
    
    
    
    *All directors and executive officers as a group (10)
    
    
    249,805,545
    
    
    
    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) 649,913,136, being the number of ordinary shares outstanding
as of June 11, 2008,
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 11, 2008, or the number
of restricted shares held by such person or group, if any, that will fully vest within 60
days after June 11, 2008, 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 11, 2008 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 Tower D2, IT Park, Electronic
Town, No. 10A, Jiu Xian Qiao North Road, Chaoyang District, Beijing 100015, Peoples
Republic of China.(4)
    
    Includes 210,000 restricted shares that were granted to Christopher Patrick Holbert on
July 1, 2006 and that will fully vest within 60 days after
June 11, 2008.(5)
    
    Includes 131,636 ordinary shares that were issuable upon exercise of options exercisable
within 60 days after June 11, 2008 held by Mr. Lee.(6)
    
    Includes 65,818 restricted shares that were granted to Robert Chen on August 12, 2006,
the previous granted 131,636 share options were cancelled accordingly.(7)
    
    Includes 65,818 restricted shares that were granted to Hui (Tom) Zhang on August 12, 2006.(8)
    
    Includes 65,818 restricted shares that were granted to Ken Lu on November 11, 2006.(9)
    
    Includes 16,455 restricted shares that were granted to Sui
Ling on August 11, 2007.(10)
    
    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)
    
    
    99,250,000
    
    
    
    15.3
    %Fidelity Management & Research Company (4)
    
    
    66,806,940
    
    
    
    10.3
    %Lin Dong (5)
    
    
    35,009,655
    
    
    
    5.4
    %
 
 (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) 649,913,136, being the number
of ordinary shares outstanding as of May 31, 2008, 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 May 31,
2008, or the number of restricted shares held by such person or group,
if any, that will fully vest within 60 days after May 31, 2008, 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 May
31, 2008 by option or other agreement. 36




---



##### Table of Contents



(3)
    
    Includes 82,500,000 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 16,750,000 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, Tower D2, IT Park, Electronic Town, No. 10A, Jiu
Xian Qiao North Road, Chaoyang District, Beijing 100015, Peoples
Republic of China.(4)
    
    Includes 66,806,940 ordinary shares held by Fidelity Management &
Research Company, which is a wholly owned subsidiary of FMR Corp. 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.(5)
    
    Includes 35,009,655 ordinary shares held by Crossvine Assets Limited,
which is ultimately owned by Dongs 2 Family Trust. Mr. Lin Dong is
the sole director of Crossvine Assets Limited with the sole power to
vote on behalf of Crossvine Assets Limited on all matters of TechFaith
requiring shareholder approval. The business address for Lin Dong is
Room 1106, No. 103, Wang Jing, Li Zhe Xi Yuan, Chao Yang District,
Beijing, Peoples Republic of China. 
 Item 7. Major Shareholders and Related Party Transactions
 Major Shareholders
  Related Party Transactions
 Issuance and Sale of Convertible Notes
   Demand Registration Rights
 Form F-3 Registration Rights
 Piggyback Registration Rights
 Expenses of Registration
 Transactions with QUALCOMM
  37




---



##### Table of Contents



Transactions with NEC
   Transactions with SEF
    Transactions with Techfaith Technology and Kang Mu Ni
   Year endedDecember 31, 2007(in thousands)Techfaith Technology
    
    $
    1,047Kang Mu Ni
    
    
    54$
    1,101
  Year endedDecember 31, 2007(in thousands)Kang Mu Ni
    
    $
    201
 38




---



##### Table of Contents



Transactions with an Employee
   Potential Transactions with a Director and Officer
  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
    39




---



##### Table of Contents



Sales PriceHigh
    
    LowAnnual High and Low2006
    
    
    18.00
    
    
    
    6.582007
    
    
    11.13
    
    
    
    4.01Quarterly Highs and LowsFirst Quarter 2006
    
    
    18.00
    
    
    
    10.28Second Quarter 2006
    
    
    15.50
    
    
    
    12.88Third Quarter 2006
    
    
    15.40
    
    
    
    6.58Fourth Quarter 2006
    
    
    11.28
    
    
    
    6.60First 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
    
    
    
    3.40Monthly Highs and LowsDecember 2007
    
    
    6.95
    
    
    
    5.40January 2008
    
    
    6.24
    
    
    
    3.40February 2008
    
    
    6.79
    
    
    
    3.83March 2008
    
    
    5.98
    
    
    
    4.30April 2008
    
    
    6.25
    
    
    
    5.42May 2008
    
    
    6.98
    
    
    
    4.75June 2008
(through June 11, 2008)
    
    
    4.95
    
    
    
    4.26
 Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  
 Item 10. Additional Information
 Share Capital
  Memorandum and Articles of Association
  Material Contracts
  40




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##### Table of Contents



Exchange Controls
     Taxation
  Cayman Islands Taxation
  U.S. Federal Income Taxation
   
    
    banks;
 
    
    certain financial institutions;
 41




---



##### Table of Contents




    
    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;
 
    
    holders that actually or constructively own 10% or more of our voting stock;
 
    
    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.
   
    
    a citizen or resident of the United States;
 
    
    a corporation (or other entity taxable as a corporation) organized under the laws of the
United States, any State thereof or the District of Columbia;
 
    
    an estate whose income is subject to U.S. federal income taxation regardless of its source; or
 
    
    a trust that (1) is subject to the primary supervision of a court within the United States
and the control of one or more U.S. persons for all substantial trust decisions or (2) has a
valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person.
   Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
     42




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##### Table of Contents



Taxation of Disposition of ADSs or Ordinary Shares
  Passive Foreign Investment Company
  
    
    at least 75% of its gross income is passive income, 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 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 year will be subject to the highest tax rate in effect for that year and the
interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to
each such year.
  Information Reporting and Backup Withholding
  43




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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.
 44




---



##### 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
    1)
    
    The absence of an effective and standardized inventory management control, which resulted
in significant financial adjustments which were identified by the auditor.
 45




---



##### Table of Contents



2)
    
    A significant cash transaction in Techfaith Wireless Communication Technology
(Hangzhou) Limited which was not approved properly in accordance with the authorization
control established.
  Attestation Report of the Registered Public Accounting Firm
 Report of Independent Registered Public Accounting Firm
 
      1)
    
    The absence of an effective and standardized inventory
management control which resulted in
significant financial adjustments which were identified by the auditor.2)
    
    A significant cash transaction in Techfaith Wireless Communication Technology (Hangzhou)
Limited which was not approved properly in accordance with the authorization control
established.
  46




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##### Table of Contents



Deloitte Touche Tohmatsu CPA, Ltd.
 Beijing, China, PRC
June 2, 2008
 Changes in internal control over financial reporting
             
 Item 16.A. Audit Committee Financial Expert
  47




---



##### Table of Contents



Item 16.B. Code of Ethics
  
 Item 16.C. Principal Accountant Fees and Services
  For the Year Ended December 31,2006
    
    2007(In thousands of $)Audit fees (1)
    
    
    805
    
    
    
    1,361Tax fees (2)
    
    
    55
    
    
    
    48
 
 (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. 
 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
 48




---



##### 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).4.5
    
    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 (incorporated by reference to
Exhibit 99.5 from our Registration Statement on Form F-1 (file no. 333-123921)
filed with the Securities and Exchange Commission on April 7, 2005).
 49




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##### Table of Contents



ExhibitNumber
    
    Document4.9
    
    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. 50




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##### Table of Contents



SIGNATURES
  CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITEDBy:

/s/
Defu DongName:
    Defu DongTitle:
    Chief Executive Officer  51




---



##### 



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2007
    
    
    F-3CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    
    
    F-5CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
DECEMBER 31, 2005, 2006 AND 2007
    
    
    F-6CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    
    
    F-7NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-9ADDITIONAL INFORMATION  FINANCIAL STATEMENT SCHEDULE I
    
    
    F-40
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
       Deloitte Touche Tohmatsu CPA Ltd.
   F-2




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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 31,2006
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    113,172
    
    
    $
    84,754Restricted cash
    
    
    5,205
    
    
    
    3,389Accounts receivable, net of allowances of $4,448 in 2006
and $3,838 in 2007, respectively
    
    
    37,229
    
    
    
    40,014Notes receivable
    
    
    2,234
    
    
    
    4,020Amounts due from related parties
    
    
    
    
    
    
    1,101Inventories
    
    
    8,546
    
    
    
    50,763Prepaid expenses and other current assets
    
    
    9,120
    
    
    
    10,116Total current assets
    
    $
    175,506
    
    
    $
    194,157Deposits for acquisition of plant, machinery, equipment
and leasehold improvement
    
    
    5,905
    
    
    
    10,177Plant, machinery and equipment, net
    
    
    25,092
    
    
    
    28,275Acquired intangible assets, net
    
    
    355
    
    
    
    1,646Goodwill
    
    
    6
    
    
    
    606Long-term investment
    
    
    850
    
    
    
    TOTAL ASSETS
    
    $
    207,714
    
    
    $
    234,861LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term payable
    
    $
    443
    
    
    $
    1,358Accounts payable
    
    
    6,678
    
    
    
    35,416Notes payable
    
    
    144
    
    
    
    Amount due to related party
    
    
    
    
    
    
    201Accrued expenses and other current liabilities
    
    
    18,812
    
    
    
    14,251Advance from customers
    
    
    5,223
    
    
    
    7,512Deferred revenue
    
    
    5,408
    
    
    
    1,541Income tax payable
    
    
    140
    
    
    
    142Put option liability
    
    
    275
    
    
    
    318Total current liabilities
    
    $
    37,123
    
    
    $
    60,739Long-term payable
    
    $
    398
    
    
    $
    453Total liabilities
    
    $
    37,521
    
    
    $
    61,192
 F-3




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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 31,2006
    
    
    2007Commitments (Note 18)Minority interests
    
    $
    3,843
    
    
    $
    1,660Shareholders equity:Ordinary shares of par value $0.00002:50,000,000,000,000 shares authorized; shares issued and outstanding,
649,692,954 in 2006
and 649,913,136 in 2007
    
    $
    13
    
    
    $
    13Additional paid-in capital
    
    
    109,833
    
    
    
    110,327Treasury stock, at cost (8,655,000 shares as of
December 31, 2006 and 2007)
    
