##### 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, 2006
 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
  (Translation of Registrants name into English)
 (Jurisdiction of incorporation or organization)
 Chao Yang District, Beijing 100015, Peoples Republic of China
  
 (Title of Class)
 (Title of Class)
   o þ
  o þ
  þ o
  o þ o
  o þ
  o þ




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##### 



TABLE OF CONTENTS
 INTRODUCTIONPART IItem 1. Identity of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on the CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholder and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description of Securities Other than Equity SecuritiesPART IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15. Controls and ProceduresItem 16.A. Audit Committee Financial ExpertItem 16.B. Code of EthicsItem 16.C. Principal Accountant Fees and ServicesItem 16.D. Exemptions from the Listing Standards for Audit CommitteesItem 16.E. Purchases of Equity Securities by the Issuer and Affiliated PurchasersPART IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsEx-4.14 Construction Contract dated Feb 11, 2007EX-8.1 SUBSIDIARIES OF THE REGISTRANTEX-12.1 CEO CERTIFICATION TO SECTION 302EX-12.2 CFO CERTIFICATION TO SECTION 302EX-13.1 CEO CERTIFICATION TO SECTION 906EX-13.2 CFO CERTIFICATION TO SECTION 906Ex-15.1 Consent of Conyers Dill & PearmanEX-15.2 Consent of Guantao 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;§
    
    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.
    FORWARD-LOOKING INFORMATION
  §
    
    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.
  
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
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Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 Selected Financial Data
  For the PeriodFrom July 26,2002 toDecember 31,
    
    
    For the Year Ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(In thousands, except share, per share and per ADS data)Consolidated Statement
of Operations DataNet revenues
    
    $
    
    
    
    $
    9,677
    
    
    $
    46,560
    
    
    $
    90,110
    
    
    $
    80,804Gross profit
    
    
    
    
    
    
    7,046
    
    
    
    26,676
    
    
    
    55,049
    
    
    
    25,699Operating expenses
    
    
    (6
    )
    
    
    (2,130
    )
    
    
    (7,971
    )
    
    
    (14,290
    )
    
    
    (40,728
    )Other operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180(Loss) income from
operations
    
    
    (6
    )
    
    
    4,916
    
    
    
    18,705
    
    
    
    40,759
    
    
    
    (14,849
    )Net (loss) income
    
    $
    1
    
    
    $
    4,956
    
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )Net income (loss) per share3⁄4 Basic
    
    $
    
    
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.01
    )3⁄4 Diluted
    
    $
    
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    (0.01
    )Net income (loss) per ADS3⁄4 Basic
    
    $
    
    
    
    $
    0.31
    
    
    $
    0.55
    
    
    $
    1.03
    
    
    $
    (0.20
    )3⁄4 Diluted
    
    $
    
    
    
    $
    0.31
    
    
    $
    0.52
    
    
    $
    1.00
    
    
    $
    (0.20
    )Shares used in per share
computation3⁄4 Basic
    
    
    
    
    
    
    242,465,753
    
    
    
    500,000,000
    
    
    
    604,011,009
    
    
    
    656,255,8823⁄4 Diluted
    
    
    
    
    
    
    243,074,581
    
    
    
    551,823,942
    
    
    
    626,626,671
    
    
    
    656,255,882
 As of December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006(In thousands)Consolidated Balance
Sheet DataCash and cash equivalents
    
    $
    11
    
    
    $
    7,699
    
    
    $
    35,086
    
    
    $
    137,207
    
    
    $
    113,172Accounts receivable
    
    
    
    
    
    $
    5,230
    
    
    $
    7,760
    
    
    $
    34,060
    
    
    $
    37,229Inventories
    
    
    
    
    
    $
    732
    
    
    $
    5,030
    
    
    $
    4,974
    
    
    $
    8,546Total assets
    
    $
    3,618
    
    
    $
    23,911
    
    
    $
    67,542
    
    
    $
    194,163
    
    
    $
    207,714Total current liabilities
    
    $
    1,201
    
    
    $
    8,324
    
    
    $
    23,869
    
    
    $
    15,335
    
    
    $
    37,123Total shareholders equity
    
    $
    2,417
    
    
    $
    9,824
    
    
    $
    28,090
    
    
    $
    175,853
    
    
    $
    166,350Number of ordinary shares
issued
    
    
    
    
    
    
    500,000,000
    
    
    
    500,000,000
    
    
    
    658,183,409
    
    
    
    649,692,954Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,655,000Total liabilities
and shareholders equity
    
    $
    3,618
    
    
    $
    23,911
    
    
    $
    67,542
    
    
    $
    194,163
    
    
    $
    207,714
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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 margin;§
    
    acquire and retain customers;§
    
    attract, train and retain qualified personnel;§
    
    maintain adequate control of 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.
   If mobile handset brand owners discontinue or reduce the use of independent mobile handset design
houses, our business will be materially and adversely affected.
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If we fail to retain existing or attract additional international mobile handset brand owners as
customers, our business will be materially affected and the growth of our business impaired.
  If our customers fail to achieve success in their business, our mobile handset solution 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.
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We may experience net losses in the future.
  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.
   We rely on a limited number of customers for a significant portion of our net revenues, and if a
large customer fails to place additional orders with us, or if we fail to attract additional major
customers, our results of operations and financial condition could 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.
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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 have not registered copyrights for our product designs and other intellectual property.
  We may not be able to prevent others from unauthorized use of our intellectual property, which
could harm our business and competitive position.
  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.
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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.
  We have limited business insurance coverage in China.
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As we have commenced accounting for employee share options using the fair value method beginning
from 2006, 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.
  Recent 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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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.
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We are controlled by a small group of our existing shareholders, whose interests may differ from
other shareholders.
  We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. holders.
  
 Item 4. Information on the Company
 History and Development of the Company
     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.
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Wireless Software and Application
 Sales of products and components.
  §
    
    Wireless modules and data cards 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 wireless module and data card business started to grow and the
revenue was more than doubled from 2005. The data cards we provided are in three forms,
namely, PC cards, USB cards and express cards.§
    
    Feature phones We started feature phone business in the fourth quarter of 2006.
Similar to the case for 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 EMS
providers.§
    
    Smart Phone Prior to 2006, we only designed but did not sell completed handsets. In
response to customer demand, in 2006 we began selling completed smart phone handsets that
we designed. We, however, did not manufacture smart phones ourselves, but outsourced the
manufacturing to EMS providers.§
    
    Other Products and Services. We also sell PCBs and other electronic components. We have
historically sold to our Chinese customers printed circuit boards, or PCBs, that others
produced for us 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 0.9% of our total
revenues from it in 2006, and do not intend to generate significant profit from it in the
future.
 Design Process
  Responsibilities
of Engineering Teams
 Industrial Design.
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Mechanical Design.
 Hardware Design.
 Software Design.
 Project Management.
 Quality Assurance.
 Sourcing.
 Production Support.
 Customers
   18




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2006Chinese mobile handset brand owners
    
    - CEC Telecom- Haier- Huawei- Lenovo- Yulong- AmoiInternational mobile handset brand owners
    
    - Kyocera- NEC- UTStarcom- Toshiba- LG- Freescale- Philips
     Sales and Marketing
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Technology
      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 on design and production modifications; and§
    
    to make effective use of the technologies licensed from leading global technology
companies.
  Intellectual Property
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Competition
   §
    
    ability to design and integrate many hardware and software functions and features based
on different platforms;§
    
    product quality and reliability;§
    
    cost effectiveness;§
    
    economies of scale;§
    
    ability to rapidly complete a design;§
    
    service and customer support capabilities; and§
    
    customer base and customer loyalty.
   Regulation
  FTA Certification
  CTA Certification
  21




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Tax
     22




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,
 Foreign Currency Exchange
   Dividend Distribution
   23




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Organizational Structure
  
 
 *
    
    Held through intermediary companies incorporated in the British Virgin Islands  §
    
    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.
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Property, Plants and Equipment
  
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  Operating Results
    25




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Major Factors Affecting Our Results of Operations
 Net Revenues.
   26




