**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**







**FORM
      20-F**





o
            **REGISTRATION
                STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
                ACT OF 1934**ORx
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              **—****For
                the fiscal year ended December 31, 2007**ORo
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              **—****For
                the transition period from __________ to
                __________**ORo
            **SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
                ACT OF 1934**





Commission
      file number 001-33692




**CHINA
      DIGITAL TV HOLDING CO., LTD.**


(Exact
      Name of Registrant as Specified in Its Charter)




**N/A**
            **Cayman
                Islands**(Translation
                of Registrant’s Name Into English)
            (Jurisdiction
                of Incorporation or Organization)





**Jingmeng
      High-Tech Building B, 4th Floor**


**No.
      5 Shangdi East Road**


**Haidian
      District, Beijing 100085**


**People’s
      Republic of China**


(Address
      of Principal Executive Offices)




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




Title of Each Class
            
            Name of Each Exchange On Which RegisteredOrdinary shares, par value US$0.0005 per share*
              American depositary shares, each representing one
              ordinary
                share
            
            New
                York Stock Exchange





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




None


(Title
      of
      Class)




_____________________


*
            Not
                for trading, but only in connection with the listing on the New York
                Stock
                Exchange of American depositary shares, or ADSs, each representing
                one
                ordinary share.





Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:




None


(Title
      of
      Class)





Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual
      report.




As
      of
      December 31, 2007, 57,296,932 ordinary shares, par value US$0.0005 per share,
      were issued and outstanding.




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes  No √




If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934. Yes  No √




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes √ No




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      Accelerated Filer  Accelerated Filer  Non-Accelerated Filer √




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




U.S.
      GAAP √




International
      Financial Reporting Standards as issued by the International Accounting
      Standards Board __




Other
      __




If
      “Other” has been checked in response to the previous question, indicate by check
      mark which financial statement item the registrant has elected to follow.
      Item 17 __ Item 18 __




If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No √







**TABLE
      OF CONTENTS**




INTRODUCTION
            1FORWARD-LOOKING
                STATEMENTS
            1**PART
                I**
            2Item
                1.
            Identity
                of Directors, Senior Management and Advisers
            2Item
                2.
            Offer
                Statistics and Expected Timetable
            3Item
                3.
            Key
                Information
            3Item
                4.
            Information
                on the Company
            27Item
                4A.
            Unresolved
                Staff Comments
            46Item
                5.
            Operating
                and Financial Review and Prospects
            46Item
                6.
            Directors,
                Senior Management and Employees
            66Item
                7.
            Major
                Shareholders and Related Party Transactions
            74Item
                8.
            Financial
                Information
            79Item
                9.
            The
                Offer and Listing
            80Item
                10.
            Additional
                Information
            81Item
                11.
            Quantitative
                and Qualitative Disclosures About Market Risks
            85Item
                12.
            Description
                of Securities Other than Equity Securities
            86**PART
                II**
            86Item
                13.
            Defaults,
                Dividend Arrearages and Delinquencies
            86Item
                14.
            Material
                Modifications to the Rights of Security Holders and Use of
                Proceeds
            86Item
                15.
            Controls
                and Procedures
            87Item
                16A.
            Audit
                Committee Financial Expert
            88Item
                16B.
            Code
                of Ethics
            88Item
                16C.
            Principal
                Accountant Fees and Services
            88Item
                16D.
            Exemptions
                from the Listing Standards for Audit Committees
            89Item
                16E.
            Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            89**PART
                III**
            89Item
                17.
            Financial
                Statements
            89Item
                18.
            Financial
                Statements
            89Item
                19.
            Exhibits
            89


i


**INTRODUCTION**




Except
      where the context otherwise requires and for purposes of this annual report
      only:




·
            “ADSs”
                refers to our American depositary shares, each of which represents
                one
                ordinary share;




·
            “ADRs”
                refers to American depositary receipts, which, if issued, evidence
                our
                ADSs;




·
            “CA
                systems” refers to conditional access systems provided to the PRC’s
                digital television market, which consist of (i) smart cards that
                are
                inserted into set-top boxes at the subscriber’s end, or terminal end, (ii)
                software installed at the digital television network operator’s
                transmission point, or head end, and (iii) software for set-top boxes,
                enabling digital television network operators to control the distribution
                of contents and value-added services to their subscribers and block
                unauthorized access to their
                networks;




·
            “China”
                or the “PRC” refers to the People’s Republic of China, excluding, for the
                purposes of this annual report, Hong Kong, Macau and
                Taiwan;




·
            “RMB”
                or “Renminbi” refers to the legal currency of
                China;




·
            “U.S.
                dollars” or “$” refers to the legal currency of the United States;




·
            “US
                GAAP” refers to generally accepted accounting principles in the United
                States; and




·
            all
                references to the number of the ordinary shares and the number of
                the
                Series A convertible redeemable shares, or Series A preferred
                shares, of our wholly owned subsidiary, China Digital TV Technology
                Co.,
                Ltd., or CDTV BVI, take into account a 40-for-1 share split executed
                by
                CDTV BVI in May 2007.




All
      references to “CDTV Holding,” “we,” “us” or “our” include China Digital TV
      Holding Co., Ltd., its subsidiaries, the businesses acquired from Novel-Tongfang
      Information Engineering Co., Ltd., or N-T Information Engineering, and, in
      the context of describing our operations and consolidated financial information,
      also include Beijing Novel-Super Digital TV Technology Co., Ltd. (formerly
      known
      as Beijing Novel-Tongfang Digital TV Technology Co., Ltd.), or N-S Digital
      TV.




**FORWARD-LOOKING
      STATEMENTS**




This
      annual report contains forward-looking statements, within the meaning of Section
      27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended, with respect to our business, operating
      results and financial condition as well as our current expectations,
      assumptions, estimates and projections about our industry. All statements other
      than statements of historical fact in this annual report are forward-looking
      statements. These forward-looking statements can be identified by words or
      phrases such as the words “anticipate,” “believe,” “estimate,” “expect,”
“intend,” “plan,” “may,” “is/are likely to,” “should,” “will” and similar
      expressions. These forward-looking statements include, without limitation,
      statements relating to:




·
            our
                goals and strategies;




·
            the
                future growth of the PRC’s digital television broadcasting market, and
                factors driving that growth;




·
            changes
                in technology standards in the digital television broadcasting industry
                and our ability to adapt to these
                changes;




·
            our
                expectations regarding demand for our products and
                services;


1


·
            our
                ability to expand our production, our sales and distribution network
                and
                other aspects of our operations;




·
            expected
                changes in our revenues and certain cost and expense
                items;




·
            our
                ability to effectively protect our intellectual property rights and
                not
                infringe on the intellectual property rights of
                others;




·
            our
                belief regarding the competitiveness of our products and
                services;




·
            competition
                in the CA systems market;




·
            government
                policies and regulations relating to the digital television broadcasting
                industry, the CA systems industry and other areas relevant to our
                business
                activities;




·
            any
                significant changes to the PRC government’s digitalization
                program;




·
            general
                economic and business conditions in the
                PRC;




·
            our
                future business development and economic performance;
                and




·
            our
                use of proceeds.




These
      forward-looking statements involve various risks and uncertainties. These
      forward-looking statements reflect our current views with respect to future
      events and are not a guarantee of future performance. Actual results may differ
      materially from the information contained in the forward-looking statements
      as a
      result of a number of factors, including, without limitation, the risk factors
      set forth in “Item 3. Key Information—D. Risk Factors” and the
      following:




·
            general
                economic and business conditions in the PRC and
                elsewhere;




·
            governmental,
                statutory, regulatory or administrative initiatives affecting
                us;




·
            trends
                in the PRC’s digital television broadcasting industry, including progress
                of digitalization in the PRC and the growth of digital television
                network
                operators;




·
            future
                profitability of our operations;




·
            exchange
                rate fluctuations between the Renminbi and other currencies;
                and




·
            the
                availability of qualified management and technical
                personnel.




Because
      of these risks, uncertainties and assumptions, the forward-looking events and
      circumstances discussed in this annual report might not occur in the way we
      expect, or at all. Accordingly, you should not place undue reliance on any
      forward-looking information. The forward-looking statements made in this annual
      report relate only to events or information as of the date on which the
      statements are made in this annual report. We undertake no obligation to update
      or otherwise revise the forward-looking statements in this annual report,
      whether as a result of new information, future events or otherwise.




**PART
      I**




**Item
      1.**  **Identity
      of Directors, Senior Management and Advisers**




Not
      Applicable.




2


**Item
      2.**  **Offer
      Statistics and Expected Timetable**




Not
      Applicable.




**Item
      3.**  **Key
      Information**




**A.**  **Selected
      Financial Data**




Our
      Selected Consolidated Financial
      Data




The
      following selected consolidated financial data should be read in conjunction
      with our audited historical consolidated financial statements, the notes thereto
      and “Item 5. Operating and Financial Review and Prospects.” The selected
      consolidated statement of operations data for the years ended December 31,
      2005,
      2006 and 2007, and the selected consolidated balance sheet data as of December
      31, 2006 and 2007 set forth below are derived from our audited consolidated
      financial statements included elsewhere in this annual report. The selected
      consolidated statement of operations data for the year ended December 31, 2004
      and the selected historical consolidated balance sheet data as of December
      31,
      2004 and 2005 set forth below are derived from our audited consolidated
      financial statements which are not included in this annual report.




Selected
      consolidated financial information as of December 31, 2003 and for the year
      ended December 31, 2003 has been omitted because such information could not
      be
      provided without unreasonable effort or expense.




Our
      audited historical consolidated financial statements have been prepared and
      presented in accordance with US GAAP.




Our
      historical results for any prior period do not necessarily indicate our results
      to be expected for any future period.




**Years
                ended December 31,****2004****(a)**
            
            **2005**
            
            **2006**
            
            **2007****(in thousands of U.S. dollars, except share and per share data)****Consolidated
                Statements of Operations Data:**RevenuesProducts
            
            $
            1,388
            
            $
            9,291
            
            $
            26,443
            
            $
            49,741Services
            
            
            2,300
            
            
            3,855
            
            
            4,182
            
            
            6,0113,688
            
            
            13,146
            
            
            30,625
            
            
            55,752Business
                tax
            
            
            (61
            )
            
            (60
            )
            
            (225
            )
            
            (299
            )Net
                revenues
            
            
            3,627
            
            
            13,086
            
            
            30,370
            
            
            55,453Cost
                of revenuesProducts
            
            
            458
            
            
            1,936
            
            
            4,726
            
            
            8,100Services
            
            
            1,339
            
            
            1,967
            
            
            1,859
            
            
            2,1351,797
            
            
            3,903
            
            
            6,585
            
            
            10,235Gross
                profit
            
            
            1,830
            
            
            9,183
            
            
            23,785
            
            
            45,218Total
                operating expenses
            
            
            3,019
            
            
            3,830
            
            
            5,297
            
            
            12,107(Loss)/
                income from operations
            
            
            (1,189
            )
            
            5,353
            
            
            18,488
            
            
            33,111Interest
                income
            
            
            12
            
            
            117
            
            
            279
            
            
            2,790Impairment
                of long-term investment
            
            
            (358
            )
            
            —
            
            
            —
            
            
            —Other
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            263Recognition
                of the change in the fair value of the warrant
            
            
            (472
            )
            
            (18
            )
            
            (5,406
            )
            
            —(Loss)/
                income before income taxes
            
            
            (2,007
            )
            
            5,452
            
            
            13,361
            
            
            36,164Income
                tax
            
            
            21
            
            
            66
            
            
            59
            
            
            (2,342
            )(Loss)/
                income before minority interest
            
            
            (1,986
            )
            
            5,518
            
            
            13,420
            
            
            33,822


3


**Years
                ended December 31,****2004****(a)**
            
            **2005**
            
            **2006**
            
            **2007****(in thousands of U.S. dollars, except share and per share data)**Minority
                interest
            
            
            1,319
            
            
            975
            
            
            430
            
            
            —Net
                (loss)/ income
            
            
            (3,305
            )
            
            4,543
            
            
            12,990
            
            
            33,816Deemed
                dividend to preferred shareholder at issuance
            
            
            (7,427
            )
            
            —
            
            
            —
            
            
            —Cash
                dividend to preferred shareholder
            
            
            —
            
            
            —
            
            
            (5,731
            )
            
            —Net
                (loss)/ income attributable to holders of ordinary shares
            
            $
            (10,732
            )
            $
            4,543
            
            $
            7,259
            
            $
            33,816**Earnings
                per share data:**Net
                (loss)/ income per share—basic ordinary shares
            
            $
            (0.36
            )
            $
            0.11
            
            $
            0.24
            
            $
            0.74Net
                income per share—basic participating preferred shares
            
            
            1.32
            
            
            0.11
            
            
            0.54
            
            
            0.66Net
                (loss)/ income per ordinary share—diluted
            
            $
            (0.36
            )
            $
            0.11
            
            $
            0.21
            
            $
            0.68Weighted
                average shares used in calculating basic net (loss)/ income per
                share—ordinary shares
            
            
            30,000,000
            
            
            30,000,000
            
            
            30,488,889
            
            
            39,170,004Weighted
                average shares used in calculating basic net income per share—preferred
                shares
            
            
            5,638,889
            
            
            10,000,000
            
            
            10,519,120
            
            
            7,389,394Weighted
                average shares used in calculating basic net (loss)/ income per
                share
            
            
            30,000,000
            
            
            30,000,000
            
            
            34,225,321
            
            
            42,773,590**Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            5,278
            
            $
            8,272
            
            $
            21,137
            
            $
            228,958Total
                assets
            
            
            9,545
            
            
            16,217
            
            
            33,505
            
            
            263,735Total
                liabilities
            
            
            5,585
            
            
            6,362
            
            
            21,564
            
            
            11,884Minority
                interest
            
            
            1,969
            
            
            2,944
            
            
            4,000
            
            
            4,000Series A
                convertible redeemable preferred shares
            
            
            12,000
            
            
            12,000
            
            
            16,078
            
            
            —Total
                shareholders’ (deficiency)/ equity
            
            
            (10,009
            )
            
            (5,089
            )
            
            (8,137
            )
            
            247,851Total
                liabilities, minority interest, Series A convertible redeemable
                preferred shares and shareholders equity
            
            $
            9,545
            
            $
            16,217
            
            $
            33,505
            
            $
            263,735







(a)
            The
                consolidated statements of operations data for the year ended December
                31,
                2004 also include the results of operations of the smart card and
                CA
                systems business of N-T Information Engineering through June 7, 2004,
                on which date such business was transferred to N-S Digital TV, our
                variable interest entity.




**Exchange
      Rate Information**




We
      present our historical consolidated financial statements in U.S. dollars. In
      addition, solely for the convenience of the reader, certain pricing information
      is presented in U.S. dollars and certain contractual amounts that are in
      Renminbi include a U.S. dollar equivalent. Except as otherwise specified, this
      pricing information and these contractual amounts are translated at $1.00 to
      RMB7.2946, the noon buying rate in The City of New York for cable transfers
      of
      Renminbi as certified for customs purposes by the Federal Reserve Bank of New
      York on December 31, 2007. We make no representation that any Renminbi or U.S.
      dollar amounts could have been, or could be, converted into U.S. dollars or
      Renminbi, as the case may be, at any particular rate, the rates stated below,
      or
      at all. The PRC government imposes controls over its foreign currency reserves
      in part through direct regulation of the conversion of Renminbi into foreign
      exchange and through restrictions on foreign trade.




On June
      16, 2008, the noon buying rate in The City of New York for cable transfers
      of
      Renminbi as certified for customs purposes by the Federal Reserve Bank of New
      York was RMB6.8911 to $1.00. The following table sets forth additional
      information concerning exchange rates between Renminbi and U.S. dollars for
      the
      periods indicated. These rates are provided solely for your convenience and
      are
      not necessarily the exchange rates that we used in this annual report or will
      use in the preparation of our periodic reports or any other information to
      be
      provided to you.


4




**RMB
                per $1.00 Noon Buying Rate****Period**
            
            **Period
                End**
            
            **Average****(1)**
            
            **Low**
            
            **High**2003
            
            
            8.2769
            
            
            8.2770
            
            
            8.2272
            
            
            8.28002004
            
            
            8.2765
            
            
            8.2768
            
            
            8.2764
            
            
            8.27742005
            
            
            8.0702
            
            
            8.1940
            
            
            8.0702
            
            
            8.27652006
            
            
            7.8041
            
            
            7.9723
            
            
            7.8041
            
            
            8.07022007
            
            
            7.2946
            
            
            7.6072
            
            
            7.2946
            
            
            7.8127December
            
            
            7.2946
            
            
            7.3680
            
            
            7.2946
            
            
            7.41202008January
            
            
            7.1818
            
            
            7.2405
            
            
            7.1818
            
            
            7.2946February
            
            
            7.1115
            
            
            7.1644
            
            
            7.1100
            
            
            7.1973March
            
            
            7.0120
            
            
            7.0722
            
            
            7.0105
            
            
            7.1110April
            
            
            6.9870
            
            
            6.9997
            
            
            6.9840
            
            
            7.0185May
            
            
            6.9400
            
            
            6.9725
            
            
            6.9377
            
            
            7.0000June
                (through June 16)
            
            
            6.8911
            
            
            6.9235
            
            
            6.8911
            
            
            6.9633





*Source:
      Federal Reserve Bank of New York*




(1)
            Annual
                averages are calculated using month-end rates. Monthly averages are
                calculated using the average of the daily rates during the relevant
                period.




**B.** **Capitalization
      and Indebtedness**




Not
      Applicable.




**C.** **Reasons
      for the Offer and Use of Proceeds**




Not
      Applicable.




**D.** **Risk
      Factors**




*You
      should carefully consider all of the information in this annual report,
      including the risks and uncertainties described below, before deciding to invest
      in our ADSs. The trading price of our ADSs could decline due to any of these
      risks and uncertainties, and you may lose all or part of your
      investment.*




**Risks
      Relating to Our Business and Industry**




***The
      PRC television broadcasting industry may not digitalize as quickly as we expect,
      as a result of which our revenues would be materially adversely
      affected.***




Our
      future success depends upon the pace at which PRC television network operators
      switch from analog to digital transmission. Analysys International, a
      Beijing-based market research firm, projected that the number of digital cable
      television subscribers in the PRC will grow from 12.5 million as of
      December 31, 2006 to 111.2 million as of December 31, 2010. However,
      various factors may cause PRC television network operators to convert from
      analog to digital transmission at a slower pace. The PRC government, which
      has
      strongly encouraged television network operators to digitalize their networks
      and has set a target of 2015 for all, except for up to six, analog channels
      to
      be switched off, may relax or cancel the 2015 target. PRC television viewers
      may
      fail to subscribe to digital television services in sufficient numbers to
      support wide-scale digitalization. PRC television network operators may decide
      that the commercial benefits of digitalization are outweighed by the costs
      or
      other commercial or policy considerations. If any of these or other factors
      were
      to cause the pace of digitalization to proceed significantly more slowly than
      we
      anticipate, our sales of CA systems, in particular smart cards, would suffer
      significantly, and our revenues would be materially adversely
      affected.


5


***Changes
      in the regulatory environment of, and government policies towards, the PRC
      television network industry could materially adversely affect our
      revenues.***




Strong
      PRC government support has been a significant driver of the PRC television
      broadcasting industry’s transition from analog to digital transmission. Although
      the PRC government has set a target of 2015 for all television networks to
      switch to digital transmissions, terminating all analog transmissions except
      for
      up to six channels that will continue in service for the benefit of those unable
      to afford digital television, there is no assurance that the government will
      not
      change or adjust its digitalization policies at any time, including canceling
      or
      relaxing the target for digitalization. If the digitalization process in the
      PRC
      were to be slowed down or otherwise adversely affected by any government action
      or inaction, we might not be able to develop new customers or attract new
      business from existing customers, and our revenues would be materially adversely
      affected.




Furthermore,
      the television broadcasting industry in the PRC is highly regulated. Government
      regulations with respect to television broadcasting content, the amount and
      content of advertising, the pricing of pay-television subscriptions, the role
      of
      private-sector investment and the role of foreign investment significantly
      influence the business strategies and operating results of our customers. For
      example, the PRC State Administration of Radio, Film and Television, or the
      SARFT, issues licenses without which our customers cannot operate, and it may
      withdraw such licenses for violation of its regulations. Among other things,
      the
      SARFT must approve the creation of new premium content channels and has the
      power to order television network operators to stop airing programs or
      advertising that it considers illegal or inappropriate. Any of such adverse
      government actions against television network operators could in turn cause
      us
      to lose existing or potential customers.




In
      addition, many of our customers are directly or indirectly owned by the central
      PRC government or provincial or local governments. As a result, their business
      strategies and capital expenditure budgets are significantly influenced by
      government policies at various levels. Any change in the business strategies
      of
      our customers that leads to a reduction in the funds available to purchase
      our
      CA systems could have a material adverse effect on our business, operating
      results and financial condition. Furthermore, any changes in regulation that
      might result in the consolidation of the PRC cable television network industry
      could, among other things, substantially increase the bargaining power of the
      consolidated network operators over us and require us to reduce the prices
      of
      our CA systems and other products and services, which could, in turn, materially
      adversely affect our net income.




***If
      significant numbers of television viewers in the PRC are unwilling to pay for
      digital television or value-added services, we may not be able to sustain our
      current revenue level.***




The
      substantial majority of our revenues are derived from digital television network
      operators who purchase our head-end CA systems software and smart cards to
      insert in the set-top boxes of their subscribers. Therefore, we are
      substantially dependent upon the television network operators’ ability to sell
      digital television subscriptions to viewers. In addition, the success of our
      efforts to generate future revenues by offering television network operators
      new
      software applications that facilitate the delivery of value-added services
      to
      viewers ultimately depends on whether viewers are willing to pay for such
      value-added services.




However,
      television network operators may be unsuccessful in promoting digital television
      or value-added services. Television viewers in the PRC are accustomed to
      receiving television for free or for a very low price. Even viewers who are
      accustomed to paying for cable television subscriptions have historically paid
      very low rates and may not be willing to pay significantly higher rates for
      digital television services, or additional fees for value-added services. If
      cable television operators are unable to develop unique and compelling content
      to differentiate themselves from terrestrial broadcasters or offer value-added
      services that meet viewers’ needs at an affordable price, they may find it
      difficult to persuade viewers to accept the pay-television model or pay more
      for
      digital cable television or value-added services than viewers have historically
      paid for analog cable television. In that event, our customers’ digital
      subscriber numbers may not grow and we may be unable to sustain our current
      revenue level.


6


***If
      significant numbers of television network operators who have already installed
      our CA system head-end software fail to purchase commercial quantities of our
      smart cards, we may not be able to sustain our current revenue
      level.***




Television
      network operators who purchase and install our CA systems head-end software
      generally purchase our smart cards in batches over a period of months as they
      roll out digital services to their subscribers in stages. Most of our revenues
      are derived from the sale of smart cards to customers who are engaged in such
      service roll-outs. However, certain television network operators have installed
      our CA systems head-end software and subsequently failed to purchase commercial
      quantities of our smart cards. Factors that may cause a television network
      operator to suspend or halt its digitalization using our products include,
      but
      are not limited to, changes in such television network operator’s management
      priorities or financial condition, and a decision by such television network
      operator to carry out digitalization using the CA systems of a competitor.
      If
      significant numbers of television network operators who have already installed
      our CA systems head-end software fail to purchase commercial quantities of
      our
      smart cards, we may not be able to sustain our current revenue
      level.




***We
      derive substantially all of our revenues from customers who are installing
      new
      CA systems, who may not require system upgrades or new applications for some
      time if at all. If we are unable to continue attracting new customers to install
      our CA systems or persuade existing customers to purchase our system upgrades
      or
      value-added applications, our profitability and prospects may be materially
      adversely affected.***




CA
      systems vendors in more mature digital television markets, such as the United
      States and Europe, derive revenues not only from the purchase of new CA systems
      by television network operators who are switching from analog to digital
      transmissions but also from the purchase of new and replacement smart cards,
      system upgrades and new value-added services by existing customers. In the
      PRC,
      however, cable television network operators are still in the initial phase
      of
      purchasing CA systems and introducing digital content and services to their
      subscribers. To date, none of our customers has made a follow-on purchase for
      system upgrades or card replacements. As a result, the success of our business
      depends entirely on our ability to attract a continuing stream of customers
      who
      are switching from analog to digital transmission. If we are unable to continue
      attracting sufficient numbers of such customers, or to begin developing a
      significant source of recurring revenues, our profitability and prospects may
      be
      materially adversely affected.




***We
      have a limited operating history, which may make it difficult for you to
      evaluate our business and prospects, and our rapid growth to date may not be
      sustainable.***




Since
      our
      incorporation in March 2004, we have enjoyed rapid growth in revenues. Our
      net
      revenues increased, 82.6%, 132.1% and 260.7% in 2007, 2006 and 2005,
      respectively, compared to the prior year. Such revenue growth rates may not
      be
      representative of future growth or be sustainable. As our operating history
      is
      limited, the revenue and income potential of our business and markets are
      unproven. Our historical operating results may not provide a meaningful basis
      for evaluating our business, financial performance and prospects. In addition,
      we face numerous risks, uncertainties, expenses and difficulties frequently
      encountered by companies at an early stage of development. Some of these risks
      and uncertainties relate to our ability to:




·
            develop
                new customers or new business from existing
                customers;




·
            expand
                the technical sophistication of the products we
                offer;




·
            respond
                effectively to competitive pressures;
                and




·
            attract
                and retain qualified management and
                employees.




We
      cannot
      predict whether we will meet internal or external expectations of our future
      performance. If we are not successful in addressing these risks and
      uncertainties, our business, operating results and financial condition may
      be
      materially adversely affected.


7


***Our
      business will suffer if we do not respond effectively to technological or
      commercial changes in our industry.***




Our
      business and the market in which we operate are characterized by rapid
      commercial and technological change, evolving industry standards and frequent
      product enhancements. As digital broadcasting becomes more popular in the PRC,
      television network operators are likely to seek more sophisticated CA technology
      that offers them greater reliability, flexibility and functionality in
      delivering protected content or value-added services to viewers. As methods
      of
      distributing information and entertainment evolve, CA technology may also need
      to evolve to provide content protection for distribution platforms other than
      television, such as mobile phones. Our continued success will depend, in part,
      on our ability to develop and market products and services that respond to
      technological changes and evolving market demand or industry standards in a
      timely and cost-effective manner. We will need to invest significant financial
      resources in research and development to keep pace with technological advances
      in the CA systems industry and related industries. However, research and
      development activities are inherently uncertain, and our significant
      expenditures on research and development may not yield corresponding benefits.
      If we fail to develop and introduce products and services that effectively
      respond to technical changes and evolving market demand or industry standards
      and compete effectively with products and services offered by our competitors,
      our sales may be significantly reduced and we may not be able to sustain our
      current revenue level.