    
    (4,628
    )
    
    
    (4,628
    )Accumulated other comprehensive income
    
    
    5,339
    
    
    
    13,776Statutory reserve
    
    
    6,093
    
    
    
    6,813Retained earnings
    
    
    49,700
    
    
    
    45,708Total shareholders equity
    
    
    166,350
    
    
    
    172,009TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS EQUITY
    
    $
    207,714
    
    
    $
    234,861
  F-4




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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 31,2005
    
    
    2006
    
    
    2007Revenues:Design fees
    
    $
    63,020
    
    
    $
    29,864
    
    
    $
    26,042Royalty income
    
    
    15,651
    
    
    
    7,674
    
    
    
    7,772Component sales
    
    
    11,439
    
    
    
    5,322
    
    
    
    7,854Product sales
    
    
    
    
    
    
    37,944
    
    
    
    101,723Service income
    
    
    
    
    
    
    
    
    
    
    53Total net revenues
    
    $
    90,110
    
    
    $
    80,804
    
    
    $
    143,444Cost of revenues:Design fees
    
    
    26,258
    
    
    
    19,998
    
    
    
    16,882Royalty income
    
    
    
    
    
    
    
    
    
    
    Component sales
    
    
    8,803
    
    
    
    5,264
    
    
    
    8,328Product sales
    
    
    
    
    
    
    29,843
    
    
    
    79,556Service cost
    
    
    
    
    
    
    
    
    
    
    29Total cost of revenues
    
    
    35,061
    
    
    
    55,105
    
    
    
    104,795Gross profit
    
    
    55,049
    
    
    
    25,699
    
    
    
    38,649Operating expenses:General and administrative
    
    
    (9,574
    )
    
    
    (15,110
    )
    
    
    (13,142
    )Research and development
    
    
    (3,447
    )
    
    
    (21,970
    )
    
    
    (30,876
    )Selling and marketing
    
    
    (1,269
    )
    
    
    (2,260
    )
    
    
    (3,422
    )Leasehold improvement impairment
    
    
    
    
    
    
    (1,388
    )
    
    
    Total operating expenses
    
    
    (14,290
    )
    
    
    (40,728
    )
    
    
    (47,440
    )Government subsidy income
    
    
    
    
    
    
    180
    
    
    
    1,734(Loss) income from operations
    
    
    40,759
    
    
    
    (14,849
    )
    
    
    (7,057
    )Interest expense
    
    
    (583
    )
    
    
    (18
    )
    
    
    (166
    )Interest income
    
    
    3,843
    
    
    
    4,879
    
    
    
    3,871Other (expense) income
    
    
    192
    
    
    
    149
    
    
    
    (220
    )Change in fair value of call option embedded
in convertible notes
    
    
    (1,303
    )
    
    
    
    
    
    
    Change in fair value of put option
    
    
    
    
    
    
    (269
    )
    
    
    (43
    )(Loss) income before income taxes
    
    
    42,908
    
    
    
    (10,108
    )
    
    
    (3,615
    )Income taxes
    
    
    (54
    )
    
    
    (100
    )
    
    
    (6
    )(Loss) Income before minority interests
    
    
    42,854
    
    
    
    (10,208
    )
    
    
    (3,621
    )Minority interests
    
    
    (1,469
    )
    
    
    1,808
    
    
    
    1,200Equity in loss of an affiliate
    
    
    
    
    
    
    (393
    )
    
    
    (851
    )Net (loss) income
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Net (loss) income per share:Basic
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )Diluted
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )Weighted average shares used in computation:Basic
    
    
    604,011,009
    
    
    
    656,255,882
    
    
    
    649,807,421Diluted
    
    
    626,626,671
    
    
    
    656,255,882
    
    
    
    649,807,421
  F-5




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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
    
    
    
    
    
    
    
    
    
    
    shareOrdinary shares
    
    
    paid-in
    
    
    Treasury
    
    
    comprehensive
    
    
    Retained
    
    
    Statutory
    
    
    holders
    
    
    ComprehensiveNumber
    
    
    Amount
    
    
    capital
    
    
    stock
    
    
    income
    
    
    earnings
    
    
    reserve
    
    
    equity
    
    

income
(loss)Balance at January 1, 2005
    
    
    500,000,000
    
    
    
    10
    
    
    
    4,832
    
    
    
    
    
    
    
    47
    
    
    
    18,645
    
    
    
    4,556
    
    
    
    28,090
    
    
    $
    18,266Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,441
    
    
    
    
    
    
    
    
    
    
    
    1,441
    
    
    $
    1,441Issuance of shares upon the initial public
offering, net of offering expenses
    
    
    158,183,409
    
    
    
    2
    
    
    
    89,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,493
    
    
    
    Conversion of convertible notes
    
    
    
    
    
    
    1
    
    
    
    15,313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,314
    
    
    
    Unrealized gain on available-for-sale
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    Realized gain on available-for-sale
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,385
    
    
    
    
    
    
    
    41,385
    
    
    
    41,385Provision for statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (633
    )
    
    
    633
    
    
    
    
    
    
    
    Balance at December 31, 2005
    
    
    658,183,409
    
    
    $
    13
    
    
    $
    109,798
    
    
    $
    
    
    
    $
    1,456
    
    
    $
    59,397
    
    
    $
    5,189
    
    
    $
    175,853
    
    
    $
    42,826Foreign 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
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494
    
    
    
    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
    
    
    $
    5,165
 
 *
    
    Representing 577,000 ADSs.  F-6




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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 31,2005
    
    
    2006
    
    
    2007Operating activities:Net (loss) income
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Adjustments to reconcile net income to net cash provided by
operating activities:Loss on disposal of plant, machinery and equipment
    
    
    6
    
    
    
    138
    
    
    
    690Loss on disposal of intangible assets
    
    
    
    
    
    
    110
    
    
    
    Impairment of leasehold improvement
    
    
    
    
    
    
    1,388
    
    
    
    Amortization of acquired intangible assets
    
    
    372
    
    
    
    381
    
    
    
    276Amortization of discount on issuance of convertible notes
    
    
    168
    
    
    
    
    
    
    
    Inventory provision
    
    
    430
    
    
    
    54
    
    
    
    911Warranty provision
    
    
    1,135
    
    
    
    2,004
    
    
    
    1,103Bad debts expense
    
    
    678
    
    
    
    3,770
    
    
    
    336Depreciation and amortization of plant, machinery and equipment
    
    
    4,415
    
    
    
    7,163
    
    
    
    7,145Realised gain on investment in marketable securities
    
    
    (106
    )
    
    
    
    
    
    
    Minority interests
    
    
    1,469
    
    
    
    (1,808
    )
    
    
    (1,200
    )Equity in loss of an affiliate
    
    
    
    
    
    
    393
    
    
    
    851Change in fair value of call option embedded in convertible notes
    
    
    1,303
    
    
    
    
    
    
    
    Change in fair value of put option
    
    
    
    
    
    
    269
    
    
    
    43Amortization of share-based compensation
    
    
    162
    
    
    
    116
    
    
    
    94Reversal of share-based compensation
    
    
    
    
    
    
    (81
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (26,978
    )
    
    
    (6,740
    )
    
    
    (492
    )Notes receivables
    
    
    1,226
    
    
    
    (1,131
    )
    
    
    (1,568
    )Inventories
    
    
    (374
    )
    
    
    (3,522
    )
    
    
    (41,096
    )Prepaid expenses and other current assets
    
    
    1,328
    
    
    
    (7,959
    )
    
    
    399Accounts payable
    
    
    460
    
    
    
    3,481
    
    
    
    26,677Notes payable
    
    
    
    
    
    
    148
    
    
    
    (148
    )Accrued expenses and other current liabilities
    
    
    3,962
    
    
    
    7,366
    
    
    
    (8,094
    )Advance from customers
    
    
    (429
    )
    
    
    4,932
    
    
    
    2,071Deferred revenue
    
    
    (13,716
    )
    
    
    3,667
    
    
    
    (4,073
    )Income tax payable
    
    
    54
    
    
    
    88
    
    
    
    (6
    )Net cash (used) provided by operating activities
    
    
    16,950
    
    
    
    5,434
    
    
    
    (19,353
    )Investing activities:Investment in an affiliate
    
    
    
    
    
    
    (1,243
    )
    
    
    Deposits paid for acquisition of plant, machinery and equipment,
and acquired intangible assets
    
    
    (597
    )
    
    
    (4,711
    )
    
    
    (4,271
    )Purchase of plant, machinery and equipment
    
    
    (8,832
    )
    
    
    (19,082
    )
    
    
    (8,904
    )Proceeds from sale of plant, machinery and equipment
    
    
    13
    
    
    
    29
    
    
    
    85Purchase of marketable securities
    
    
    (15,005
    )
    
    
    
    
    
    
    Purchase of intangible assets
    
    
    (273
    )
    
    
    
    
    
    
    (644
    )Purchase of minority interest of STEP Technologies
    
    
    
    
    
    
    
    
    
    
    (1,361
    )Proceeds from sale of marketable securities
    
    
    19,165
    
    
    
    
    
    
    
    Decrease (increase) in restricted cash
    
    
    
    
    
    
    (5,205
    )
    
    
    1,816Net cash used in investing activities
    
    
    (5,529
    )
    
    
    (30,212
    )
    
    
    (13,279
    )
 F-7




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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 31,2005
    
    
    2006
    
    
    2007Financing activities:Proceeds
from short-term bank borrowings
    
    
    
    
    
    
    
    
    
    
    10,952Repayment of
short-term bank borrowings
    
    
    
    
    
    
    
    
    
    
    (10,952
    )Capital contribution by minority shareholder
    
    
    
    
    
    
    3,000
    
    
    
    Repurchase of ordinary shares from market
    
    
    
    
    
    
    (4,628
    )
    
    
    Proceeds from issuance of shares upon initial public offering,
net of issuance cost of $10,104
    
    
    89,493
    
    
    
    
    
    
    
    Dividend paid to minority shareholder
    
    
    (234
    )
    
    
    (325
    )
    
    
    Net cash (used) provided by financing activities
    
    
    89,259
    
    
    
    (1,953
    )
    
    
    Effect of exchange rate changes
    
    
    1,441
    
    
    
    2,696
    
    
    