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Cost of Revenues.
 Operating Expenses.
 General and Administrative.
 Research and Development.
 Selling and Marketing.
 Income Taxes.
  27




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Critical Accounting Policies
  Revenue Recognition.
  Design fee.
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Royalty.
 Product and component sales.
 Results of Operations
  For the Year Ended December 31,2004
    
    2005
    
    2006(In thousands)Consolidated Statement of Operations DataNet revenues:Design fees
    
    $
    29,495
    
    
    $
    63,020
    
    
    $
    29,864Royalty income
    
    
    6,961
    
    
    
    15,651
    
    
    
    7,674Component and product sales
    
    
    10,104
    
    
    
    11,439
    
    
    
    43,266Total net revenues
    
    $
    46,560
    
    
    $
    90,110
    
    
    $
    80,804Cost of revenues:Design fees
    
    $
    10,951
    
    
    $
    26,258
    
    
    $
    19,998Royalty income
    
    
    725
    
    
    
    
    
    
    
    Component and product sales
    
    
    8,208
    
    
    
    8,803
    
    
    
    35,107Total cost of revenues
    
    $
    19,884
    
    
    $
    35,061
    
    
    $
    55,105Gross profit:Design fees
    
    $
    18,544
    
    
    $
    36,762
    
    
    $
    9,866Royalty income
    
    
    6,236
    
    
    
    15,651
    
    
    
    7,674Component and product sales
    
    
    1,896
    
    
    
    2,636
    
    
    
    8,159Total gross profit
    
    $
    26,676
    
    
    $
    55,049
    
    
    $
    25,699Operating expenses:General and administrative
    
    $
    (4,771
    )
    
    $
    (9,574
    )
    
    $
    (15,110
    )Research and development
    
    
    (2,506
    )
    
    
    (3,447
    )
    
    
    (21,970
    )Selling and marketing
    
    
    (694
    )
    
    
    (1,269
    )
    
    
    (2,260
    )Leasehold improvement impairment
    
    
    
    
    
    
    
    
    
    
    (1,388
    )Total operating expenses
    
    $
    (7,971
    )
    
    $
    (14,290
    )
    
    $
    (40,728
    )Other operating income
    
    
    
    
    
    
    
    
    
    
    180Income (loss) from operations
    
    $
    18,705
    
    
    $
    40,759
    
    
    $
    (14,849
    )Total other income (loss), net
    
    
    (484
    )
    
    
    2,149
    
    
    
    4,741Income taxes
    
    
    
    
    
    
    (54
    )
    
    
    (100
    )Minority interests
    
    
    23
    
    
    
    (1,469
    )
    
    
    1,808Equity in loss of an affiliate
    
    
    
    
    
    
    
    
    
    
    (393
    )Net (loss) income
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )
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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
  General and Administrative.
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Research and Development.
 Selling and Marketing.
 Leasehold Improvement Impairment.
 Other Operating Income
  Other Income (Loss), Net
  Net Income
  Comparison of the Year Ended December 31, 2004 and the Year Ended December 31, 2005
 Net Revenues
  Design Fees.
 Royalty Income.
 Component Products.
 Cost of Revenues
  Design Fees.
 Royalty Income.
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Component Products.
 Gross Profit
  Design Fees.
 Royalty Income.
 Component Products.
 Operating Expenses
  General and Administrative.
 Research and Development.
 Selling and Marketing.
 Total Other Income (Loss), Net
  Net Income
  Liquidity and Capital Resources
  Year Ended December 31,2004
    
    2005
    
    2006(In thousands)Net cash provided by operating activities
    
    $
    25,809
    
    
    $
    16,950
    
    
    $
    5,434Net cash used in investing activities
    
    
    (8,112
    )
    
    
    (5,529
    )
    
    
    (30,212
    )Net cash provided by financing activities
    
    
    9,700
    
    
    
    89,259
    
    
    
    (1,953
    )Effect of exchange rate changes
    
    
    (10
    )
    
    
    1,441
    
    
    
    2,696Net increase in cash and cash equivalents
    
    
    27,387
    
    
    
    102,121
    
    
    
    (24,035
    )Cash and cash equivalents at beginning of period
    
    
    7,699
    
    
    
    35,086
    
    
    
    137,207Cash and cash equivalents at end of period
    
    $
    35,086
    
    
    $
    137,207
    
    
    $
    113,172
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3⁄4 3⁄4
 Operating Activities.
    Investing Activities.
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Financing Activities.
   Research and Development, Patents and Licenses, etc.
 3⁄4
 Trend Information
  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payment Due by PeriodLess Than 1
    
    1-3
    
    3-5
    
    More Than 5Contractual Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    Years(In thousands of $)Operating lease
obligations
    
    
    1,195
    
    
    
    740
    
    
    
    455
    
    
    
    
    
    
    
    Purchase obligations (1)
    
    
    1,700
    
    
    
    1,197
    
    
    
    503
    
    
    
    
    
    
    
    Total
    
    
    2,895
    
    
    
    1,937
    
    
    
    958
    
    
    
    
    
    
    
    
 
 (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. 34




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##### Table of Contents



Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Exchange Risk.
 Recent Accounting Pronouncements
     35




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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
    
    
    36
    
    
    Chairman and Chief Executive OfficerJy-Ber Gilbert Lee
    
    
    51
    
    
    Director, President and Chief Operating OfficerBaozhuang Huo
    
    
    36
    
    
    Director, Chief Executive Officer of Handset Design UnitHung Hsin (Robert) Chen
    
    
    61
    
    
    Independent DirectorYing Han
    
    
    53
    
    
    Independent DirectorKen Lu
    
    
    44
    
    
    Independent DirectorHui (Tom) Zhang
    
    
    34
    
    
    Independent DirectorChristopher Patrick Holbert
    
    
    36
    
    
    Chief Financial OfficerChangke He
    
    
    45
    
    
    Chief Technology OfficerYibo Fang
    
    
    38
    
    
    President of STEP TechnologiesXiaonong Cai
    
    
    37
    
    
    Vice President
 Executive Directors
 Mr. Defu Dong
 Dr. Jy-Ber Gilbert Lee
 Mr. Baozhuang Huo
 36




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##### Table of Contents



Independent Directors
 Mr. Hung Hsin (Robert) Chen
 Ms. Ying Han
 Dr. Ken Lu
 Dr. Hui (Tom) Zhang
 Other Executive Officers
 Mr. Christopher Patrick Holbert
 Mr. Changke He
 37




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##### Table of Contents



Mr. Yibo Fang
 Mr. Xiaonong Cai
  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
 38




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##### Table of Contents



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
    )Total
    
    
    578,272
 
 (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 will vest on November 1, 2007.  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.
 39




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##### Table of Contents



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
  Compensation Committee
 40




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##### Table of Contents



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)
    
    
    105,000
    
    
    
    *Jy-Ber Gilbert Lee (5)
    
    
    131,636
    
    
    
    *Hung Hsin (Robert) Chen (6)
    
    
    65,818
    
    
    
    *Ying Han (7)
    
    
    65,818
    
    
    
    *Hui (Tom) Zhang (8)
    
    
    65,818
    
    
    
    *Ken Lu (9)
    
    
    32,909
    
    
    
    *All directors and executive officers as a group (10)
    
    
    249,716,999
    
    
    
    38.4%
 
 *
    
    Less than 1%.(1)
    
    Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission, or the SEC, and includes voting or investment power with respect to the
securities.(2)
    
    For each person and group included in this table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group by the sum of (1)
649,692,954, being the number of ordinary shares outstanding as of June 25, 2007, 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 25, 2007, or the
number of restricted shares held by such person or group, if any, that will fully
vest within 60 days after June 25, 2007, 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 25, 2007 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 105,000 restricted shares that were granted to Christopher Patrick Holbert on
July 1, 2006 and that will fully vest within 60 days after June 25, 2007.(5)
    
    Includes 131,636 ordinary shares that were issuable upon exercise of options exercisable
within 60 days after June 25, 2007 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 Ying Han on August 12, 2006.(8)
    
    Includes 65,818 restricted shares that were granted to Hui (Tom) Zhang on August 12, 2006.(9)
    