***A
      significant portion of our revenues in any single period depends on a limited
      number of customers. If one customer defers or cancels its orders or chooses
      our
      competitors’ products or services, our revenues in such period could decline
      significantly.***




We
      currently derive, and we expect to continue to derive, a significant portion
      of
      our revenues from a limited number of customers, although the particular
      customers may vary from period to period. As digital cable television networks
      are in their infancy in the PRC, the largest shipments of smart cards are to
      operators who are launching new digital transmission systems and need to
      purchase in bulk for their new networks. For example, three customers each
      contributed more than 10% of our total revenues in 2005, representing an
      aggregate of 44.1% of our total revenues during 2005; two customers each
      contributed more than 10% of our total revenues in 2006, representing an
      aggregate of 27.5% of our total revenues during 2006; and one customer
      contributed more than 10% of our total revenues in 2007, representing 14.1%
      of
      our revenues in that period. If a customer significantly reduces the volume
      of
      its purchases from us, defers or cancels orders or terminates its relationship
      with us, our revenues could decline significantly and, as a result, our
      business, operating results and financial condition could be materially
      adversely affected.




***Our
      business may suffer if cable television network operators, who currently
      comprise our primary customer base, do not compete successfully with existing
      and emerging alternative platforms for delivering television programs, including
      terrestrial networks, Internet protocol television and satellite broadcasting
      networks.***




Our
      existing customers are mainly cable television network operators in the PRC,
      which compete with traditional terrestrial television networks for the same
      pool
      of viewers. As technologies develop, other means of delivering information
      and
      entertainment to television viewers are evolving. For example, some
      telecommunications companies in the PRC are seeking to compete with terrestrial
      broadcasters and cable television network operators by offering Internet
      protocol television, or IPTV, which allows telecommunications companies to
      stream television programs through telephone lines. While the PRC Ministry
      of
      Industry and Information (formerly known as the PRC Ministry of Information
      Industry), or the MII, so far has issued only five IPTV licenses, it may issue
      significantly more licenses in the future. In addition, the SARFT issued a
      broadcast license in 2006 to the PRC’s first direct satellite broadcast company,
      which is expected to begin commercial operation this year. We may not be as
      successful in selling our CA systems to the operators of IPTV or satellite
      television networks as we have been in selling to cable television network
      operators. To the extent that the terrestrial television networks,
      telecommunications companies and satellite television network operators compete
      successfully with cable television network operators for viewers, the ability
      of
      our existing customer base to attract and retain subscribers may be adversely
      affected. As a result, demand for additional smart cards will falter and we
      may
      not be able to sustain our current revenue level.


8


***Our
      business could be harmed if the security of our customers’ networks is
      compromised due to the failure of our CA systems or the security breach of
      the
      software or hardware supplied by other vendors.***




We
      face
      risks relating to the failure of our CA systems to block unauthorized access
      to
      the television networks of our customers. Our CA systems use a combination
      of
      signal scrambling and encryption to prevent unauthorized viewing of our
      customers’ television programs. An important component of our CA systems is the
      smart cards we provide for our customers’ individual subscribers. Unauthorized
      viewing and use of content could be accomplished by counterfeiting our smart
      cards, stealing our system’s authorization messages or security codes, or in any
      other way thwarting our CA systems’ security features. Any significant security
      breach could require us to develop and implement solutions that could be costly
      or time-consuming, or to replace an operator’s smart cards at our own expense.
      For example, pursuant to our contracts with buyers of our CA systems, if we
      were
      unable to remedy such security breach with system modifications, we could be
      obligated to replace the cards free of charge if the breach occurs within the
      first year (or in some cases, within the first two or three years) after sale.
      Even though we have not experienced any significant counterfeiting or other
      security breach, we cannot assure you that our current assumptions regarding
      the
      security of our CA systems are reasonable. We could be obligated to incur a
      significant portion of the cost of replacing our smart cards in future years
      if
      any significant counterfeiting or security breach occurs. See “Item 4.
      Information on the Company—B. Business Overview—Our Products and Services—CA
      Systems.” The cost of smart card replacement and the damage to our reputation
      could have a material adverse effect on our business, operating results and
      financial condition.




In
      addition to our CA systems, the secured transmission of digital television
      programming also relies on certain other software and hardware components,
      such
      as set-top boxes supplied by other vendors, used on our customers’ digital
      television networks. A security breach of any of these other software and
      hardware components could also result in unauthorized access to the television
      networks of our customers. For example, in November 2007, it was discovered
      that
      an individual located in the city of Daqing in Heilongjiang Province had
      provided shared access to the local digital television network to more than
      one
      hundred other people without authorization by hacking into certain set-top
      boxes
      used on that network, which do not have advanced security features due to cost
      considerations. By using a “tracking” technology offered by our CA systems,
      which enables an operator to track down the compromised set-up boxes, the local
      television network operator identified the points of breach, took measures
      to
      block further unauthorized access and contained the impact of the breach. The
      local police department also investigated the breach and made an arrest.
      According to our contractual arrangement with this cable network
      operator, we believe we are not liable for such security breach of software
      or
      hardware components that are supplied by other vendors. However, our business,
      operating results and financial conditions could still be materially and
      adversely affected if the scale of such security breach reaches a level such
      that the affected television network operators may have difficulty in recruiting
      new subscribers or retaining existing subscribers and a significant reduction
      in
      demand for our smart cards results. Furthermore, as our CA systems are used
      on
      the affected networks, our reputation could also be harmed by being associated
      with such security breaches on our customers’ networks.




***We
      generally do not have long-term contracts with suppliers of computer chips
      or
      the companies that manufacture our smart cards. If any of our computer chip
      suppliers or smart-card manufacturers is unable to fulfill our orders in time
      or
      at all, we may be unable to deliver smart cards to our customers on time or
      at
      all, which could have a material adverse effect on our business, operating
      results and financial condition.***




We
      generally do not have long-term contracts with our suppliers. We purchase
      substantially all of the computer chips that are used in our smart cards from
      two suppliers, STMicroelectronics, or STM, and ACG Identification Technologies
      Asia Pte. Ltd., or ACG, which is an agent for Infineon Technologies AG, or
      Infineon. In addition, we have arrangements with four smart-card manufacturers,
      China Electronics Smart Card Co., Ltd., or China Electronics, the China Sciences
      Group, Axalto Smart Card Technology Co., and Oberthur Card Systems, to embed
      the
      computer chips into plastic cards. We generally place purchase orders with
      our
      computer chip and smart card suppliers as needed to meet our customers’ demand.
      Generally, our computer chip and smart card suppliers are not under any
      contractual obligation to accept our purchase orders or fulfill them within
      our
      desired time frame. However, we currently maintain a one-year contract with
      each
      of China Electronics and the China Sciences Group, that requires China
      Electronics or the China Sciences Group, as the case may be, to fulfill our
      orders in accordance with an agreed schedule. Any significant delay or failure
      by any of our suppliers or manufacturers to fulfill our orders for computer
      chips or smart cards could force us to obtain computer chips or smart cards
      from
      alternative sources at higher cost, negatively affecting our operating margins,
      or could prevent us from delivering smart cards in the required quantities
      to
      our customers on time. Any such failure by us could have a material adverse
      effect on our reputation, retention of customers, business, operating results
      and financial condition, and may subject us to claims from our
      customers.


9


***We
      face intense competition, which could reduce our market share and harm our
      financial performance.***




The
      market for digital television CA systems and software applications is intensely
      competitive. Several of the world’s leading developers and producers of CA
      systems, including Conax AS, Irdeto Access BV, Kudelski SA and NDS Group,
      operate in the PRC market. We also compete with domestic CA systems vendors,
      including Compunicate Technologies Inc., DVN Holdings Ltd. and Sumavision
      Technologies Co., Ltd. Some of our competitors have substantially greater
      financial, technical and other resources than we do, and may respond more
      quickly than us to technological or commercial changes in our industry. In
      addition, some competitors offer their CA systems at a lower price than we
      do.
      We may need to reduce our prices to compete with them, which may lead to reduced
      margins or loss of market share. See “Item 4. Information on the Company—B.
      Business Overview—Competition.”




***We
      depend upon key personnel, including our senior executives and technical and
      engineering staff, and our business and growth prospects may be severely
      disrupted if we lose their services.***




Our
      future success depends heavily on the continued service of our key executives.
      In particular, we rely on the expertise and experience of Mr. Jianhua Zhu,
      our chief executive officer, Dr. Zengxiang Lu, chairman of our board of
      directors and our chief strategy officer, and Mr. Jian Han, our chief
      technology officer, in our business operations and technology development
      efforts, and on their relationships with the regulatory authorities, our
      customers, our suppliers, our employees and our operating company,
      N-S Digital TV. If any of Mr. Zhu, Dr. Lu or Mr. Han becomes
      unable or unwilling to continue in their present positions, or if they join
      a
      competitor or form a competing company, we may not be able to replace them
      easily, our business may be significantly disrupted and our business, operating
      results and financial condition may be materially adversely affected. We do
      not
      currently maintain key-man insurance for any of our key personnel. Furthermore,
      our future success depends heavily upon our ability to recruit and retain
      experienced technical and engineering staff. There is substantial competition
      for qualified technical personnel from other companies in our industry as well
      as from businesses outside our industry, and we may not be successful in
      retaining technical and engineering employees and recruiting new ones. If we
      are
      unsuccessful in our recruitment and retention efforts, our business may be
      materially adversely affected.




***Our
      attempts to diversify our business and expand our revenues by cooperating with
      digital television network operators to provide value-added television services
      may not be successful and may prove costly.***




We
      are
      pursuing strategies to expand and diversify our revenues, including cooperating
      with digital television network operators to offer premium cable television
      services such as electronic program guides based advertising platforms,
      pay-per-view programming and video-on-demand. To this end, we established
      Beijing Novel-Super Media Investment Co., Ltd., or N-S Media Investment, as
      a wholly owned subsidiary of Super TV in December 2007 and are currently in
      the
      process of establishing a joint venture, Dongguan SuperTV Video Info Co. Ltd.,
      or Dongguan SuperTV, between N-S Digital TV and a PRC citizen to provide
      value-added services to television viewers. See “Item 4. Information on the
      Company—A. History and Development of the Company.” However, we have no prior
      experience cooperating with television network operators in providing
      value-added services, and may not be successful in doing so. In addition, our
      attempts to develop this new business model may be time-consuming and may
      distract our management from developing our existing lines of business, which
      could adversely affect our business, operating results and financial
      condition.


10




*We
      may face difficulties implementing our acquisition strategy, including
      identifying suitable opportunities and integrating acquired businesses and
      assets with our existing operations, which could have a material adverse effect
      on our business, operating results and financial
      condition.*




As
      part
      of our business strategy, we intend to enhance our capabilities by acquiring
      other companies or businesses that complement our existing business or enhance
      our product portfolio and proprietary technology. However, our ability to
      implement our acquisition strategy will depend on our ability to identify
      suitable acquisition candidates, our ability to compete effectively to attract
      and reach agreement with acquisition candidates on commercially reasonable
      terms
      and the availability of financing to complete larger acquisitions, as well
      as
      our ability to obtain any required shareholder or government approvals. In
      addition, any particular acquisition may not produce the intended benefits.
      For
      example, we may not be successful in integrating acquisitions with our existing
      operations and personnel, and the process of integration may cause unforeseen
      operating difficulties and expenditures and may attract significant attention
      of
      our management that would otherwise be available for the ongoing development
      of
      our business. If we make future acquisitions, we may issue new shares that
      dilute the interests of our other shareholders, expend cash, incur debt, assume
      contingent liabilities or create additional expenses related to the impairment
      of goodwill or the amortization of other intangible assets with estimable useful
      lives.




***Our
      business could be harmed if a defect in our software, technology or services
      interferes with, or causes any failure in, our customers’
systems.***




Our
      software and technology are integrated into the television transmission
      infrastructure of our customers. Accordingly, a defect, error or performance
      problem with our software or technology could interfere with, or cause a
      critical component of, one or more of our customers’ systems to fail for a
      period of time. Any negligence or error of our employees in the course of their
      performance of system integration, upgrade or maintenance services for our
      customers may also cause malfunctioning, suspension or failure of our customers’
systems. Occurrence of such incidents could result in claims for substantial
      damages against us, regardless of whether we are responsible for such failure.
      Any claim brought against us could be expensive to defend and require the
      expenditure of a significant amount of resources, regardless of whether we
      prevail. In addition, we do not currently maintain any product or business
      liability insurance. Although we have not experienced any such material
      interference or failure in the past, our potential exposure to this risk may
      increase as sales of our products and customer demand for our upgrade or
      maintenance services grow. Any future problem in this area could cause severe
      customer service and public relations problems for our customers.




**N-S Digital****TV may be deemed not to be in full compliance with certain legal regulatory
      requirements relating to the production****and sale of encryption products. The relevant PRC government authorities could
      require N-S Digital TV to cease such activities and impose administrative
      penalties including fines, which could have a material adverse effect on our
      business.**




The
      PRC
      government introduced regulations in 1999 generally requiring a company that
      engages in the production and sale of encryption products to obtain two
      licenses, one for the production of encryption products and the other for the
      sale and distribution of encryption products, and the implementation rules
      for
      issuing such two licenses were promulgated in December 2005. Under these
      regulations and rules, a company generally is only allowed to produce and/or
      sell encryption products that use algorithms designated by the encryption
      authority and such products shall also be certified by the encryption authority.
      The encryption authority initially designated permitted algorithms for CA
      systems in April 2007 and a final and official designation remains pending.
      Like
      many other vendors of CA systems in the PRC, N-S Digital TV has been
      producing and selling CA systems using algorithms other than those initially
      designated by the encryption authority. We understand the encryption authority
      has allowed a transition period, of a duration yet to be determined at the
      sole
      discretion of the encryption authority, for vendors of CA systems to comply
      with
      this requirement to use the algorithms to be finally and officially designated
      by the government. See “Item 4. Information on the Company—B. Business
      Overview— Regulation—Regulation of Encryption Industry.” N-S Digital TV has
      engaged in the production and sale of encryption products since its
      establishment in May 2004, but it did not obtain the license for the production
      of encryption products until June 2006. It has commenced the process of applying
      for a license for the sale of encryption products, but its efforts may not
      be
      successful. If its efforts to obtain such license are unsuccessful, it may
      be
      required to discontinue selling encryption products. In addition, if
      N-S Digital TV fails to adopt the government-designated algorithms for its
      CA systems products at the end of the transition period, it may be required
      to
      discontinue the production and sale of its non-compliant CA systems. If
      N-S Digital TV fails to obtain a license for the sale of encryption
      products but continues such sales and if the relevant PRC government authorities
      deem such sales activities to be in violation of the applicable regulations,
      or
      if the relevant PRC government authorities deem N-S Digital TV’s production
      of encryption products prior to June 2006 to be in violation of the applicable
      regulations, they may impose sanctions against N-S Digital TV. Such
      sanctions may include confiscation of income from non- compliant activities,
      fines of up to three times the amount of income from non-compliant activities
      and revocation of the licenses already issued. Imposition of such sanctions
      may
      result in material disruptions to our business operations, damage to our
      reputation and financial losses. As a result, our business, operating results
      and financial condition may be materially adversely affected.


11


***Enforcement
      of certain recent PRC regulatory requirements regarding the use of encryption
      products may prevent prospective customers from purchasing our CA systems and
      our business could be materially adversely affected as a
      result.***




In
      March
      2007, the PRC encryption authority introduced regulations that require users
      to
      use only encryption products that are certified by the encryption authority
      and
      purchased from vendors who hold an encryption product sales license. We have
      commenced the process of applying for but not yet obtained an encryption product
      sales license. In addition, our CA systems have not been certified by the
      encryption authority because we have not adopted the government-designated
      algorithms for our CA systems. King & Wood, our PRC counsel, has
      advised us that because the encryption authority has allowed a transition
      period, of a duration yet to be determined at the sole discretion of the
      encryption authority, for us to adopt the algorithms to be finally and
      officially designated by the government, it is unlikely that the encryption
      authority will enforce the above-mentioned regulatory requirements with respect
      to the use or purchase of our CA systems during that transition period. However,
      if we have not obtained the required encryption products sales license or the
      certification for our CA systems upon the expiration of the transition period,
      enforcement of the above-mentioned regulatory requirements could prevent our
      prospective customers from purchasing our CA systems. In addition, even if
      we do
      obtain the required encryption product sales license and develop products
      incorporating algorithms certified by the PRC encryption authority, we cannot
      assure you that we will be able to successfully market such products. As a
      result, our business, operating results and financial condition may be
      materially adversely affected.




***We
      may incur development costs and may be required to pay certain fees in order
      to
      use the algorithms designated by the PRC encryption authority for CA
      systems.***




A
      company
      generally is only allowed to produce and/or sell encryption products that have
      adopted the algorithms designated by the PRC encryption authority. As the
      encryption authority did not initially designate any algorithms for CA systems
      until April 2007, we have been using algorithms in our CA systems other than
      those designated by the encryption authority. If we are required by the
      government authorities to instead use the algorithms designated by the
      encryption authority in our CA systems, we may incur costs to develop new
      products adopting such algorithms and may have to pay certain fees to the
      government for such usage. Development costs and the payment of such fees,
      the
      amount of which remains unclear, may have an adverse material effect on our
      profit margin if we cannot pass on such increased costs to our
      customers.




***We
      are in the process of registering as our trademarks the English and Chinese
      names “NOVEL SUPERTV”. If we fail to have such trademarks registered, our
      business operations could be adversely affected.***




We
      used
      to depend on N-T Information Engineering for the use of the English and
      Chinese names for “NOVEL-TONGFANG” and a graphic logo pursuant to a
      non-exclusive license agreement. N-T Information Engineering has registered
      these names and this logo as trademarks. Pursuant to our agreement with
      N-T Information Engineering, we may use these trademarks free of charge for
      as long as they remain registered. Prior to January 2008, we used these
      trademarks in all of the CA systems we sold in the PRC. The registrations for
      these trademarks expire at various dates in 2013. We also used “NOVEL-TONGFANG”
as part of the name of our variable interest entity, N-S Digital
      TV.




In
      November 2007, we ceased using “NOVEL-TONGFANG” in N-S Digital TV’s name by
      changing its name from “Beijing Novel-Tongfang Digital TV Technology Co., Ltd.”
to “Beijing Novel-Super Digital TV Technology Co., Ltd.” In January 2008, we
      ceased using the English and Chinese names for “NOVEL-TONGFANG” as trademarks
      for our products and we currently intend not to use such trademarks in the
      future. We started to use the English and Chinese names for “NOVEL SUPERTV” in
      combination with the graphic logo we licensed from N-T Information Engineering
      as the trademarks for our products. In the meanwhile, we are in the process
      of
      acquiring for free the licensed graphic logo from N-T Information Engineering
      and applying to register the trademarks of the English and Chinese names for
      “NOVEL SUPERTV.” We cannot assure you that the registration of such trademarks
      containing the English and Chinese names of “NOVEL SUPERTV” will finally be
      approved by the PRC trademark registration authority. If we fail to have such
      trademarks registered, we may not be able to prevent any third parties,
      including our competitors, from using the same trademarks for their products
      or
      services. In addition, if a third party has already registered names similar
      to
“NOVEL SUPERTV” as its trademarks, we may be prevented from using the English
      and Chinese names for “NOVEL SUPERTV” as our trademarks. In either case, our
      business operations could be adversely affected as a result.


12


***If
      we fail to protect our intellectual property rights, it could harm our business
      and competitive position.***




Our
      business relies on intellectual properties to stay competitive in the
      marketplace. We rely on a combination of patent, trademark and copyright laws,
      trade secrets, confidentiality procedures and contractual provisions to protect
      our intellectual property rights and the obligations we have to third parties
      from whom we license intellectual property rights. Nevertheless, these afford
      only limited protection and policing unauthorized use of proprietary technology
      can be difficult and expensive. In addition, intellectual property rights
      historically have not been enforced in the PRC to the same extent as in the
      United States, and intellectual property theft presents a serious risk in doing
      business in the PRC. We may not be able to detect unauthorized use of, or take
      appropriate steps to enforce, our intellectual property rights and this could
      have a material adverse effect on our business, operating results and financial
      condition.




***We
      may be exposed to infringement or misappropriation claims by third parties
      that,
      if determined adversely to us, could cause us to pay significant damage
      awards.***




Our
      success depends largely on our ability to use and develop our technology and
      know-how without infringing the intellectual property rights of third parties.
      The validity and scope of any claims relating to our technology patents would
      involve complex technological, legal and factual questions and analyses and,
      therefore, the outcome would be highly uncertain. We may be subject to
      litigation involving claims of patent infringement or violation of other
      intellectual property rights of third parties. The defense of such claims would
      be both costly and time-consuming, and could significantly divert the efforts
      and resources of our management and technical personnel. An adverse
      determination in any such litigation or proceedings to which we may become
      a
      party could subject us to significant liability to third parties, require us
      to
      seek licenses from third parties, pay ongoing royalties or redesign our
      products, or subject us to injunctions prohibiting the manufacture and sale
      of
      our products or the use of our technologies. Protracted litigation could also
      result in our customers or potential customers deferring or limiting their
      purchase or use of our products until resolution of such litigation. In
      addition, we could face disruptions to our business operations and damage to
      our
      reputation, and our operating results and financial condition could be
      materially adversely affected.




***We
      rely on a single facility for almost all of our business operations. Any
      destruction of, or significant disruption to, this facility could severely
      affect our ability to conduct normal business
      operations.***




Almost
      all of our business operations, including the encoding of our smart cards,
      which
      is an essential part of the smart card production process, all our research
      and
      development activities and our corporate headquarters are concentrated within
      a
      single facility that we lease in Beijing, PRC. As we do not maintain back-up
      facilities, we rely on this facility for the continued operation of our
      business. In addition, we currently do not maintain any business disruption
      or
      similar insurance coverage. A major earthquake, fire or other catastrophic
      event
      that results in the destruction of, or significant disruption to, the facility
      could severely affect our ability to complete sales or conduct other normal
      business operations. As a result, our business, operating results and financial
      condition could be materially adversely affected.




***Our
      operating results may fluctuate significantly from quarter to quarter, which
      could adversely affect the price of our ADSs.***




Our
      quarterly operating results have varied significantly in the past and are likely
      to continue to vary significantly in the future. Historically, we have generally
      experienced a slowdown or decrease in smart card orders in the first quarter
      of
      the year due to the Chinese Lunar New Year holiday and an annual trade fair
      for
      the digital television, broadband and related industries in the PRC during
      such
      quarter. In addition, our quarterly revenues are subject to fluctuation because
      they substantially depend upon the timing of orders. Our quarterly revenues
      have
      generally reflected a small number of relatively large orders for our CA
      systems, which generally have long sales and order cycles. Our cost of revenue
      and operating expenses may also fluctuate from quarter to quarter. As a result,
      you may not be able to rely on period-to-period comparisons of our operating
      results as an indication of our future performance. Our actual quarterly results
      may differ from market expectations, which could adversely affect the price
      of
      our ADSs.


13


***Failure
      to manage our growth or develop appropriate internal organizational structures,
      internal control environment and risk monitoring and management systems in
      line
      with our rapid growth could negatively affect our business and
      prospects.***




Our
      business and operations have expanded rapidly since our formation in 2004.
      Significant management resources must be expended to develop and implement
      appropriate structures for internal organization and information flow, an
      effective internal control environment and risk monitoring and management
      systems in line with our rapid growth, as well as to hire and integrate
      qualified employees into our organization. In addition, the disclosure and
      other
      ongoing obligations associated with becoming a public company also increased
      the
      challenges to our finance and accounting team. It is possible that our existing
      internal control and risk monitoring and management systems could prove to
      be
      inadequate. If we fail to appropriately develop and implement structures for
      internal organization and information flow, an effective internal control
      environment and a risk monitoring and management system, we may not be able
      to
      identify unfavorable business trends, administrative oversights or other risks
      that could materially adversely affect our business, operating results and
      financial condition.




***In
      the course of preparing our consolidated financial statements for the year
      ended
      December 31, 2007, several significant deficiencies in our internal control
      over
      financial reporting were noted. We expect to incur extra costs in implementing
      measures to address such deficiencies. If we fail to maintain an effective
      system of internal control over financial reporting, our ability to accurately
      and timely report our financial results or prevent fraud may be adversely
      affected. As a result, investor confidence and the trading price of our ADSs
      may
      be adversely impacted.***




Upon
      the
      completion of our initial public offering, we have become a public company
      in
      the United States that is subject to the Sarbanes-Oxley Act of 2002. Section
      404
      of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include
      a
      report of management on our internal control over financial reporting in our
      annual report on Form 20-F beginning with our annual report for the fiscal
      year ending December 31, 2008. In addition, our independent registered public
      accounting firm must report on the effectiveness of our internal control over
      financial reporting. Our management may conclude that our internal control
      over
      financial reporting is not effective. Moreover, even if our management concludes
      that our internal control over financial reporting is effective, our independent
      registered public accounting firm may disagree. If such independent registered
      public accounting firm is not satisfied with our internal control or the level
      at which our control is documented, designed, operated or reviewed, or if it
      interprets the relevant requirements differently from us, then it may not be
      able to issue an un-qualified opinion. In addition, our reporting obligations
      as
      a public company may place a significant strain on our management, operational
      and financial resources and systems for the foreseeable future.




Prior
      to
      our initial public offering, we had been a private company with limited
      accounting personnel and other resources with which to address our internal
      controls and procedures. Our independent registered public accounting firm
      has
      not conducted an audit of our internal control over financial reporting;
      however, in connection with the audit of our consolidated financial statements
      for the year ended December 31, 2007, our independent registered public
      accounting firm identified several “significant deficiencies” in our internal
      control over financial reporting, as defined in the standards established by
      the
      Public Company Accounting Oversight Board (United States). The significant
      deficiencies identified related to (i) our inadequate accounting resources
      with
      a good understanding of US GAAP and SEC reporting requirements, (ii) our failure
      to develop a comprehensive accounting policies and procedures manual and (iii)
      our failure to establish detailed financial closing and reporting policies
      and
      procedures. We have been in the process of implementing a number of measures
      to
      address the deficiencies that have been identified. In the first quarter of
      2008, we appointed an internal audit manager. Since April 2008, we also have
      hired a Financial Controller, together with a team of accounting personnel,
      to
      enhance our understanding of US GAAP and SEC reporting requirements. In October
      2007, we engaged an international accounting firm to help us design our internal
      control process and prepare a US GAAP accounting policies and procedures manual.
      By April 2008, we had substantially completed the drafting of these documents.
      We are in the process of establishing closing and reporting procedures and
      standards and will continue to enhance our efforts in this regard.