    4,214Net (decrease) increase in cash and cash equivalents
    
    
    102,121
    
    
    
    (24,035
    )
    
    
    (28,418
    )Cash and cash equivalents at the beginning of the year
    
    
    35,086
    
    
    
    137,207
    
    
    
    113,172Cash and cash equivalents at the end of the year
    
    $
    137,207
    
    
    
    113,172
    
    
    
    84,754Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    166Income taxes
    
    $
    
    
    
    $
    15
    
    
    $
    6Non-cash financing activities:Conversion of convertible notes into ordinary shares upon the
Groups initial public offering
    
    $
    15,314
    
    
    $
    
    
    
    $
    
  F-8




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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 ACTIVITIESChina Techfaith Wireless Communication Technology Limited (the Company) was incorporated
under the laws of the Cayman Islands on June 25, 2004 and its subsidiaries and variable
interest entity include the following as of December 31, 2007:
 Date of
    
    Place of
    
    PercentageSubsidiaries
    
    incorporation
    
    incorporation
    
    ownershipTechfaith Wireless Communication
    
    
    
    
    
    Peoples Republic of ChinaTechnology (Beijing) Limited
    
    July 26, 2002
    
    (the PRC)
    
    
    100
    %(Techfaith China)Techfaith Wireless Technology
    
    
    
    
    
    British Virgin IslandsGroup Limited (Techfaith BVI)
    
    July 8, 2003
    
    (the BVI)
    
    
    100
    %(formerly known as Techfaith 
Wireless Communication 
Technology Limited)Great Earnest Technology Limited
    
    August 8, 2003
    
    BVI
    
    
    100
    %(Great Earnest)Techfaith Wireless Communication
    
    September 5, 2003
    
    PRC
    
    
    100
    %Technology (Beijing) Limited II
(Techfaith Beijing)Leo Technology Limited
    
    October 15, 2003
    
    BVI
    
    
    100
    %(Leo Technology)STEP Technologies (Beijing)
    
    November 20, 2003
    
    PRC
    
    
    100
    %Co., Ltd. (STEP Technologies)Techfaith Intelligent Handset
    
    December 29, 2003
    
    Hong Kong
    
    
    100
    %Technology
(Hong Kong) Limited
(Techfaith HK)
(formerly known as 
First Achieve Technology Ltd.)Finest Technology Limited
    
    January 8, 2004
    
    BVI
    
    
    100
    %(Finest Technology)Techfaith
Wireless Communication Technology
    
    March 22, 2004
    
    PRC
    
    
    100
    %(Shanghai) Limited
(Techfaith Shanghai)Infoexcel Technology Limited
    
    April 18, 2005
    
    BVI
    
    
    100
    %(Infoexcel Technology)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
    
    August 25, 2005
    
    PRC
    
    
    100
    %Wireless
Communication
Technology (Shenzhen) Limited
(Techfaith Shenzhen)
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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
    
    PercentageSubsidiaries
    
    incorporation
    
    incorporation
    
    ownershipTechfaith Intelligent Handset
    
    September 9, 2005
    
    PRC
    
    
    100
    %Technology (Beijing) Limited
(Techfaith Intelligent Handset Beijing)Charm Faith Limited (Charm Faith)
    
    November 21, 2005
    
    BVI
    
    
    100
    %Techfaith Wireless Communication
    
    April 24, 2006
    
    PRC
    
    
    100
    %Technology (Hangzhou) Limited
(Techfaith Hangzhou)Fair Nice Limited (Fair Nice)
    
    February 26, 2007
    
    BVI
    
    
    100
    %Techfaith Wireless Communication
    
    March 27, 2007
    
    PRC
    
    
    100
    %Technology (Shenyang) Limited
(Techfaith Shenyang )
 Date of
    
    Place of
    
    PercentageVariable interest entity
    
    incorporation
    
    incorporation
    
    ownershipTechfaith Software (China) 
Holding Limited (Techsoft Holding)
    
    March 17, 2006
    
    Cayman Islands
    
    
    70
    %
 These companies have been entities under common control which has established the basis to
consolidate them from their inception. Accordingly, the accompanying financial statements
include the financial statements of the Company, its wholly owned subsidiaries, which
consist of Techfaith China, Techfaith BVI, Great Earnest, Techfaith Beijing, Leo Technology,
STEP Technologies, Techfaith HK, Finest Technology, Techfaith Shanghai, Infoexcel
Technology, Techfaith U.S., Boost Time, Techfaith Shenzhen, Techfaith Intelligent Handset
Beijing, Charm Faith, Techfaith Hangzhou, Fair Nice, Techfaith Shenyang and its variable
interest entity Techsoft Holding. The Company and all of its subsidiaries and the variable
interest entity are collectively referred to as the Group.The Group is principally engaged in the provision of customized handset design solutions,
which span the entire handset development cycle, from market and industry research, through
detailed design and prototype testing, to pilot production and production support. The Group
designs handsets for use on Global System for Mobile Communications (GSM)/General Packet
Radio Services (GPRS), Code Division Multiple Access (CDMA) and Wideband CDMA (WCDMA)
networks based on major baseband technology platforms, including those developed by
QUALCOMM, Inc. (QUALCOMM), Philips AG and Texas Instruments, Inc. In 2006, the Group started
to design and manufacture handsets and smart phones through Electronics Manufacturing
Service (EMS) providers. The Group changed from a handset design house to an original
developed product (ODP) provider.
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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  continuedIn March 2006, the Group entered into Series A Preferred Shares Purchase and Sell Agreement
(the Agreement) with QUALCOMM to establish a 70%-owned subsidiary, Techsoft Holding, which
engaged in the business of developing software applications for wireless communication
devices. According to the Agreement, the Group and QUALCOMM subscribed 70% and 30% of the
issued series A preferred shares of Techsoft Holding, respectively. QUALCOMM is granted the
right to, upon the occurrence of certain conditions, require the Group to purchase back any
or all of its Series A Preferred Shares (Put option); and the right to, upon the
occurrence of certain conditions, purchase any or all of the Series A Preferred Shares held
by the Group at the price and on the terms pre-defined (Call option). The exercise price
payable for each of the option shares shall be the higher of, the original per share
purchase price paid by QUALCOMM or the Group, increased at a continuous compounded growth
rate of ten percent (10%) per annum including the date of full payment of the option price,
as well as any declared and unpaid dividends accrued or accruing thereupon up until the date
of redemption; and the amount equivalent to the business valuation performed by an
independent professional valuation company that is mutually agreed upon by QUALCOMM and the
Group, in proportion to QUALCOMM s percentage of shareholding on a fully-diluted as
converted basis. The terms in the Agreement gives QUALCOMM the unconditional right to
exercise its put option at its discretion, and the Group is expected to absorb the majority
losses in an expected loss calculation. Accordingly, the Group would be the primary
beneficiary of Techsoft Holding.Through above arrangements, under the requirements of FIN 46 (Revised) Consolidation of
Variable Interest Entities (FIN 46 (R)), Techsoft Holding has become the variable
interest entity of the Group, as a result, the financial statements of Techsoft Holding has
been consolidated with the Group since it was established.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of presentationThe consolidated financial statements of the Group have been prepared in accordance with the
accounting principles generally accepted in the United States of America (U.S. GAAP).Basis of consolidationThe consolidated financial statements include the financial statements of the Company, its
subsidiaries and its variable interest entity, Techfaith Software (China) Holding Limited.
All inter-company transactions and balances are eliminated upon consolidation.
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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  continuedUse of estimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Groups financial statements include revenue
recognition, allowance for doubtful accounts, provision for inventory write-down, provision
for warranty, useful lives and impairment for plant, machinery and equipment and intangible
assets, share based compensation expense and valuation allowance for deferred tax assets.Certain significant risks and uncertaintiesThe Group participates in a dynamic high technology industry and believes that changes in
any of the following areas could have a material adverse effect on the Groups future
financial position, results of operations, or cash flows: changes in the overall demand for
customized handset design solutions; competition from other competitors; advances and trends
in new technologies and industry standards; changes in certain strategic relationship or
customer relationships; regulatory or other factors; risks associated with the Groups
ability to attract and retain employees necessary to support its growth; pressures in the
form of new products or price reductions on current products; and changes in third party
manufacturers.Cash and cash equivalentsCash and cash equivalents consist of cash on hand, demand deposits and highly liquid
investments, which are unrestricted as to withdrawal and use, and which have maturities of
three months or less when purchased.Restricted cashThe Groups restricted cash is related to deposits required by banks for issuing letters of
credit. The balance of restricted cash was $5,205 and $3,389 as of December 31, 2006 and
2007, respectively.Notes receivableNotes receivable represents bank and commercial acceptance drafts that are non-interest
bearing and due within one year.
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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  continuedInventoriesInventories are stated at the lower of cost or market. Cost is determined using the weighted
average method. Inventories are adjusted for estimated provisions for obsolescence and
written down to net realizable value based upon estimates of future demand, technology
developments, and market conditions. The inventories balances are net of these provisions of
$499 in 2006 and $1,410 in 2007, respectively.Plant, machinery and equipment, netPlant, machinery and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated on a straight-line basis over the
following estimated useful lives:
 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 assetsThe Group reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Group measures impairment by comparing the carrying value of
the long-lived assets to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected
undiscounted cash flow is less than the carrying amount of the assets, the Group would
recognize an impairment loss based on the fair value of the assets.The Group incurred an impairment loss of $Nil, $1,388 and $Nil for the years ended December
31, 2005, 2006 and 2007, respectively.
 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  continuedGoodwillGoodwill is not amortized but is tested for impairment annually or more frequently if events
or changes in circumstances indicate that it might be impaired. The Group performs its
annual goodwill impairment test on December 31 of each fiscal year for all reporting units.
Goodwill is tested following a two-step process. The first step compares the fair value of
each reporting unit to its carrying amount, including goodwill. If the fair value of each
reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and
the second step will not be required. If the carrying amount of a reporting unit exceeds
its fair value, the second step compares the implied fair value of goodwill to the carrying
value of a reporting units goodwill. The implied fair value of goodwill is determined in a
manner similar to accounting for a business combination with the allocation of the assessed
fair value determined in the first step to the assets and liabilities of the reporting unit.
The excess of the fair value of the reporting unit over the amounts assigned to the assets
and liabilities is the implied fair value of goodwill. An impairment loss is recognized for
any excess in the carrying value of goodwill over the implied fair value of goodwill. There
was no impairment loss on goodwill in 2006 and 2007.Long-term investmentsA company that is not consolidated, but over which the Group exercises significant
influence, is accounted for under the equity method of accounting. Whether or not the Group
exercises significant influence with respect to an affiliate depends on an evaluation of
several factors including, among others, representation on the affiliated companys board of
directors and ownership level, which is generally a 20% to 50% interest in the voting
securities of the affiliated company. Under the equity method of accounting, the affiliated
companys accounts are not reflected within the Groups consolidated balance sheets and
statements of operations; however, the Groups share of the earnings or losses of the
affiliated company is reflected in the caption Equity in loss of an affiliate in the
consolidated statements of operations. The Groups carrying value in an equity method
affiliated company is reflected in the caption long-term investments in the Groups
consolidated balance sheets.When the Groups carrying value in an equity method affiliated company is reduced to zero,
no further losses are recorded in the Groups consolidated financial statements unless the
Group guaranteed obligations of the affiliated company or has committed additional funding.
When the affiliated company subsequently reports income, the Group will not record its share
of such income until it equals the amount of its share of losses not previously recognized.The Group shared the loss of an affiliate for $Nil, $393 and $851 for the years ended
December 31, 2005, 2006 and 2007, respectively.Deferred revenueDeferred revenue represents design fee advances received from customers immediately after
the design contracts are executed. Such advances are not recognized as design fee revenue
until a pre-agreed milestone has been reached.
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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  continuedRevenue recognitionThe Groups revenues are primarily derived from mobile handset design service and sales of
products which include the sale of Feature phone, Smart phone, Printed Circuit Board
Assemble (PCBA), Printed Circuit Board (PCB), wireless modules and other electronic
components. The Group earns its revenue mainly through design fee, royalties, and sales of
products.Design feeDesign fee is a fixed amount paid in instalments according to pre-agreed milestones. In
general, three milestones are identified in the Groups design contracts with customers.
When the mobile handset design receives the approval verifying its conformity with
applicable industry standards, in the case of GSM-based handsets, the full type approval, or
FTA, for its conformity with GSM standards, the Group achieves the first milestone with
respect to the design. When the mobile handset design receives regulatory approval for its
use in the intended country, in the case of China, a China type approval, or CTA, the Group
achieves the second milestone. When the customer accepts the mobile handset design and is
ready to begin mass production of mobile handsets based on the Groups design, the Group
achieves the last milestone, which the Group refers to as shipping acceptance, or SA. The
handset design process normally includes hardware, software, mechanical engineering design,
testing and quality assurance, pilot production, production support and other incidental
support requested by customers. Because the software element of the handset has been deemed
more than incidental for the handset design process taken as a whole, the Company recognizes
revenues in accordance with Statement of Position (SOP) 97-2. The handset design process
requires significant production, development and customization of software, accordingly, as
prescribed by SOP97-2 revenue is recognized using the percentage of completion method in
accordance with SOP81-1, Accounting for Performance of Construction Type and Certain
Performance Type Contracts. The Group recognizes revenue only upon achievement of each
milestone (i.e. FTA, CTA and SA), which is consistent with the use of an output measure. The
milestones can vary depending on the customers requirements. The percentage of completion
designated for each milestone, however, is the percentage that would be obtained by using an
input measure (i.e. labor hours and other relevant costs incurred). The Group believes that
designating the percentage of completion for each milestone based on labor hours and other
relevant costs incurred, as opposed to by reference to the amounts that become billable at
the milestone, is more reflective of the progress completed through the date of the
milestone. In the event that a milestone has not been reached, the associated cost is
deferred and revenue is not recognized until the milestone has been achieved and/or accepted
by the customer.
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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  continuedRevenue recognition continuedDesign fee  continuedIn 2006, the Group began to expand its international customer base by developing handsets on
new technology platforms. These international customers might not subject to the PRC
certification standards mentioned above, namely FTA and CTA, but the pre-agreed milestones
stipulated by contract, such as engineering prototype or EP, semi-production or SP and pilot
production or PP. Achievement of these milestones is verified by customers before revenue is
recognized.RoyaltyIn addition to design fee, the Group also charge royalty to certain customers. The royalty
is calculated at a variable rate based on the volume of mobile handsets manufactured or sold
by a customer. Royalty income is recognized when the confirmation of manufacturing or
selling volume is obtained from customers.Product and component salesRevenue from sales of products and components, including feature phones and smart phones
designed by the Group and manufactured by EMS providers, PCBAs, PCBs, wireless modules and
data cards as well as other electronic components is recognized when persuasive evidence of
an arrangement exists, the fee is fixed or determinable, collection is reasonably assured,
and in the period in which delivery or performance has occurred.Service incomeThe Group provides mobile handset testing outsourcing services to other handset
manufactures. Service income is recognized when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, collection is reasonably assured, and in the
period in which performance has occurred.Product warrantyThe Groups product warranty relates to the provision of bug fixing services to Groups
designed mobile handset for a period of one to three years commencing upon the mass
production of the mobile handset, and warranties to the Groups customers on the sales of
products. Accordingly, the Groups product warranty accrual reflects managements best
estimate of probable liability under its product warranties. Management determines the
warranty based on historical experience and other currently available evidence.
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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  continuedProduct warranty  continued
 Year ended December 31,2006
    