    Includes 32,909 restricted shares that were granted to Ken Lu on November 11, 2006.(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, Ying Han, 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) 649,692,954, being the number of ordinary shares
outstanding as of Decmber 31, 2006, 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
December 31, 2006, or the number of restricted shares held by
such person or group, if any, that will fully vest within 60 days after December 31, 2006, 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 December 31, 2006 by option
or other agreement.(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 Managment & 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 Managment & Research Company is 82 Devoshire Street, Boston, Masschusetts 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 diretor 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. 41




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 Major Shareholders
  Related Party Transactions
 42




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##### Table of Contents



Issuance and Sale of Convertible Notes
   Demand Registration Rights
 Form F-3 Registration Rights
 Piggyback Registration Rights
 Expenses of Registration
 Transactions with QUALCOMM
  43




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##### Table of Contents



Transactions with NEC
    Transactions with SEF
     44




---



##### Table of Contents



Transactions with Beijing Qidi
 Transfer of Mobile Handset Design Contracts.
    Settlement with CECW.
 Transactions with an Employee
   Potential
Transactions with a Director and Officer
  Interests of Experts and Counsel
  45




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##### Table of Contents



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
    Sales PriceHigh
    
    LowAnnual High and Low2006
    
    
    18.00
    
    
    
    6.58Quarterly
Highs and LowsThird Quarter 2005
    
    
    19.50
    
    
    
    8.75Fourth Quarter 2005
    
    
    18.80
    
    
    
    7.80First 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
    
    
    
    8.11Monthly Highs and LowsJanuary 2007
    
    
    11.13
    
    
    
    9.45February 2007
    
    
    10.87
    
    
    
    8.30March 2007
    
    
    9.90
    
    
    
    8.11April 2007
    
    
    9.45
    
    
    
    7.83May 2007
    
    
    8.19
    
    
    
    5.50June 2007 (through June 25, 2007)
    
    
    6.20
    
    
    
    5.30
 46




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##### Table of Contents



Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  
 Item 10. Additional Information
 Share Capital
  Memorandum and Articles of Association
  Material Contracts
  Exchange Controls
   47




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##### Table of Contents



Taxation
  Cayman Islands Taxation
  U.S. Federal Income Taxation
   §
    
    banks;§
    
    certain financial institutions;§
    
    insurance companies;§
    
    broker dealers;§
    
    traders that elect to mark to market;§
    
    tax-exempt entities;§
    
    persons liable for alternative minimum tax;§
    
    persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or
integrated transaction;
 48




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##### Table of Contents



§
    
    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
     49




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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
  50




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##### Table of Contents



Dividends and Paying Agents
  Statement by Experts
  Documents on Display
     Subsidiary Information
 3⁄4
 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
 3⁄4
 
 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
  51




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##### Table of Contents



Item 15. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Report of Management on Internal Control over Financial Reporting
         52




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 Item 16.A. Audit Committee Financial Expert
 3⁄4
 
 Item 16.B. Code of Ethics
  
 Item 16.C. Principal Accountant Fees and Services
  For the Year Ended December 31,2005
    
    2006(In thousands of $)Audit fees (1)
    
    
    395
    
    
    
    605Audit-related fees (2)
    
    
    118
    
    
    
    200Tax fees (3)
    
    
    8
    
    
    
    55
 
 (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)
    
    Audit-related fees means the aggregate fees billed in each of
the fiscal years listed for assurance and related services by our
principal auditors that are reasonably related to the performance
of the audit or review of our financial statements and are not
reported under Audit fees. Services comprising the fees
disclosed under the category of Audit-related fees involve
principally the issue of comfort letter, rendering of listing
advice, and other audit-related services for the year ended
December 31, 2006.(3)
    
    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
  53




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##### Table of Contents



Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
  
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 Exhibit Number
    
    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).
 54




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##### Table of Contents



Exhibit Number
    
    Document4.6
    
    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).4.9
    
    Agreement dated June 29, 2004 between the Registrant and a PRC subsidiary
of NEC (translation) (incorporated by reference to Exhibit 99.6 from our
Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).4.10
    
    Agreement dated December 20, 2004 between the Registrant and a PRC
subsidiary of NEC (translation) (incorporated by reference to Exhibit 99.7
from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).4.11
    
    Series A Preferred Share Purchase and Sale Agreement dated March 22, 2006
among the Registrant, QUALCOMM and Techfaith Software (China) Holding
Limited (incorporated by reference to Exhibit 4.11 from our Registration
Statement on Form 20-F (file no. 000-51242) filed with the Securities and
Exchange Commission on June 29, 2006).4.12
    
    Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Wireless Communication Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.12 from our Registration Statement
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006).4.13
    
    Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Intelligent Handset Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.13 from our Registration Statement
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006).4.14*
    
    Construction Contract dated February 11, 2007 between Techfaith Wireless
Communication Technology (Hangzhou) Limited and Hangzhou Jiang Qian
Construction Engineering Co., Ltd.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 Conyers Dill & Pearman.15.2*
    
    Consent of Guantao Law Firm.
 
 *
    
    Filed with this annual report on Form 20-F. 55




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##### Table of Contents



SIGNATURES
  CHINA TECHFAITH WIRELESSCOMMUNICATION TECHNOLOGYBy:
Name:
    
    /s/ Defu Dong

Defu DongTitle:
    
    Chief Executive Officer
  56




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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F - 1CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2006
    
    
    F - 2CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
    
    
    F - 3CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
    
    
    F - 4CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
    
    
    F - 5NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F - 6ADDITIONAL
INFORMATION  FINANCIAL STATEMENT SCHEDULE I
    
    
    F - 35




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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 - 1




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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Year ended December 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    137,207
    
    
    $
    113,172Restricted cash
    
    
    
    
    
    
    5,205Accounts receivable, net of allowances of $678 in 2005
and $4,448 in 2006, respectively
    
    
    34,060
    
    
    
    37,229Notes receivable
    
    
    1,070
    
    
    
    2,234Inventories, net
    
    
    4,974
    
    
    
    8,546Prepaid expenses and other current assets
    
    
    926
    
    
    
    9,120Total current assets
    
    $
    178,237
    
    
    $
    175,506Deposits for acquisition of plant,
machinery, equipment and leasehold improvement
    
    
    597
    
    
    
    5,905Plant, machinery and equipment, net
    
    
    14,483
    
    
    
    25,092Acquired intangible assets, net
    
    
    846
    
    
    
    355Goodwill
    
    
    
    
    
    
    6Long-term investment in an affiliate
    
    
    
    
    
    
    850TOTAL ASSETS
    
    $
    194,163
    
    
    $
    207,714LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term payable
    
    $
    
    
    
    $
    443Accounts payable
    
    
    3,294
    
    
    
    6,678Notes payable
    
    
    
    
    
    
    144Accrued expenses and other current liabilities
    
    
    9,714
    
    
    
    18,812Advance from customers
    
    
    429
    
    
    
    5,223Deferred revenue
    
    
    1,844
    
    
    
    5,408Income tax payable
    
    
    54
    
    
    
    140Put option liability
    
    
    
    
    
    
    275Total current liabilities
    
    $
    15,335
    
    
    $
    37,123Long-term payable
    
    $
    
    
    
    $
    398Total liabilities
    
    $
    15,335
    
    
    $
    37,521Commitments (Note 16)Minority interests
    
    $
    2,975
    
    
    $
    3,843Shareholders equity:Ordinary shares of par value $0.00002:50,000,000,000,000 shares authorized; shares issued and
outstanding, 658,183,409 in 2005 and 649,692,954 in 2006
    
    $
    13
    
    
    $
    13Additional paid-in capital
    
    
    109,798
    
    
    
    109,833Treasury stock, at cost (nil and 8,655,000 shares as of
December 31, 2005 and 2006, respectively)
    
    
    
    
    
    
    (4,628
    )Accumulated other comprehensive income
    
    
    1,456
    
    
    
    5,339Statutory reserve
    
    
    5,189
    
    
    
    6,093Retained earnings
    
    
    59,397
    
    
    
    49,700Total shareholders equity
    
    
    175,853
    
    
    