14


During
      the course of documenting and testing our internal control procedures in order
      to satisfy the requirements of Section 404, we may identify other deficiencies
      in our internal control over financial reporting. We plan to remediate control
      deficiencies identified in time to meet the deadline imposed by the requirements
      of Section 404, but we may be unable to do so.




In
      addition, if we fail to maintain the adequacy of our internal control over
      financial reporting, as these standards are modified, supplemented or amended
      from time to time, we may not be able to conclude on an ongoing basis that
      we
      have effective internal control over financial reporting in accordance with
      Section 404. If we fail to achieve and maintain an effective internal control
      environment, we could suffer material misstatements in our financial statements
      and fail to meet our reporting obligations, which would likely cause investors
      to lose confidence in our reported financial information. This could harm our
      operating results and lead to a decline in the trading price of our ADSs.
      Additionally, ineffective internal control over financial reporting could expose
      us to increased risk of fraud or misuse of corporate assets and subject us
      to
      potential delisting from the stock exchange on which we list, regulatory
      investigations and civil or criminal sanctions.




***We
      may need additional capital and we may not be able to obtain it, which could
      adversely affect our liquidity and financial
      position.***




In
      order
      for us to grow, remain competitive, develop new products, expand our customer
      base and carry out acquisitions, we may seek to obtain additional capital in
      the
      future through selling additional equity or debt securities or obtaining a
      credit facility. Our ability to obtain additional capital in the future is
      subject to a variety of uncertainties, including:




·
            our
                future financial condition, results of operations and cash
                flows;




·
            conditions
                of the U.S. and other capital markets in which we may seek to raise
                funds;




·
            investors’
                perception of, and demand for, securities of digital television components
                and related companies; and




·
            economic,
                political and other conditions in the PRC and
                elsewhere.




We
      may be
      unable to obtain additional capital in a timely manner or on acceptable terms
      or
      at all. Furthermore, the additional issuances of equity securities may result
      in
      significant dilution to our shareholders. The incurrence of debt would result
      in
      increased interest expense and could require us to agree to operating and
      financial covenants that would restrict our operations.




***We
      may become a passive foreign investment company, or PFIC, which could result
      in
      adverse United States federal income tax consequences to U.S. holders of our
      ADSs.***




Depending
      upon the value of our shares and ADSs and the nature of our assets and income
      over time, we could be classified as a PFIC by the United States Internal
      Revenue Service for U.S. federal income tax purposes. Based upon the past
      composition of our income and valuation of our assets, including goodwill,
      we
      believe we were not a PFIC for 2007. There can be no assurance that we will
      not
      be a PFIC for the taxable year 2008 or future taxable years, as PFIC status
      is
      tested each year and depends on our assets and income in such year. Our PFIC
      status for the current taxable year 2008 will not be determinable until the
      close of the taxable year ending December 31, 2008.




We
      will
      be classified as a PFIC in any taxable year if either: (1) the average
      percentage value of our gross assets during the taxable year that produce
      passive income or are held for the production of passive income is at least
      50%
      of the value of our total gross assets or (2) 75% or more of our gross income
      for the taxable year is passive income. For example, we would be a PFIC for
      the
      taxable year 2008 if the sum of our average market capitalization, which is
      our
      share price multiplied by the total number of our outstanding shares, and our
      liabilities over that taxable year is not more than twice the value of our
      cash,
      cash equivalents and other assets that can be readily converted into cash.
      In
      particular, we would likely become a PFIC if the value of our outstanding shares
      were to decrease significantly while we hold substantial cash and cash
      equivalents.


15


If
      we are
      classified as a PFIC in any taxable year in which you hold our ADSs or shares
      and you are a U.S. holder, you would generally be taxed at higher ordinary
      income rates, rather than lower capital gain rates, if you dispose of our ADSs
      or shares for a gain in a later year, even if we are not a PFIC in that year.
      In
      addition, a portion of the tax imposed on your gain would be increased by an
      interest charge. Moreover, if we were classified as a PFIC in any taxable year,
      you would not be able to benefit from any preferential tax rate with respect
      to
      any dividend distribution that you may receive from us in that year or in the
      following year. Finally, you would also be subject to special United States
      federal income tax reporting requirements. We cannot assure you that we will
      not
      be a PFIC for 2008 or any future taxable year. For more information on the
      United States federal income tax consequences to you that would result from
      our
      classification as a PFIC, see “Item 10. Additional Information—E.
      Taxation—United States Federal Income Taxation—Taxation of Capital Gains—PFIC
      Rules.”




**Risks
      Relating to Our Corporate Structure**




***If
      the PRC government determines that N-S Digital TV is a vendor of non-PRC CA
      systems by virtue of the agreements that establish the structure for operating
      our business, we could face difficulty selling our CA systems in the
      PRC.***




SARFT
      policy requires any cable television network operator who uses a non-PRC CA
      system to install a parallel PRC CA system. Under this policy, vendors of
      non-PRC CA systems may sell only to cable network operators who have already
      installed a PRC CA system or who are willing to purchase a parallel PRC CA
      system. This may result in a competitive disadvantage for vendors of non-PRC
      CA
      systems relative to vendors of PRC CA systems. Such policy does not expressly
      indicate whether the CA systems produced by a foreign-invested company
      incorporated in the PRC, such as our subsidiary, Super TV, fall into the
      category of non-PRC CA systems. In light of this ambiguity, in order to avoid
      our CA systems being deemed non-PRC CA systems, we have established
      N-S Digital TV, which is wholly owned by PRC persons, to produce and sell
      our CA systems. We do not have any equity interest in N-S Digital TV and
      instead enjoy the economic benefits of, and have substantive control over,
      N-S Digital TV through contractual arrangements with N-S Digital TV
      and its shareholders. N-S Digital TV also holds the licenses and approvals
      that are essential to our business, and we derive a significant portion of
      our
      revenues from N-S Digital TV.




There
      are
      substantial uncertainties regarding the interpretation and application of the
      above-described PRC government policy and relevant PRC laws and regulations.
      Accordingly, the PRC government may determine that N-S Digital TV is a
      vendor of non-PRC CA systems by virtue of our contractual arrangements with
      N-S Digital TV and its shareholders. If N-S Digital TV is deemed to be
      a vendor of non-PRC CA systems by the PRC government, cable network operators
      may cancel their orders for our CA systems to avoid being required to install
      a
      parallel PRC CA system, and we may also lose potential customers who are not
      willing, or have no plan, to install a parallel PRC CA system for economic
      or
      other reasons. As a result, our business, financial condition and operating
      results could be materially adversely affected.




***The
      agreements that establish the structure for operating our business may result
      in
      the relevant PRC government regulators revoking or refusing to renew
      N-S Digital TV’s license for the production of commercial encryption
      products, or refusing to issue any other license required to engage in an
      encryption-related business.***




Our
      CA
      systems business uses encryption technology and thus is required by the relevant
      PRC laws and regulations to obtain a license to produce commercial encryption
      products. Although foreign-invested enterprises incorporated in the PRC, such
      as
      our subsidiary, Super TV, are not expressly prohibited from conducting a
      business that uses encryption technology, foreign-invested enterprises may
      have
      difficulty obtaining the necessary license due to the PRC encryption authority’s
      generally restrictive approach towards foreign participation in the PRC
      encryption industry. N-S Digital TV, which is wholly owned by PRC
      persons and through which we conduct our CA systems business, has obtained
      a license to produce commercial encryption products as required for our
      business.


16


Our
      contractual arrangements with N-S Digital TV and its shareholders provide
      us with the economic benefits of, and substantive control over, N-S Digital
      TV. If the PRC encryption authority determines that our control over, or
      relationship with, N-S Digital TV through those contractual arrangements is
      contrary to their generally restrictive approach towards foreign participation
      in the PRC encryption industry, we can not assure you that the PRC encryption
      authority will not reconsider N-S Digital TV’s eligibility to hold the
      license to produce commercial encryption products. The PRC encryption authority
      may revoke, or refuse to renew, N-S Digital TV’s license to produce
      commercial encryption products, or refuse to grant any other encryption-related
      license that may be required for our business in the future. If that were to
      happen, we might have to discontinue all or a substantial portion of our
      business pending the re-issuance, extension or issuance of the required license.
      In addition, we might have to restructure our operation in order to have such
      license re-issued, extended or issued. Such restructuring may result in a loss
      or reduction of our control over, or the economic benefits we enjoy from,
      N-S Digital TV under existing contractual arrangements. As a result, our
      business, financial condition or operating results could be materially adversely
      affected.




***Our
      contractual arrangements with our operating company, N-S Digital TV, and
      its shareholders may not be as effective in providing operational control as
      direct ownership and may be difficult to enforce.***




In
      order
      for our CA systems not to be deemed by the PRC government as non-PRC CA systems,
      which may result in a competitive disadvantage for us in the PRC market, we
      have
      established N-S Digital TV, which is wholly owned by PRC persons, to
      produce and sell our CA systems in the PRC. As a result, we generate a
      significant portion of our revenues through N-S Digital TV. We do not have
      any equity interest in N-S Digital TV and instead enjoy the economic
      benefits of, and have substantive control over, N-S Digital TV through
      contractual arrangements with N-S Digital TV and its shareholders.
      N-S Digital TV also holds the licenses and approvals that are essential to
      our business. For a description of such contractual arrangements, see
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party
      Transactions.” These arrangements may not be as effective in providing control
      over our operations as direct ownership would be. In particular,
      N-S Digital TV could fail to perform or make payments as required under
      these contractual arrangements, and we would have to rely on the PRC legal
      system to enforce these arrangements, which may not be effective. For example,
      we have entered into share pledge agreements with the shareholders of
      N-S Digital TV in September 2005 and August 2007, under which such
      shareholders pledge their equity interests in N-S Digital TV to us.
      However, the relevant government agency has refused to register such kinds
      of
      pledges due to the lack of relevant registration procedures. Under the Property
      Rights Law of the PRC promulgated on March 16, 2007, which became effective
      on
      October 1, 2007, or the Property Rights Law, a pledge of equity interests can
      only be valid after such pledge is registered at the relevant agency, though
      the
      Property Rights Law is silent on whether the registration requirement applies
      to
      a pledge agreement that was entered into prior to October 1, 2007, the date
      when
      the Property Rights Law became effective, such as our share pledge agreements
      with the shareholders of N-S Digital TV. Without the registration with the
      relevant government agency, a pledgor could disregard a prior pledge and
      re-pledge the same equity interests to third parties. We cannot assure you
      whether or when Super TV will be able to register the pledges with the relevant
      government agency, prior to which such pledges may be invalid under the Property
      Rights Law.




***The
      shareholders or directors of N-S Digital TV may have conflicts of interest
      with us, which may materially and adversely affect our business and financial
      condition.***




We
      do not
      have any equity interest in N-S Digital TV and instead enjoy the economic
      benefits of, and have substantive control over, N-S Digital TV through
      contractual arrangements with N-S Digital TV and its shareholders.
      Conflicts of interests may arise between us and the shareholders of
      N-S Digital TV. In addition, three directors of N-S Digital TV are
      also directors of our company, and conflicts may arise between the duties they
      owe to N-S Digital TV and the duties they owe to us. We cannot assure you
      that if any such conflicts arise, any or all of the shareholders or directors
      of
      N-S Digital TV, as the case may be, will act in the best interests of our
      company or that such conflicts will be resolved in our favor. We have no
      specific policies or procedures for resolving any such conflicts that may arise.
      In addition, these shareholders or directors may breach, or cause
      N-S Digital TV to breach or refuse to renew, the existing contractual
      arrangements that allow us to effectively control N-S Digital TV and
      receive economic benefits from it. If we cannot satisfactorily resolve any
      conflicts of interest or disputes between us and the shareholders or directors
      of N-S Digital TV, we may have to rely on legal proceedings, which may
      involve substantial uncertainty and result in disruptions to our business
      operations.


17


***Contractual
      arrangements we have entered into between Super TV and N-S Digital TV may
      be subject to scrutiny by the PRC tax authorities and any finding that we or
      N-S Digital TV owe additional taxes could substantially reduce our
      consolidated net income and the value of your
      investment.***




Under
      PRC
      laws and regulations, arrangements and transactions among related parties may
      be
      subject to audit or challenge by the PRC tax authorities. We could face material
      adverse tax consequences if the PRC tax authorities determine that the
      contractual arrangements between Super TV, our wholly owned subsidiary in the
      PRC, and N-S Digital TV do not represent an arm’s-length price and
      consequently adjust N-S Digital TV’s income in the form of a transfer
      pricing adjustment. A transfer pricing adjustment could, among other things,
      result in a reduction of expense deductions recorded by N-S Digital TV,
      which could in turn increase its tax liabilities. In addition, the PRC tax
      authorities may impose late payment fees and other penalties.




***Certain
      of our existing shareholders have substantial influence over our company and
      their interests may not be aligned with the interests of our other
      shareholders.***




As
      of May
      31, 2008, our three largest shareholders beneficially owned a total of
      approximately 58.4% of our outstanding shares. Accordingly, they will have
      significant influence in determining the outcome of any corporate transaction
      or
      other matter submitted to the shareholders for approval, including mergers,
      consolidations and the sale of all or substantially all of our assets, election
      of directors and other significant corporate actions. They will also have the
      power to prevent or cause a change in control. In addition, without the consent
      of these shareholders, we could be prevented from entering into transactions
      that could be beneficial to us. These shareholders may cause us to take actions
      that are opposed by other shareholders as the interests of these shareholders
      may differ from the interests of our other shareholders, including those who
      purchased the ADSs in our initial public offering. See “Item 7. Major
      Shareholders and Related Party Transactions” for more information regarding the
      share ownership of our officers, directors and significant
      shareholders.




**Risks
      Relating to the People’s Republic of China**




***Adverse
      changes in economic policies of the PRC government could have a material adverse
      effect on the overall economic growth of the PRC, which could reduce the demand
      for our products and materially adversely affect our
      business.***




All
      of
      our assets are located in and all of our revenue is sourced from the PRC.
      Accordingly, our business, financial condition, results of operations and
      prospects may be influenced to a significant degree by political, economic
      and
      social conditions in the PRC generally and by continued economic growth in
      the
      PRC as a whole.




The
      PRC
      economy differs from the economies of most developed countries in many respects,
      including the amount of government involvement, level of development, growth
      rate, control of foreign exchange and allocation of resources. Although the
      PRC
      government has implemented measures since the late 1970s emphasizing the
      utilization of market forces for economic reform, the reduction of state
      ownership of productive assets and the establishment of improved corporate
      governance in business enterprises, a substantial portion of productive assets
      in the PRC is still owned by the PRC government. In addition, the PRC government
      continues to play a significant role in regulating industry development by
      imposing industrial policies. The PRC government also exercises significant
      control over the PRC’s economic growth through the allocation of resources,
      controlling payment of foreign currency-denominated obligations, setting
      monetary policy and providing preferential treatment to particular industries
      or
      companies.




While
      the
      PRC economy has experienced significant growth over the past decade, growth
      has
      been uneven, both geographically and among various sectors of the economy.
      The
      PRC government has implemented various measures to encourage economic growth
      and
      guide the allocation of resources. Some of these measures benefit the overall
      PRC economy, but may also have a negative effect on us. For example, our
      operating results and financial condition may be adversely affected by
      government control over capital investments or changes in tax regulations that
      are applicable to us. The PRC government has implemented certain measures,
      including recent interest rate increases, to control the pace of economic
      growth. These measures may cause decreased economic activity in the PRC,
      including a slowing or decline in investment in cable television networks,
      which
      in turn could adversely affect our operating results and financial
      condition.


18


***Uncertainties
      in the interpretation and enforcement of PRC laws and regulations could limit
      the legal protections available to you and us.***




The
      PRC
      legal system is a civil law system based on written statutes. Unlike common
      law
      systems, it is a system in which legal decisions have limited value as
      precedents. In 1979, the PRC government began to promulgate a comprehensive
      system of laws and regulations governing economic matters in general. The
      overall effect of legislation over the past three decades has significantly
      increased the protections afforded to various forms of foreign or private-sector
      investment in the PRC. Our PRC operating subsidiary, Super TV, is a
      foreign-invested enterprise and is subject to laws and regulations applicable
      to
      foreign investment in the PRC as well as laws and regulations applicable to
      foreign-invested enterprises. N-S Digital TV is a privately-owned company
      and is subject to various PRC laws and regulations that are generally applicable
      to companies in the PRC. These laws and regulations change frequently, and
      their
      interpretation and enforcement involve uncertainties. For example, we may have
      to resort to administrative and court proceedings to enforce the legal
      protections that we enjoy either by law or contract. However, since PRC
      administrative and court authorities have significant discretion in interpreting
      and implementing statutory and contractual terms, it may be more difficult
      to
      evaluate the outcome of administrative and court proceedings and the level
      of
      legal protection we enjoy than in more developed legal systems. These
      uncertainties may also impede our ability to enforce the contracts we have
      entered into. As a result, these uncertainties could materially adversely affect
      our business and operations.




***The
      approval of the China Securities Regulatory Commission, or the CSRC, might
      be
      required in connection with our initial public offering under certain PRC
      regulation; failure to obtain this approval, if required, could have a material
      adverse effect on our business, operating results and reputation as well as
      the
      trading price of our ADSs.***




On
      August
      8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or
      the
      MOFCOM, the State-owned Assets Supervision and Administration Commission, the
      State Administration for Taxation, the State Administration for Industry and
      Commerce, the CSRC and the State Administration of Foreign Exchange, or the
      SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic
      Enterprises by Foreign Investors, or the New M&A Rules, which became
      effective on September 8, 2006. The New M&A Rules, among other things,
      include provisions that purport to require that an offshore special purpose
      vehicle formed for the purpose of an overseas listing of securities in a PRC
      company obtain the approval of the CSRC prior to the listing and trading of
      such
      special purpose vehicle’s securities on an overseas stock exchange.




On
      September 21, 2006, the CSRC published on its official website procedures
      regarding its approval of overseas listings by special purpose vehicles. The
      CSRC approval procedures require the filing of an application and supporting
      documents with the CSRC.




We
      completed the initial listing and trading of our ADSs on the New York Stock
      Exchange on October 11, 2007. We did not seek CSRC approval in connection with
      our initial public offering. Our PRC counsel, King & Wood, advised us
      that, based on their understanding of the current PRC laws, regulations and
      rules and the procedures announced on September 21, 2006, because we completed
      our restructuring in 2004 in connection with an equity investment in our company
      by a private equity investor more than two years prior to the promulgation
      of
      the New M&A Rules, we were not and are not required by the New M&A Rules
      to apply to the CSRC for approval of our initial public offering, unless we
      are
      clearly required to do so by any rules promulgated in the future. See
“Item 4. Information on the Company—B. Business
      Overview—Regulation—Regulation of Overseas Listings.” However, the application
      of the New M&A Rules remains unclear. If the CSRC or another PRC regulatory
      agency subsequently determines that the CSRC’s approval was required for our
      initial public offering, we may face sanctions by the CSRC or another PRC
      regulatory agency. If this happens, theses regulatory agencies may impose fines
      and penalties on our operations in the PRC, limit our privileges in the PRC,
      or
      take other actions that could have a material adverse effect on or business,
      financial condition, results of operations, as well as the trading price of
      our
      ADSs.


19


***PRC
      regulations relating to offshore investment activities by PRC residents may
      increase the administrative burden we face and create regulatory uncertainties
      that could restrict our overseas and cross-border investment activity, and
      a
      failure by our shareholders who are PRC residents to make any required
      applications and filings pursuant to such regulations may prevent us from being
      able to distribute profits and could expose us and our PRC resident shareholders
      to liability under PRC law.***




The
      SAFE
      has promulgated regulations that require PRC residents and PRC corporate
      entities to register with and obtain approvals from relevant PRC government
      authorities in connection with their direct or indirect offshore investment
      activities. These regulations may apply to our shareholders who are PRC
      residents in connection with our prior and any future offshore acquisitions,
      including the employee participants in our stock incentive plans who are PRC
      citizens.




The
      SAFE
      regulations required registration by March 31, 2006 of direct or indirect
      investments previously made by PRC residents in offshore companies prior to
      the
      implementation of the Notice on Issues Relating to the Administration of Foreign
      Exchange in Fund-Raising and Reverse Investment Activities of Domestic Residents
      Conducted via Offshore Special Purpose Companies on November 1, 2005. If a
      PRC
      shareholder with a direct or indirect stake in an offshore parent company fails
      to make the required SAFE registration, the PRC subsidiaries of such offshore
      parent company may be prohibited from making distributions of profit to the
      offshore parent and from paying the offshore parent proceeds from any reduction
      in capital, share transfer or liquidation in respect of the PRC subsidiaries.
      Furthermore, failure to comply with the various SAFE registration requirements
      described above could result in liability under PRC law for foreign exchange
      evasion.




We
      cannot
      assure you that all of our shareholders who are PRC residents will comply with
      our request to make or obtain any registrations or approvals required under
      these regulations or other related legislation. If any existing shareholder
      transfers any of our shares or ADSs to another PRC resident, it is unclear
      whether such new shareholder is also required to make the SAFE registration.
      Furthermore, as these regulations are still relatively new and there is
      uncertainty concerning the reconciliation of the new regulation with other
      approval requirements, it is unclear how the regulation, and any future
      regulation concerning offshore or cross-border transactions, will be
      interpreted, amended and implemented by the relevant government authorities.
      The
      failure or inability of our PRC resident shareholders to obtain any required
      approvals or make any required registrations may subject us to fines and legal
      sanctions, and prevent us from being able to make distributions or pay
      dividends, as a result of which our business operations and our ability to
      distribute profits to you could be materially adversely affected.




***We
      may rely on dividends and other distributions on equity paid by our operating
      subsidiary to fund cash and financing requirements, and limitations on the
      ability of our operating subsidiary to pay dividends to us could have a material
      adverse effect on our ability to conduct our
      business.***




Although
      we currently have a significant amount of cash that we received from our initial
      public offering, we, as a holding company, may rely on dividends and other
      distributions on equity paid by our operating subsidiary, Super TV, for our
      cash
      and financing requirements, including the funds necessary to pay dividends
      and
      other cash distributions to our shareholders, service any debt we may incur
      and
      pay our operating expenses. If Super TV incurs debt on its own behalf in the
      future, the instruments governing the debt may restrict its ability to pay
      dividends or make other distributions to us. Furthermore, relevant PRC laws
      and
      regulations permit payments of dividends by Super TV only out of its retained
      earnings, if any, determined in accordance with PRC accounting standards and
      regulations.




Under
      PRC
      laws and regulations, Super TV is required to set aside 10% of its after-tax
      profits each year to fund a statutory surplus reserve. This reserve is not
      distributable as dividends until the accumulated amount of such reserve has
      exceeded 50% of its registered capital. As a result of these PRC laws and
      regulations, Super TV is restricted in its ability to transfer a portion of
      its
      net assets to us in the form of dividends. Limitations on the ability of Super
      TV to pay dividends to us could adversely limit our ability to grow, make
      investments or acquisitions that could be beneficial to our businesses, pay
      dividends, or otherwise fund and conduct our business.


20


***Restrictions
      on currency exchange may limit our ability to utilize our revenues
      effectively.***




Substantially
      all of our revenues were denominated in Renminbi in 2007. The Renminbi is
      currently convertible under the “current account,” which includes dividends,
      trade and service-related foreign exchange transactions, but not under the
      “capital account,” which includes foreign direct investment and loans.
      Currently, Super TV may purchase foreign exchange for settlement of “current
      account transactions,” including purchase of imported computer chips and payment
      of dividends to us, without the approval of the SAFE by complying with certain
      procedural requirements. However, the relevant PRC governmental authorities
      may
      limit or eliminate our ability to purchase foreign currencies in the future
      for
      current account transactions. Since a significant amount of our future revenues
      will be denominated in Renminbi, any existing and future restrictions on
      currency exchange may limit our ability to utilize revenues generated in
      Renminbi to purchase computer chips from suppliers outside of the PRC or fund
      our business activities outside of the PRC denominated in foreign currencies
      or
      pay dividends in foreign currencies to our shareholders, including holders
      of
      our ADSs. Foreign exchange transactions under the capital account are still
      subject to limitations and require approvals from, or registration with, the
      SAFE and other relevant PRC governmental authorities. This could affect the
      ability of Super TV to obtain foreign exchange through debt or equity financing,
      including by means of loans or capital contributions from us.




***PRC
      regulation of loans and investment by offshore holding companies to PRC entities
      may delay or prevent us from using the proceeds we received from our initial
      public offering, which could materially and adversely affect our liquidity
      and
      our ability to fund and expand our business.***




As
      an
      offshore holding company, we may make loans or additional capital contributions
      to Super TV, our wholly owned subsidiary in the PRC, in order to utilize the
      proceeds we received from our initial public offering. Any loans to Super TV
      are
      subject to PRC regulations and approvals. For example:




·
            loans
                by us to Super TV, a foreign-invested enterprise, cannot exceed statutory
                limits and must be registered with the SAFE or its local counterpart;
                and




·
            loans
                by us to N-S Digital TV, which is a domestic PRC entity, must be
                approved by the relevant government authorities and must also be
                registered with the SAFE or its local
                counterpart.




We
      may
      also decide to finance Super TV by means of capital contributions, and such
      contributions must be approved by the MOFCOM or its local counterpart. We are
      unlikely to finance N-S Digital TV by means of capital contributions due to
      regulatory issues discussed in “Item 4. Information on the Company—B.
      Business Overview—Regulation—Regulation of the Cable Television Industry.” We may
      not be
      able to obtain the relevant government registrations or approval on a timely
      basis, if at all, with respect to future loans or capital contributions by
      us to
      Super TV or to N-S Digital TV. If we fail to do so, our ability to use the
      proceeds of our initial public offering and to capitalize our PRC operations
      may
      be negatively affected, which could adversely and materially affect our
      liquidity and our ability to fund and expand our business.




***Fluctuations
      in exchange rates could result in foreign currency exchange
      losses.***




As
      substantially all of our revenues are denominated in Renminbi and the net
      proceeds from our initial public offering are denominated in U.S. dollars,
      fluctuations in exchange rates between U.S. dollars and Renminbi will affect
      the
      relative purchasing power of these proceeds and our balance sheet and earnings
      per share in U.S. dollars. Appreciation or depreciation in the value of the
      Renminbi relative to the U.S. dollar would affect our financial results reported
      in U.S. dollar terms without giving effect to any underlying change in our
      business, financial condition or results of operations. Since July 2005, the
      Renminbi is no longer pegged solely to the U.S. dollar. Instead, the Renminbi
      is
      reported to be pegged against a basket of currencies, determined by the People’s
      Bank of China, against which it can rise or fall by as much as 0.3% each day.
      This permitted floating range was raised to 0.5% in May 2007. The Renminbi
      may
      appreciate or depreciate significantly in value against the U.S. dollar in
      the
      long term, depending on the fluctuation of the basket of currencies against
      which it is currently valued, or it may be permitted to enter into a full float,
      which may also result in a significant appreciation or depreciation of the
      Renminbi against the U.S. dollar. Fluctuations in the exchange rate will also
      affect the relative value of dividends, if any, payable on, our ordinary shares
      in U.S. dollars terms and the value of any U.S. dollar-denominated investments
      we make in the future. In addition, since substantially all of our revenues
      are
      denominated in Renminbi while approximately half of our cost of revenues is
      denominated in U.S. dollars, fluctuations in the exchange rate could also impact
      our results of operations and financial condition.