    
    2007Balance at beginning of year
    
    $
    1,643
    
    
    $
    1,250Current period provision
    
    
    2,004
    
    
    
    1,103Utilized during the year
    
    
    (2,397
    )
    
    
    (681
    )Balance at end of year
    
    $
    1,250
    
    
    $
    1,672
 Government subsidies and grantsGovernment subsidies are recognized when received and all the conditions for their receipt
have been met. Government subsidies are paid to the Company after they have completed
certain agreed government endorsed projects. Government subsidies are recognized as subsidy
income in the consolidated statements of income and comprehensive income in the period in
which the related expenditure is recorded. The Group recognized subsidy income of $nil,
$180 and $1,734 for the years ended December 31, 2005, 2006 and 2007, respectively. This
amount is recognized as part of operating income.Government grants are recorded as a liability until earned. The amount of $1,990 and $746
is recorded as a liability on the balance sheet as of December 31, 2006 and 2007,
respectively, which is to be used for specific certified future research and development
projects by the Chinese government.Research and development costsResearch and development expenses are incurred in the development of handset design and
wireless software application. Technological feasibility for the Groups internally
developed products is reached shortly before the products are released to customers. Costs
incurred after technological feasibility has historically been immaterial. Accordingly, the
Group has expensed all research and development costs when incurred.Advertising costsThe Group expenses advertising costs as incurred. Total advertising expenses were $164,
$227 and $300 in 2005, 2006 and 2007, respectively, and have been included as part of
selling and marketing expenses.
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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  continuedForeign currency translation  continuedThe functional currency of the Groups subsidiaries established in PRC is Renminbi (RMB).
Transactions denominated in currencies other than RMB are translated into RMB at the
exchange rates quoted by the Federal Reserve Bank of New York at the balance sheet dates.
The resulting exchange differences are included in the statement of operations.The Company has determined that the U.S. dollar is its functional and reporting currency.
Accordingly, assets and liabilities are translated using exchange rates in effect at each
year end and average exchange rates are used for the consolidated statements of operations.
Translation adjustments resulting from translation of these consolidated financial
statements are reflected as accumulated other comprehensive income included in the
shareholders equity.Income taxesDeferred income taxes are provided using the asset and liability method. Under this method,
deferred income taxes are recognized for tax credits and net operating losses available for
carry-forwards and significant temporary differences. Deferred tax assets and liabilities
are classified as current or non-current based upon the classification of the related asset
or liability in the financial statements or the expected timing of their reversal if they do
not relate to a specific asset or liability. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not that some portion of,
or all of, the deferred tax assets will not be realized. Current income taxes are provided
for in accordance with the laws and regulations applicable to the Group as enacted by the
relevant tax authorities.In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. The Group has adopted FIN 48 with effect from January 1, 2007.
The adoption of FIN 48 had no significant impact on the Groups accounting for income taxes
for the year ended December 31, 2007. The Group did not incur any interest and penalties
related to potential underpaid income tax expenses. In the opinion of directors of the
Company, the adoption of FIN 48 will not have a significant impact on the unrecognized tax
benefits within 12 months from December 31, 2007.
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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  continuedValue added tax (VAT) and VAT refundVAT on sales is calculated at 17% on revenue from product and component sales and paid after
deducting input VAT on purchases. Net VAT balance between input VAT and output VAT is
reflected in the account other taxes payable or receivable.For products sold to overseas customers by PRC entities, the Group can pay VAT at 17% first
and then receive a refund of 13% for module sales and 17% for other products sales after it
is paid. The Group records VAT refund receivables on accrual basis. VAT refund is recorded
as a deduction to VAT payable on the consolidated balance sheets.Comprehensive income (loss)Comprehensive income (loss) included net income (loss), unrealized gains and losses on
investments and foreign currency translation adjustments and is reported in the consolidated
statement of shareholders equity and comprehensive income.Financial instrumentsFinancial instruments consist of cash and cash equivalents, restricted cash, accounts
receivable and accounts payable. The carrying values of all of these financial instruments
approximate their fair values due to the short-term nature of these instruments. The Group
does not use derivative instruments to manage risks.Concentration of credit riskFinancial instruments that potentially expose the Group to concentrations of credit risk
consist primarily of cash and cash equivalents, and accounts receivable. The Group places
its cash and cash equivalents with financial institutions with high-credit ratings and
quality.The Group conducts credit evaluations of customers and generally does not require collateral
or other security from its customers; however, upfront deposit based on a portion of the
design fee under the contract will generally be required to be received when the design
contract is entered into. The Group establishes an allowance for doubtful accounts primarily
based upon the age of the receivables and factors surrounding the credit risk of specific
customers. Information relating to the Groups major customers is summarized in Note 19.
 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  continuedShare-based compensationThe Group early 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.Share-based payment transactions with employees, such as share options and restricted
shares, are measured based on the grant-date fair value of the equity instrument issued in
accordance with SFAS 123(R), and recognized as compensation expense over the period during
which an employee is required to provide service in exchange for the award, which generally
is the vesting period, based on graded vesting attribution method, with a corresponding
impact reflected in additional paid-in capital.Net (loss) income per shareBasic net (loss) income per ordinary share is computed by dividing net (loss) income
attributable to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. Diluted net (loss) income per ordinary share reflects the
potential dilution that could occur if securities or other contracts to issue ordinary
shares were exercised or converted into ordinary shares. Ordinary share equivalents are
excluded from the computation of the diluted net loss per share in periods when their effect
would be anti-dilutive.Recently issued accounting pronouncementsIn September 2006, the FASB issued SFAS 157, Fair Value Measurements, which provides
enhanced guidance for using fair value to measure assets and liabilities. This standard also
responds to investors requests for expanded information about the extent to which companies
measure assets and liabilities at fair value, the information used to measure fair value,
and the effect of fair value measurements on earnings. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007
(fiscal years beginning after November 15, 2008 for certain non-financial assets and
liabilities), and interim periods within those fiscal years. The Group does not expect the
adoption of SFAS 157 to have a significant effect on the Groups consolidated financial
statements.
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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  continuedRecently issued accounting pronouncements- continuedIn February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115. SFAS 159 provides
companies with an option to report selected financial assets and liabilities at fair value.
The standard requires companies to provide additional information that will help investors
and other users of financial statements to more easily understand the effect of the
companys choice to use fair value on its earnings. It also requires entities to display the
fair value of those assets and liabilities for which the company has chosen to use fair
value on the face of the balance sheet. This Statement is effective as of the beginning of
an entitys first fiscal year beginning after November 15,
2007. The Group does not expect
the adoption of SFAS 159 will have a significant effect on the Groups consolidated
financial statements.In December 2007, the FASB issued SFAS 141R, Business Combination, to improve reporting by
creating greater consistency in the accounting and financial reporting of business
combinations. The standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all assets
acquired and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the nature and
financial effect of the business combination. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the first annual reporting period
beginning on or after December 15, 2008. Early adoption is prohibited. The Group has not
yet begun the process of assessing the potential impact the adoption of SFAS No. 141R may
have on its consolidated financial position or results of operations.In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements to improve the relevance, comparability, and transparency of financial
information provided to investors by requiring all entities to report non-controlling
(minority) interests in subsidiaries in the same way as required in the consolidated
financial statements. Moreover, SFAS 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and non-controlling interests by requiring
they be treated as equity transactions. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Group has not yet begun the process of assessing the potential
impact the adoption of SFAS 160 may have on its consolidated financial position or results
of operations.In March 2008, The FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities. The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an entitys financial
position, financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The Group has not yet
begun the process of assessing the potential impact the adoption of FASB No. 161 may have on
its consolidated financial position or results of operations.
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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 TECHNOLOGIESOn March 31, 2007, the Group acquired an additional 30% equity interest in STEP
Technologies, a subsidiary of the Group. The fair value of equity interest of STEP
Technologies was determined after considering a number of factors, including the result of a
third-party appraisal by American Appraisal Limited. Upon the completion of the transaction,
the Groups total equity interest in STEP Technologies increased from 70% to 100%. The
acquired net assets were recorded at their fair market value at the date of acquisition. The
net book value of the minority interest in STEP Technologies on the date of acquisition
totalled US$983, which was acquired by the Group for $1,361 in cash. The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed on the
acquisition of 30% equity interest in 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
 4.
    