    166,350TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS EQUITY
    
    $
    194,163
    
    
    $
    207,714
  F - 2




---



##### 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 31,2004
    
    
    2005
    
    
    2006Revenues:Design fees
    
    $
    29,495
    
    
    $
    63,020
    
    
    $
    29,864Royalty income
    
    
    6,961
    
    
    
    15,651
    
    
    
    7,674Component sales
    
    
    10,104
    
    
    
    11,439
    
    
    
    5,322Product sales
    
    
    
    
    
    
    
    
    
    
    37,944Total net revenues
    
    $
    46,560
    
    
    $
    90,110
    
    
    $
    80,804Cost of revenuesDesign fees
    
    
    10,951
    
    
    
    26,258
    
    
    
    19,998Royalty income
    
    
    725
    
    
    
    
    
    
    
    Component sales
    
    
    8,208
    
    
    
    8,803
    
    
    
    5,264Product sales
    
    
    
    
    
    
    
    
    
    
    29,843Total cost of revenues
    
    
    19,884
    
    
    
    35,061
    
    
    
    55,105Gross profit
    
    
    26,676
    
    
    
    55,049
    
    
    
    25,699Operating expenses:General and administrative
    
    
    (4,771
    )
    
    
    (9,574
    )
    
    
    (15,110
    )Research and development
    
    
    (2,506
    )
    
    
    (3,447
    )
    
    
    (21,970
    )Selling and marketing
    
    
    (694
    )
    
    
    (1,269
    )
    
    
    (2,260
    )Leasehold improvement impairment
    
    
    
    
    
    
    
    
    
    
    (1,388
    )Total operating expenses
    
    
    (7,971
    )
    
    
    (14,290
    )
    
    
    (40,728
    )Other operating income
    
    
    
    
    
    
    
    
    
    
    180(Loss) income from operations
    
    
    18,705
    
    
    
    40,759
    
    
    
    (14,849
    )Interest expense
    
    
    (1,756
    )
    
    
    (583
    )
    
    
    (18
    )Interest income
    
    
    108
    
    
    
    3,843
    
    
    
    4,879Other income
    
    
    302
    
    
    
    192
    
    
    
    149Change in fair value of call option
embedded in convertible notes
    
    
    862
    
    
    
    (1,303
    )
    
    
    Change in fair value of put option
    
    
    
    
    
    
    
    
    
    
    (269
    )(Loss) income before income taxes
    
    
    18,221
    
    
    
    42,908
    
    
    
    (10,108
    )Income taxes
    
    
    
    
    
    
    (54
    )
    
    
    (100
    )(Loss) Income before minority interests
    
    
    18,221
    
    
    
    42,854
    
    
    
    (10,208
    )Minority interests
    
    
    23
    
    
    
    (1,469
    )
    
    
    1,808Equity in loss of an affiliate
    
    
    
    
    
    
    
    
    
    
    (393
    )Net (loss) income
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )Net (loss) income per share:Basic
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.01
    )Diluted
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    (0.01
    )Weighted average shares used in computation:Basic
    
    
    500,000,000
    
    
    
    604,011,009
    
    
    
    656,255,882Diluted
    
    
    551,823,942
    
    
    
    626,626,671
    
    
    
    656,255,882
  F - 3




---



##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
 (In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 Accumulated
    
    
    
    
    
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    
    other
    
    
    
    
    
    
    
    
    
    
    share
    
    
    Com-Ordinary shares
    
    
    paid-in
    
    
    Treasury
    
    
    comprehensive
    
    
    Retained
    
    
    Statutory
    
    
    holders
    
    
    prehensiveNumber
    
    
    Amount
    
    
    capital
    
    
    stock
    
    
    income
    
    
    earnings
    
    
    reserve
    
    
    equity
    
    
    incomeBalance at January 1, 2004
    
    
    500,000,000
    
    
    
    10
    
    
    
    4,832
    
    
    
    
    
    
    
    25
    
    
    
    3,855
    
    
    
    1,102
    
    
    
    9,824
    
    
    $
    4,981Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    $
    (10
    )Unrealized gain on available-for-sale-
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,244
    
    
    
    
    
    
    
    18,244
    
    
    
    18,244Provision for statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,454
    )
    
    
    3,454
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    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
    
    
    
    3,883Vesting of restricted shares
    
    
    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
    )
 
 *
    
    Representing 577,000 ADSs.  F - 4




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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 31,2004
    
    
    2005
    
    
    2006Operating activities:Net (loss) income
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )Adjustments to reconcile net income to net cash provided by operating activities:Loss on disposal of plant, machinery and equipment
    
    
    215
    
    
    
    6
    
    
    
    138Loss on disposal of intangible assets
    
    
    
    
    
    
    
    
    
    
    110Impairment of leasehold improvement
    
    
    
    
    
    
    
    
    
    
    1,388Amortization of acquired intangible assets
    
    
    996
    
    
    
    372
    
    
    
    381Amortization of discount on issuance of convertible notes
    
    
    705
    
    
    
    168
    
    
    
    Inventory provision
    
    
    
    
    
    
    430
    
    
    
    54Warranty provision
    
    
    
    
    
    
    1,135
    
    
    
    (393
    )Bad debts expense
    
    
    
    
    
    
    678
    
    
    
    3,770Depreciation and amortization of plant, machinery and equipment
    
    
    2,355
    
    
    
    4,415
    
    
    
    7,163Realised gain on investment in marketable securities
    
    
    (67
    )
    
    
    (106
    )
    
    
    Minority interests
    
    
    (23
    )
    
    
    1,469
    
    
    
    (1,808
    )Equity in loss of an affiliate
    
    
    
    
    
    
    
    
    
    
    393Change in fair value of call option
embedded in convertible notes
    
    
    (862
    )
    
    
    1,303
    
    
    
    Change in fair value of put option
    
    
    
    
    
    
    
    
    
    
    269Amortization of share-based compensation
    
    
    
    
    
    
    162
    
    
    
    116Reversal of share-based compensation
    
    
    
    
    
    
    
    
    
    
    (81
    )Exchange loss
    
    
    
    
    
    
    
    
    
    
    1,187Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,530
    )
    
    
    (26,978
    )
    
    
    (6,939
    )Notes receivables
    
    
    (2,296
    )
    
    
    1,226
    
    
    
    (1,164
    )Inventories
    
    
    (4,298
    )
    
    
    (374
    )
    
    
    (3,626
    )Prepaid expenses and other current assets
    
    
    (1,868
    )
    
    
    1,328
    
    
    
    (8,194
    )Accounts payable
    
    
    2,104
    
    
    
    460
    
    
    
    3,384Notes payable
    
    
    
    
    
    
    
    
    
    
    144Accrued expenses and other current liabilities
    
    
    2,668
    
    
    
    3,962
    
    
    
    9,491Advance from customers
    
    
    
    
    
    
    (429
    )
    
    
    4,794Deferred revenue
    
    
    10,466
    
    
    
    (13,716
    )
    
    
    3,564Income tax payable
    
    
    
    
    
    
    54
    
    
    
    86Net cash provided by operating activities
    
    
    25,809
    
    
    
    16,950
    
    
    
    5,434Investing activities:Investment in an affiliate
    
    
    
    
    
    
    
    
    
    
    (1,243
    )Deposit paid
    
    
    (3,740
    )
    
    
    
    
    
    
    Deposits paid for acquisition of plant, machinery and
equipment, and acquired intangible assets
    
    
    (529
    )
    
    
    (597
    )
    
    
    (4,711
    )Purchase of plant, machinery and equipment
    
    
    (5,643
    )
    
    
    (8,832
    )
    
    
    (19,082
    )Proceeds from sale of plant, machinery and equipment
    
    
    1
    
    
    
    13
    
    
    
    29Purchase of marketable securities
    
    
    (4,289
    )
    
    
    (15,005
    )
    
    
    Purchase of acquired intangible assets
    
    
    (1,941
    )
    
    
    (273
    )
    
    
    Proceeds from sale of marketable securities
    
    
    8,029
    
    
    
    19,165
    
    
    
    Increase in restricted cash
    
    
    