21


Very
      limited hedging transactions are available in the PRC to reduce our exposure
      to
      exchange rate fluctuations. To date, we have not entered into any hedging
      transactions in an effort to reduce our exposure to foreign currency exchange
      risk. While we may decide to enter into hedging transactions in the future,
      the
      availability and effectiveness of these hedges may be limited and we may not
      be
      able to successfully hedge our exposure at all. In addition, our currency
      exchange losses may be magnified by PRC exchange control regulations that
      restrict our ability to convert Renminbi into foreign currency.




***The
      discontinuation of any of the preferential tax treatments or the financial
      incentives currently available to us in the PRC could adversely affect our
      business, operating results and financial condition.***




The
      PRC
      government has provided various incentives to Super TV and N-S Digital TV.
      These incentives include reduced enterprise income tax rates, value-added tax
      refunds and tax holidays. For example, as high-and-new technology enterprises
      incorporated and operated in the Beijing High-Tech Development Experimental
      Zone, which is a designated high and new technology development zone, each
      of
      Super TV and N-S Digital TV is entitled to a preferential income tax rate
      of 15% (against the standard income tax rate of 33% before January 1, 2008
      and
      25% from January 1, 2008). In addition, each of Super TV and N-S Digital TV
      is entitled to income tax exemption from 2004 to 2006 and a 50% reduction of
      income tax from 2007 to 2009. Furthermore, for certain software-related products
      that are qualified as “software products” by PRC tax authorities, we received
      tax refunds which effectively reduce the applicable value-added tax rate from
      17% to 3%.




Super
      TV
      and N-S Digital TV must meet a number of financial and non-financial
      criteria in order to continue to qualify for the above tax incentives. Moreover,
      the government could determine at any time to eliminate or reduce the scale
      of
      such preferential tax policies. For example, under the newly enacted PRC
      Enterprise Income Tax Law, or the 2008 EIT Law, which took effect on January
      1,
      2008, the enterprise income tax rate applicable to N-S Digital TV and Super
      TV could be increased to 25%. See “Item 5. Operating and Financial Review
      and Prospects—A. Operating Results—Taxes and Incentives—PRC.”




Any
      increase in Super TV’s or N-S Digital TV’s enterprise income tax rate or
      discontinuation or reduction of any of the preferential tax treatments or
      financial incentives currently enjoyed by Super TV or N-S Digital TV could
      adversely affect our business, operating results and financial
      condition.




***We
      may be treated as a resident enterprise for PRC tax purposes under the PRC
      Enterprise Income Tax Law and we may therefore be subject to PRC income tax
      for
      any dividends we receive from our subsidiaries, which may materially and
      adversely affect the amount of dividends we must pay to our shareholders and
      ADS
      holders.***




Pursuant
      to the 2008 EIT Law and Enterprise Income Tax Law Implementation Regulations,
      or
      the Implementing Rules, enacted by the State Council on December 6, 2007 and
      which became effective on January 1, 2008, enterprises established under the
      laws of foreign countries or regions whose “de facto management bodies” are
      located within the PRC territory are considered resident enterprises and will
      normally be subject to the enterprise income tax at the rate of 25% on its
      global income. According to the Implementation Rules, “de facto management body”
refers to a managing body that exercises, in substance, overall management
      and
      control over the production and business, personnel, accounting and assets
      of an
      enterprise. Substantially all of our management is currently and expected to
      continue to be located in the PRC, and there exists the risk that CDTV Holding
      may be considered a resident enterprise and therefore be subject to the
      enterprise income tax at the rate of 25% on its global income, which will
      include any dividend income we receive from our subsidiaries. In addition,
      although the 2008 EIT Law provides that dividend income between qualified
      resident enterprises is exempted income, it is not clear what is considered
      a
      qualified resident enterprise under the 2008 EIT Law. If we are required under
      the 2008 EIT Law to pay income tax for our global income, including any
      dividends we receive from our subsidiaries, it will materially and adversely
      affect the amount of dividends we may pay to our shareholders and ADS holders.


22


***Dividends
      payable by us to our non-PRC shareholders and ADS holders, and gains on the
      sales of our ordinary shares or ADSs, may be subject to withholding taxes under
      PRC tax laws, which may materially reduce the value of your investment.***




Prior
      to
      January 1, 2008, dividends payable to non-PRC investors were exempted from
      withholding tax. The 2008 EIT Law and the Implementing Rules, both of which
      became effective on January 1, 2008, provide that an income tax rate of 10%
      (subject to the tax treaties between PRC and other jurisdictions) will generally
      be applicable to dividends payable to non-PRC investors which are derived from
      sources within the PRC, provided that dividends are not subject to the 10%
      tax
      if they are paid out of distributable profits accumulated before January 1,
      2008. Similarly, any gain realized on the transfer of shares by such investors
      is also subject to 10% tax if such gains are regarded as income derived from
      sources within the PRC. We are a Cayman Islands holding company and
      substantially all of our income may come from dividends we receive from our
      subsidiaries, primarily those located in the PRC. If we declare dividends from
      such income and such dividends are paid out of distributable profits accumulated
      after January 1, 2008, it is unclear whether the dividends we pay with respect
      to our ADSs, or the gain our non-PRC shareholders or ADS holders may realize
      from the transfer of our ordinary shares or ADSs, would be treated as
      PRC-sourced income and be subject to PRC tax. If we are required under the
      2008
      EIT Law to withhold PRC income tax on our dividends payable to our non-PRC
      shareholders and ADS holders, or if non-PRC foreign shareholders and ADS holders
      are required to pay PRC income tax on the transfer of their ordinary shares
      or
      ADSs, the value of your investment may be materially reduced.




***Natural
      disasters and health hazards and in the PRC may severely disrupt our business
      and operations and may have a material adverse effect on our financial condition
      and results of operations.***




In
      May
      2008, a major earthquake registering 8.0 on the Richter scale struck Sichuan
      Province and certain other parts of China, devastating much of the affected
      areas and causing tens of thousands of deaths and widespread injuries. In
      additional, in early 2008, parts of Mainland China, in particular its southern,
      central and eastern regions, experienced what was reportedly the most severe
      winter weather in the country in half a century, which resulted in significant
      and extensive damage to factories, power lines, homes, automobiles, crops and
      other properties, blackouts, transportation and communications disruptions
      and
      other losses in the affected areas. Moreover, certain countries and regions,
      including China, have encountered incidents of the H5N1 strain of bird flu,
      or
      avian flu, as well as severe acute respiratory syndrome, or SARS, over the
      past
      five years. We are unable to predict the effect, if any, that any future natural
      disasters and health and public security hazards may have on our business.
      Any
      future natural disasters and health and public security hazards may, among
      other
      things, significantly disrupt our ability to adequately staff our business,
      and
      may generally disrupt our operations. Furthermore, such natural disasters and
      health and public security hazards may severely restrict the level of economic
      activity in affected areas, which may in turn materially and adversely affect
      our business and prospects. As a result, any natural disasters or health hazards
      in China may have a material adverse effect on our financial condition and
      results of operations.





***The
      implementation of the PRC Labor Contract Law may increase our operating expenses
      and adversely affect our business and results of
      operations.***





On
      June
      29, 2007, the PRC National People’s Congress enacted the Labor Contract Law,
      which became effective on January 1, 2008. The Labor Contract Law formalizes
      workers’ rights concerning overtime hours, pensions, layoffs, employment
      contracts and the role of trade unions and provides for specific standards
      and
      procedure for the termination of an employment contract. In addition, the Labor
      Contract Law requires the payment of a statutory severance pay upon the
      termination of an employment contract in most cases, including in cases of
      the
      expiration of a fixed-term employment contract. As there has been little
      guidance as to how the Labor Contract Law will be interpreted and enforced
      by
      the relevant PRC authorities, there remains substantial uncertainty as to its
      potential impact on our business and results of operations. The implementation
      of the Labor Contract Law may increase our operating expenses, in particular
      our
      personnel expenses and labor service expenses. In the event that we decide
      to
      significantly reduce the number of our employees or otherwise change our
      employment or labor practices, the Labor Contract Law may also limit our ability
      to effect these changes in a manner that we believe to be cost-effective or
      desirable, which could adversely affect our business and results of
      operations.


23


**Risks
      Relating to the ADSs**




***The
      trading price of our ADSs has been and may continue to be volatile, which could
      result in substantial losses to you.***




The
      trading price of our ADSs has been be volatile and subject to wide fluctuations.
      Since October 5, 2007, the closing prices of our ADSs on the New York Stock
      Exchange has ranged from $14.64 to $51.08 per ADS and the last reported sale
      price on June 16, 2008 was $14.75. Our ADSs may continue to fluctuate in
      response to various factors beyond our control. The financial markets in
      general, and the market prices for many other PRC companies listed on stock
      exchanges in the United States in particular, have experienced extreme
      volatility. These broad market and industry factors may significantly affect
      the
      market price and volatility of our ADSs, regardless of our actual operating
      performance.




In
      addition to market and industry factors, the price and trading volume for our
      ADSs may be highly volatile for specific business reasons. In particular,
      factors such as variations in our revenues, earnings and cash flow,
      announcements of new investments and cooperation arrangements or acquisitions,
      could cause the market price for our ADSs to change substantially. Any of these
      factors may result in large and sudden changes in the volume and trading price
      of our ADSs. In the past, following periods of volatility in the market price
      of
      a company’s securities, shareholders have often instituted securities class
      action litigation against that company. If we were involved in a class action
      suit, it could divert the attention of senior management, and, if adversely
      determined, have a material adverse effect on our financial condition and
      results of operations.




***The
      sale or availability for sale of substantial amounts of our ADSs could adversely
      affect their trading price and could materially impair our future ability to
      raise capital through offerings of our ADSs.***




Sales
      of
      substantial amounts of our ADSs in the public market, or the perception that
      theses sales could occur, could adversely affect the market price of our ADSs
      and could materially impair our future ability to raise capital through
      offerings of our ADSs.




As
      of May
      31, 2008, we had 57,374,049 ordinary shares outstanding (excluding 1,922,883
      ordinary shares that were issued and held for our account in preparation for
      exercise of share options by option holders under our employee stock incentive
      plans), including 20,090,037 ordinary shares represented by 20,090,037 ADSs
      (excluding the 1,922,883 ADSs that were held for our account in preparation
      for
      exercise of share options by option holders under our employee stock incentive
      plans). All ADSs are freely transferable without restriction or additional
      registration under the Securities Act of 1933, as amended, or the Securities
      Act. The remaining ordinary shares outstanding have been available for sale,
      after the expiration of the 180-day lock-up period beginning from the date
      of
      our initial public offering prospectus, subject to volume and other restrictions
      that may be applicable under Rule 144 and Rule 701 under the Securities Act.
      In
      addition, we have filed a registration statement on Form S-8 to register
      the ordinary shares to be issued to the share option holders under our employee
      stock incentive plans. The ordinary shares to be received by such share option
      holders who are not affiliated with us may be resold freely to the public
      market. We cannot predict what effect, if any, market sales of securities held
      by our significant shareholders or any other shareholder or the availability
      of
      theses securities for future sale will have on the market price of our
      ADSs.




***Your
      interest in our ADSs will be diluted as a result of our 2005 Stock Incentive
      Plan, 2008 Stock Incentive Plan or other stock option
      grants.***




We
      have
      reserved 4,444,440 ordinary shares for issuance pursuant to our Amended and
      Restated 2005 Stock Incentive Plan. We have reserved a total of 1,200,000
      ordinary shares for issuance under the 2008 Stock Incentive Plan, subject to
      any
      adjustments as contemplated by the plan. As of December 31, 2007, options to
      purchase 3,877,429 ordinary shares had been granted and were outstanding under
      our Amended and Restated 2005 Stock Incentive Plan and 2008 Stock Incentive
      Plan. For a description of these plans, see “Item 6. Directors, Senior
      Management and Employees—B. Compensation of Directors and Senior Officers—Stock
      Options.” In addition, in 2005 we granted options to purchase 143,474 ordinary
      shares to Tech Power Enterprises, a company affiliated with SB Asia
      Infrastructure Fund L.P., or SAIF, a principal shareholder of our company,
      and
      in 2007 we granted options to purchase 40,000 ordinary shares to Mr. Louis
      T. Hsieh, who became an independent director of our company upon the completion
      of our initial public offering. Therefore, as of December 31, 2007, options
      to
      purchase 4,060,903 ordinary shares had been granted and were outstanding. The
      exercise of those options would result in a reduction in the percentage of
      ownership of the holders of ordinary shares and of ADSs, and therefore would
      result in a dilution in the earnings per ordinary share and per ADS. You may
      face difficulties in protecting your interests, and your ability to protect
      your
      rights through the United States federal courts may be limited, because we
      are
      incorporated under Cayman Islands law.


24


***You
      may face difficulties in protecting your interest, and your ability to protect
      your rights through the United States federal courts may be limited, because
      we
      are incorporated under Cayman Islands law.***




Our
      corporate affairs are governed by our Second Amended and Restated Memorandum
      and
      Articles of Association, the Cayman Islands Companies Act and the common law
      of
      the Cayman Islands. The rights of shareholders to take action against the
      directors and actions by minority shareholders are to a large extent governed
      by
      the common law of the Cayman Islands. Cayman Islands law in this area may not
      be
      as established and may differ from provisions under statutes or judicial
      precedent in existence in the United States. As a result, our public
      shareholders may face different considerations in protecting their interests
      in
      actions against our management or directors than would shareholders of a
      corporation incorporated in a jurisdiction of the United States.




The
      rights of shareholders and the responsibilities of management and members of
      the
      board of directors under Cayman Islands law, such as in the areas of fiduciary
      duties, are different from those applicable to a company incorporated in a
      jurisdiction of the United States. For example, the Cayman Islands courts are
      unlikely:




·
            to
                recognize or enforce against us judgments of courts of the United
                States
                based on the civil liability provisions of United States federal
                securities laws; and




·
            in
                original actions brought in the Cayman Islands, to impose liabilities
                against us based on the civil liability provisions of United States
                federal securities laws that are penal in
                nature.




As
      a
      result, our public shareholders may have more difficulty in protecting their
      interests in connection with actions taken by our management or members of
      our
      board of directors than they would as public shareholders of a company
      incorporated in the United States.




***Certain
      judgments obtained against us by our shareholders may not be
      enforceable.***




We
      are a
      Cayman Islands company and substantially all of our assets are located outside
      of the United States. Substantially all of our current operations are conducted
      in the PRC. In addition, most of our directors and officers are nationals and
      residents of countries other than the United States. A substantial portion
      of
      the assets of these persons are located outside the United States. As a result,
      it may be difficult or impossible for you to bring an action against us or
      against these individuals in the United States in the event that you believe
      that your rights have been infringed under the United States federal securities
      laws or otherwise. Even if you are successful in bringing an action of this
      kind, the laws of the Cayman Islands and of the PRC may render you unable to
      enforce a judgment against our assets or the assets of our directors and
      officers.




***Your
      voting rights as a holder of our ADSs are limited by the terms of the deposit
      agreement.***




You
      may
      exercise your voting rights with respect to the ordinary shares underlying
      your
      ADSs only in accordance with the provisions of the deposit agreement. Upon
      receipt of voting instructions from you in the manner set forth in the deposit
      agreement, the depositary for our ADSs will endeavor to vote your underlying
      ordinary shares in accordance with these instructions. Under our Second Amended
      and Restated Memorandum and Articles of Association and Cayman Islands law,
      the
      minimum notice period required for convening a general meeting is 15 days.
      When a general meeting is convened, you may not receive sufficient notice of
      a
      shareholders’ meeting to permit you to withdraw your ordinary shares to allow
      you to cast your vote with respect to any specific matter at the meeting. In
      addition, the depositary and its agents may not be able to send voting
      instructions to you or carry out your voting instructions in a timely manner.
      We
      will make all reasonable efforts to cause the depositary to extend voting rights
      to you in a timely manner, but you may not receive the voting materials in
      time
      to ensure that you can instruct the depositary to vote your shares. Furthermore,
      the depositary and its agents will not be responsible for any failure to carry
      out any instructions to vote, for the manner in which any vote is cast or for
      the effect of any such vote. As a result, you may not be able to exercise your
      right to vote and you may lack recourse if your ordinary shares are not voted
      as
      you requested.


25


***The
      depositary for our ADSs will give us a discretionary proxy to vote our ordinary
      shares underlying your ADSs if you do not vote at shareholders’ meetings, except
      in limited circumstances, which could adversely affect your
      interests.***




Under
      the
      deposit agreement for our ADSs, the depositary will give us a discretionary
      proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings
      if you do not vote, unless:




·
            we
                have failed to timely provide the depositary with our notice of meeting
                and related voting materials;




·
            we
                have instructed the depositary that we do not wish a discretionary
                proxy
                to be given;




·
            we
                have informed the depositary that there is substantial opposition
                as to a
                matter to be voted on at the
                meeting;




·
            a
                matter to be voted on at the meeting would have a material adverse
                impact
                on shareholders; or




·
            voting
                at the meeting is made on a show of
                hands.




The
      effect of this discretionary proxy is that you cannot prevent our ordinary
      shares underlying your ADSs from being voted, absent the situations described
      above, and it may make it more difficult for shareholders to influence the
      management of our company.




***You
      may not receive distributions on our ordinary shares or any value for them
      if it
      is illegal or impractical to make them available to
      you.***




The
      depositary of our ADSs has agreed to pay you the cash dividends or other
      distributions it or the custodian for our ADSs receives on our ordinary shares
      or other deposited securities after deducting its fees and expenses. You will
      receive these distributions in proportion to the number of our ordinary shares
      that your ADSs represent. However, the depositary is not responsible if it
      is
      unlawful or impractical to make a distribution available to any holders of
      ADSs.
      For example, it would be unlawful to make a distribution to a holder of ADSs
      if
      it consists of securities that require registration under the Securities Act
      but
      that are not properly registered or distributed pursuant to an applicable
      exemption from registration. The depositary is not responsible for making a
      distribution available to any holders of ADSs if any government approval or
      registration required for such distribution cannot be obtained after reasonable
      efforts made by the depositary. We have no obligation to take any other action
      to permit the distribution of our ADSs, ordinary shares, rights or anything
      else
      to holders of our ADSs. This means that you may not receive the distributions
      we
      make on our ordinary shares or any value for them if it is illegal or
      impractical for us to make them available to you. These restrictions may have
      a
      material and adverse effect on the value of your ADSs.




**You
      m****a****y
      not be able to participate in rights offerings and may experience dilution
      of
      your holdings.**




We
      may,
      from time to time, distribute rights to our shareholders, including rights
      to
      acquire securities. Under the deposit agreement, the depositary will not
      distribute rights to holders of ADSs unless the distribution and sale of rights
      and the securities to which these rights relate are either exempt from
      registration under the Securities Act with respect to all holders of ADSs,
      or
      are registered under the provisions of the Securities Act. The depositary may,
      but is not required to, attempt to sell these undistributed rights to third
      parties, and may allow the rights to lapse. We may be unable to establish an
      exemption from registration under the Securities Act, and we are under no
      obligation to file a registration statement with respect to these rights or
      underlying securities or to endeavor to have a registration statement declared
      effective. Accordingly, holders of ADSs may be unable to participate in our
      rights offerings and may experience dilution of their holdings as a
      result.


26


***You
      may be subject to limitations on transfer of your
      ADSs.***




Your
      ADSs
      represented by ADRs are transferable on the books of the depositary. However,
      the depositary may close its books at any time or from time to time when it
      deems expedient in connection with the performance of its duties. The depositary
      may close its books from time to time for a number of reasons, including in
      connection with corporate events such as a rights offering, during which time
      the depositary needs to maintain an exact number of ADS holders on its books
      for
      a specified period. The depositary may also close its books in emergencies,
      and
      on weekends and public holidays. The depositary may refuse to deliver, transfer
      or register transfers of our ADSs generally when our books or the books of
      the
      depositary are closed, or at any time if we or the depositary thinks it is
      advisable to do so because of any requirement of law or any government or
      governmental body, or under any provision of the deposit agreement, or for
      any
      other reason.




**Item
      4.**  **Information
      on the Company**




**A.**  **History
      and Development of the Company**




N-T Information
      Engineering was established by Tsinghua Enterprise Group, a company affiliated
      with Tsinghua University, and Hong Kong-based Tsinghua Novel Hi-Tech Investment
      Holding Ltd. in July 1998, and initially focused on developing, producing and
      selling digital data broadcasting equipment for cable television operators.
      In
      December 2002, N-T Information Engineering completed its acquisition of the
      CA systems-related assets of Tsinghua Tongfang. In March 2004, CDTV BVI was
      incorporated as a holding company in the British Virgin Islands, or BVI.
      Following the establishment of CDTV BVI, we restructured our operations, in
      connection with an investment by SAIF, by establishing Super TV, a wholly owned
      subsidiary of CDTV BVI, on May 31, 2004. On the same day, N-T Information
      Engineering and Ms. Li Yang, a PRC citizen then employed by SAIF,
      established N-S Digital TV. In June 2004, N-S Digital TV acquired from
      N-T Information Engineering its smart card and CA systems business and, in
      August 2006, N-S Digital TV acquired from N-T Information Engineering
      its set-top box design business. In April 2007, a new holding company, China
      Digital TV Holding Co., Ltd., or CDTV Holding, was established in the Cayman
      Islands. In May 2007, CDTV BVI executed a 40-for-1 share split of its ordinary
      shares and Series A preferred shares. Following this share split, the
      shareholders of CDTV BVI exchanged all of their shares of CDTV BVI for shares
      of
      CDTV Holding in proportion to their percentage interest in CDTV BVI, as a result
      of which CDTV BVI became a wholly owned subsidiary of CDTV Holding. In August
      2007, with our consent, Ms. Li Yang transferred her entire equity interest
      in N-S Digital TV to Ms. Wei Gao, a PRC citizen employed by an
      affiliated company of SAIF. In order to benefit from the tax arrangement between
      the PRC and Hong Kong, in December 2007, CDTV BVI acquired Golden Benefit
      Technology Limited, or Golden Benefit, a company incorporated in Hong Kong,
      for
      a nominal consideration, and transferred its 100% equity interest in Super
      TV to
      Golden Benefit. Golden Benefit has conducted no operation since its
      incorporation. See “Item 5. Operating and Financial Review and Prospects—A.
      Operating Results—Taxes and Incentives—PRC.” In December 2007, Super TV
      established a wholly owned subsidiary, N-S Media Investment, in the PRC to
      partner with China’s cable television operators and content providers to offer
      value-added services to television viewers. In February 2008, CDTV BVI
      established a wholly-owned subsidiary, China Super Media Holdings Limited,
      or
      CSM Holdings, in Hong Kong. In addition, in May 2008, N-S Digital TV entered
      into a joint venture agreement with a PRC citizen for the purposes of
      establishing Dongguan SuperTV to provide value-added services to television
      viewers.




Our
      principal executive office is located at Jingmeng High-Tech Building B, 4th
      Floor, No. 5 Shangdi East Road, Haidian District, Beijing 100085, PRC. Our
      telephone number is (8610) 6297 1199. Information contained on our website
      or
      our wireless Internet site does not constitute a part of this annual report.
      Our
      agent for service of process is CT Corporation System, located at 111 Eighth
      Avenue, New York, New York 10011, U.S.A.




In
      October 2007, we completed the initial public offering of our ADSs representing
      our ordinary shares and listed the ADSs on the New York Stock
      Exchange.




***Our
      Investments and Acquisitions***




In
      August
      2006, N-S Digital TV entered into an asset transfer agreement to purchase
      from N-T Information Engineering its set-top box design business for an
      initial purchase price of RMB29,440,000 ($4,035,862), subject to certain
      post-closing downward adjustments. As an adjustment to the initial purchase
      price, N-T Information Engineering refunded RMB12,051,000 ($1,652,044) to
      N-S Digital TV in April 2007. For details of the adjustment mechanism of
      the initial purchase price, see “Item 7. Major Shareholders and Related
      Party Transactions—B. Related Party Transactions—Super TV and N-S Digital
      TV Arrangements—Transfer of Assets and Equity Interests and Trademark
      License—Asset Transfer Agreement, dated August 5, 2006, between
      N-T Information Engineering and N-S Digital TV, as amended on April 6,
      2007.”


27


In
      August
      2006, N-S Digital TV entered into an equity transfer agreement to purchase
      from N-T Information Engineering its 51% equity interest in Foshan Nanhai
      Guokai Digital TV Technology Co., Ltd., or Guokai, for a cash consideration
      of
      RMB2,370,000 ($324,898). The parties entered into a new agreement in March
      2007
      to reduce the consideration to RMB2,255,858 ($309,250). Guokai is a company
      primarily engaged in the research, development and sale of digital TV-related
      systems, software and products. A Japanese multinational company holds the
      remaining 49% equity interest in Guokai. This transaction was completed on
      July
      27, 2007.




In
      March
      2007, N-S Digital TV and Jiangsu Qingda Technology Co. Ltd, or Jiangsu
      Qingda, one of our customers, entered into an agreement to set up a joint
      venture in Nanjing of Jiangsu Province mainly engaging in digital television
      technology development and services, Nanjing Qingda Yongxin Culture &
Media Co. Ltd., or Qingda Yongxin. N-S Digital TV contributed cash of
      RMB0.8 million ($0.1 million), representing 40% of equity interest in
      the joint venture. Jiangsu Qingda contributed cash of RMB1.2 million
      ($0.2 million) representing 60% of equity interest in the joint venture. In
      three years after the establishment of Qingda Yongxin, N-S Digital TV has
      the option to purchase up to an additional 30% of the equity interest of Qingda
      Yongxin. The purchase price of the additional interest will be determined based
      on the valuation of the joint venture on the date of purchase, which will be
      the
      higher of ten times its net profits in the year prior to the purchase, and
      the
      net asset value of Qingda Yongxin on the last fiscal year end date prior to
      the
      purchase. As of December 31, 2007, Qingda Yongxin has not commenced
      operations.