    ACCOUNTS RECEIVABLEAccounts receivable consists of the following:
 December 31,2006
    
    
    2007Billed receivables
    
    $
    34,057
    
    
    $
    38,822Unbilled receivables
    
    
    3,172
    
    
    
    1,192$
    37,229
    
    
    $
    40,014
 Unbilled receivables represent amounts earned under design service contracts in progress but
not billable at the respective balance sheet dates. These amounts become billable according
to the contract terms, which usually consider the achievement of certain milestones or
completion of the project. The Group anticipates that substantially all of such unbilled
amounts will be billed and collected within twelve months of balance sheet date.
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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 continuedMovement of allowance for doubtful accounts is as follows:
 December 31,2005
    
    
    2006
    
    
    2007Balance at beginning of year
    
    $
    
    
    
    $
    678
    
    
    $
    4,448Charge to expenses
    
    
    678
    
    
    
    3,744
    
    
    
    44Utilized during the year
    
    
    
    
    
    
    
    
    
    
    (946
    )Exchange difference
    
    
    
    
    
    
    26
    
    
    
    292Balance at end of year
    
    $
    678
    
    
    $
    4,448
    
    
    $
    3,838
 5.
    
    INVENTORIESInventories consist of the following:
 December 31,2006
    
    
    2007Work in progress
    
    $
    4,877
    
    
    $
    714Raw materials
    
    
    3,323
    
    
    
    46,670Finished goods
    
    
    346
    
    
    
    3,379Inventories, net
    
    $
    8,546
    
    
    $
    50,763
 6.
    
    PREPAID EXPENSES AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consist of the following:
 December 31,2006
    
    
    2007Prepaid testing and tooling fee
    
    $
    192
    
    
    $
    465Prepaid software license fee
    
    
    191
    
    
    
    660Prepaid commercial insurance
    
    
    127
    
    
    
    100Other prepaid expenses
    
    
    165
    
    
    
    121Interest receivable
    
    
    776
    
    
    
    522Staff advances
    
    
    312
    
    
    
    464Deposits
    
    
    124
    
    
    
    819Social insurance borne by employees
    
    
    512
    
    
    
    712Value added taxes recoverable
    
    
    
    
    
    
    2,788Advance to EMS providers
    
    
    6,346
    
    
    
    3,204Others
    
    
    375
    
    
    
    261$
    9,120
    
    
    $
    10,116
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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)
 7.
    
    PLANT, MACHINERY AND EQUIPMENT, NETPlant, machinery and equipment, net consist of the following:
 December 31,2006
    
    
    2007Office building
    
    $
    11,507
    
    
    $
    17,602Leasehold improvements
    
    
    5,504
    
    
    
    2,605Motor vehicles
    
    
    535
    
    
    
    775Plant and machinery
    
    
    11,596
    
    
    
    12,563Furniture, fixtures and equipment
    
    
    6,397
    
    
    
    5,712Software
    
    
    5,569
    
    
    
    6,930Total
    
    
    41,108
    
    
    
    46,187Less: Accumulated depreciation and amortization
    
    
    (14,599
    )
    
    
    (17,912
    )Leasehold improvement impairment
    
    
    (1,417
    )
    
    
    Plant, machinery and equipment, net
    
    $
    25,092
    
    
    $
    28,275
 The Group paid deposits for acquisitions of plant, machinery and equipment, amounted to
$5,905 and $10,177 as of December 31, 2006 and 2007, respectively. Due to relocation of
office building of Techfaith China, the Group incurred impairment loss on leasehold
improvement in 2006.8.
    
    ACQUIRED INTANGIBLE ASSETS, NETAcquired licenses:
 December 31,2006
    
    
    2007Cost
    
    
    927
    
    
    
    2,494Accumulated amortization
    
    
    (572
    )
    
    
    (848
    )Acquired licenses, net
    
    $
    355
    
    
    $
    1,646
   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)
 9.
    
    LONG-TERM INVESTMENTOn July 12, 2005, CK Techfaith Communication Technology Limited (CK Techfaith) was
established by Techfaith BVI and CK Telecom Inc. in BVI. CK Techfaiths registered capital
is $2,735, of which Techfaith BVI and CK Telecom Inc. injected $1,243 and $1,492 in March
2006, and owns 45% and 55% equity interest, respectively. The company is principally engaged
in the provision of customized handset design solutions.In 2007, CK Techfaith was in an operating loss. Techfaith BVI fully recognized the loss
against its investment.Long-term investment in an affiliate
 Balance at beginning of year
    
    $
    850Exchange diff
    
    
    1Investment cost
    
    
    Less: equity in loss of an affiliate
    
    
    (851
    )Balance at end of year
    
    $
    
   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)
 10.
    
    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESAccrued expenses and other current liabilities consist of the following:
 December 31,2006
    
    
    2007Accrued professional fees
    
    $
    1,247
    
    
    $
    1,122Payable for acquisition of plant,
machinery and equipment
    
    
    5,103
    
    
    
    Accrued wages
    
    
    3,140
    
    
    
    2,404Warranty provision
    
    
    1,250
    
    
    
    1,672Business tax, value added tax and
other tax payables
    
    
    568
    
    
    
    474Accrued testing fee
    
    
    690
    
    
    
    1,367Government grants
    
    
    1,990
    
    
    
    746Rental payable
    
    
    271
    
    
    
    114Social insurance payables
    
    
    2,325
    
    
    
    3,319Customer deposits for minimum purchase
    
    
    562
    
    
    
    294Customer prepayment for materials
    
    
    455
    
    
    
    Accrued royalty and license fee
    
    
    481
    
    
    
    1,755Other
    
    
    730
    
    
    
    984$
    18,812
    
    
    $
    14,251
 11.
    
    INCOME TAXESThe Company is a tax exempted company incorporated in the Cayman Islands.Under the current BVI law, income from Techfaith BVI, Great Earnest, Leo Technology, Finest
Technology, Infoexcel Technology, Boost Time, Charm Faith and Fair Nice is not subject to
taxation.No provision for Hong Kong Profits Tax was made for the years ended December 31, 2006 and
2007 on the basis that Techfaith HK did not have any assessable profits arising in or
derived from Hong Kong for the years.No provision for United States federal and state income taxes was made for the years ended
December 31, 2006 and 2007 on the basis that Techfaith U.S. did not have any assessable
profits for the years.
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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.
    