    
    
    
    
    
    
    
    (5,205
    )Net cash used in investing activities
    
    
    (8,112
    )
    
    
    (5,529
    )
    
    
    (30,212
    )Financing activities:Proceeds from convertible notes
    
    
    10,000
    
    
    
    
    
    
    
    Capital contribution by minority shareholder
    
    
    
    
    
    
    
    
    
    
    3,000Repurchase of ordinary shares from market
    
    
    
    
    
    
    
    
    
    
    (4,628
    )Repayment of short-term loan
    
    
    (300
    )
    
    
    
    
    
    
    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
    
    
    9,700
    
    
    
    89,259
    
    
    
    (1,953
    )Effect of exchange rate changes
    
    
    (10
    )
    
    
    1,441
    
    
    
    2,696Net (decrease) increase in cash and cash equivalents
    
    
    27,387
    
    
    
    102,121
    
    
    
    (24,035
    )Cash and cash equivalents at the beginning of the year
    
    
    7,699
    
    
    
    35,086
    
    
    
    137,207Cash and cash equivalents at the end of the year
    
    $
    35,086
    
    
    
    137,207
    
    
    
    113,172Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    12
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    
    
    
    $
    15Non-cash financing activities:Conversion of convertible notes into ordinary shares upon the Groups initial
public offering
    
    $
    
    
    
    $
    15,314
    
    
    $
    
  F - 5




---



##### 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, 2006:
 Date of
    
    Place of
    
    PercentageSubsidiaries
    
    incorporation
    
    incorporation
    
    ownershipTechfaith Wireless
Communication
Technology
(Beijing) Limited
(Techfaith China)
    
    July 26, 2002
    
    Peoples Republic
of China (the
PRC)
    
    
    100
    %Techfaith Wireless
Technology Group
Limited (Techfaith
BVI) (formerly
known as Techfaith
Wireless
Communication
Technology Limited)
    
    July 8, 2003
    
    British Virgin
Islands (the BVI)
    
    
    100
    %Great Earnest
Technology Limited
(Great Earnest)
    
    August 8, 2003
    
    BVI
    
    
    100
    %Techfaith Wireless
Communication
Technology
(Beijing) Limited
II (Techfaith
Beijing)
    
    September 5, 2003
    
    PRC
    
    
    100
    %Leo Technology
Limited (Leo
Technology)
    
    October 15, 2003
    
    BVI
    
    
    100
    %STEP Technologies
(Beijing) Co., Ltd.
(STEP
Technologies)
    
    November 20, 2003
    
    PRC
    
    
    70
    %Techfaith
Intelligent Handset
Technology (HK)
Limited (Techfaith
HK) (formerly
known as First
Achieve Technology
Ltd.)
    
    December 29, 2003
    
    Hong Kong
    
    
    100
    %Finest Technology
Limited (Finest
Technology)
    
    January 8, 2004
    
    BVI
    
    
    100
    %Techfaith Wireless
Communication
(Shanghai) Limited
(Techfaith
Shanghai)
    
    March 22, 2004
    
    PRC
    
    
    100
    %Infoexcel
Technology Limited
(Infoexcel
Technology)
    
    April 18, 2005
    
    BVI
    
    
    100
    %Techfaith Wireless
Corporation
(Techfaith U.S.)
    
    August 22, 2005
    
    United States of
America (U.S.)
    
    
    100
    %Boost Time Limited
(Boost Time)
    
    August 25, 2005
    
    BVI
    
    
    100
    %Shenzhen Techfaith
Intelligent Handset
Technology Limited
(Techfaith
Shenzhen)
    
    August 25, 2005
    
    PRC
    
    
    100
    %
 F - 6




---



##### 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 Technology
(Beijing) Limited
(Techfaith Intelligent
Handset
Beijing)
    
    September 9, 2005
    
    PRC
    
    
    100
    %Charm Faith Limited
(Charm Faith)
    
    November 21, 2005
    
    BVI
    
    
    100
    %Techfaith Wireless
Communication
(Hangzhou) Technology
Limited
(Techfaith Hangzhou)
    
    April 24, 2006
    
    PRC
    
    
    100
    %Variable interest entity
    
    Date of
Incorporation
    
    Place of
Incorporation
    
    Percentage
OwnershipTechfaith Software
(China) Holding Limited
(Techsoft Holding)
    
    March 17, 2006
    
    Cayman Islands
    
    
    70
    %
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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.
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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 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 and
its majority-owned subsidiaries and its variable interest entity, Techfaith Software (China)
Holding Limited. All significant inter-company transactions and balances are eliminated
upon consolidation.Use 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 cashRestricted cash represents the cash used to secure payment to Electronics Manufacturing
Service (EMS) providers as well as secure notes payable of the Group.
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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  continuedNotes receivableNotes receivable represents bank and commercial acceptance drafts that are non-interest
bearing and due within one year.InventoriesInventories are stated at the lower of cost or market. Cost is determined using the
weighted average method. The inventories balances are net of provisions of $430 in 2005 and
$499 in 2006, respectively.Plant, machinery and equipment, netPlant, machinery and equipment, net 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, $Nil and $1,388 for the years ended December
31, 2004, 2005 and 2006 respectively.
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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  continuedGoodwillSFAS No. 142 requires the Group to complete a two-step goodwill impairment test. The first
step compares the fair values 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. SFAS No. 142
requires completion of this first step within the first six months of initial adoption and
annually thereafter. 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 good will 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. This allocation process is only
performed for purposes of evaluating goodwill impairment and does not result in an entry to
adjust the value of any assets or liabilities. An impairment loss is recognized for any
excess in the carrying value of goodwill over the implied fair value of goodwill.As of December 31, 2006, the Group has a goodwill balance of $6, representing the fair value
of put option granted to Qualcomm in relation to establishment of Techsoft Holding on July
5, 2006 as mentioned in note 1.Long-term investmentsAffiliated 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 profit or 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, $Nil and $393 for the years ended
December 31, 2004, 2005 and 2006.
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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Revenue recognition
  Design fee
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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  continued
 Revenue recognition
 Royalty
  Product and component sales
  Product warranty
  Year ended December 31,2005
    
    
    2006Balance at beginning of year
    
    $
    508
    
    
    $
    1,643Current period provision
    
    
    2,426
    
    
    
    2,004Utilized during the year
    
    
    (1,291
    )
    
    
    (2,397
    )Balance at end of year
    
    $
    1,643
    
    
    $
    1,250
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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  continuedGovernment subsidies and grantsGovernment subsidies are recognized when received and all the conditions for their receipt
have been met. 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 recognised subsidy income of $nil, $nil and $180 for the year ended
December 31, 2004, 2005 and 2006, respectively.Government grants are recorded as a liability until earned. The amount of $1,442 and $1,990
is recorded as a liability on the balance sheet as of December 31, 2005 and 2006,
respectively, which is to be used for specific certified future research and development
projects by the Chinese government.Research and development costsResearch and development costs are expensed as incurred.Advertising costsThe Group expenses advertising costs as incurred. Total advertising expenses were $69, $164
and $227 in 2004, 2005 and 2006, respectively, and have been included as part of selling and
marketing expenses.Foreign currency translationThe 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 prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies are
translated into RMB using the applicable exchange rates quoted by the Peoples Bank of China
(PBOC) 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.
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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  continuedIncome taxesDeferred income taxes are recognized for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements, net operating
loss carryforwards and credits by applying enacted statutory tax rates applicable to future
years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Current income taxes are provided for in accordance with the laws of
the relevant taxing authorities.Value added tax (VAT)VAT 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.Comprehensive incomeComprehensive income included unrealized gains and losses on investments and foreign
currency translation adjustments and is reported in the consolidated statement of
shareholders equity.Put option liabilityIn relation to the put option granted to Qualcomm mentioned in Note 1, the fair value of put
option is based on pricing models using prevailing financial market information as of
December 31, 2006.
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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  continuedConcentration 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.Share-based compensationShare-based payment transactions with employees, such as share options, are measured based
on the grant-date fair value of the equity instrument issued in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment",and recognized as
compensation expense over the requisite service 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 share is computed by dividing net (loss) income 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.Comparative figuresCertain comparative figures on the consolidated balance sheets, consolidated statements of
operations and details of tax rate reconciliation in note 11 have been restated to conform
with the current years presentation.
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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  continuedRecently issued accounting pronouncementsIn February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159).
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. Early
adoption is permitted as of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that fiscal year and also elects to apply
the provisions of Statement 157. The Company is currently evaluating whether the adoption of
SFAS 159 will have a material effect on our consolidated results of operations and financial
condition.In September 2006, the Financial accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), 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 12, 2007, and interim periods within those fiscal years. Early adoption is
permitted. The Group does not expect the adoption of SFAS157 will have a material effect on
its results of operations and financial conditions.In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition
threshold and measurement attribute for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December
15, 2006, with early adoption permitted. The Group adopted FIN48 in the first quarter of
2007 and it did not have any material effect on its results of operations and financial
conditions.
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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 3.
    