In
      May
      2008, N-S Digital TV and Xitao Lai, a PRC citizen, entered into an agreement
      to
      set up Dongguan SuperTV, a joint venture in Dongguan, Guangdong Province, mainly
      to provide value-added services to television viewers. N-S Digital TV and Xitao
      Lai will each contribute cash of RMB 5.0 million ($0.7 million), representing
      50% of equity interest in the joint venture. N-S Digital TV has an option to
      purchase an additional 10% equity interest in the joint venture from Xitao
      Lai,
      subject to certain conditions. In addition, N-S Digital TV is entitled to 70%
      of
      shareholders’ voting rights and appointing three out of the five members of the
      board of directors of Dongguan SuperTV. We are currently in the process of
      incorporating Dongguan SuperTV.




***Capital
      Expenditures and Divestitures***




See
      “Item 5. Operating and Financial Review and Prospectus—B. Liquidity and
      Capital Resources—Capital Expenditures” for information concerning our principal
      capital expenditures for the previous three years and those currently in
      progress. We have not undertaken any significant divestitures.




**B.**  **Business
      Overview**




**Overview**




We
      are
      the leading provider of CA systems to the PRC’s rapidly growing digital
      television market. Our CA systems, which consist of smart cards, head-end
      software for television network operators and terminal-end software for set-top
      box manufacturers, enable digital television network operators in the PRC to
      control the distribution of content and value-added services to their
      subscribers and block unauthorized access to their networks. As of December
      31,
      2007, we had installed CA systems at 164 digital television network operators
      in
      27 of the 32 provinces, autonomous regions and centrally administered
      municipalities in the PRC. We were the leading vendor of smart cards for CA
      systems in terms of smart cards shipped in the PRC in 2007, with a market share
      of approximately 48% in 2007, according to Analysis International. We derive
      a
      substantial majority of our revenues from sales of our smart cards, which
      accounted for 85.6% and 89.1% of our total revenues in 2006 and 2007,
      respectively. We expect that the sales of our smart cards will continue to
      constitute the majority of our revenues in the near future. In addition, we
      license our set-top box design to set-top box manufacturers and sell advanced
      digital television application software such as electronic program guides and
      subscriber management systems to digital television network operators. Following
      the establishment of N-S Media and Dongguan SuperTV, we expect to engage in
      the
      value-added television business by offering premium value-added cable television
      services such as electronic program guides based advertising platforms,
      pay-per-view programming and video-on-demand through cooperation with digital
      television network operators.


28


PRC
      television network operators are in the early stages of switching from analog
      to
      digital transmissions, and the PRC government has set a target of 2015 for
      operators to complete their digital transition. We are a primary beneficiary
      of
      this transition because CA systems are an essential component of any
      pay-television platform. We sell our CA systems and digital television
      application software to PRC television network operators, including cable,
      satellite and terrestrial television network operators, and enterprises that
      maintain private cable television networks within their facilities.




Among
      the
      49 cable television network operators selected by the SARFT to host digital
      television demonstration projects, 29 are our customers. Our top five customers
      in terms of revenues in 2007 were Jiangsu Qingda, Dongguan Broadcasting Network
      Media Development Stock Co., Ltd., Kunshan Municipal Digital Cable Technology
      Co., Ltd., Hefei CATV Broadband Co. Ltd. and Chengdu Municipal Xingwang Media
      Co., Ltd. China Central Television, the largest broadcaster in China, also
      uses
      our CA system as well as those from other vendors to encrypt its programs for
      distribution to local television operators, although it is not a major
      contributor to our revenue.




We
      were
      founded in 2004 by Dr. Zengxiang Lu and Mr. Jianhua Zhu, who had
      worked together from 2001 at N-T Information Engineering, one of the PRC’s
      earliest CA systems vendors. We purchased N-T Information Engineering’s CA
      systems business in 2004 and continued to build upon the strong reputation
      that
      business had achieved. Our net revenues increased from $13.1 million in
      2005 to $30.4 million in 2006 and $55.5 million in 2007. We sold
      0.2 million, 1.5 million, 3.9 million and 7.3 million smart
      cards in 2004, 2005, 2006 and 2007, respectively. We grew our net income from
      $4.5 million in 2005 to $13.0 million in 2006 and 33.8 million
      2007.




**Our
      Products and Services**




Our
      core
      products and services include the following:




·
            end-to-end
                CA systems, including smart cards, head-end software and terminal-end
                software;




·
            other
                digital television application software for television network operators;
                and




·
            set-top
                box designs.




***CA
      Systems***




Our
      CA
      systems consist of software that is installed at the premises of the television
      network operator, or the head end; software that is installed in a set-top
      box
      at the subscriber’s end, or the terminal end; and smart cards that are inserted
      into the set-top boxes. At both the head end and the terminal end, our CA
      systems are designed to interface easily with the software and hardware of
      as
      many other vendors as possible. This gives our customers maximum flexibility
      in
      selecting the components of their digital transmission systems, and allows
      us to
      cooperate with the other vendors in promoting each other’s products to the
      network operators.




Our
      CA
      systems give cable television network operators the flexibility to charge
      subscribers on a per-channel or per-view basis, and to restrict viewers from
      making copies of the programs they watch. Our CA systems also offer the
      following functions:




·
            ***Near
                video-on-demand.***Television network operators who do not yet have two-way transmission
                capacity, which is necessary for full-blown video on demand, can
                broadcast
                the same program repeatedly at short intervals, typically of 10 to
                20
                minutes, giving subscribers many choices of time to start watching
                the
                program.


29




·
            ***Parental
                control.***Parents can use the set-top box to set viewing controls by creating
                a
                password that must be entered to watch television or to watch certain
                programs, and can block access to the system at certain
                hours.




·
            ***Location
                control.***Television network operators can authorize each smart card and set-top
                box
                to function only on the premises of the subscriber in whose name
                the smart
                card and set-top box are registered, preventing subscribers from
                providing
                their smart cards and set-top boxes to
                others.




·
            ***E-wallets.***Information about pre-payment by subscribers for programs or services
                can
                be recorded on their smart cards. As subscribers order programs or
                services, the fees are deducted from the amounts recorded on their
                smart
                cards.




·
            ***Messaging.***Network operators can communicate with their subscribers by transmitting
                electronic messages about bill status, rate changes and new programs
                and
                services to their subscribers’ televisions. Network operators also can
                allow other vendors, such as water or electricity companies, to send
                billing or other service messages via this messaging
                platform.




·
            ***Upgrades.***CA
                systems upgrades can be accomplished by transmitting software over
                the
                transmission network to the terminal
                end.




We
      guarantee the security of the encryption technologies of our CA systems. In
      the
      event of a security problem, we undertake to attempt to resolve the problem
      by
      taking steps such as resetting the encryption code or adding additional layers
      of encryption. If these or other system modifications do not resolve the
      problem, we undertake to replace our smart cards. Our warranty terms vary,
      but
      we generally agree to replace our smart cards for free during the first one
      to
      two years after sale in the event of a security breach, with the customer
      bearing some portion or all of the cost thereafter. To date, we have not
      encountered any material problems with the security of our CA
      systems.




***Smart
      Cards.*** Our
      smart cards are manufactured by third-party manufacturers based on our
      blueprints, and then are encoded by us on our premises with security codes
      unique to each customer. We forward the chips to smart card manufacturers in
      the
      PRC, which embed the chips in plastic cards. When we receive the cards from
      the
      card manufacturers, we program each one with a unique security code so that
      it
      can communicate with the CA systems of its intended network. We currently have
      enough equipment and trained staff to encode 100,000 smart cards on our premises
      during an eight-hour shift. An additional layer of security code is added at
      the
      customer’s premises using software that we install as part of our CA
      systems.




Our
      customers generally wait until after they have purchased, installed and tested
      our head-end CA systems software before placing purchase orders for smart cards.
      We may offer discounts for large smart card orders. We sold 1.5 million,
      3.9 million and 7.3 million cards in 2005, 2006 and 2007,
      respectively.




Our
      smart
      cards are manufactured to meet the ISO-7816 standard for card readability.
      We
      guarantee the quality of our smart cards and if any of our cards are found
      to
      have defects during the warranty period, we replace them free of charge. The
      length of our warranty period varies from one to three years. To date, we have
      not experienced a material rate of smart card failure.




***Head-End
      Software.*** Our
      head-end software includes an entitlement management message generator, which
      notifies the smart card whether the subscriber is entitled to view a program
      or
      not; an entitlement control message generator, which sends messages that the
      set-top box uses to unscramble the digital television signal; and encryption
      software, which encrypts the outgoing messages.




Our
      head-end software also includes simulcryption software that allows network
      operators to install parallel CA systems from multiple vendors and transmit
      their programs to some subscribers using one CA system’s security codes and to
      other subscribers using another CA system’s security codes. Many of the cable
      television network operators in the PRC who have digitalized have installed
      two
      or more CA systems sourced from different vendors in order to reduce dependency
      on a single vendor. Moreover, in 2003, the SARFT issued a policy requiring
      digital cable television network operators who install non-PRC CA systems to
      also install a domestic CA system. Our simulcryption software and open-interface
      technology enable us to work with operators to install parallel CA systems,
      and
      we have integrated our CA systems with those of NDS Group, Irdeto Access BV
      and
      DVN Holdings Ltd., among others.


30


As
      of
      December 31, 2007, our CA systems had been installed at 164 digital television
      network operators.




We
      generally install, customize, test and commission our CA systems over a period
      of months and train our customer’s staff to operate it. Our prices vary
      according to the size and complexity of each customer’s network, as well as
      market conditions. Generally, 90% of the contract price is payable upon issuance
      of a preliminary acceptance or, if there is only a single acceptance, upon
      its
      issuance, and the remaining 10% is payable upon issuance of a final acceptance
      or within one year of such issuance.




***Terminal-End
      Software*** .
      We
      license our CA systems terminal-end software to whichever set-top box
      manufacturer has been chosen by our customer to produce set-top boxes compatible
      with our CA systems. More than 115 set-top box manufacturers in the PRC have
      installed our technology in their set-top boxes.




Once
      our
      customer has selected one or more set-top box manufacturers, the selected
      manufacturers enter into contracts with us to license our terminal-end software
      for use in their manufacturing processes so that their set-top boxes can be
      used
      on the planned network. The manufacturers agree to pay us a one-time license
      fee, including fees for testing and certifying their set-top boxes, and
      royalties for each box they manufacture using our software. In 2006, we began
      entering into agreements with certain television network operators who purchase
      our CA systems pursuant to which the operators agree to pay us royalties for
      each set-top box deployed on their networks that uses our CA systems
      terminal-end software.




***Other
      Digital Television Application Software for Television Network
      Operators***




***Subscriber
      Management Systems.*** We
      produce subscriber management system, or SMS, software, which can be used by
      television network operators to reduce the cost and improve the efficiency
      of
      their subscriber management. Our SMS software is compatible with the CA systems
      of other vendors, and we sell it on a stand- alone basis as well as packaged
      with our CA systems. Our SMS software performs the following
      functions:




·
            maintains
                and updates a database of subscriber
                information;




·
            processes
                subscriber orders for new services;




·
            maintains
                billing, payment and authorization records and sends e-mail bills
                and
                receipts to subscribers; and




·
            processes
                subscriber requests to repair or replace defective or lost set-top
                boxes
                or smart cards.




As
      of
      December 31, 2007, our SMS software had been installed by 54 television network
      operators. Our prices vary according to the size and complexity of each
      customer’s network, as well as market conditions.




***Electronic
      Program Guides.*** An
      electronic program guide is an on-screen guide to the programs and services
      available to subscribers. Our electronic program guide is a software application
      that is installed at the head end of a CA system and can be controlled by a
      remote control. Viewers can use the guide to obtain program schedules as well
      as
      information about specific programs, such as plot descriptions and the names
      of
      featured actors.




As
      of
      December 31, 2007, our electronic program guide had been installed by 93
      television network operators. We generally sell our electronic program guide
      together with our CA systems, but it is also compatible with the CA systems
      of
      other vendors. When we sell our electronic program guides packaged with our
      CA
      systems, we provide the same maintenance terms as for the CA systems. Our prices
      vary according to the size and complexity of each customer’s network, as well as
      market conditions.


31


***Set-top
      Box Design***




We
      produce a design, or operating system, for set-top boxes and license it to
      set-top box manufacturers. Our sophisticated design enables set-top box
      manufacturers to incorporate high-end features into their set-top boxes. We
      also
      provide our customers with computer chips for the set-top boxes that have been
      made to our specifications by third-party fabricators. The set-top box
      manufacturers generally sign a purchase order specifying the number of set-top
      boxes that they intend to manufacture using our design, and pay us a license
      fee
      and royalties based on such number. Our set-top box design does not include
      CA
      system terminal-end software. Manufacturers who use our set-top box design
      may
      separately purchase our or other vendors’ CA system terminal-end software. We
      are developing additional applications for our set-top box designs to support
      new value-added services and to allow the set-top boxes to operate as personal
      video recorders.




**Technical
      Support and Services**




We
      offer
      system integration services for television network operators who are
      digitalizing and installing our CA systems. As system integrators, we purchase
      additional hardware and software from third parties and integrate it with our
      CA
      systems software. If our customers install multiple CA systems from more than
      one vendor, we integrate these systems with our own so that all the hardware
      and
      software operates as a seamless whole.




As
      of
      December 31, 2007, we had a total of 58 technicians and engineers located in
      Beijing and six other cities on call around the clock to respond to customer
      requests for information and assistance. Our three regional service centers
      are
      strategically located in eastern (Hangzhou), central (Changsha) and southern
      (Nanhai) China, and we have smaller centers serving customers in the cities
      of
      Dalian in the northeast, Chengdu in the southwest and Hefei in the east. Each
      service center maintains a 24-hour telephone hotline. Upon receiving a call
      for
      assistance, our technical support employees first attempt to identify and
      resolve the problem over the telephone or by accessing the software remotely,
      and then arrange a site visit if necessary. In addition, each customer is
      assigned a project manager who oversees the initial software installation and
      remains primarily responsible for ensuring that after-sale requests for
      assistance are handled promptly.




**Sales
      and Marketing**




As
      of
      December 31, 2007, we had 67 full-time direct sales personnel. We maintain
      regular contact with our customer base through contacts at industry forums
      and
      sales visits, and use these opportunities to educate them about digital
      television systems. We actively monitor which operators are moving towards
      digitalization, and when we learn that a particular operator is planning to
      launch a digital network, we target that operator for more frequent contact
      by
      our sales and technical personnel. We compensate our sales personnel by means
      of
      base salaries and performance bonuses.




We
      also
      cooperate informally with other providers of digital television software and
      hardware with whom we do not compete, such as set-top box manufacturers, to
      promote each other’s products to our respective customers, and thereby benefit
      from each other’s marketing efforts.




We
      currently have one distributor, Jiangsu Qingda, a Nanjing-based company, which
      acts as our exclusive distributor for CA systems and smart cards in Jiangsu
      Province in eastern China. Jiangsu Qingda also provides after-sales technical
      support and maintenance services for our customers in Jiangsu Province. We
      entered into a new, 13-year distribution contract with Jiangsu Qingda effective
      January 1, 2007. We account for revenues contributed by Jiangsu Qingda in the
      same way as revenues from our customers who are television network operators.
      Jiangsu Qingda was our largest contributor to revenues in 2006 and
      2007.




**Customers**




Our
      primary customers are cable television network operators. We sell our products
      and services to networks of all sizes. Our top five customers during the year
      ended December 31, 2007 were Jiangsu Qingda, Dongguan Broadcasting Network
      Media
      Development Stock Co., Ltd., Kunshan Municipal Digital Cable Technology Co.,
      Ltd., Hefei CATV Broadband Co., Ltd. and Chengdu Municipal Xinwang Media Co.,
      Ltd., which contributed 14.1%, 8.0%, 3.9%, 3.0% and 2.9%, respectively, of
      our
      total revenues for such period. China Central Television, the largest
      broadcaster in China, also uses our CA system as well as those from other
      vendors to encrypt its programs for distribution to local television operators,
      although it is not a major contributor to our revenue.


32


We
      also
      have sold our CA systems to:




·
            satellite
                and terrestrial television network operators, including the China
                Central
                Satellite Television Transmission
                Center;




·
            large
                enterprises that maintain private cable television networks within
                their
                facilities, including the Beijing Capital International Airport;
                and




·
            the
                operators of wireless television networks for taxi fleets, including
                the
                Shanxi Dazhong Mobile Television Co.,
                Ltd.




We
      currently derive, and we expect to continue to derive, a significant portion
      of
      our revenues each period from a limited number of large customers, although
      the
      particular customers may vary from period to period. As digital cable television
      systems are in their infancy in the PRC, the largest shipments of smart cards
      are to operators who are launching new digital transmission systems and need
      to
      purchase in bulk for their new networks. For example, each of Hangzhou Digital
      Television Co., Ltd., Dalian Tiantu Cable Network Stock Co., Ltd. and Taiyuan
      Cable Television Network Co., Ltd. contributed more than 10% of our total
      revenues in 2005, representing 20.0%, 12.6% and 11.5%, respectively, of our
      total revenues during 2005, and each of Jiangsu Qingda, our distributor, and
      Dalian Tiantu Cable Network Stock Co., Ltd., contributed more than 10% of our
      total revenues in 2006, representing 14.5% and 13.0%, respectively, of our
      total
      revenues during 2006. Jiangsu Qingda was our only customer that contributed
      more
      than 10% of our total revenues during 2007, representing 14.1% of our revenues
      in that period. We may face certain risks from this concentration of revenues.
      See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business
      and Industry—A significant portion of our revenues in any single period depends
      on a limited number of customers. If one customer defers or cancels its orders
      or chooses our competitors’ products or services, our revenues in such period
      could decline significantly.”




Because
      most cable television network operators in the PRC are state-owned, they are
      required to follow a public bidding process for major purchases. As a result,
      the majority of our CA systems sales are made pursuant to a formal bid process.
      In such cases, the network operator generally submits its CA systems
      requirements to a state-owned bidding company, which posts a request for bids
      at
      its Internet site and specifies the necessary financial and technical
      qualifications of bidders. We closely monitor new requests for bids. We also
      cultivate good relations with potential customers before they reach the stage
      of
      requesting bids, so that we can better understand their needs and tailor our
      bid
      proposals accordingly. We are generally required to accompany our bid with
      a
      cash deposit, which generally is from $6,500 to $13,000 and which is refundable
      in full if we fail to win the sales contract. If we succeed in winning the
      contract, some network operators require that we leave our deposit in their
      account until we have installed and tested our software and the network operator
      has signed a certificate of acceptance. The time from when a request for bids
      is
      posted until a winner is selected is usually one to two months.




Our
      customers also include set-top box manufacturers, to whom we license
      terminal-end software for our CA systems and set-top box designs. More than
      115
      set-top box manufacturers in the PRC have installed our terminal-end software
      in
      their set-top boxes, including Changhong Electric Co., Huawei Technologies,
      Panasonic AVC Networks, Samsung Electronics, TCL Technology, **** Intel
      Corporation, LG, and OKI. In addition, 18 set-top box manufacturers have
      licensed our set-top box designs, including Motorola and Hisense.




**Suppliers**




Before
      2006, we bought most of our computer chips for our smart cards from STM. In
      order to maintain a secure supply of computer chips, beginning in 2006 we have
      purchased a significant portion of our computer chips from ACG, which acts
      as an
      agent for Infineon. We are currently holding talks with two other vendors about
      purchasing computer chips from them.




STM
      and
      Infineon produce chips that use our card operating system at their facilities
      in
      France and Germany, respectively, and deliver them to Beijing by air freight.
      We
      do not have long-term contracts with any of our computer chip suppliers, but
      place orders according to our customers’ demands. We pay based upon the
      prevailing market price at the time of order. The vendors warranty their chips
      for a period of one year from delivery.


33


The
      time
      required from placing a new chip order with the fabricators to shipping finished
      smart cards to our customers may be as long as 15 weeks. To ensure that we
      are
      able to meet our customers’ demands, we plan at all times to have enough chips
      and smart cards on order or in inventory to meet our demand for an average
      15-week period.




We
      have
      arrangements with four smart-card manufacturers, China Electronics, the China
      Sciences Group, Axalto Smart Card Technology Co. and Oberthur Card Systems,
      to
      embed the computer chips into plastic cards. We currently maintain a one-year
      contract with each of China Electronics and the China Sciences Group that
      guarantees us a volume-based price discount and requires China Electronics
      or
      the China Sciences Group, as the case may be, to fulfill our orders in
      accordance with an agreed schedule. We do not have any long-term contract with
      Axalto Smart Card Technology Co. or Oberthur Card Systems. Our contracts with
      China Electronics and the China Sciences Group require them to meet the ISO-7816
      standard for card readability. In addition, we believe that there are numerous
      alternative smart-card manufacturers from whom we would be able to obtain smart
      cards if either or both of our current suppliers were unable to meet our
      needs.




For
      more
      information about risks relating to our relationships with our suppliers, see
      “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and
      Industry—We generally do not have long-term contracts with suppliers of computer
      chips or the companies that manufacture our smart cards. If any of our computer
      chip suppliers or smart-card manufacturers is unable to fulfill our orders
      in
      time or at all, we may be unable to deliver smart cards to our customers on
      time
      or at all, which could have a material adverse effect on our business, operating
      results and financial condition.”




**Competition**




We
      face
      competition in the CA systems market from both international and domestic
      companies. We compete on the basis of:




·
            customer
                service and technical support;




·
            brand
                name, track record and market
                recognition;




·
            encryption
                management and other technologies, including our smart
                cards;




·
            the
                number of set-top box manufacturers with whom we cooperate;
                and




·
            price.




Our
      main
      international competitors in the CA systems business are Conax AS, Irdeto Access
      BV, Kudelski SA, and NDS Group. These companies have longer operating histories
      and substantially greater financial, technical and other resources than we
      do,
      which may enable them to respond more quickly than us to technological or
      commercial changes in our industry. Several of these companies entered the
      PRC
      market before us but have been less successful in capturing market share.
      Historically, these companies have generally focused on sales to the television
      network operators in the PRC’s largest cities. To the extent that our
      international competitors may begin targeting small and mid-size television
      network operators, we believe that we can continue to compete successfully
      because of our local knowledge and relationships and our more extensive customer
      support and service network.




Our
      main
      domestic competitors are Compunicate Technologies Inc., DVN Holdings Ltd.,
      and
      Sumavision Technologies Co., Ltd., all of which are non-state-owned companies
      operating mainly in the PRC. They may offer their CA systems at a lower price
      than we do. However, we believe that we have more advanced technology than
      they
      do, and that our strong technology and leading market position will enable
      us to
      continue to compete successfully against these companies.


34


According
      to Analysys International, we were the leader in the PRC CA systems market
      in
      2006 and 2007. According to Analysys International, in 2007, we had an
      approximately 48% market share based on the number of smart cards shipped,
      followed by DVN Holdings Ltd. with approximately 22% market share, Irdeto Access
      BV with approximately 10% market share, NDS Group with approximately 7% market
      share, Kudelski SA with approximately 7% market share, Sumavision Technologies
      Co., Ltd. with approximately 5% market share, and others accounting for the
      remaining 1%. For more information about risks relating to our competitors,
      see
“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and
      Industry—We face intense competition, which could reduce our market share and
      harm our financial performance.”




**Research
      and Development**




Our
      success to date has in large part resulted from our strong research and
      development capabilities. As of December 31, 2007, our research and development
      team consisted of 224 employees, up from 145 as of December 31, 2006, and
      we plan to further expand the team during 2008. Our investment in research
      and
      development increased to $4.6 million in 2007 from $2.2 million in 2006.




Our
      business and the market in which we operate are characterized by rapid
      technological change, evolving industry standards and frequent product
      enhancements. As digital broadcasting becomes more popular in the PRC,
      television network operators are likely to seek more sophisticated CA technology
      that offers them greater reliability, flexibility and functionality in
      delivering protected content or value-added services to viewers. As methods
      of
      distributing information and entertainment evolve, CA technology may also need
      to evolve to provide content protection for distribution platforms other than
      television, such as mobile phones. Our continued success will depend, in part,
      on our ability to develop and market products and services that respond to
      technological changes and evolving market demand or industry standards in a
      timely and cost-effective manner.




Many
      of
      our current research and development staff are graduates of the PRC’s top
      science and engineering universities, including Tsinghua University, and have
      extensive experience in digital television and encryption technologies. Our
      research team played a leading role in drafting the PRC industry standards
      for
      CA systems, electronic program guides and other key industry standards. We
      are
      active in the China Digital Rights Management Forum, which aims to develop
      a PRC
      standard for digital rights management, and the Audio and Video Coding Standard
      Workgroup of China, which has developed the PRC’s own video and audio
      compression technology. In 2006, the Radio and Television Standards Institute
      of
      the SARFT awarded us their annual “technology innovator” award, and honored
      Mr. Jian Han, our chief technology officer, with their “innovative person”
award.




Our
      research and development personnel are actively seeking ways to improve the
      security of our CA systems, as well as prevent content theft at other stages
      of
      the television network operators’ chain of transmission. Other focuses of
      research include adapting our CA systems for use on new television platforms
      such as mobile television and IPTV, developing new value-added services that
      will enhance operator revenues, and developing a new line of digital rights
      management, products, to allow content providers to control the way their
      content is distributed and reproduced.




**Intellectual
      Property**




We
      develop all of our software internally. Our proprietary intellectual property
      is
      critical to our success. We rely primarily on a combination of patent, trademark
      and copyright laws, trade secrets, licenses and employee and third-party
      confidentiality agreements to safeguard our intellectual property. We generally
      enter into confidentiality and non-disclosure agreements with our employees,
      customers and suppliers.




As
      of
      December 31, 2007, we had a total of four patents issued and 15 pending patent
      applications in the PRC. Our issued patents and pending patent applications
      relate primarily to digital transmission technologies, encryption and decryption
      technologies, technologies relating to the production of set-top boxes and
      smart
      cards and technologies relating to value-added services. We have also completed
      copyright registration of 38 software programs for digital television in the
      PRC.




When
      we
      license our intellectual property to third parties we generally receive a
      combination of license fees and royalties. We mainly license our terminal-end
      software and our set-top box design to the set-top box
      manufacturers.


35


We
      have a
      non-exclusive license to use the English and Chinese names for “NOVEL-TONGFANG”
and a graphic logo, free of charge, pursuant to an agreement with
      N-T Information Engineering. N-T Information Engineering has
      registered these names and the logo as trademarks. Our term of use is from
      June
      1, 2004 until such trademark registrations expire at various dates in 2013.
      In
      November 2007, we ceased using “NOVEL-TONGFANG” in N-S Digital TV’s name by
      changing the name from “Beijing Novel-Tongfang Digital TV Technology Co., Ltd.”
to “Beijing Novel-Super Digital TV Technology Co., Ltd.” In January 2008, we
      ceased using the English and Chinese names for “NOVEL-TONGFANG” as trademarks
      for our products and we currently intend not to use such trademarks in the
      future. We started to use the English and Chinese names for “NOVEL SUPERTV” in
      combination with the graphic logo we licensed from N-T Information Engineering
      as the trademarks for our products. In the meanwhile, we are in the process
      of
      acquiring for free the graphic logo from N-T Information Engineering and
      applying to register the trademarks of the English and Chinese names for “NOVEL
      SUPERTV”.