    INCOME TAXES  continuedThe subsidiaries incorporated in the PRC are governed by the Income Tax Law of the PRC
Concerning Foreign Investment Enterprises and Foreign Enterprises and various local income
tax laws (Income Tax Laws). Pursuant to the PRC Income Tax Laws, the foreign investment
enterprises are subject to income tax at a statutory rate of 33% (30% of state income tax
plus 3% local income tax) on PRC taxable income. However, preferential tax treatment as new
and high technology companies has been agreed for Techfaith China, Techfaith Beijing, STEP
Technologies and Techfaith Intelligent Handset Beijing with the relevant tax authorities and
effective in 2003, 2003, 2004 and 2006 respectively. All new and high technology companies
are entitled to a preferential tax rate of 15% and are entitled to a three-year exemption
from income tax, followed by a 50% reduction in tax rates for the succeeding three years, in
accordance with the Income Tax Laws of the PRC. Techfaith Shanghai is qualified as
productive enterprise and has been agreed with the relevant tax authorities for a two-year
exemption from income tax, followed by a 50% reduction in tax rates for the succeeding three
years effective 2005. Techfaith Shenzhen, is also qualified as productive enterprise and
has been agreed by the relevant tax authorities to entitle to a two-year exemption from
income tax, followed by a 50% reduction in tax rate for succeeding three years effective
upon the first assessable profit year. Techfaith Hangzhou, is also qualified as productive
enterprise and has been agreed by the relevant tax authorities to entitle to a two-year
exemption from income tax, followed by a 50% reduction in tax rate for succeeding three
years effective upon the first assessable profit year. Techfaith Software (China) Limited
(TechSoft), a 100% owned subsidiary of Techsoft Holding is qualified as productive
enterprise and has been agreed by the relevant tax authorities to entitle to a two-year
exemption from income tax, followed by a 50% reduction in tax rate for succeeding three
years effective upon the first assessable profit year. Techfaith Shenyang is subject to
income tax at 33% on PRC taxable income.On March 16, 2007, the National Peoples Congress adopted the Enterprise Income Tax Law (the
New Income Tax Law), which became effective from January 1, 2008 and replaced the existing
separate income tax laws for domestic enterprises and foreign-invested enterprises, which
are PRC subsidiaries of the Group, by adopting a unified income tax rate of 25% for most
enterprises.The existing preferential tax treatments granted to Techfaith China, Techfaith Beijing, STEP
Technologies and Techfaith Intelligent Handset Beijing which each previously qualified as a
high and new technology enterprise entitled them to a tax rate of 15%. Under the New
Income Tax Law if they wish to qualify for such a preferential rate for years commencing on
January 1 2008 they will need to qualify as a high and new technology enterprise strongly
supported by the State under the new rules. Until these subsidiaries receive official
approval for this new status, they will be subject to the statutory 25% tax rate and
therefore have used such rate in the calculation of our deferred tax balances.
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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.
    
    INCOME TAXES  continuedUnder the New Income Tax Law effective from January 1, 2008, the rules for determining
whether an entity is resident in the PRC for tax purposes have changed and the determination
of residence depends amongst other things on the place of actual management. If the
Company, or its non-PRC subsidiaries, were to be determined to be PRC resident for tax
purposes it, or they, would be liable to tax in the PRC on worldwide income including the
income arising in jurisdictions outside the PRC. The Company is still evaluating its
resident status under the new law and related guidance.If the Company were to be non-resident for PRC tax purposes, dividends paid to it out of
profits earned after January 1, 2008 would be subject to a withholding tax. In the case of
dividends paid by PRC subsidiaries to their foreign investors, the withholding tax would be
10%, unless any such foreign investors jurisdiction of incorporation has a tax treaty with
China that provides for a different withholding arrangement.Aggregate undistributed earnings of the Companys
subsidiaries, VIE and its VIEs
subsidiaries located in the PRC that are available for distribution to the Company of
approximately $62,109 at December 31, 2007 are considered to be indefinitely reinvested
under APB opinion No. 23, and accordingly, no provision has been made for the Chinese
dividend withholding taxes that would be payable upon the distribution of those amounts to
the Company. The Chinese tax authorities have also clarified that distributions made out of
pre January 1, 2008 retained earnings will not be subject to the withholding tax.The Group does not have any present plan to pay any cash dividends on its ordinary shares in
the foreseeable future. It intends to retain most of its available funds and any future
earnings for use in the operation and expansion of its business. As such, the Group does not
accrue any withholding tax regarding dividends for Year 2007.The current and deferred components of the income tax expense appearing in the consolidated
statements of operation are as follows:
 Year ended December 31,2005
    
    
    2006
    
    
    2007Current tax
    
    $
    54
    
    
    $
    100
    
    
    $
    6Deferred tax
    
    
    
    
    
    
    
    
    
    
    $
    54
    
    
    $
    100
    
    
    $
    6
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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.
    
    INCOME TAXES  continuedThe principal components of the Groups deferred tax assets and liabilities are as follows:
 December 31,2006
    
    
    2007Deferred tax assets:Depreciation and amortization
    
    $
    544
    
    
    $
    754Expenditure deductible for tax purpose
in future years warranty provision
    
    
    45
    
    
    
    72 bad debts provision
    
    
    298
    
    
    
    194 inventory provision
    
    
    33
    
    
    
    36Deferred revenue
    
    
    156
    
    
    
    991Net operating loss carry forwards
    
    
    381
    
    
    
    6,872Valuation allowance
    
    
    (1,457
    )
    
    
    (8,919
    )$
    
    
    
    $
    
   Year ended December 31,2005
    
    
    2006
    
    
    2007Tax provision at PRC enterprise
income tax rate of 33%
    
    $
    14,160
    
    
    $
    (3,336
    )
    
    $
    (1,477
    )Expenses not deductible for tax purposes
    
    
    
    
    
    
    245
    
    
    
    71Tax exemption granted to PRC subsidiaries
    
    
    (12,971
    )
    
    
    (2,331
    )
    
    
    (3,339
    )Effect of the different income tax rates
in other jurisdiction
    
    
    (1,081
    )
    
    
    (2,322
    )
    
    
    597Tax effect of tax losses not recognized
    
    
    129
    
    
    
    9,058
    
    
    
    11,616Changes in valuation allowances
    
    
    (183
    )
    
    
    (1,214
    )
    
    
    (1,614
    )Changes in income tax rate
    
    
    
    
    
    
    
    
    
    
    (5,848
    )$
    54
    
    
    $
    100
    
    
    $
    6
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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.
    
    INCOME TAXES  continuedWithout the tax exemptions, income tax expense would have been increased by approximately
$12,971, $2,331 and $3,339 for the year ended December 31, 2005, 2006 and 2007,
respectively, representing a decrease in the basic and diluted earnings per share of $0.02,
$0.01 and $0.01, $0.02, $0.01 and $0.01 for the year ended December 31, 2005, 2006 and 2007,
respectively.12.
    
    Put option liability
 Balance at beginning of year
    
    $
    275Change in fair value of put option
    
    
    43Balance at end of year
    
    $
    318
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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.
    
    CONVERTIBLE NOTESOn December 19, 2003, Techfaith BVI issued eight convertible notes in an aggregate principal
amount of $4,000 to a strategic investor (the 1st Notes). The 1st Notes were
interest-free; however, should any dividend be declared and distributed by Techfaith BVI, a
special interest payment calculated based on an as converted basis as if the notes had
been converted into ordinary shares of Techfaith BVI, was payable to the noteholder. The
conversion price for the notes was subject to certain adjustments and was $0.234 per
ordinary share of Techfaith BVI initially. The holder of the 1st Notes could convert the
notes into such shares at any time during the period from the date of issuance to December
19, 2005 or the date of listing of the shares of the Company on The Stock Exchange of Hong
Kong Limited, whichever was earlier.On April 16, 2004, the 1st Notes were, at the election of the noteholder, cancelled and
replaced with new notes with the same principal amount, which was issued by Techfaith BVI
concurrently with the issuance of additional convertible notes in an aggregate principal
amount of $10,000 to three other strategic investors (hereinafter collectively referred to
as 2nd Notes) pursuant to a note subscription and rights agreement dated April 9, 2004
(the Agreement) with the same interest terms as the 1st Notes. The conversion price for
the 2nd Notes was $0.212 per ordinary share of Techfaith BVI, subject to certain adjustments
and could be converted into such shares at any time from the date of issuance to April 16,
2007. The notes not previously converted or repaid, would be automatically converted into
ordinary shares of Techfaith BVI or its parent company without any further action of any
party, into that number of ordinary shares pursuant to the then effective conversion price,
upon the closing of Techfaith BVIs or its parent companys initial public offering or a
substantial sale of the shares in Techfaith BVI pursuant to the relevant terms as stipulated
in the Agreement. After April 16, 2007, the holders of the then outstanding notes may
require Techfaith BVI to redeem all or part of the notes upon occurrence of certain events,
including an event of default or Techfaith BVIs merger or consolidation with another
entity. The redemption price is the greater of (a) principal amount plus accrued and unpaid
interest or (b) the fair value of the ordinary shares into which such notes are convertible.The embedded conversion option of the convertible notes has been recorded at its fair value
of $2,818 at the issuance and accounted for separately as a derivative liability. The Group
accounted for the derivative liability relating to the conversion option by adjusting the
liability to its estimated fair value at each subsequent balance sheet date before the
conversion, with adjustments recorded as other non-operating income or expense.The holders of the 2nd Notes had on April 1, 2005 waived their rights to require the Group
to redeem the 2nd Notes at the holders election upon occurrence of certain events after
April 16, 2007, thereby ceased the adjustment of the liabilities to its estimated fair value
at each reporting date.Upon the completion of initial public offering of American Depositary Shares (ADSs) of the
Company on May 6, 2005, all the then outstanding convertible notes were converted
automatically into shares of the Company pursuant to the terms of the Agreement.
 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)
 14.
    
    SHARE-BASED COMPENSATIONStock optionIn March 2005, the Group adopted the 2005 Share Incentive Plan (the Plan) which allows the
Group to offer a variety of incentive awards to employees and directors of the Group. For
the year ended December 31, 2005, options to purchase 40,000,000 ordinary shares were
authorized under the Plan. Under the terms of the Plan, options are generally granted at
prices equal to the fair market value of the Groups shares listed on NASDAQ and expire 10
years from the date of grant. The options vest in accordance with the terms of the
agreement separately entered into by the Group and grantee at the time of the grant.In 2005, the Group granted 263,272 stock options to purchase ordinary shares to two
independent directors which would vest entirely in November 2005. There are 39,736,728
remaining options to be issued under the Plan.In March 2006, the Group granted 131,636 stock options to an independent director which was
vested entirely on the grant date. Share based compensation expense of $59 was recognized
upon grant of option of which the fair value on the grant date was $0.45. In August 2006,
the Group cancelled the above mentioned stock options and issued 65,818 restricted shares as
a replacement, which was fully vested immediately. Total fair value of stock options
cancelled was $35 with each share option valued at $0.27 while total fair value of
restricted shares as of the grant date was $38 with each restricted share valued at $0.58,
an additional compensation expense of $3 was recognized in 2006 upon
cancellation of stock options and issuance of restricted shares.The fair value of the options granted is estimated on the date of grant using Black-Scholes
option pricing model with the following assumptions used.Option grants to independent directors
 Average risk-free rate of return
    
    
    4.1%Weighted average expected option life
    
    
    10 yearsVolatility rate
    
    
    35%Dividend yield
    
    
    Nil
    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)
 14.
    