    RESTRICTED CASHThe Group has restricted cash of $nil and $5,205 as of December 31, 2005 and 2006,
respectively. As of December 31, 2006, the Group has restricted cash balance of $5,205
pledged as a guarantee to secure payment to EMS provider and notes payable issued to
suppliers. Upon the settlement of the payment to EMS provider and notes payable in 2007,
the Group has the rights to the pledged cash.4.
    
    ACCOUNTS RECEIVABLEAccounts receivable consists of the following:
 December 31,2005
    
    
    2006Billed receivables
    
    $
    17,991
    
    
    $
    34,057Unbilled receivables
    
    
    16,069
    
    
    
    3,172$
    34,060
    
    
    $
    37,229
 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.Movement of allowance for doubtful accounts is as follows:
 December 31,2004
    
    
    2005
    
    
    2006Balance at beginning of year
    
    $
    
    
    
    $
    
    
    
    $
    678Charge to expenses
    
    
    
    
    
    
    678
    
    
    
    3,744Deductions
    
    
    
    
    
    
    
    
    
    
    Exchange difference
    
    
    
    
    
    
    
    
    
    
    26Balance at end of year
    
    $
    
    
    
    $
    678
    
    
    $
    4,448
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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)
 5.
    
    INVENTORIESInventories consist of the following:
 December 31,2005
    
    
    2006Work in progress
    
    $
    2,865
    
    
    $
    4,877Raw materials
    
    
    2,109
    
    
    
    3,323Finished goods
    
    
    
    
    
    
    346$
    4,974
    
    
    $
    8,546
 6.
    
    PREPAID EXPENSES AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consist of the following:
 December 31,2005
    
    
    2006Prepaid expenses
    
    $
    122
    
    
    $
    110Prepaid rental
    
    
    111
    
    
    
    55Prepaid software license fee
    
    
    7
    
    
    
    191Prepaid commercial insurance
    
    
    54
    
    
    
    127Interest receivable
    
    
    84
    
    
    
    776Staff advances
    
    
    180
    
    
    
    312Rental deposit
    
    
    111
    
    
    
    124Social insurance borne by employees
    
    
    
    
    
    
    512Testing fee borne by customers
    
    
    
    
    
    
    192Advance to EMS providers
    
    
    71
    
    
    
    6,346Other
    
    
    186
    
    
    
    375$
    926
    
    
    $
    9,120
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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 31,2005
    
    
    2006Office building
    
    $
    
    
    
    $
    11,507Leasehold improvements
    
    
    4,431
    
    
    
    5,504Motor vehicles
    
    
    215
    
    
    
    535Plant and machinery
    
    
    9,349
    
    
    
    11,596Furniture, fixtures and equipment
    
    
    4,757
    
    
    
    6,397Software
    
    
    2,904
    
    
    
    5,569Total
    
    
    21,656
    
    
    
    41,108Less: Accumulated depreciation and amortization
    
    
    (7,173
    )
    
    
    (14,599
    )Leasehold improvement impairment
    
    
    
    
    
    
    (1,417
    )Plant, machinery and equipment, net
    
    $
    14,483
    
    
    $
    25,092
 The Group paid deposits for acquisitions of plant, machinery and equipment, amounted to $597
and $5,905 as of December 31, 2005 and 2006, respectively. Due to relocation of office
building of Techfaith China, the Group incurred the impairment loss on leasehold improvement
impairment.8.
    
    ACQUIRED INTANGIBLE ASSETS, NETAcquired intangible assets, net consist of the following:
 December 31,2005
    
    
    2006Cost:Technology
    
    $
    60
    
    
    $
    Licenses
    
    
    1,489
    
    
    
    927Royalty rights
    
    
    725
    
    
    
    2,274
    
    
    
    927Accumulated amortization:Technology
    
    
    (60
    )
    
    
    Licenses
    
    
    (643
    )
    
    
    (572
    )Royalty rights
    
    
    (725
    )
    
    
    (1,428
    )
    
    
    (572
    )Acquired intangible assets, net
    
    $
    846
    
    
    $
    355
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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 8.
    
    ACQUIRED INTANGIBLE ASSETS, NET  continuedThe Group acquired licenses for technology platform from third parties, which are amortized
over the shorter of the useful economic life of the relevant technology platform or license
period, which is usually 2 to 5 years. The Group acquired licenses for technology platform
for $273 in 2005.The Group has recorded amortization expense of $996, $372 and $381 for the years ended
December 31, 2004, 2005 and 2006, respectively.9.
    
    LONG-TERM INVESTMENT IN AN AFFILIATEOn 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 2006, CK Techfaith was in an operating loss.
 Long-term investment in an affiliate
    
    December 31, 2006Balance at beginning of year
    
    $
    Investment cost
    
    
    1,243Less: equity in loss of an affiliate
    
    
    (393
    )Balance at end of year
    
    $
    850
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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 31,2005
    
    
    2006Accrued professional fees
    
    $
    996
    
    
    $
    1,247Payable for acquisition of plant,
machinery and equipment
    
    
    595
    
    
    
    5,103Accrued wages
    
    
    3,296
    
    
    
    3,140Warranty provision
    
    
    1,643
    
    
    
    1,250Business and value added tax payable
    
    
    465
    
    
    
    568Accrued testing fee
    
    
    233
    
    
    
    690Government grants
    
    
    1,442
    
    
    
    1,990Rental payable
    
    
    95
    
    
    
    271Social insurance payables
    
    
    108
    
    
    
    2,325Customer deposits for minimum purchase
    
    
    
    
    
    
    562Customer prepayment for materials
    
    
    260
    
    
    
    455Accrued compensation and penalty to customer
    
    
    91
    
    
    
    168Accrued royalty and license fee
    
    
    
    
    
    
    481Other
    
    
    490
    
    
    
    562$
    9,714
    
    
    $
    18,812
 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 and Charm Faith is not subject to taxation.No provision for Hong Kong Profits Tax was made for the years ended December 31, 2005 and
2006 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, 2005 and 2006 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. For the newly established
company, the current income tax of Techfaith Hangzhou is 26.4% as it is located in Hangzhou
which is a coastal city of open economy, and enjoys some tax incentives from PRC government.
As of December 31, 2006, Techfaith Software (China) Limited, 100% owned subsidiary by
Techsoft Holding is in the process of making an application to the relevant tax authorities
for the new and high technology status.The current and deferred components of the income tax expense appearing in the consolidated
statements of operation are as follows:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Current tax
    
    $
    
    
    
    $
    54
    
    
    $
    100Deferred tax
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    54
    
    
    $
    100
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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 31,2005
    
    
    2006Deferred tax assets:Depreciation and amortization
    
    $
    273
    
    
    $
    544Expenditure deductible for tax purpose in
future years- warranty provision
    
    
    104
    
    
    
    45- bad debts provision
    
    
    
    
    
    
    298- inventory provision
    
    
    
    
    
    
    33Deferred revenue
    
    
    (134
    )
    
    
    537Valuation allowance
    
    
    (243
    )
    
    
    (1,457
    )$
    
    
    