In
      addition, we own four other **** trademarks
      that we have not registered. We have registered the domain names www.superdtv.com.cn and www.superdtv.cn .




**Insurance**




We
      do not
      maintain any business insurance or key-man insurance. Insurance companies in
      the
      PRC offer limited business insurance products and do not, to our knowledge,
      offer business liability insurance. While business disruption insurance is
      available to a limited extent in the PRC, we have determined that the risks
      of
      disruption, cost of such insurance and the difficulties associated with
      acquiring such insurance on commercially reasonable terms make it impractical
      for us to have such insurance. As a result, we do not have any business
      liability, disruption or litigation insurance coverage for our operations in
      the
      PRC. We generally do not maintain property insurance either, except for
      insurance that covers the company vehicles.




**Employees**




As
      of
      December 31, 2007, we had 424 full-time employees, as compared to 270 employees
      as of December 31, 2006. We have no part-time employees. All of our
      employees are located in the PRC. The table below shows the number of employees
      categorized by business area and as a percentage of our workforce as of December
      31, 2007:




**Number of employees**
            
            
            **Percentage**Research
                and development
            
            
            224
            
            
            52.8
            %Technical
                service
            
            
            58
            
            
            13.7
            %Sales
                and marketing
            
            
            67
            
            
            15.8
            %General
                and administration
            
            
            48
            
            
            11.3
            %Smart
                card production
            
            
            27
            
            
            6.4
            %Total
            
            
            424
            
            
            100.0
            %




As
      required by PRC regulations, we participate in various employee benefit plans
      that are organized by municipal and provincial governments, including housing,
      pension, medical and unemployment benefit plans. We are required under PRC
      law
      to make contributions to the employee benefit plans at specified percentages
      of
      the salaries, bonuses and certain allowances of our employees, up to a maximum
      amount specified by the local government from time to time. Members of the
      retirement plan are entitled to a pension equal to a fixed proportion of the
      salary prevailing at the member’s retirement date. The total amount of
      contributions that we made to employee benefit plans in 2005, 2006 and 2007
      was
      approximately $0.3 million, $0.4 million and $0.8 million,
      respectively.




Our
      employees are not represented by any collective bargaining agreements or labor
      unions. We believe that we maintain a good working relationship with our
      employees and we have not experienced any significant labor
      disputes.


36


We
      typically enter into a standard confidentiality agreement with our employees.
      We
      also enter into an agreement with each of our employees giving us full rights
      to
      any inventions developed by such persons during the course of their employment
      by us. In addition, we enter into a non-competition agreement with each of
      our
      executive officers and key research and development personnel. These agreements
      include a covenant that prohibits each of them from engaging in any activities
      that directly or indirectly compete with our business during, and for one year
      after, the period of their employment with us.




**Regulation**




We
      operate substantially all of our business in the PRC and various aspects of
      our
      business activities are subject to the laws and regulations of the PRC,
      including laws and regulations relating to the encryption industry, the cable
      television industry and the software industry. These laws and regulations
      require us to obtain certain licenses and certificates for our encryption
      products and register our software with the PRC government. In addition, certain
      laws and regulations of the PRC also affect the rights of our shareholders
      to
      receive dividends and other distributions from us.




***Regulation
      of Encryption Industry***




Encryption
      software is an essential component of our CA systems. The development,
      production and sale of commercial encryption products in the PRC is regulated
      by
      the PRC National Encryption Administrative Bureau, or the Encryption Bureau,
      and
      its authorized local branches. The principal regulations governing the
      encryption business in the PRC are the *Administrative
      Regulation for Commercial Cryptogram* promulgated by the State Council in 1999 and a series of rules issued by the
      Encryption Bureau thereunder.




A
      company
      generally is only allowed to produce and/or sell encryption products that have
      adopted the algorithms designated by the Encryption Bureau and such products
      shall also be certified by Encryption Bureau. The Encryption Bureau did not
      initially designate algorithms for CA systems until April 2007 and a final
      and
      official designation still remain pending. Therefore, like many other vendors
      of
      CA systems in the PRC, N-S Digital TV has been making and selling CA
      systems using algorithms other than those initially designated by the Encryption
      Bureau. Based on its consultation with the Encryption Bureau, King &
Wood, our PRC counsel, advised us that it has no reason to believe, given that
      N-S Digital TV commenced its CA systems business when the initially
      designated algorithms were not yet available, the Encryption Bureau would impose
      any sanctions against N-S Digital TV for not using initially designated
      algorithms in the past. King & Wood further advised us that since the
      Encryption Bureau did not initially designate any algorithms for CA systems
      until April 2007 with a final and official designation pending and the CA
      systems using algorithms other than those initially designated by the Encryption
      Bureau have been widely used and accepted in the market, the Encryption Bureau
      has allowed vendors of CA systems a transition period, of a duration yet to
      be
      determined at the sole discretion of the Encryption Bureau, during which such
      vendors, including N-S Digital TV, may continue to produce and sell CA
      systems without using government-designated algorithms. The Encryption Bureau
      may require vendors of CA systems to adopt the algorithms to be finally and
      officially designated by the authority at the expiration of such transition
      period.




In
      addition, a company engaging in the encryption-related business is subject
      to
      certain licensing requirements. For example, a company engaging in the
      production of commercial encryption products must obtain a production license
      from the Encryption Bureau, and a company engaging in the sale and distribution
      of commercial encryption products must obtain a sales and distribution license.
      In addition, a company engaging in research and development of commercial
      encryption systems, protocols, algorithms or technical standards shall obtain
      a
      license for research and development from the Encryption Bureau. To obtain
      such
      licenses, a company must meet requirements established by the Encryption Bureau,
      among others, with respect to its technological capabilities, its equipment,
      its
      production and quality control processes, the level of security of its
      algorithms and the qualifications of its employees. In addition, both importing
      and exporting products or equipment containing encryption technologies are
      subject to the prior approval of the Encryption Bureau.


37


In
      the
      opinion of King & Wood, our PRC counsel, the business of
      N-S Digital TV does not require a license for research and development.
      N-S Digital TV has engaged in the production and sale of encryption
      products since its establishment in May 2004, but it did not obtain the license
      for the production of encryption products until June 2006. In addition, it
      has
      commenced the process of applying for a license to sell and distribute
      encryption products. As the first step of this process, it already submitted
      applications to the Encryption Bureau to use certain algorithms designated
      by
      the Encryption Bureau and received the Encryption Bureau’s approval for such
      use. N-S Digital TV is currently in the process of adopting the
      government-designated algorithms for our encryption products and intends to
      submit the application for a license to sell and distribute such encryption
      products following completion of such adoption. For risk relating to the
      potential legal penalties against N-S Digital TV for its operation prior to
      its obtaining the production license and the uncertainties relating to the
      application for the sales license, see “Item 3. Key Information—D. Risk
      Factors—Risk Relating to Our Business and Industry—N-S Digital TV may be
      deemed not to be in full compliance with certain legal regulatory requirements
      relating to the production and sale of encryption products. The relevant PRC
      government authorities could require N-S Digital TV to cease such
      activities and impose administrative penalties including fines, which could
      have
      a material adverse effect on our business.”




Furthermore,
      certain PRC regulations allow users to use only encryption products that are
      certified by the encryption authority and purchased from vendors who hold an
      encryption product sales license. As indicated above, we have commenced the
      process of applying for but not yet obtained an encryption product sales
      license. In addition, our CA systems have not been certified by the Encryption
      Bureau because we have not adopted the government-designated algorithms for
      our
      CA systems. King & Wood, our PRC counsel, has advised us that because
      the Encryption Bureau has allowed a transition period, of a duration yet to
      be
      determined at the sole discretion of the Encryption Bureau, for us to adopt
      the
      algorithms to be finally and officially designated by the authority, it is
      unlikely that the Encryption Bureau will enforce the above-mentioned regulatory
      requirements with respect to the use or purchase of our CA systems during that
      transition period. See also “Item 3. Key Information—D. Risk Factors—Risks
      Relating to Our Business and Industry—Enforcement of certain PRC regulatory
      requirements regarding the use of encryption products may prevent prospective
      customers from purchasing our CA systems and our business could be materially
      adversely affected as a result.”




Although
      foreign-invested enterprises incorporated in the PRC, such as our subsidiary,
      Super TV, are not expressly prohibited from conducting encryption-related
      business, they may have difficulties obtaining the licenses or permits required
      for conducting such business from the Encryption Bureau due to the Encryption
      Bureau’s generally restrictive approach towards foreign participation in the PRC
      encryption industry. N-S Digital TV, which is wholly owned by PRC citizens
      and through which we conduct our CA system business, has obtained the license
      for the production of commercial encryption products required for our business.
      Our contractual arrangements with N-S Digital TV and its shareholders
      provide us with the economic benefits of, and substantive control over,
      N-S Digital TV. If the Encryption Bureau determines that our control over,
      or relationship with, N-S Digital TV through those contractual arrangements
      is contrary to its generally restrictive approach towards foreign participation
      in the PRC encryption industry, it may reconsider N-S Digital TV’s
      eligibility to hold the license to produce commercial encryption products.
      The
      Encryption Bureau may revoke, or refuse to renew, N-S Digital TV’s license
      to produce commercial encryption products, or refuse to grant any other
      encryption-related license that may be required for our business in the future.
      See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our
      Corporate Structure—The agreements that establish the structure for operating
      our business may result in the relevant PRC government regulators revoking
      or
      refusing to renew N-S Digital TV’s license for the production of commercial
      encryption products, or refusing to issue any other license required to engage
      in an encryption-related business.”




***Regulation
      of the Cable Television Industry***




The
      PRC
      cable television industry, in which most of our customers operate, is subject
      to
      extensive government regulation and control. All PRC cable television network
      operators are directly or indirectly owned or controlled by provincial or local
      governments, and their business decisions and strategies are significantly
      affected by government budgets and spending plans. In April 2005, the PRC State
      Council issued a notice to allow domestic private investors to invest in PRC
      companies engaged in the operation and infrastructure development of cable
      networks, subject to a 49% ownership cap. Foreign ownership of cable television
      networks and stations, however, is still prohibited.




Cable
      television network operators are subject to the laws and regulations promulgated
      from time to time by the State Council, the SARFT and other ministries and
      government departments. Such regulations include the *Administrative
      Regulations for Television Broadcasting* promulgated by the State Council in 1997 and the *Administrative
      Regulations for Cable Television* promulgated by a predecessor government agency of the SARFT in 1994. Under
      these
      laws and regulations:


38


·
            the
                establishment of a television station or cable television network
                requires
                the approval from the SARFT or its relevant local
                branch;




·
            the
                establishment of a digital pay-television channel requires the approval
                of
                the SARFT;




·
            basic
                cable television subscription rates are set by local governments
                and may
                not be increased without a public
                hearing;




·
            cable
                television networks must be designed, constructed and installed by
                institutions or companies that meet the SARFT-set
                qualifications;




·
            each
                province and municipality, respectively, can have only one provincial
                or
                municipal cable television network;
                and




·
            various
                restrictions on television programming must be complied with, including
                a
                requirement that television operators shall procure programs only
                from
                licensed production companies.




According
      to the relevant regulations of the SARFT, cable television network operators
      may
      not use any network equipment or system unless the SARFT has issued a network
      access certificate with respect to such equipment or system. In determining
      whether to issue such a certificate, the SARFT reviews the quality assurance
      system of the relevant manufacturer or vendor and the results of tests of the
      equipment or systems. A network access certificate has a term of three years
      and
      is subject to annual review by the SARFT or its local branches. N-S Digital
      TV has obtained network access certificates for our CA systems and SMS
      products.




According
      to a policy introduced by the SARFT in 2003, any cable network operator who
      uses
      a non-PRC CA system should use such non-PRC CA system together with a PRC CA
      system when transmitting broadcasting signals. To satisfy this requirement,
      a
      cable network operator who uses a non-PRC CA system must install a parallel
      PRC
      CA system. Under this policy, vendors of non-PRC CA systems may sell only to
      cable network operators who have already installed a PRC CA system or who are
      willing to purchase a parallel PRC CA system. This may result in a competitive
      disadvantage for vendors of non-PRC CA systems relative to vendors of PRC CA
      systems. Such policy does not expressly indicate whether the CA systems produced
      by a foreign-invested company incorporated in the PRC, such as our subsidiary,
      Super TV, fall into the category of non-PRC CA systems. In light of this
      ambiguity, we have established N-S Digital TV, which is wholly owned by PRC
      citizens, to produce and sell our CA systems. We do not have any equity interest
      in N-S Digital TV and instead enjoy the economic benefits of, and have
      substantive control over, N-S Digital TV through contractual arrangements
      with N-S Digital TV and its shareholders as described in “Item 7.
      Major Shareholders and Related Party Transactions—B. Related Party
      Transactions.” There are substantial uncertainties regarding the interpretation
      and application of the above- described PRC government policy and relevant
      PRC
      laws and regulations. Accordingly, the PRC government may determine that
      N-S Digital TV is a vendor of non-PRC CA systems by virtue of our
      contractual arrangements with N-S Digital TV and its shareholders. See
“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate
      Structure—If the PRC government determines that N-S Digital TV is a vendor
      of non-PRC CA systems by virtue of the agreements that establish the structure
      for operating our business, we could face difficulty selling our CA systems
      in
      the PRC.”




***Software
      Products Registration***




On
      October 27, 2000, the former Ministry of Information Industry, issued the *Measures
      Concerning Software Products Administration* ,
      or
      Software Measures, to regulate software products and promote the development
      of
      the software industry in the PRC. Pursuant to these Software Measures, all
      software products used or sold in the PRC must be registered with the relevant
      authorities.




In
      addition, to produce software products in the PRC, a software producer must
      show
      that it: (i) possesses the status of an enterprise legal person and computer
      software must be included in its registered scope of business; (ii) has a fixed
      production site; (iii) possesses necessary conditions and technologies for
      producing software products; and (iv) possesses quality control measures and
      capabilities for the production of software products. Software developers or
      producers are allowed to sell or license their registered software products
      independently or through agents. Software products developed in the PRC must
      be
      registered with the local provincial government authorities in charge of the
      information industry and filed with the Ministry of Industry and Information,
      the MII. Upon registration, the software products shall be granted registration
      certificates. Each registration certificate is valid for five years and may
      be
      renewed upon expiration. The MII and other relevant departments may carry out
      supervision and inspection over the development, production, operation and
      importing and exporting of software products in the PRC.


39


***Tax***




See
“Item
      5. Operating and Financial Review and Prospects—A. Operating Results—Taxes and
      Incentives—PRC.”




***Foreign
      Currency Exchange***




Foreign
      currency exchange in the PRC is primarily governed by the following
      regulations:




·
            *Foreign
                Exchange Administration Rules*(1996), as amended; and




·
            *Regulations
                of Settlement, Sale and Payment of Foreign Exchange*(1996).




Under
      the *Foreign
      Exchange Administration Rules* ,
      the
      Renminbi is freely convertible for current account items, including the
      distribution of dividends, payment of interest, trade and service-related
      foreign exchange transactions. Conversion of Renminbi for capital account items,
      such as direct investment, loans, securities investment and repatriation of
      investment, however, is still generally subject to the approval or verification
      of the SAFE.




Under
      the *Regulations
      of Settlement, Sale and Payment of Foreign Exchange* ,
      foreign-invested enterprises may only buy, sell or remit foreign currencies
      at
      those banks authorized to conduct foreign exchange business after providing
      valid commercial documents and, in the case of capital account item
      transactions, obtaining approval from the SAFE. Capital investments by
      foreign-invested enterprises outside of the PRC are also subject to limitations,
      which include approvals by the MOFCOM, the SAFE and the National Development
      and
      Reform Commission.




***Dividend
      Distribution***




The
      principal regulations governing distribution of dividends paid by wholly
      foreign-owned enterprises include:




·
            *Wholly
                Foreign-Owned Enterprise Law*(1986), as amended; and




·
            *Wholly
                Foreign-Owned Enterprise Law Implementation Rules*(1990), as amended.




Under
      these regulations, wholly foreign-owned enterprises in the PRC may pay dividends
      only out of their accumulated profits, if any, determined in accordance with
      PRC
      accounting standards and regulations. In addition, according to the PRC Company
      Law, wholly foreign-owned enterprises in the PRC, like other PRC companies,
      are
      required to set aside to general reserves each year at least 10% of their
      after-tax profit, based on PRC accounting standards, until the cumulative total
      of such reserves reaches 50% of its registered capital. These reserves are
      not
      distributable as cash dividends to equity owners except in accordance with
      applicable laws and regulations.




***Regulation
      of Foreign Exchange in Certain Onshore and Offshore
      Transactions***




In
      October 2005, the SAFE issued the Notice on Issues Relating to the
      Administration of Foreign Exchange in Fund-raising and Return Investment
      Activities of Domestic Residents Conducted via Offshore Special Purpose
      Companies, or SAFE Notice 75, which became effective as of November 1, 2005,
      and
      was further supplemented by an implementation notice issued by the SAFE on
      November 24, 2005. SAFE Notice 75 suspends the implementation of two prior
      regulations promulgated in January and April of 2005 by the SAFE. SAFE Notice
      75
      states that PRC residents, whether natural or legal persons, must register
      with
      the relevant local SAFE branch prior to establishing or taking control of an
      offshore entity established for the purpose of overseas equity financing
      involving onshore assets or equity interests held by them. The term “PRC legal
      person residents” as used in SAFE Notice 75 refers to those entities with legal
      person status or other economic organizations established within the territory
      of the PRC. The term “PRC natural person residents” as used in SAFE Notice 75
      includes all PRC citizens and all other natural persons, including foreigners,
      who habitually reside in the PRC for economic benefit. The SAFE implementation
      notice of November 24, 2005 further clarifies that the term “PRC natural person
      residents” as used under SAFE Notice 75 refers to those “PRC natural person
      residents” defined under the relevant PRC tax laws and those natural persons who
      hold any interests in domestic entities that are classified as
“domestic-funding” interests.


40


PRC
      residents are required to complete amended registrations with the local SAFE
      branch upon: (i) injection of equity interests or assets of an onshore
      enterprise to the offshore entity, or (ii) subsequent overseas equity financing
      by such offshore entity. PRC residents are also required to complete amended
      registrations or filing with the local SAFE branch within 30 days of any
      material change in the shareholding or capital of the offshore entity, such
      as
      changes in share capital, share transfers and long-term equity or debt
      investments, and providing security. PRC residents who have already incorporated
      or gained control of offshore entities that have made onshore investment in
      the
      PRC before SAFE Notice 75 was promulgated must register their shareholding
      in
      the offshore entities with the local SAFE branch on or before March 31,
      2006.




Under
      SAFE Notice 75, PRC residents are further required to repatriate into the PRC
      all of their dividends, profits or capital gains obtained from their
      shareholdings in the offshore entity within 180 days of their receipt of
      such dividends, profits or capital gains. The registration and filing procedures
      under SAFE Notice 75 are prerequisites for other approval and registration
      procedures necessary for capital inflow from the offshore entity, such as
      inbound investments or shareholders loans, or capital outflow to the offshore
      entity, such as the payment of profits or dividends, liquidating distributions,
      equity sale proceeds, or the return of funds upon a capital
      reduction.




***Regulation
      of Overseas Listings***




On
      August
      8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the
      State Administration of State-owned Assets Supervision and Administration
      Commission, the State Administration for Taxation, the State Administration
      for
      Industry and Commerce, the CSRC, and the SAFE, jointly adopted the New M&A
      Rules, which became effective on September 8, 2006. The New M&A Rules, among
      other things, include provisions that purport to require that an offshore
      special purpose vehicle formed for the purpose of an overseas listing of
      securities in a PRC company and controlled directly or indirectly by PRC
      companies or individuals obtain the approval of the CSRC prior to the listing
      and trading of such special purpose vehicle’s securities on an overseas stock
      exchange.




On
      September 21, 2006, the CSRC published on its official website procedures
      regarding its approval of overseas listings by special purpose vehicles. The
      CSRC approval procedures require the filing of an application and supporting
      documents with the CSRC and it would take several months to complete the
      approval process.




We
      completed the initial listing and trading of our ADSs on the New York Stock
      Exchange on October 11, 2007. We did not seek CSRC approval in connection
      with our initial public offering. Our PRC counsel, King & Wood, advised
      us that, based on their understanding of the current PRC laws, regulations
      and
      rules and the procedures announced on September 21, 2006, because we completed
      our restructuring before September 8, 2006, the effective date of the New
      M&A Rules, we were not required by the New M&A Rules to apply to the
      CSRC for approval of the listing and trading of our ADSs on a U.S. stock
      exchange, unless we were clearly required to do so by any rules promulgated
      in
      the future. See “Item 3. Key Information—D. Risk Factors—Risks Relating to
      the People’s Republic of China—The approval of the China Securities Regulatory
      Commission, or CSRC, might be required in connection with our initial public
      offering under certain PRC regulation; failure to obtain this approval, if
      required, could have a material adverse effect on our business, operating
      results and reputation as well as the trading price of our
      ADSs.”


41


**C.**  **Organizational
      Structure**




We
      are a
      Cayman Islands holding company and conduct substantially all of our business
      through Super TV, our operating subsidiary in the PRC, and through
      N-S Digital TV, a PRC company that we control through contractual
      arrangements. We own 100% of the equity interest of CDTV BVI, a British Virgin
      Islands holding company, that directly owns 100% of the equity interest of
      Golden Benefit and CSM Holdings, each a Hong Kong holding company. Golden
      Benefit, in turn, directly owns 100% of the equity interest of Super TV. In
      order to assure that the PRC government does not deem our CA systems to be
      “non-PRC” CA systems, which would result in a significant competitive
      disadvantage for us in the PRC market, we have established N-S Digital TV,
      which is wholly owned by PRC persons, to produce and sell our CA systems in
      the
      PRC. We do not have any equity interests in N-S Digital TV, but instead
      enjoy the economic benefits derived from N-S Digital TV through a series of
      contractual arrangements.




42


The
      following diagram illustrates our corporate structure as of the date of this
      annual report:







(1)
              Ms.WeiGaoisaPRCcitizenemployedbyanaffiliatedcompanyofSAIF,aprincipalshareholderof
                  our company.
 (2)
              N-T
                  Information Engineering is (i) 10% owned by Mr. Hong Zhou, who
                  is a
                  brother-in-law of Mr. Hua Guo, one of our directors and (ii) 90%
                  owned by
                  Beijing Shi Xun Hu Lian Technology Co., Ltd., a PRC company, which
                  is, in
                  turn, (a) 40% owned by Mr. Wangzhi Chen, who is a brother-in-law
                  of Mr.
                  Yuk Shing Wong, a principal shareholder of our company, (b) 40%
                  owned by
                  Ms. Jingxiu Tan, who is the mother of Mr. Jianhua Zhu, our chief
                  executive
                  officer and one of our directors, and (c) 20% owned by Mr. Hong
                  Zhou. All
                  the owners of N-T Information Engineering are PRC
                  citizens.
 (3)
              Threeofourdirectors,Dr.ZengxiangLu,Mr.JianhuaZhuandMr.HuaGuo,arealsodirectorsof
                  N-S
                  DigitalTV.


43





N-T Information
      Engineering was established by Tsinghua Enterprise Group, a company affiliated
      with Tsinghua University, and Hong Kong-based Tsinghua Novel Hi-Tech Investment
      Holding Ltd. in July 1998, and initially focused on developing, producing and
      selling digital data broadcasting equipment for cable television operators.
      In
      December 2002, N-T Information Engineering completed its acquisition of the
      CA systems-related assets of Tsinghua Tongfang. In March 2004, CDTV BVI was
      incorporated as a holding company in the British Virgin Islands. Following
      the
      establishment of CDTV BVI, we restructured our operations in connection with
      an
      investment by SAIF. As part of this restructuring, we established Super TV,
      a
      wholly owned subsidiary of CDTV BVI, on May 31, 2004. On the same day,
      N-T Information Engineering and Ms. Li Yang, a PRC citizen employed by
      SAIF, established N-S Digital TV. In June 2004, N-S Digital TV
      acquired from N-T Information Engineering its smart card and CA systems
      business and, in August 2006, N-S Digital TV acquired from
      N-T Information Engineering its set-top box design business. In April 2007,
      a new holding company, CDTV Holding, was established in the Cayman Islands.
      In
      May 2007, CDTV BVI executed a 40-for-1 share split of its ordinary shares and
      Series A preferred shares. Following this share split, the shareholders of
      CDTV BVI exchanged all of their shares of CDTV BVI for shares of CDTV Holding
      in
      proportion to their percentage interest in CDTV BVI. As a result, CDTV BVI
      became a wholly owned subsidiary of CDTV Holding. In August 2007, with our
      consent, Ms. Li Yang transferred her entire equity interest in
      N-S Digital TV to Ms. Wei Gao, a PRC citizen employed by an affiliated
      company of SAIF. In order to benefit from the tax arrangement between the PRC
      and Hong Kong, in December 2007, CDTV BVI acquired Golden Benefit, a company
      incorporated in Hong Kong, for a nominal consideration, and transferred its
      100%
      equity interest in Super TV to Golden Benefit. Golden Benefit has conducted
      no
      operation since its incorporation. See “Item 5. Operating and Financial
      Review and Prospects—A. Operating Results—Taxes and Incentives—Tax Arrangement
      Between PRC and Hong Kong.” In December 2007, Super TV established a wholly
      owned subsidiary, N-S Media Investment, in the PRC to partner with China’s
      cable television operators and content providers to offer value-added services
      to television viewers. In February 2008, CDTV BVI established a wholly-owned
      subsidiary, CSM Holdings, in Hong Kong. In addition, in May 2008, N-S Digital
      TV
      entered into a joint venture agreement with a PRC citizen for the purposes
      of
      establishing Dongguan SuperTV to provide value-added services to television
      viewers.




A
      SARFT
      policy requires any cable network operator who uses a non-PRC CA systems to
      install a parallel PRC CA system. Under this policy, vendors of non-PRC CA
      systems may sell only to cable network operators who have already installed
      a
      PRC CA system or are willing to purchase a parallel PRC CA system. This may
      result in a competitive disadvantage for vendors of non-PRC CA systems relative
      to vendors of PRC CA systems. Such policy does not expressly indicate whether
      the CA systems produced by a foreign-invested company incorporated in the PRC,
      such as our subsidiary Super TV, falls into the category of non-PRC CA systems.
      In light of this ambiguity, we have established N-S Digital TV, which is
      incorporated in the PRC and wholly owned by PRC citizens, to produce and sell
      our CA systems to avoid our CA systems being deemed as non-PRC CA systems.
      We
      conduct a significant portion of our operations through N-S Digital TV. We
      do not directly or indirectly have any equity interest in N-S Digital TV,
      but Super TV, our wholly owned subsidiary in the PRC, has entered into a series
      of contractual arrangements with N-S Digital TV and its shareholders. As a
      result of these contractual arrangements, we are considered the primary
      beneficiary of N-S Digital TV and, accordingly, we consolidate
      N-S Digital TV’s results of operations in our financial
      statements.