    SHARE-BASED COMPENSATION  continuedRestricted stock
 Number ofrestricted stockUnvested at January 1, 2007
    
    
    413,727Granted during the year
    
    
    65,818Vested during the year
    
    
    (220,182
    )Unvested at December 31, 2007
    
    
    259,363
      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)
 15.
    
    ORDINARY SHARESIn March 2005, the Groups shareholders approved a 50,000-for-1 share split. All share and
per share data have been restated to give retroactive effect to this share split.In May 2005, the Group offered 6,143,045 ADSs, representing 92,145,675 ordinary shares, to
the public and listed the ADSs on the NASDAQ stock market.Upon the Groups initial public offering in May 2005, all of the outstanding convertible
notes were converted into an aggregate of 66,037,734 ordinary shares of the Group.During 2006, the Group purchased 577,000 ADSs, representing 8,655,000 ordinary shares from
the NASDAQ stock market for treasury stock.16.
    
    RELATED PARTY TRANSACTIONSIn 2005, the group sold components to a corporate customer, in which 30% of shareholding is
owned by an employee of the Group. Total net revenues for 2005 amounted to $1,622 and the
related accounts receivable as of December 2005 was $1,622. The balance was collected during
2006.In 2006, there was no transaction with related parties.In 2007, the Group purchased raw materials from its related parties, Techfaith Technology
(Shenyang) Ltd. (Techfaith Technology) and Kang Mu Ni Electronics (Hang Zhou) Ltd. (Kang
Mu Ni) for $34 and $523, respectively. Techfaith Technology and Kang Mu Ni are subsidiaries
of Techfaith Electronics Limited, a company established in September 2007, of which the
Groups Founder and CEO holds 43% equity interest.As of December 31, 2007, amounts due from related parties are as follows:
 Year endedDecember 31, 2007Techfaith Technology
    
    $
    1,047Kang Mu Ni
    
    
    54$
    1,101
  Year endedDecember 31, 2007Kang Mu Ni
    
    $
    201
 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)
 17.
    
    SEGMENT AND GEOGRAPHIC INFORMATIONThe Group follows the provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting information
about operating segments. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.The Groups chief operating decision maker has been identified as the Chief Executive
Officer, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Group. The Group operates and manages three business
segments, handset design, product sales as well as wireless software and application. As
the business of wireless software and application is in the start-up stage and therefore no
segment results were recorded in the current year, and only two segments are presented. The
Group primarily generates its revenues from customers in the PRC, and accordingly, no
geographical information is presented.
 Year ended December 31,2005
    
    
    2006
    
    
    2007Revenue:Design contract related revenue
    
    $
    90,110
    
    
    $
    42,860
    
    
    $
    41,721Product sales
    
    
    
    
    
    
    37,944
    
    
    
    101,723Total revenue
    
    
    90,110
    
    
    
    80,804
    
    
    
    143,444Cost of sales:Design contract related revenue
    
    
    35,061
    
    
    
    25,262
    
    
    
    25,239Product sales
    
    
    
    
    
    
    29,843
    
    
    
    79,556Total cost of revenue
    
    
    35,061
    
    
    
    55,105
    
    
    
    104,795Gross profit
    
    $
    55,049
    
    
    $
    25,699
    
    
    $
    38,649
 Geographic informationThe Group operates in the PRC and all of the Groups
long-lived assets are located in the
PRC.
 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)
 18.
    
    COMMITMENTS
 (a)
    
    Purchase commitmentsThe Group made license fee payment to software provider for PCBA and Smart phone
under non-cancellable agreements which expire in 2009. License fee under purchase
commitments for the years ended December 31, 2005, 2006 and 2007 were $nil, $671 and
$2,176, respectively.Future minimum payments under non-cancellable license fee agreements as of December
31, 2007 were as follows:
 Fiscal year ending2008
    
    $
    1,6762009
    
    
    500Total
    
    $
    2,176
 The Group also used EMS providers to provide manufacturing services for its products.
During the normal course of business, in order to reduce manufacturing lead times
and ensure adequate component supply, the Group enters into contract with certain
manufacturers that allow them to procure inventory based on criteria defined by the
Group. Future minimum purchases under non-cancellable contracts were $20,098 and
$20,774 as of December 31, 2006 and 2007.(b)
    
    Operating lease as lesseeThe Group leases certain office premises under non-cancellable leases, which expire
in 2008. Rental expenses under operating leases for the years ended December 31,
2005, 2006 and 2007 were $963, $2,008 and $684 respectively.Future minimum lease payments under non-cancellable operating lease agreements as of
December 31, 2007 were $532, which are due in 2008.(c)
    
    Capital commitmentsCapital commitments for purchase of plant, machinery and equipment as of December 31,
2005, 2006 and 2007 were $418, $1,700, and $1,964, respectively.
 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)
 19.
    
    MAJOR CUSTOMERSThe following table summarizes net revenues and accounts receivable for customers that
accounted for 10% or more of the Groups net revenues and accounts receivable:
 Net revenuesYear ended December 31,2005
    
    2006
    
    2007A
    
    
    N/A
    
    
    
    15.6
    %
    
    
    N/AB
    
    
    41.2
    %
    
    
    N/A
    
    
    
    N/AC
    
    
    N/A
    %
    
    
    N/A
    
    
    
    11
    %41.2
    %
    
    
    15.6
    %
    
    
    11
    %
 Accounts receivableYear ended December 31,2005
    
    2006
    
    2007A
    
    
    N/A
    %
    
    
    31.3
    %
    
    
    N/A
    %B
    
    
    44.8
    %
    
    
    19.2
    %
    
    
    N/A
    %D
    
    
    15.8
    %
    
    
    N/A
    %
    
    
    25.1
    %60.6
    %
    
    
    50.5
    %
    
    
    25.1
    %
 20.
    
    NET (LOSS) INCOME PER SHAREThe following table sets forth the computation of basic and diluted net (loss) income per
share for the years indicated:
 Year ended December 31,2005
    
    
    2006
    
    
    2007Net (loss) income (numerator), basic
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Effect of dilutive securities: convertible notes
    
    
    490
    
    
    
    
    
    
    
    Net (loss) income (numerator), diluted
    
    $
    41,875
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Shares (denominator):Weighted average ordinary shares outstanding used
in computing basic net income per share
    
    
    604,011,009
    
    
    
    656,255,882
    
    
    
    649,807,421Effect of dilutive securities:Weighted average shares from assumed conversions
of convertible notes
    
    
    22,615,662
    
    
    
    
    
    
    
    Weighted average shares used in computing
diluted net income per share
    
    
    626,626,671
    
    
    
    656,255,882
    
    
    
    649,807,421Net (loss) income per share, basic
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )Net (loss) income per share, diluted
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
 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)
 20.
    
    NET (LOSS) INCOME PER SHARE  continuedAs of December 31, 2006 and 2007, the Group had 545,363 and 390,999 ordinary shares
equivalents outstanding that could have potentially diluted basic (loss) income per share in
the future, but which were excluded in the computation of diluted (loss) income per share in
the years presented, as their effect would have been anti-dilutive.21.
    
    MAINLAND CHINA CONTRIBUTION AND PROFIT APPROPRIATIONFull time employees of the Group in the PRC participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided
to employees. Chinese labor regulations require the Group to accrue for these benefits based
on certain percentages of the employees salaries. The total provisions for such employee
benefits were $1,547, $5,046 and $5,304 for the years ended December 31, 2005, 2006 and
2007, respectively.The Group is required to make contributions to the plan out of the amounts accrued for
medical and pension benefits to relevant local labor bureaus. The contributions for the
years ended December 31, 2005, 2006 and 2007 amounted to $1,101, $3,802 and $3,863
respectively. The local labor bureaus are responsible for the medical benefits and pension
liability to be paid to these employees. The Group has no further commitments beyond its
monthly contribution.Pursuant to the laws applicable to the PRCs Foreign Investment Enterprises, the Companys
subsidiaries in the PRC registered as foreign-owned enterprise must make appropriations from
after-tax profit to non-distributable reserve funds as determined by the Board of Directors
of the relevant PRC subsidiaries. These reserves include a (1) general reserve, (2)
enterprise expansion fund and (3) staff bonus and welfare fund. Subject to certain
cumulative limits, the general reserve fund requires annual appropriations of not less than
10% of after-tax profit (as determined under accounting principles and financial regulations
applicable to PRC enterprises at each year-end); the other fund appropriations are at the
Groups discretion. These reserve funds can only be used for specific purposes and are not
distributable as cash dividends. Prior to the conversion into wholly foreign-owned
enterprises, Techfaith China and Techfaith Beijing, as domestic enterprises established in
the PRC, were also subject to similar statutory reserve funds requirements. The Company has
made appropriation to these statutory reserve funds of $904 and $720 for the year ended
December 31, 2006 and 2007, respectively.
 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)
 22.
    