    $
    
 As the management does not believe that it is more likely than not that all of the deferred
tax asset will be realized, a full valuation allowance has been established as of December
31, 2005 and 2006.A reconciliation between the provision for income tax computed by PRC enterprise income tax
rate of 33% to income before income taxes and actual provision for income taxes is as
follows:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Tax provision at PRC enterprise
income tax rate of 33%
    
    $
    6,013
    
    
    $
    14,160
    
    
    $
    (3,336
    )Tax exemption granted to PRC subsidiaries
    
    
    (7,017
    )
    
    
    (12,971
    )
    
    
    (2,331
    )Effect of the different income tax rate
in other jurisdiction
    
    
    735
    
    
    
    (1,081
    )
    
    
    (2,322
    )Tax effect of tax losses not recognized
    
    
    329
    
    
    
    129
    
    
    
    9,303Changes in valuation allowances
    
    
    (60
    )
    
    
    (183
    )
    
    
    (1,214
    )$
    
    
    
    $
    54
    
    
    $
    100
 Without the tax exemptions, income tax expense would have been increased by approximately
$7,017, $12,971 and $2,331 for the year ended December 31, 2004, 2005 and 2006,
respectively, representing a decrease in the basic and diluted earnings per share of $0.02,
$0.02, and $0.01, $0.01, $0.02 and $0.01 for the year ended December 31, 2004, 2005 and
2006, respectively.
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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
 12.
    
    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.
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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.
    
    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
authorised 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 the then two
independent directors which would vest entirely in November 2005. The Group early adopted
SFAS No. 123(R) by using the prospective method and recorded a stock-based compensation
expense of $162 which was determined at fair value for the year ended December 31, 2005.
There are 39,736,728 remaining options to be issued under the Plan.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
    
    2005Average risk-free rate of return
    
    
    4.1
    %Weighted average expected option life
    
    10 yearsVolatility rate
    
    
    35
    %Dividend yield
    
    Nil
 A summary of the stock option activity is as follows:
 Number ofoptionOutstanding at January 1, 2006
    
    
    263,272Forfeited during the year
    
    
    (131,636
    )Outstanding at December 31, 2006
    
    
    131,636
 Pursuant to the resignation of a former independent director during the year, 131,636 stock
options granted to him were forfeited as the stock options were not exercised within the
time stipulated in the stock option agreement and accordingly $81 share based compensation
expense was reversed.The fair value of option as of the grant date and the weighted average exercise price was
$0.62 and $1.083 respectively and they are all exercisable as of December 31, 2006 with a
remaining contractual life of 8.7 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)
 13.
    
    SHARE-BASED COMPENSATION- continuedRestricted stock
 Number ofrestricted stockOutstanding at January 1, 2006
    
    
    Granted during the year
    
    
    578,272Vested during the year
    
    
    (164,545
    )Unvested at December 31, 2006
    
    
    413,727
 In July 2006, the Group granted 315,000 restricted shares to Chief Finance Officer for free
with a vesting schedule of 3 years under 2005 Share Incentive Plan. As of December 31,
2006, the restricted shares granted to the Chief Finance Officer were not vested.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 upon cancellation of share options
and issuance of restricted shares.Meanwhile, 65,818 and 65,818 restricted shares were granted to two independent directors
with half of the number of restricted shares, 65,818 vested immediately and the other half,
65,818 to be vested on April 1, 2007. The fair value of restricted shares as of the grant
date was $0.58 and $38 share based compensation expense was recognized for the year ended
December 31, 2006.In November 2006, another 65,818 restricted shares were granted to an independent director
with half of the number of restricted shares, 32,909 vested immediately and the other half,
32,909 to be vested on November 1, 2007. The fair value of restricted shares as of the
grant date was $0.50 and $16 share based compensation expense was recognized for the year
ended December 31, 2006.As of December 31, 2006, the intrinsic value of 164,545 vested restricted shares and 203,737
unvested restricted shares which will be vested in one year was $118 and $146 respectively.
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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.
    
    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.15.
    
    RELATED PARTY TRANSACTIONSTransaction with an employeeIn 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 31, 2005 was $1,622. The balance was collected
during 2006.In 2006, there is no transaction with related parties.
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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)
 16.
    
    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 no revenue
was recorded in the current year, therefore 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 31,2004
    
    
    2005
    
    
    2006Revenue:Design contract related revenue
    
    $
    46,560
    
    
    $
    90,110
    
    
    $
    42,860Product sales
    
    
    
    
    
    
    
    
    
    
    37,944Total revenue
    
    
    46,560
    
    
    
    90,110
    
    
    
    80,804Cost of sales:Design contract related revenue
    
    
    19,884
    
    
    
    35,061
    
    
    
    25,262Product sales
    
    
    
    
    
    
    
    
    
    
    29,843Total cost of revenue
    
    
    19,884
    
    
    
    35,061
    
    
    
    55,105Gross profit
    
    $
    26,676
    
    
    $
    55,049
    
    
    $
    25,699
 Geographic informationThe Group operates in the PRC and all of the Groups long lived assets are located in the
PRC.
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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.
    
    COMMITMENTS
 (a)
    
    Purchase commitmentsThe Group made license fee payment to software provider for PCBA and Smart phone
under non-cancellable agreements which expire in 2008. License fee under purchase
commitments for the years ended December 31, 2004, 2005 and 2006 were $nil, $nil and
$671, respectively.Future minimum payments under non-cancellable license fee agreements as of December
31, 2006 were as follows:
 Fiscal year ending2007
    
    $
    1,9732008
    
    
    926Total
    
    $
    2,899
 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 $nil and
$20,098 as of December 31, 2005 and 2006.(b)
    
    Operating lease as lesseeThe Group leases certain office premises under non-cancellable leases, which expire
in 2008. Rental expense under operating leases for the years ended December 31,
2004, 2005 and 2006 were $509, $963 and $2,008, respectively.Future minimum lease payments under non-cancellable operating lease agreements as of
December 31, 2006 were as follows:
 Fiscal year ending2007
    
    $
    7402008
    
    
    455Total
    
    $
    1,195
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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.
    
    COMMITMENTS  continued
 (c)
    
    Capital commitmentsCapital commitments for purchase of plant, machinery and equipment as of December 31,
2004, 2005 and 2006 were $655, $418 and $1,700 respectively.
 18.
    
    MAJOR CUSTOMERSThe following table summarizes net revenues and accounts receivable for customers which
accounted for 10% or more of the Groups net revenues and accounts receivable:
 Net revenuesYear ended December 31,2004
    
    
    2005
    
    
    2006A
    
    
    N/A
    
    
    
    N/A
    
    
    
    15.6
    %B
    
    
    32.0
    %
    
    
    41.2
    %
    
    
    N/AC
    
    
    10.2
    %
    
    
    N/A
    
    
    
    N/A42.2
    %
    
    
    41.2
    %
    
    
    15.6
    %
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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)
 18.
    
    MAJOR CUSTOMERS  continued
 Accounts receivableYear ended December 31,2004
    
    
    2005
    
    
    2006A
    
    
    N/A
    
    
    
    N/A
    
    
    
    31.3
    %B (note)
    
    
    46.1
    %
    
    
    44.8
    %
    
    
    19.2
    %C
    
    
    13.3
    %
    
    
    15.8
    %
    
    
    N/A59.4
    %
    
    
    60.6
    %
    
    
    50.5
    %
 Note: B is Wuhan NEC Mobile Communication Co., Ltd. that ceased business
relationship with the Group in March 2007. According to the settlement agreement entered
into by the Group and Wuhan NEC, the Group will receive $8,324 from Wuhan NEC to cover the
outstanding accounts receivable and other costs incurred in Wuhan NEC related projects. For
details, refer to Note 21, Subsequent Event.19.
    