Super
      TV
      mainly engages in supplying smart cards and related software products to
      N-S Digital TV, providing technical support and related services to
      N-S Digital TV, and developing technology for use by N-S Digital TV.
      Specifically, Super TV and N-S Digital TV have entered into the following
      contracts:




·
            a
                products and software purchase agreement, pursuant to which
                N-S Digital TV exclusively purchased from Super TV all the smart
                cards and related software products required for N-S Digital TV’s CA
                systems;




·
            a
                technical support and related services agreement, pursuant to which
                Super
                TV exclusively provides N-S Digital TV and/or its customers with
                technical support, technical training, personnel services in connection
                with N-S Digital TV’s marketing activities and services relating to
                the maintenance and optimization for the products and software of
                N-S Digital TV’s customers at N-S Digital TV’s
                request;




·
            a
                technology license agreement, pursuant to which N-S Digital TV
                granted Super TV, free of charge, an exclusive license to use certain
                software copyrights, patents, unpatentable technologies and technical
                secrets relating to the CA systems business that was transferred
                from
                N-T Information Engineering to N-S Digital TV;
                and


44


·
            a
                technology development agreement, pursuant to which N-S Digital TV
                engages Super TV to develop all technology required by N-S Digital TV
                or its customers.




In
      addition, Super TV has entered into agreements with N-S Digital TV and its
      shareholders that provide us with the ability to control N-S Digital TV.
      Pursuant to those contractual arrangements:




·
            the
                shareholders of N-S Digital TV have jointly granted Super TV an
                exclusive and irrevocable option to purchase all or part of their
                equity
                interests in N-S Digital TV at any
                time;




·
            without
                Super TV’s consent, the shareholders of N-S Digital TV may not (i)
                transfer or pledge their equity interests in N-S Digital TV, (ii)
                cause N-T Information Engineering or N-S Digital TV to issue new
                shares; (iii) receive any dividends, loan interest or other benefits
                from
                N-S Digital TV, or (iv) make any material adjustment or change
                to N-S Digital TV’s business or
                operations;




·
            N-S Digital
                TV and its shareholders agreed to (i) accept the policies and guidelines
                furnished by Super TV with respect to the hiring and dismissal of
                employees, or the operational management and financial system of
                N-S Digital TV, (ii) appoint the candidates recommended by Super TV
                as directors of N-S Digital TV, and (iii) seek a guarantee from Super
                TV first when any guarantee is required to secure performance by
                N-S Digital TV of any contract or working capital loans borrowed by
                N-S Digital TV;




·
            each
                shareholder of N-S Digital TV has appointed one director of Super TV
                as their attorneys-in-fact to exercise all its voting rights as
                shareholders of N-S Digital TV;
                and




·
            each
                shareholder of N-S Digital TV has pledged all of its respective
                equity interests in N-S Digital TV to Super TV to secure the payment
                obligations of N-S Digital TV under certain contractual arrangements
                between N-S Digital TV and Super
                TV.




For
      a
      more detailed description of these contractual agreements, see “Item 7.
      Major Shareholders and Related Party Transactions—B. Related Party
      Transactions—Super TV and N-S Digital TV Arrangements” and “Item 7.
      Major Shareholders and Related Party Transactions—B. Related Party
      Transactions—Shareholder Rights and Corporate Governance.”




**D.**  **Property,
      Plants and Equipment**




We
      currently maintain our headquarters and substantially all of our operations
      at
      Jingmeng High-Tech Building B, 4th Floor, No. 5 Shangdi East Road, Haidian
      District, Beijing 100085, the PRC, where we lease 5,654 square meters of
      office space pursuant to five two-year lease agreements with the same landlord
      for separate portions of the total space. The five lease agreements are (i)
      a
      lease agreement of N-S Digital TV with respect to an area of 275 square
      meters used by our smart card processing department; (ii) a lease agreement
      of
      N-S Digital TV with respect to an aggregate area of 946 square meters used
      by our sales and marketing department; and (iii) a lease agreement of Super
      TV
      with respect to an aggregate area of 3,936 square meters used by our research
      and development, finance and other departments; (iv) a lease agreement of N-S
      Media Investment with respect to an aggregate area of 380 square meters used
      by
      N-S Media Investment to conduct its business; and (v) a lease agreement of
      Super
      TV with respect to an aggregate area of 117 square meters used by our
      administration department. The lease agreement referred to in item (i) above
      will expire in June 2009, the lease agreements referred to in items (ii) and
      (iii) above will expire in March 2009, and the other two lease agreements will
      expire in May 2010. Under each of the lease agreements, if we intend to renew
      the lease, we are required to enter into a new lease agreement with the landlord
      no later than one month prior to the expiration date and the landlord has
      undertaken to offer us a preferential rental rate for any renewal. In addition,
      we have the right to terminate any of these leases by providing three months’
prior notice. We also lease office space for service and support centers in
      Changsha, Chengdu, Dalian, Hangzhou and Nanhai. We routinely review our needs
      for office space in light of the development of our operations. We believe
      that
      the office space that we currently lease is sufficient for our current and
      immediately foreseeable needs. We may lease additional space if needed in the
      future.


45


**Item
      4A.**  **Unresolved
      Staff Comments**




None.




**Item
      5.**  **Operating
      and Financial Review and Prospects**




The
      following discussion and analysis should be read in conjunction with our
      consolidated financial statements and the related notes included elsewhere
      in
      this annual report. Our audited consolidated financial statements have been
      prepared in accordance with U.S. GAAP. This discussion contains forward-looking
      statements that involve risks and uncertainties. Our actual results could differ
      materially from those projected in the forward-looking statements. In evaluating
      our business, you should carefully consider the information provided in
“Item 3. Key Information—D. Risk Factors.”




**A.**  **Operating
      Results**




**Overview**




We
      are
      the leading provider of CA systems to the PRC’s rapidly growing digital
      television market. Our CA systems, which consist of smart cards, head-end
      software for television network operators and terminal-end software for set-top
      box manufacturers, enable digital television network operators in the PRC to
      control the distribution of content and value-added services to their
      subscribers and block unauthorized access to their networks. In addition, we
      license our set-top box design to set-top box manufacturers and sell advanced
      digital television application software, such as electronic program guides
      and
      subscriber management systems, to digital television network
      operators.




We
      sell
      our CA systems and digital television application software to PRC television
      network operators, including cable, satellite and terrestrial television network
      operators and enterprises that maintain private cable television networks within
      their facilities. We currently derive, and we expect to continue to derive,
      a
      significant portion of our revenues during any given period from a limited
      number of customers, primarily cable television network operators who are
      launching new digital transmission systems, although the particular customers
      may vary from period to period.




PRC
      television network operators are in the early stages of switching from analog
      to
      digital transmissions, and the PRC government has set a target of 2015 for
      operators nationwide to complete the digital transition. Benefiting from this
      transition and the expanding market for our products, our business has
      experienced significant growth since 2004. As of December 31, 2007, we had
      installed CA systems at 164 digital television network operators in 27 of the
      32
      provinces, autonomous regions and centrally administered municipalities in
      the
      PRC. We derive a substantial majority of our revenues from sales of our smart
      cards, which accounted for 85.6% and 89.1% of our total revenues in 2006 and
      in
      2007, respectively. We expect that the sales of our smart cards will continue
      to
      constitute the majority of our revenues in the near future. We sold
      1.5 million, 3.9 million and 7.3 million smart cards in 2005,
      2006 and 2007, respectively. Our net revenues increased from $13.1 million
      in 2005 to $30.4 million in 2006 and $55.5 million in 2007. Our net
      income grew from $4.5 million in 2005 to $13.0 million in 2006 to
      $33.8 million in 2007.




Among
      the
      most significant factors affecting our business, financial condition and results
      of operations are:




·
            ***Progress
                of digitalization in the PRC and the growth of digital television
                network
                operators’ subscriber base.***Our continued success depends on the pace at which PRC television
                network
                operators switch from analog to digital transmission as well as the
                growth
                in our customers’ subscriber base. If the PRC government postpones its
                target date for digitalization, or our customers fail to roll out
                analog-to-digital conversion or attract subscribers to digital television,
                we may be unable to sustain or grow our
                revenues.




·
            ***Pricing.***The business in which we operate is subject to intense competition,
                in
                particular with respect to pricing of our products and services.
                Our
                customers generally expect to receive volume-based discounts from
                us, and
                we may be required to reduce prices for large purchases or as the
                competition intensifies.


46


·
            ***Purchasing
                patterns of our customers.***Our customers generally purchase smart cards from us based on the
                number
                of digital television subscribers they expect to add in the immediate
                near
                term, resulting in significant fluctuations in our revenues from
                period to
                period due to the uncertainty of both the timing and the amount of
                such
                customer orders. In addition, we have historically experienced lower
                smart
                card sales in the first quarter of a year, compared to the other
                three
                quarters of the same year, as our customers typically defer their
                major
                purchasing decisions during such quarter due to the Chinese Lunar
                New Year
                holiday and an annual trade fair for the digital television, broadband
                and
                related industries in the PRC.




·
            ***Ability
                to respond effectively to technological and commercial
                changes.***Our business and the market in which we operate are characterized
                by rapid
                commercial and technological change, evolving industry standards
                and
                frequent product enhancements. Our continued success will depend,
                in part,
                on our ability to develop and market products and services that respond
                to
                technological changes and evolving market demand or industry standards
                in
                a timely and cost-effective manner.




·
            ***Cost
                structure.***Our profitability also depends on the cost structure of our operations,
                including, among other things, the costs of computer chips sourced
                from
                third-party suppliers and personnel
                costs.




In
      addition to the factors discussed above, our reported results are also affected
      by the fluctuations in the value of the Renminbi against the U.S. dollar because
      our reporting currency is the U.S. dollar while the functional currency of
      our
      subsidiaries and variable interest entities in China, which operate
      substantially all of our business, is the Renminbi. In 2007, 2006 and 2005,
      the
      Renminbi appreciated against the U.S. dollar by approximately 6.5%, 3.3% and
      2.5%, respectively. The appreciation of the Renminbi against the U.S. dollar
      contributed to the increase in our net income reported in U.S. dollar terms
      in
      2005, 2006 and 2007, respectively. For additional information relating to the
      fluctuations in the value of the Renminbi against the U.S. dollar, see “Item 3.
      Key Information—A. Selected Financial Data—Exchange Rate Information,” “Item 3.
      Key Information—D. Risk Factors—Risks Relating to the People’s Republic of
      China—Fluctuations in exchange rates could result in foreign currency exchange
      losses.” and “Item 11. Quantitative and Qualitative Disclosures About Market
      Risk—Foreign Currency Risk.”




We
      have a
      limited operating history upon which you can evaluate our business. Our recent
      rapid revenue growth should not be taken as indicative of the rate of revenue
      growth, if any, that can be expected in the future. For a discussion of other
      important factors that may affect our business, financial condition and results
      of operations, see “Item 3. Key Information—D. Risk Factors”.




Our
      business is managed as a single operating segment. Our management reviews our
      consolidated results of operations prepared in accordance with U.S. GAAP when
      making decisions about allocating our resources and assessing our performance,
      and our internal reporting does not distinguish between markets or
      segments.




**Revenues**




We
      derive
      revenues from the following two sources:




·
            ***Products.***We
                currently derive a substantial majority of our revenues from sales
                of
                smart cards and other products to digital television network operators.
                Smart cards are an essential part of our CA systems. Our customers
                purchase our smart cards for distribution to and use by their subscribers
                in their set-top boxes. Revenues from the sales of our smart cards
                account
                for substantially all of our revenues from the sales of our products.
                In
                addition, we also sell small quantities of other products, including
                set-top boxes sourced from third-party suppliers to a limited number
                of
                digital television network operators from time to time. We expect
                that the
                sales of our smart cards will continue to constitute the majority
                of our
                revenues in the near future.


47


·
            ***Services.***We
                derive revenues from providing head-end system integration services
                and
                head-end system development services to digital television network
                operators as well as collecting licensing fees and royalty income
                from
                set-top box manufacturers. Our head-end system integration services
                involve providing head-end software, hardware and related system
                integration services to our customers. Head-end software consists
                of
                software for CA systems, subscribers management systems and electronic
                program guides. Our head-end system development services involve
                the
                development of customized digital television-related software applications
                for our customers. In addition, we provide set-top box manufacturers
                with
                our CA system terminal-end software that enables them to manufacture
                set-top boxes compatible with our CA systems, and receive one-time
                licensing fees as well as royalties from such set-top box manufacturers.
                Following our acquisition of the set-top box design business from
                N-T Information Engineering in August 2006, we also started earning
                licensing fees and royalties from licensing our set-top box design
                to
                set-top box manufacturers.




In
      certain circumstances, we receive royalties from digital television network
      operators who purchase smart cards for use with set-top boxes that were
      manufactured using our CA system terminal-end software, in lieu of collecting
      royalties from the relevant set-top boxes manufacturers. We include such royalty
      income as part of the revenue from sales of the related smart
      cards.




Revenues
      from the sales of our products and services accounted for 89.2% and 10.8%,
      respectively, of our total revenues in 2007 and 86.3% and 13.7%, respectively,
      of our total revenues in 2006. Our revenues also include certain refunds of
      value-added taxes from PRC tax authorities that we previously paid with respect
      to some of our software products. See “Item 5. Operating and Financial
      Review and Prospects—A. Operating Results—Taxes and Incentives” below for more
      information.




Our
      net
      revenues represent total revenues less PRC business tax and related surcharges,
      which are currently levied at the rate of 5.5% on certain service type of
      revenues.




**Cost
      of Revenues**




Cost
      of
      revenues primarily includes costs of raw materials, such as computer chips
      manufactured by third-party suppliers and used in our smart cards and other
      products; personnel costs directly relating to provision of our services;
      warranty costs relating to our smart card sales; depreciation and amortization
      costs; share-based compensation allocated to the production and processing
      of
      our smart cards and other products; and other miscellaneous costs. These costs
      are allocated to our two types of revenue-generating activities as their
      respective cost of revenues. Cost of revenues related to the sales of our
      products and to the sales of our services accounted for 79.1% and 20.9%,
      respectively, of our total cost of revenues in 2007 and 71.8% and 28.2%,
      respectively, of our total cost of revenues in 2006. As a percentage of our
      net
      revenues, cost of revenues decreased from 21.7% in 2006 to 18.5% in
      2007.




**Gross
      Profit and Gross Margin**




Gross
      profit is equal to net revenues less cost of revenues. Gross margin is equal
      to
      gross profit divided by net revenues. The increases in our gross margin from
      70.2% in 2005 to 78.3% in 2006 and to 81.5% in 2007 were primarily driven by
      the
      increase, as a percentage of total revenues, from 70.6% to 85.6% to 89.1%,
      in
      revenues from the sales of our smart cards in those periods. Our smart cards
      typically enjoy a higher gross margin relative to our head-end system
      integration services. We achieved growth in the gross margin for our smart
      cards
      business in those periods because we have benefited from declining costs of
      some
      raw materials, such as computer chips, as well as increased operating efficiency
      due to economies of scale. The average unit cost of our smart cards decreased
      by
      approximately 16.4 % in U.S. dollar terms from 2005 to 2007 primarily due to
      a
      decrease in the price of computer chips. We expect the average unit price of
      these computer chips to continue to decrease in 2008.




**Operating
      Expenses**




Our
      operating expenses consist of research and development expenses, selling and
      marketing expenses and general and administrative expenses. Each of these
      components of our operating expenses includes a portion of our total share-based
      compensation expenses, which are generally allocated according to the functions
      of those individuals who received share-based awards.


48


***Research
      and Development Expenses.*** Research
      and development expenses consist primarily of costs associated with the design,
      development and testing of our products and technologies. Among other things,
      these costs include compensation and benefits for our research and development
      staff, rental costs for our office premises used for research and development
      activities, depreciation expenses related to equipment used in research and
      development activities, expenditures for purchases of supplies and other
      relevant costs. Compensation and benefits for our research and development
      staff
      accounted for the majority of our research and development expenses. Research
      and development expenses as a percentage of our net revenues were 7.3% and
      8.4%
      in 2006 and 2007, respectively. We expanded the size of our research and
      development staff from 145 employees as of December 31, 2006 to 224 as of
      December 31, 2007. We expect to continue to increase our investment in the
      research and development activities as part of our strategy to augment our
      commitment to research and development, including by hiring additional personnel
      for our research and development team during 2008.




***Selling
      and Marketing Expenses.*** Selling
      and marketing expenses consist primarily of compensation and benefits for our
      sales and marketing staff, expenses for promotional, advertising, travel and
      entertainment activities, marketing-related consulting fees, expenditures for
      purchases of supplies and amortization of intangible assets. Selling and
      marketing expenses as a percentage of our net revenues were 6.1% and 6.8% in
      2006 and 2007, respectively. Our selling and marketing expenses have increased
      primarily due to the increase in the size of our selling and marketing team
      and
      in the amount of compensation and benefits paid to the team, as well as expanded
      marketing efforts. In light of our plan to increase our direct sales force
      and
      to enhance our selling and marketing efforts in non-CA solutions, such as
      high-definition set-top box solutions and cable television value-added services,
      we expect our selling and marketing expenses to increase in the near
      future.




***General
      and Administrative Expenses.*** General
      and administrative expenses consist primarily of compensation and benefits
      for
      our general management, finance and administrative staff, professional advisory
      fees, depreciation and amortization with respect to equipment used for general
      corporate purposes, rental costs for our office premises used by general
      management, finance and administrative staff, and other expenses incurred in
      connection with general corporate purposes. General and administrative expenses
      as a percentage of our net revenues were 4.0% and 6.7% in 2006 and 2007,
      respectively. Our general and administrative expenses have increased primarily
      due to the growth of our general management, finance and administrative team
      and
      higher professional service expenses incurred to meet the requirements of a
      publicly listed company. We expect our general and administrative expenses
      in
      dollar amount to continue to increase as our business expands in future periods,
      but such expenses as a percentage of net revenue are expected to
      stabilize.




***Share-Based
      Compensation Expenses.*** We
      account for share-based compensation expenses based on the fair value of share
      option grants at the date of grant.




We
      adopted our 2005 Stock Incentive Plan in February 2005 and, as of December
      31,
      2007, options to purchase 3,877,429 ordinary shares had been granted and were
      outstanding under our 2005 Stock Incentive Plan. In addition, in 2005, we
      granted options to purchase 143,474 ordinary shares to a company affiliated
      with
      SAIF and in May 2007 we granted options to purchase 40,000 ordinary shares
      to
      Mr. Louis T. Hsieh, who became an independent director of our company upon
      the completion of our initial public offering in October 2007. In aggregate,
      options to purchase 4,060,903 ordinary shares had been granted and were
      outstanding as of December 31, 2007. We incurred $0.2 million,
      $0.3 million and $1.3 million in share-based compensation expenses in
      2005, 2006 and 2007, respectively. For additional information regarding our
      share-based compensation expenses, see Note 19 to our consolidated financial
      statements included elsewhere in this annual report.




The
      table
      below shows the allocation of share-based compensation charges to cost of
      revenues and our operating expense line items for the periods
      indicated:


49





**Years
                ended December 31,****Share-Based
                Compensation Related to:**
            
            **2005**
            
            **2006**
            
            **2007****(In
                thousands)**Cost
                of revenues
            
            $
            10
            
            $
            21
            
            $
            34Research
                and development expenses
            
            
            103
            
            
            167
            
            
            391Selling
                and marketing expenses
            
            
            32
            
            
            56
            
            
            112General
                and administrative expenses
            
            
            67
            
            
            94
            
            
            724**Total**
            
            $
            212
            
            $
            338
            
            $
            1,261




**Income
      from Operations**




Income
      from operations represents gross profit less operating expenses.




**Other
      Income (Expenses)**




Other
      income (expenses) includes interest income, recognition of the change in the
      fair value of the warrant and other income, each as presented in our
      consolidated statements of operations. We issued a warrant to SAIF in 2004
      to
      purchase Series A preferred shares of our company. We recognized
      $0.5 million, $17,601 and $5.4 million as of December 31, 2004, 2005
      and 2006, respectively, of the change in the fair value of the warrant. The
      warrant was exercised in November 2006 and no further expenses have been
      incurred related to it. In December 2007, we received a cash award of
      $0.3 million from the Administration Committee of Beijing Zhongguancun
      Economic Zone as a one-off award for the consummation of our initial public
      offering in the United States. For additional information, see Note 14 to our
      consolidated statement of operations included elsewhere in this annual
      report.




**Corporate
      Structure**




We
      are a
      Cayman Islands holding company and conduct substantially all of our business
      through Super TV, our indirectly wholly owned subsidiary in the PRC. In May
      2004, we established N-S Digital TV, a PRC company that is wholly owned by
      PRC citizens, to carry out our CA systems business in the PRC. We do not
      directly or indirectly have any equity interest in N-S Digital TV, but
      Super TV has entered into a series of contractual arrangements with
      N-S Digital TV and its shareholders. As a result of these contractual
      arrangements, we are considered the primary beneficiary of N-S Digital TV
      and, accordingly, we consolidate N-S Digital TV’s results of operations in
      our financial statements. For a description of these contractual agreements,
      see
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party
      Transactions—Super TV and N-S Digital TV Arrangements” and “Item 7.
      Major Shareholders and Related Party Transactions—B. Related Party
      Transactions—Shareholder Rights and Corporate Governance.”




**Critical
      Accounting Policies**




We
      prepare our financial statements in conformity with US GAAP, which requires
      us
      to make estimates and assumptions that affect our reporting of, among other
      things, assets and liabilities, contingent assets and liabilities and revenues
      and expenses. We continually evaluate these estimates and assumptions based
      on
      the most recently available information, our own historical experiences and
      other factors that we believe to be relevant under the circumstances. Since
      our
      financial reporting process inherently relies on the use of estimates and
      assumptions, our actual results could differ from what we expect. This is
      especially true with some accounting policies that require higher degrees of
      judgment than others in their application. We consider the policies discussed
      below to be critical to an understanding of our audited consolidated financial
      statements because they involve the greatest reliance on our management’s
      judgment.




***Revenue
      Recognition.*** We
      derive revenues primarily from two sources: (i) sales of products, including
      smart cards and other products sourced from third-party suppliers, such as
      set-top boxes, and (ii) provision of services, including head-end system
      integration services, head-end system development services and CA system
      terminal-end software or set-top box design that generate licensing income
      and
      royalty income.


50


For
      sales
      of our products, we recognize revenue when the products are delivered to and
      received by customers.




Our
      head-end integration services primarily involve provision of our head-end
      software, third-party hardware and software, related installation and
      integration services, training and post-contract customer support, or PCS,
      including telephone support and bug-fixing. Our head-end system development
      services involve the development of customized digital television
      technology-related software applications. Head-end software offered by us
      includes CA systems head-end software, subscriber management system software
      and
      electronic program guide software.




We
      sign
      head-end system integration contracts with cable television network operators
      to
      install and integrate our software with third-party hardware and software.
      Once
      the service is substantially completed, customers will issue a preliminary
      acceptance, while a final acceptance is usually issued three months to one
      year
      after the issuance of preliminary acceptance if no major technical problems
      are
      discovered. In the majority of our head-end system integration contracts, we
      offer free PCS for one year or less, beginning from preliminary acceptance
      by
      customers. Based on historical information, we believe that a final acceptance
      is not a significant event because essentially all the services we were
      obligated to provide have been delivered and all technical problems, if any,
      have been detected at the point of the preliminary acceptance by the customer
      and the cost of additional work between a preliminary acceptance and a final
      acceptance has historically been insignificant.




With
      respect to the contracts in which we offer free PCS for no more than one year,
      we recognize revenue when all installation and integration services are
      completed, which is generally indicated by obtaining the preliminary acceptances
      from customers. With respect to contracts in which we offer free PCS for more
      than one year, although the costs incurred during the PCS term have historically
      been insignificant, we defer the revenue and ratably recognize it over the
      PCS
      term. Where we offer PCS for an unspecified period, we ratably recognize the
      relevant revenue over the estimated useful life of our CA systems, which we
      determined to be five years.




With
      respect to our head-end system development services, we use the
      completed-contract method to recognize revenue when the software application
      development is finished and accepted by customers, as we currently do not have
      a
      reliable mechanism to measure the progress toward completion of the
      service.




We
      receive licensing fees from set-top box manufacturers who license our CA systems
      terminal-end software or set-top box design, and are also entitled to receive
      royalties from them based on the quantity of set-top boxes manufactured under
      such licenses. Royalty income is recognized upon receipt of sales reports from
      the set-top box manufacturers and when payment is received, while licensing
      income is recognized upon the issuance of certificates to the set-top box
      manufacturers by us.




***Deferred
      Costs.*** Where
      revenue from a head-end system integration contract is deferred and recognized
      over the PCS term, we defer the incremental costs directly associated with
      such
      revenue. Such costs mainly relate to hardware and software purchased from
      third-party suppliers. Deferred costs are recorded as an asset and amortized
      to
      cost of revenue over the same period as that over which the corresponding
      revenue is recognized.




***Warranty
      Provision.*** We
      generally guarantee the quality of our smart cards for periods ranging from
      one
      to three years. In the event of a security problem, we undertake to attempt
      to
      resolve the problem by taking steps such as resetting the encryption code or
      adding additional layers of encryption. If these or other system modifications
      do not resolve the problem, we undertake to replace our smart cards. Our
      warranty terms vary, but we generally agree to replace our smart cards for
      free
      during the first one to two years after a sale in the event of a security
      breach, with the customer bearing a portion or all of the replacement costs
      thereafter.




We
      provide for the estimated costs of such warranty at the time revenue is
      recognized. We estimate the costs we will incur under the warranty arrangement.
      Historically the defect rate of smart cards has been low and the warranty costs
      have been minimal. We recorded the equivalent of 0.1% of revenue from smart
      card
      sales as a warranty liability to accrue the estimated costs of our warranty
      obligations.




Actual
      warranty costs will depend on a variety of factors. To the extent that warranty
      costs differ significantly from the estimates, we will adjust our warranty
      provision accordingly. Any such adjustments to our accrued warranty provision
      will affect our results of operations in the period the adjustment is made
      as
      well as subsequent periods to the extent the amount of estimated warranty
      provision is adjusted.