    STATUTORY RESERVESAs stipulated by the relevant law and regulations in the PRC, the Groups subsidiary and
variable interest entity in the PRC are required to maintain non-distributable statutory
surplus reserve. Appropriations to the statutory surplus reserve are required to be made at
not less than 10% of profit after taxes as reported in these entities statutory financial
statements prepared under PRC GAAP. Once appropriated, these amounts are not available for
future distribution to owners or shareholders. Once the general reserve is accumulated to
50% of these entities registered capital, these entities can choose not to provide more
reserves. The statutory reserve may be applied against prior year losses, if any, and may be
used for general business expansion and production and an increase in registered capital of
these entities. Amounts contributed to the statutory reserve were $6,093 and $6,813 as of
December 31, 2006 and 2007, respectively.
 F-39




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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 31,2006
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,346
    
    
    $
    23,010Amounts due from subsidiaries
    
    
    58,014
    
    
    
    78,414Prepaid expenses and other current assets
    
    
    174
    
    
    
    164Total current assets
    
    $
    99,534
    
    
    $
    101,588Goodwill
    
    
    6
    
    
    
    6Investment in subsidiaries
    
    
    67,085
    
    
    
    70,734TOTAL ASSETS
    
    $
    166,625
    
    
    $
    172,328LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued expenses and other current liabilities
    
    $
    275
    
    
    $
    319Total current liabilities
    
    $
    275
    
    
    $
    319Shareholders equity:Ordinary shares of par value $0.00002:50,000,000,000,000 shares authorized;
shares issued and
outstanding, 649,692,954 in 2006 and 649,913,136 in 2007
    
    $
    13
    
    
    $
    13Additional paid-in capital
    
    
    109,833
    
    
    
    110,327Treasury stock, at cost
(8,655,000 shares as of December 31, 2006 and 2007)
    
    
    (4,628
    )
    
    
    (4,628
    )Accumulated other comprehensive income
    
    
    5,339
    
    
    
    13,776Retained earnings
    
    
    55,793
    
    
    
    52,521Total shareholders equity
    
    $
    166,350
    
    
    $
    172,009TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    166,625
    
    
    $
    172,328
 F-40




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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 31,2005
    
    
    2006
    
    
    2007Net revenues
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses:General and administrative
    
    
    (284
    )
    
    
    (239
    )
    
    
    (131
    )Total operating expenses
    
    
    (284
    )
    
    
    (239
    )
    
    
    (131
    )Loss from operations
    
    
    (284
    )
    
    
    (239
    )
    
    
    (131
    )Interest income
    
    
    3,365
    
    
    
    3,077
    
    
    
    1,800Investment (loss) income
    
    
    39,607
    
    
    
    (11,362
    )
    
    
    (4,898
    )Change in fair value of call option embedded
in convertible notes
    
    
    (1,303
    )
    
    
    Change in fair value of put option
    
    
    
    
    
    
    (269
    )
    
    
    (43
    )(Loss) income before income taxes
    
    
    41,385
    
    
    
    (8,793
    )
    
    
    (3,272
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Net (loss) income per share:Basic
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )Diluted
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )Weighted average shares used in computation:Basic
    
    
    604,011,009
    
    
    
    656,255,882
    
    
    
    649,807,421Diluted
    
    
    626,626,671
    
    
    
    656,255,882
    
    
    
    649,807,421
 F-41




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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
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Accumulated
    
    
    
    
    


    
    TotalAdditional
    
    
    
    
    
    
    other
    
    
    
    
    
    

    shareOrdinary shares
    
    
    paid-in
    
    
    Treasury
    
    
    comprehensive
    
    
    Retained
    


    
    holders
    

    
    ComprehensiveNumber
    
    
    Amount
    
    
    capital
    
    
    stock
    
    
    income
    
    
    earnings
    


    
    equity
    

    
    Income (loss)Balance at January 1, 2005
    
    
    500,000,000
    
    
    
    10
    
    
    
    4,832
    
    
    
    
    
    
    
    47
    
    
    
    23,201
    


    
    
    28,090
    

    
    $
    18,266Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,441
    
    
    
    
    


    
    
    1,441
    

    
    $
    1,441Issuance of shares upon the
initial public
offering, net of offering
expenses
    
    
    158,183,409
    
    
    
    2
    
    
    
    89,491
    
    
    
    
    
    
    
    
    
    
    
    
    


    
    
    89,493
    

    
    
    Conversion of convertible notes
    
    
    
    
    
    
    1
    
    
    
    15,313
    
    
    
    
    
    
    
    
    
    
    
    
    


    
    
    15,314
    

    
    
    Unrealized gain on
available-for-sale
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    


    
    
    74
    

    
    
    Realized gain on
available-for-sale
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    
    


    
    
    (106
    )

    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    


    
    
    162
    

    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,385
    


    
    
    41,385
    

    
    
    41,385Balance at December 31, 2005
    
    
    658,183,409
    
    
    $
    13
    
    
    $
    109,798
    
    
    $
    
    
    
    $
    1,456
    
    
    $
    64,586
    


    
    $
    175,853
    

    
    $
    42,826Foreign 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
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    
    
    
    
    
    


    
    
    494
    

    
    
    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
    

    
    $
    5,165
 
 *
    
    Representing 577,000 ADSs. F-42




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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 CASH FLOWS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2005
    
    
    2006
    
    
    2007Operating activities:Net (loss) income
    
    $
    41,385
    
    
    $
    (8,793
    )
    
    $
    (3,272
    )Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of share-based compensation
    
    
    162
    
    
    
    116
    
    
    
    94Reversal of share-based compensation
    
    
    
    
    
    
    (81
    )
    
    
    Change in fair value of call option embedded in convertible notes
    
    
    1,303
    
    
    
    Change in fair value of put option
    
    
    
    
    
    
    269
    
    
    
    43Gain or loss from long term investment
    
    
    (41,012
    )
    
    
    7,682
    
    
    
    (3,649
    )Change in operating assets and liabilities:Amounts due from subsidiaries
    
    
    (1,320
    )
    
    
    (41,380
    )
    
    
    (20,400
    )Prepaid expenses and other current assets
    
    
    (76
    )
    
    
    (98
    )
    
    
    10Accrued expenses and other current liabilities
    
    
    100
    
    
    
    (175
    )
    
    
    401Net cash (used) provided by operating activities
    
    
    542
    
    
    
    (42,460
    )
    
    
    (26,773
    )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
    
    
    89,493
    
    
    
    
    
    
    
    Repurchase of ordinary shares from market
    
    
    
    
    
    
    (4,628
    )
    
    
    Net cash (used) provided by financing activities
    
    
    89,493
    
    
    
    (4,628
    )
    
    
    Effect of exchange rate changes
    
    
    1,441
    
    
    
    3,958
    
    
    
    8,437Net (decrease) increase in cash and cash equivalents
    
    
    91,476
    
    
    
    (50,130
    )
    
    
    (18,336
    )Cash and cash equivalents at the beginning of the year
    
    
    
    
    
    
    91,476
    
    
    
    41,346Cash and cash equivalents at the end of the year
    
    $
    91,476
    
    
    $
    41,346
    
    
    $
    23,010
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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION  SCHEDULE 1
 Note:
 1.
    
    BASIS FOR PREPARATIONThe Condensed Financial Information of the Company only has been prepared using the same
accounting policies as set out in the Companys consolidated financial statements except
that the Company has used equity method to account for its investment in its subsidiaries
and variable interest entity.
 2.
    
    CONVERTIBLE NOTESOn December 19, 2003, Techfaith BVI issued eight convertible notes in an aggregate principal
amount of $4,000 to a strategic investor (the 1st Notes). The 1st Notes were
interest-free; however, should any dividend be declared and distributed by Techfaith BVI, a
special interest payment calculated based on an as converted basis as if the notes had
been converted into ordinary shares of Techfaith BVI, was payable to the noteholder. The
conversion price for the notes was subject to certain adjustments and was $0.234 per
ordinary share of Techfaith BVI initially. The holder of the 1st Notes could convert the
notes into such shares at any time during the period from the date of issuance to December
19, 2005 or the date of listing of the shares of the Company on The Stock Exchange of Hong
Kong Limited, whichever was earlier.On April 16, 2004, the 1st Notes were, at the election of the noteholder, cancelled and
replaced with new notes with the same principal amount, which was issued by Techfaith BVI
concurrently with the issuance of additional convertible notes in an aggregate principal
amount of $10,000 to three other strategic investors (hereinafter collectively referred to
as 2nd Notes) pursuant to a note subscription and rights agreement dated April 9, 2004
(the Agreement) with the same interest terms as the 1st Notes. The conversion price for
the 2nd Notes was $0.212 per ordinary share of Techfaith BVI, subject to certain adjustments
and could be converted into such shares at any time from the date of issuance to April 16,
2007. The notes not previously converted or repaid, would be automatically converted into
ordinary shares of Techfaith BVI or its parent company without any further action of any
party, into that number of ordinary shares pursuant to the then effective conversion price,
upon the closing of Techfaith BVIs or its parent companys initial public offering or a
substantial sale of the shares in Techfaith BVI pursuant to the relevant terms as stipulated
in the Agreement. After April 16, 2007, the holders of the then outstanding notes may
require Techfaith BVI to redeem all or part of the notes upon occurrence of certain events,
including an event of default or Techfaith BVIs merger or consolidation with another
entity. The redemption price is the greater of (a) principal amount plus accrued and unpaid
interest or (b) the fair value of the ordinary shares into which such notes are convertible.The embedded conversion option of the convertible notes has been recorded at its fair value
of $2,818 at the issuance and accounted for separately as a derivative liability. The Group
accounted for the derivative liability relating to the conversion option by adjusting the
liability to its estimated fair value at each subsequent balance sheet date before the
conversion, with adjustments recorded as other non-operating income or expense.
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##### Table of Contents



CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
 CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED  continued
ADDITIONAL INFORMATION  SCHEDULE 1
 2.
    
    CONVERTIBLE NOTES  continuedThe holders of the 2nd Notes had on April 1, 2005 waived their rights to require the Group
to redeem the 2nd Notes at the holders election upon occurrence of certain events after
April 16, 2007, thereby ceased the adjustment of the liabilities to its estimated fair value
at each reporting date.Upon the completion of initial public offering of American Depositary Shares (ADSs) of the
Company on May 6, 2005, all the then outstanding convertible notes were converted
automatically into shares of the Company pursuant to the terms of the Agreement.
 3.
    
    INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIESThe Company and its subsidiaries and its variable interest
entity are included in the
consolidated financial statements where the inter-company balances and transactions are
eliminated upon consolidation. For the purpose of the Companys stand-alone financial
statements, its investments in subsidiaries and variable interest
entity are reported
using the equity method of accounting. The Companys share of income and losses from its
subsidiaries and variable interest entity is reported as earnings from subsidiaries and
variable interest entities in the accompanying condensed financial information of parent
company.4.
    
    INCOME TAXESThe Company is a tax exempted company incorporated in the Cayman Islands.
 F-45