    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 31,2004
    
    
    2005
    
    
    2006Net (loss) income (numerator), basic
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )Effect of dilutive securities:- convertible notes
    
    
    840
    
    
    
    490
    
    
    
    Net (loss) income (numerator), diluted
    
    $
    19,084
    
    
    $
    41,875
    
    
    $
    (8,793
    )Shares (denominator):Weighted average ordinary shares outstanding
used in computing basic net income per share
    
    
    500,000,000
    
    
    
    604,011,009
    
    
    
    656,255,882Effect of dilutive securities:Weighted average shares from assumed
conversions of convertible notes
    
    
    51,823,942
    
    
    
    22,615,662
    
    
    
    Weighted average shares used in computing
diluted net income per share
    
    
    551,823,942
    
    
    
    626,626,671
    
    
    
    656,255,882Net (loss) income per share, basic
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.01
    )Net (loss) income per share, diluted
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    (0.01
    )
 As of December 31, 2005 and 2006, the Company had 263,272 and 676,999 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.
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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.
    
    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 $493, $1,547 and $5,046 for the years ended December 31, 2004, 2005
and 2006, 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, 2004, 2005 and 2006 amounted to $352, $1,101 and $3,802
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 $633 and $nil for the year ended
December 31, 2005 and 2006, respectively.21.
    
    STATUTORY RESERVESRelevant PRC statutory laws and regulations permit payments of dividends by the Groups PRC
variable interest entity and subsidiaries only out of their retained earnings, if any, as
determined in accordance with PRC accounting standards and regulations. In addition, PRC
laws and regulations require that annual appropriations of 10% of after-tax income should be
set aside prior to payments of dividends as reserve fund. As a result of these PRC laws and
regulations, the Groups PRC subsidiaries are restricted in their ability to transfer a
portion of their net assets to either in the form of dividends, loans or advances, which
restricted portion amounted to approximately $65,142 as of December 31, 2006.
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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.
    
    SUBSEQUENT EVENTDuring the first quarter of 2007, the Company allowed a customer to return a newly developed
product that was sold, delivered and for which revenue was recognized in 2006. This return
was booked in the first quarter of 2007 as a reduction of revenue and cost of revenue by
$1,173 and $913 respectively.In February 2007, Techfaith Hangzhou entered into an agreement with an independent third
party to construct certain property in Hangzhou, the PRC, for an aggregate consideration of
approximately US$10,245. Pursuant to the agreement, Techfaith Hangzhou is committed to pay
50% deposit upon the signature of the agreement the remainder according to the progress of
the construction.In March 2007, Wuhan NEC ceased business relationship with the Group. According to the
settlement agreement entered into by the Group and Wuhan NEC, the Group received $8,324 from
Wuhan NEC in March, 2007. All outstanding balances between two parties were cleared.On March 30, 2007, Techfaith BVI entered into a share transfer agreement with NEC to
purchase the 30% equity interest in STEP Technologies held by NEC. After the acquisition,
STEP Technologies becomes a 100% owned subsidiary of the Group.On April 5, 2007, Techfaith BVI entered into a joint venture entity (JV) agreement with
a component provider for handset manufacturers in the PRC to establish a JV in BVI. The core business of the JV is performing
research and development of handset design. According to the agreement, the group will
inject certain intangible assets for 31% equity interest in the JV.
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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 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    91,476
    
    
    $
    41,346Amounts due from subsidiaries
    
    
    16,634
    
    
    
    58,014Prepaid expenses and other current assets
    
    
    76
    
    
    
    174Total current assets
    
    $
    108,186
    
    
    $
    99,534Goodwill
    
    
    
    
    
    
    6Investment in subsidiaries
    
    
    67,767
    
    
    
    67,085TOTAL ASSETS
    
    $
    175,953
    
    
    $
    166,625LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued expenses and other current liabilities
    
    $
    100
    
    
    $
    275Total current liabilities
    
    $
    100
    
    
    $
    275Shareholders equity:Ordinary shares of par value $0.00002:50,000,000,000,000 shares authorized; shares issued and
outstanding, 658,183,409 in 2005 and 649,692,954 in 2006
    
    $
    13
    
    
    $
    13Additional paid-in capital
    
    
    109,798
    
    
    
    109,833Treasury stock, at cost (nil and 8,655,000 shares as of
December 31, 2005 and 2006, respectively)
    
    
    
    
    
    
    (4,628
    )Accumulated other comprehensive income
    
    
    1,456
    
    
    
    5,339Retained earnings
    
    
    64,586
    
    
    
    55,793Total shareholders equity
    
    $
    175,853
    
    
    $
    166,350TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    175,953
    
    
    $
    166,625
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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 31,2004
    
    
    2005
    
    
    2006Net revenues
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses:General and administrative
    
    
    
    
    
    
    (284
    )
    
    
    (239
    )Total operating expenses
    
    
    
    
    
    
    (284
    )
    
    
    (239
    )Loss from operations
    
    
    
    
    
    
    (284
    )
    
    
    (239
    )Interest expense
    
    
    
    
    
    
    1,410
    
    
    
    Interest income
    
    
    
    
    
    
    1,955
    
    
    
    3,077Investment (loss) income
    
    
    17,382
    
    
    
    39,607
    
    
    
    (11,362
    )Change in fair value of call option
embedded in convertible notes
    
    
    862
    
    
    
    (1,303
    )
    
    
    Change in fair value of put option
    
    
    
    
    
    
    
    
    
    
    (269
    )(Loss) income before income taxes
    
    
    18,244
    
    
    
    41,385
    
    
    
    (8,793
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )Net (loss) income per share:Basic
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.01
    )Diluted
    
    $
    0.03
    
    
    $
    0.07
    
    
    $
    (0.01
    )Weighted average shares used in computation:Basic
    
    
    500,000,000
    
    
    
    604,011,009
    
    
    
    656,255,882Diluted
    
    
    551,823,942
    
    
    
    626,626,671
    
    
    
    656,255,882
 F-36




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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
    
    
    
    
    
    
    share
    
    
    Com-Ordinary shares
    
    
    paid-in
    
    
    Treasury
    
    
    comprehensive
    
    
    Retained
    
    
    holders
    
    
    prehensiveNumber
    
    
    Amount
    
    
    capital
    
    
    stock
    
    
    income
    
    
    earnings
    
    
    equity
    
    
    incomeBalance at January 1, 2004
    
    
    500,000,000
    
    
    
    10
    
    
    
    4,832
    
    
    
    
    
    
    
    25
    
    
    
    4,957
    
    
    
    9,824
    
    
    $
    4,981Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )
    
    $
    (10
    )Unrealized gain on available-for-sale-
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    32
    
    
    
    32Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,244
    
    
    
    18,244
    
    
    
    18,244Balance at December 31, 2004
    
    
    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
    
    
    $
    3,883Issuance of restricted shares
    
    
    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
    )
 
 *
    
    Representing 577,000 ADSs. F-37




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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 31,2004
    
    
    2005
    
    
    2006Operating activities:Net (loss) income
    
    $
    18,244
    
    
    $
    41,385
    
    
    $
    (8,793
    )Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of share-based compensation
    
    
    
    
    
    
    162
    
    
    
    116Reversal of share-based compensation
    
    
    
    
    
    
    
    
    
    
    (81
    )Change in fair value of call option
embedded in convertible notes
    
    
    (862
    )
    
    
    1,303
    
    
    
    Change in fair value of put option
    
    
    
    
    
    
    
    
    
    
    269Gain or loss from long term investment
    
    
    (17,382
    )
    
    
    (41,012
    )
    
    
    7,682Change in operating assets and liabilities:Amounts due from subsidiaries
    
    
    
    
    
    
    (1,320
    )
    
    
    (41,380
    )Prepaid expenses and other current assets
    
    
    
    
    
    
    (76
    )
    
    
    (98
    )Accrued expenses and other current liabilities
    
    
    
    
    
    
    100
    
    
    
    (175
    )Net cash (used) provided by operating activities
    
    
    
    
    
    
    542
    
    
    
    (42,460
    )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
    
    
    
    3,958Net (decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    91,476
    
    
    
    (50,130
    )Cash and cash equivalents at the beginning of the year
    
    
    
    
    
    
    
    
    
    
    91,476Cash and cash equivalents at the end of the year
    
    $
    
    
    
    $
    91,476
    
    
    $
    41,346
 F-38




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##### Table of Contents



CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION- SCHEDULE 1
 Note:
 1. Basis for Preparation
  Convertible Notes
      F-39