51


***Allowance
      for Doubtful Accounts.*** We
      perform ongoing credit evaluations of our customers and generally do not require
      collateral on accounts receivable. We maintain an allowance for doubtful
      accounts primarily based upon the aging analysis of the receivables and factors
      surrounding the credit risk of specific customers. Losses from doubtful accounts
      have been within our management’s expectations. One customer as of December 31,
      2006 accounted for 10% or more of our accounts receivable balance, representing
      an aggregate of 17.4% of our accounts receivable balance as of December 31,
      2006. No customer accounted for 10% or more of our accounts receivable balance
      as of December 31, 2007.




***Share-based
      Compensation.*** Share-based payment transactions with employees, such as share options, are
      measured based on the fair value of the equity instrument issued on the date
      of
      grant in accordance with Statement of Financial Accounting Standards No. 123(R),
      “Share-Based Payment,” and are 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.




As
      of May
      31, 2008, all of our outstanding share options were granted prior to our initial
      public offering. We estimated the fair value of our share options, which were
      granted before our initial public offering, at the respective grant dates using
      the Black-Scholes option pricing model, with the assistance of American
      Appraisal China Limited, or American Appraisal, an unrelated and independent
      valuation firm. Under this model, we made a number of assumptions regarding
      the
      fair value of the options, including:




·
            the
                expected future volatility of our ordinary share
                price;




·
            the
                risk-free interest rate;




·
            the
                expected life of the options;




·
            the
                expected dividend yield; and




·
            the
                estimated fair value of our ordinary shares at the grant
                date.




For
      the
      purpose of determining the estimated fair value of our share options that have
      been granted, we believe that the expected volatility and the estimated fair
      value of our ordinary shares are the most critical assumptions, since we were
      a
      privately-held company as of each of the respective grant dates. The estimated
      fair value of our ordinary shares as of the respective grant dates, except
      for
      the options to purchase 40,000 of our ordinary shares granted on May 15, 2007
      to
      Mr. Louis T. Hsieh, was determined based on (i) a contemporaneous valuation
      performed by American Appraisal with respect to option grants made on September
      22, 2006, or the September 2006 Valuation, and (ii) a retrospective valuation
      performed by American Appraisal with respect to option grants made on February
      3, 2005, as indicated in its valuation reports dated January 2, 2007, or the
      February 2005 Valuation.




No
      contemporaneous valuation by an unrelated valuation firm was obtained in
      connection with the options granted on February 3, 2005. The exercise price
      of
      $0.543 per share for the options granted on February 3, 2005 was determined
      based on the determination of our enterprise value in connection with the sale
      of our preferred shares to SAIF in June 2004. We believed that value remained
      a
      fair valuation of our company in early February 2005 because the revenue and
      net
      profit of our company did not grow significantly between June 2004 and February
      2005 and the major financial projections used in that valuation largely remained
      valid. We considered the compensation expense associated with those grants,
      if
      any, to be minimal. We retained American Appraisal to conduct a retrospective
      valuation of our share options and ordinary shares in respect of the February
      3,
      2005 option grant.




As
      we
      believed that there was no material change in our operations in the short period
      between September 22, 2006 and December 5, 2006 that would materially
      impact the fair value of our ordinary shares, the estimated fair value of share
      options granted on December 5, 2006 was determined based on the fair value
      of
      our ordinary shares as of September 22, 2006.


52


The
      estimated fair value of our ordinary shares used in determining the fair value
      of the share options granted on May 15, 2007 was determined based on the price
      paid by investors to purchase our ordinary shares from China Capital Investment
      Holdings Limited, or China Capital, in eight separate transactions in March
      and
      April 2007. Since such sales and purchases of our ordinary shares took place
      between unrelated parties at arms’ length and the aggregate number of our
      ordinary shares sold in those transactions accounted for more than 10% of our
      total issued and outstanding shares, we believe that the purchase price paid
      by
      the investors in those transactions represents the fair value of our ordinary
      shares at the time of those transactions. In light of the fact that no
      significant changes in the financial, business and other conditions of our
      company occurred between April and May 2007, we determined that such purchase
      price continued to represent the fair value of our ordinary shares on
      May 15, 2007.




Specifically,
      the estimated fair value of our ordinary shares as of February 3, 2005,
      September 22, 2006, December 5, 2006 and May 15, 2007 was $0.27, $3.56, $3.56
      and $9.15, respectively.




American
      Appraisal estimated the expected future volatility of our ordinary share price
      based on the price volatility of the publicly traded shares of four comparable
      companies in the digital television and related businesses over the most recent
      period equal to the expected life of our share options.




The
      following discussion sets forth the significant factors considered and key
      assumptions and methodologies used in determining the fair value of our ordinary
      shares underlying our outstanding share options for the September 2006 Valuation
      and the February 2005 Valuation. The fair value of our ordinary shares has
      been
      their market value since our initial public offering.




*Significant
      Factors Considered.* Determining the fair value of ordinary shares requires making complex and
      subjective judgments, including those regarding our projected financial and
      operating results, our unique business risks, the liquidity of our shares and
      our operating history and prospects at the time of each grant of share
      options.




In
      assessing the fair value of our ordinary shares, we considered the following
      significant factors:




·
            our
                financial and operating results;




·
            the
                nature of our business since our
                inception;




·
            the
                stage of development of our
                operations;




·
            our
                business plan;




·
            our
                business risks;




·
            the
                nature and prospects of the digital television industry in the
                PRC;




·
            the
                assumptions and basis of our financial
                projections;




·
            the
                global economic outlook in general and the specific economic and
                competitive elements affecting our business and market;
                and




·
            the
                market-derived investment returns of entities engaged in the digital
                television business.




*Methodologies
      and Key Assumptions.* For each
      of the February 2005 Valuation and the September 2006 Valuation, we used a
      combination of (i) the discounted cash flow, or DCF, method of the income
      approach and (ii) the market approach to assess the fair value of our total
      equity value as of the respective grant dates. We assigned a weighting of 60%
      to
      the results obtained using the DCF method and a weighting of 40% to the results
      obtained using the market approach. Of the 40% weighting assigned to the results
      obtained using the market approach, 20% was assigned to the results obtained
      using the enterprise value to revenue multiple, or EV/Revenue multiple, and
      20%
      to the results obtained using the enterprise value to earning before interest,
      tax, depreciation and amortization multiple, or EV/EBITDA
      multiple.


53


The
      DCF
      method involved applying appropriate discount rates to future free cash flows
      that were based on five-year financial projections developed by us. The major
      assumptions used in deriving the financial projections were consistent with
      our
      business plan at the time of the respective valuations, including projections
      regarding the number of digital television users, our market share, our average
      revenue per user and our operating margins. In deriving the discount rates
      used
      in the DCF method, we considered the weighted average costs of capital, or
      WACC,
      applicable to us as well. The WACC we used increased from 22.2% for the February
      2005 Valuation to 23.5% for the September 2006 Valuation. This was the combined
      result of the changes in the risk-free rate, industry-average correlated
      relative volatility coefficient beta, equity risk premium and our
      company-specific risk.




Under
      the
      market approach, different value measures and market multiples of comparable
      companies were calculated and analyzed to induce a series of multiples that
      were
      considered representative of the industry average. The market multiples were
      then adjusted based on our growth rate, business risks and profitability.
      Thereafter, the adjusted multiples were applied to our performance indicators
      to
      determine our value on a minority and freely traded basis. We specifically
      applied the financial ratios of EV/Revenue and EV/EBITDA in arriving at an
      indicative value of us under the market approach. For the February 2005
      Valuation, we applied an EV/Revenue multiple of 1.8 and an EV/EBITDA multiple
      of
      4.8, compared to an EV/Revenue multiple of 6.1 and an EV/EBITDA multiple of
      8.3
      for the September 2006 Valuation.




We
      have
      selected four companies in the digital television and related businesses for
      reference as comparable companies: Shaw Communication Inc., Cablevision Systems
      Corporation, Thomson and NDS Group plc.




In
      addition, we have taken into account the discount for lack of marketability
      of
      our shares in the February 2005 Valuation and the September 2006 Valuation
      to
      reflect the fact that we are a private company. We quantified the discount
      for
      lack of marketability, or DLOM, using the Black-Scholes option-pricing model.
      This method treats the right to sell a company’s shares freely before a
      liquidity event as a put option. The more distant the valuation date is from
      a
      liquidation event, the higher the put option value and thus the higher the
      implied DLOM. For the February 2005 Valuation, we obtained and used a DLOM
      of
      24%, compared to a DLOM of 10% used for the September 2006 Valuation. The
      decrease in DLOM was primarily due to the shorter time expected to the liquidity
      event as of the September 2006 Valuation compared to the time of the February
      2005 Valuation.




In
      addition, we made other assumptions in assessing the fair value of our ordinary
      shares, including the following:




·
            that
                no material changes will occur in the applicable future periods in
                the
                existing political, legal, fiscal or economic conditions and digital
                television industry in the PRC;




·
            that
                exchange rates and interest rates in the applicable future periods
                will
                not differ materially from the current rates;




·
            that
                our financial projections have been prepared on a reasonable
                basis;




·
            that
                our future growth will not be constrained by lack of
                funding;




·
            that
                our ability to retain competent management and key personnel to support
                our ongoing operations will not be materially adversely affected
                for any
                reason; and




·
            that
                industry trends and market conditions for digital television and
                related
                industries will not deviate significantly from current
                forecasts.


54


As
      our
      capital structure was comprised of ordinary shares and preferred shares as
      of
      the respective grant dates, we used the option-pricing method to allocate total
      equity value derived to different classes of shares, taking into account the
      guidance prescribed by the AICPA Audit and Accounting Practice Aid,
“ *Valuation
      of Privately-Held-Company Equity Securities Issued as
      Compensation* ,”
or
      the
      Practice Aid. Under the option-pricing method, we treated ordinary shares and
      preferred shares as call options on our enterprise value, with exercise prices
      based on the liquidation preference of our preferred shares. We estimated the
      value of these call options using the Black-Scholes option-pricing
      model.




It
      should
      be noted that the Black-Scholes option pricing model was developed for use
      in
      estimating the fair value of traded options that have no vesting restrictions
      and are fully transferable. In addition, option-pricing models require the
      input
      of highly subjective assumptions, including the expected share price volatility.
      We use projected volatility rates, which are based upon historical volatility
      rates experienced by comparable public companies. Because our share options
      have
      characteristics significantly different from those of publicly traded options,
      and because changes in the subjective input assumptions can materially affect
      the fair value estimate, in our management’s opinion the existing models do not
      necessarily provide a reliable single measure of the fair value of our share
      options. Changes in our estimates and assumptions regarding the expected
      volatility and fair value of our ordinary shares, for example, could
      significantly impact the estimated fair value of our share options and, as
      a
      result, our net income and net income attributable to holders of our ordinary
      shares.




**Taxes
      and Incentives**




***Cayman
      Islands, British Virgin Islands and Hong Kong***




Our
      company, as an exempted company incorporated in the Cayman Islands, and CDTV
      BVI, our wholly owned subsidiary incorporated in the British Virgin Islands,
      are
      not subject to any income or capital gains tax under the current laws of the
      Cayman Islands and the British Virgin Islands. Golden Benefit and CSM Holdings,
      our indirectly wholly owned subsidiaries incorporated in Hong Kong, are subject
      to 17.5% Hong Kong profits tax on their activities conducted in Hong Kong.
      Golden Benefit’s dividend income from Super TV is subject to 5% withholding tax
      in the PRC. However, we do not foresee any dividend distribution from Super
      TV
      to Golden Benefit in the near future.




***PRC***




Our
      subsidiaries and our variable interest entity operating in the PRC are subject
      to PRC taxes as described below:




***Enterprise
      Income Tax*** *.* Both
      domestic and foreign-invested enterprises were generally subject to an
      enterprise income tax rate of 33% in the PRC under the relevant tax laws then
      effective before January 1, 2008. However, qualified high-and-new technology
      enterprises incorporated and operated in high-and-new technology development
      zones designated by the State Council might enjoy a reduced enterprise income
      tax rate of 15%. As a high-and-new technology enterprise incorporated and
      operated in the Beijing High-Tech Development Experimental Zone, which is a
      designated high-and-new technology development zone, each of Super TV and
      N-S Digital TV is entitled to a preferential-enterprise income tax rate of
      15%. In addition, each of N-S Digital TV and Super TV is entitled to income
      tax exemption during the three years from 2004 through 2006, and a 50% reduction
      of income tax during the subsequent three years from 2007 through 2009. N-S
      Media Investment was subject to an enterprise income tax rate of 33% in 2007,
      and is subject to an enterprise income tax rate of 25% starting from January
      1,
      2008.




Absent
      such enterprise income tax preferential treatment, we would have paid additional
      taxes totaling $1.9 million, $2.7 million and $10.2 million in
      2005, 2006 and 2007, respectively, representing a reduction in basic net income
      per ordinary share of $0.04, $0.09 and $0.22 in 2005, 2006 and 2007,
      respectively.




The
      2008
      EIT Law imposes a tax rate of 25% on all enterprises, including foreign-invested
      enterprises, and terminates many of the tax exemptions, reductions and
      preferential treatments available under previous tax laws and regulations.
      However, under the 2008 EIT Law, enterprises that were established before March
      16, 2007 and already enjoy preferential tax treatments will continue to enjoy
      them (i) in the case of certain preferential tax rates that are specified by
      tax
      legislations, for a transition period of five years from January 1, 2008 or
      (ii)
      in the case of tax exemption or reduction for a specified term, until the
      expiration of such term.


55


Under
      the
      2008 EIT Law, “high-and-new technology enterprises strongly supported by the
      State” will be entitled to a preferential tax rate of 15%, but neither the 2008
      EIT Law nor the Implementing Rules defines “high-and-new technology enterprises
      strongly supported by the State.” On April 14, 2008, three PRC regulatory
      agencies, including the Ministry of Science and Technology, the Ministry of
      Finance and the State Administration of Taxation, jointly issued the *Administrative
      Measures on Recognition of High-and-New Technology Enterprises* ,
      or the
      High-tech Administrative Measures, which took effect on January 1, 2008.
      According to such High-tech Administrative Measures, specific guidelines will
      be
      separately issued by the three regulatory agencies for recognizing high-and-new
      technology enterprises. Under the 2008 EIT Law and the Implementing Rules,
      each
      of Super TV and N-S Digital TV will continue to be entitled to the tax
      preferential treatment it currently enjoys until such preferential treatment
      expires in 2009. Unless Super TV or N-S Digital TV qualify as “high-and-new
      technology enterprises strongly supported by the State” under the High-tech
      Administrative Measures or otherwise obtain advance approvals from the relevant
      government authorities, they will not be entitled to a preferential enterprise
      income tax rate of 15%, rather than the standard rate of 25%. As such, the
      applicable tax rate will be 12.5% from January 1, 2008 through the end of 2009.




In
      addition, under the 2008 EIT Law, enterprises established under the laws of
      foreign countries or regions whose “de facto management bodies” are located
      within the PRC territory are considered resident enterprises and will normally
      be subject to the enterprise income tax at the rate of 25% on its global income.
      According to the Implementation Rules, “de facto management body” refers to a
      managing body that exercises, in substance, overall management and control
      over
      the production and business, personnel, accounting and assets of an enterprises.
      Since substantially all of our management is currently and expected to continue
      being located in the PRC, there exists the risk that our company may be
      considered a resident enterprise and therefore be subject to the enterprise
      income tax at the rate of 25% on its global income. See “Item 3. Key
      Information—D. Risk Factors—Risks Relating to the People’s Republic of China—We
      may be treated as a resident enterprise for PRC tax purposes under the PRC
      Enterprise Income Tax Law and we may therefore be subject to PRC income tax
      for
      any dividends we receive from our subsidiaries, which may materially and
      adversely affect the amount of dividends we must pay to our shareholders and
      ADS
      holders.” In addition, the 2008 EIT Law and the Implementing Rules provide that
      a withholding tax of 10% (or other applicable withholding tax rates based on
      tax
      treaties between the PRC and other jurisdictions) will normally be applicable
      to
      dividends payable to foreign investors, and, unlike the prior tax law, does
      not
      specifically exempt corporations that pay dividends from withholding all or
      part
      of such income tax when they pay dividends to their foreign investors. See
      “Item 3. Key Information—D. Risk Factors—Risks Relating to the People’s
      Republic of China—Dividends payable by us to our non-PRC shareholders and ADS
      holders, and gains on the sales of our ordinary shares or ADSs, may be subject
      to withholding taxes under PRC tax laws, which may materially reduce the value
      of your investment.”




***Value-added
      Tax Refunds.*** Pursuant
      to a PRC tax policy intended to encourage the development of software and
      integrated circuit industries, each of N-S Digital TV and Super TV is
      entitled to a refund of value-added tax paid at a rate of 14% of the sale value
      of some of our software products. The amount of the refund for this value-added
      tax included in our total revenues was $1.0 million, $2.5 million and
      $5.0 million in 2005, 2006 and 2007, respectively, accounting for 7.8%,
      8.2% and 9.0%, respectively, of our total revenues in the corresponding periods.
      We include such refunds in the total revenues in our consolidated statements
      of
      operations included elsewhere in this annual report. The value-added tax refund
      benefits will cease to be available to N-S Digital TV and Super TV by
      2010.




***Business
      Tax.*** Each of
      N-S Digital TV, N-S Media Investment and Super TV pay business tax and
      related surcharges at a rate of 5.5% on certain service-type revenues, including
      those from the service portion of our head-end integration services, head-end
      system development services, licensing income and royalty income.


56


***Tax
      Arrangement Between PRC and Hong Kong***




The
      Hong
      Kong government and the PRC central government entered into an *Arrangement
      for Avoidance of Double Taxation on Income and Prevention of Tax
      Evasion* on
      August 21, 2006, which took effect on January 1, 2007 and April 1, 2007 in
      the
      PRC and Hong Kong, respectively. This arrangement provides certain tax
      incentives to use a Hong Kong company as an intermediate holding company for
      holding investments in the PRC. The withholding tax rate applicable to dividends
      received by a Hong Kong company from its investments in the PRC is 5% compared
      to the 10% withholding tax rate applicable to dividends received by a company
      incorporated in a jurisdiction where there is no similar tax treaty or
      arrangement with the PRC, and a full tax exemption in the PRC is available
      on a
      capital gain derived by a Hong Kong company from the disposal of its shares
      in a
      PRC company, provided that the shares sold are less than  25% of the
      shareholding of the PRC company and the assets of the PRC company are not
      comprised mainly of real property situated in the PRC.




**Recent
      Acquisitions**




See
      “Item 4. Information on the Company—A. History and Development of the
      Company—Our Investments and Acquisitions.”




**Results
      of** **** **Operations**




The
      following table sets forth our condensed consolidated statements of operations
      by amount and as a percentage of our net revenues for the periods
      indicated:


**Years
                  ended December 31,****2005**
              
              **2006**
              
              **2007****Amount**
              
              **% of Net**
                **Revenues**
              
              **Amount**
              
              **% of Net**
                **Revenues**
              
              **Amount**
              
              **% of Net**
                **Revenues****(In
                  thousands, except percentages)**Revenues:Products
              
              $
              9,291
              
              
              71.0
              %
              $
              26,443
              
              
              87.1
              %
              $
              49,741
              
              
              89.7
              %Service
              
              
              3,855
              
              
              29.5
              
              
              4,182
              
              
              13.8
              
              
              6,011
              
              
              10.8Total
                  revenues
              
              
              13,146
              
              
              100.5
              
              
              30,625
              
              
              100.8
              
              
              55,752
              
              
              100.5Business
                  taxes
              
              
              (60
              )
              
              (0.5
              )
              
              (255
              )
              
              (0.8
              )
              
              (299
              )
              
              (0.5
              )Net
                  revenues
              
              
              13,086
              
              
              100.0
              
              
              30,370
              
              
              100.0
              
              
              55,453
              
              
              100.0Cost
                  of revenues:(1)Products
              
              
              1,936
              
              
              14.8
              
              
              4,726
              
              
              15.6
              
              
              8,100
              
              
              14.6Service
              
              
              1,967
              
              
              15.0
              
              
              1,859
              
              
              6.1
              
              
              2,135
              
              
              3.9Total
                  cost of revenues
              
              
              3,903
              
              
              29.8
              
              
              6,585
              
              
              21.7
              
              
              10,235
              
              
              18.5Gross
                  profit
              
              
              9,183
              
              
              70.2
              
              
              23,785
              
              
              78.3
              
              
              45,218
              
              
              81.5Operating
                  expenses:Research
                  and development expenses(1)
              
              
              1,818
              
              
              13.9
              
              
              2,222
              
              
              7.3
              
              
              4,643
              
              
              8.4Selling
                  and marketing expenses(1)
              
              
              1,328
              
              
              10.1
              
              
              1,847
              
              
              6.1
              
              
              3,758
              
              
              6.8General
                  and administrative
                expenses(1)
              
              
              684
              
              
              5.2
              
              
              1,228
              
              
              4.0
              
              
              3,706
              
              
              6.7Total
                  operating expenses
              
              
              3,830
              
              
              29.3
              
              
              5,297
              
              
              17.4
              
              
              12,107
              
              
              21.8Income
                  from operations
              
              
              5,353
              
              
              40.9
              
              
              18,488
              
              
              60.9
              
              
              33,111
              
              
              59.7Interest
                  income
              
              
              117
              
              
              0.9
              
              
              279
              
              
              0.9
              
              
              2,790
              
              
              5.0Other
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              263
              
              
              0.5Recognition
                  of the change in the fair value of the warrant
              
              
              (18
              )
              
              (0.1
              )
              
              (5,406
              )
              
              (17.8
              )
              
              —
              
              
              —Income
                  before income taxes
              
              
              5,452
              
              
              41.7
              
              
              13,361
              
              
              44.0
              
              
              36,164
              
              
              65.2Income
                  tax
              
              
              66
              
              
              0.5
              
              
              59
              
              
              0.2
              
              
              (2,342
              )
              
              (4.2
              )Net
                  income before minority interest
              
              
              5,518
              
              
              42.2
              
              
              13,420
              
              
              44.2
              
              
              33,822
              
              
              61.0Minority
                  interest
              
              
              975
              
              
              7.5
              
              
              430
              
              
              1.4
              
              
              —
              
              
              —Net
                  income
              
              $
              4,543
              
              
              34.7
              %
              $
              12,990
              
              
              42.8
              %
              $
              33,816
              
              
              61.0
              %Cash
                  dividend to participating preferred shareholder
              
              
              —
              
              
              —
              
              
              (5,731
              )
              
              (18.9
              )
              
              —
              
              
              —Net
                  income attributable to holders of ordinary shares
              
              $
              4,543
              
              
              34.7
              %
              $
              7,259
              
              
              23.9
              %
              $
              33,816
              
              
              61.0
              %





(1)
      Share-based compensation charges incurred during the period related
      to:


57





**Years
                ended December 31,****2005**
            
            **2006**
            
            **2007****Amount**
            
            **% of Net**
              **Revenues**
            
            **Amount**
            
            **% of Net**
              **Revenues**
            
            **Amount**
            
            **% of Net**
              **Revenues****(In
                thousands, except percentages)**Cost
                of revenues
            
            $
            10
            
            
            0.1
            %
            $
            21
            
            
            0.1
            %
            $
            34
            
            
            0.1
            %Research
                and development expenses
            
            
            103
            
            
            0.8
            
            
            167
            
            
            0.5
            
            
            391
            
            
            0.7Selling
                and marketing expenses
            
            
            32
            
            
            0.2
            
            
            56
            
            
            0.2
            
            
            112
            
            
            0.2General
                and administrative expenses
            
            $
            67
            
            
            0.5
            %
            $
            94
            
            
            0.3
            %
            $
            724
            
            
            1.3
            %




**Comparison
      of Years Ended December 31, 2007 and December 31, 2006**




***Revenues*** .
      The
      following table sets forth revenues by sources and the percentage of our total
      revenues for 2006 and 2007:




**Years
                ended December 31,****2006**
            
            **2007****Revenues**
            
            **% of Total**
              **Revenues**
            
            **Revenues**
            
            **% of Total**
              **Revenues****(in
                thousands, except percentages)****Products**Smart
                cards
            
            $
            26,223
            
            
            
            85.6
            %
            $
            49,651
            
            
            
            89.1
            %Set-top
                boxes and others
            
            
            220
            
            
            
            0.7
            %
            
            90
            
            
            
            0.2
            %Subtotal
            
            
            26,443
            
            
            
            86.3
            %
            
            49,741
            
            
            
            89.2
            %**Services**Head-end
                system integration
            
            
            2,317
            
            
            
            7.6
            %
            
            3,258
            
            
            
            5.8
            %Head-end
                system development
            
            
            558
            
            
            
            1.8
            %
            
            271
            
            
            
            0.5
            %Licensing
                income
            
            
            1,037
            
            
            
            3.4
            %
            
            1,984
            
            
            
            3.6
            %Royalty
                income
            
            
            270
            
            
            
            0.9
            %
            
            498
            
            
            
            0.9
            %Subtotal
            
            
            4,182
            
            
            
            13.7
            %
            
            6,011
            
            
            
            10.8
            %**Total
                revenues**
            
            $
            30,625
            
            
            
            100.0
            %
            $
            55,752
            
            
            
            100.0
            %





Our
      total
      revenues increased by 82.0% to $55.8 million in 2007 from
      $30.6 million in 2006. This increase primarily resulted from a significant
      increase in the revenues from the sales of our products, in particular smart
      cards, as well as, to a lesser extent, an increase in the revenue from the
      sales
      of our services, in particular the head-end system integration
      services.




Revenues
      from the sales of our products increased by 88.1% to $49.7 million in 2007
      from $26.4 million in 2006, primarily due to a significant increase in the
      revenues from the sales of our smart cards, which accounted for substantially
      all of our revenues from the sales of our products in both 2006 and 2007. The
      increase in the revenues from the sales of smart cards was primarily
      attributable to an 85.5% increase in the number of smart cards sold by us to
      7.3 million in 2007 from 3.9 million in 2006, which was partially
      offset by a 2.4% decrease in the average selling price of our smart cards in
      RMB
      terms from 2006 to 2007. The increase in the revenues from the sales of smart
      cards reflects the continued growth of the PRC television digitalization market
      as well as our leading market position. The decrease in the average selling
      price of smart cards from 2006 to 2007 was primarily due to intensified
      competition.


58


Revenues
      from the sales of our services increased by 43.7% to $6.0 million in 2007
      from $4.2 million in 2006. The increase in the revenues from the sales of
      our services was primarily due to increases in the revenues from both our
      head-end system integration services and our licensing income, which were
      partially offset by a decrease in revenues from our head-end system development
      services. Revenues from our head-end system integration services increased
      by
      40.6% to $3.3 million in 2007 from $2.3 million in 2006, primarily
      reflecting a $1.0 million increase in revenue recognized in 2007 from the
      contracts we performed in 2007 compared to revenue recognized in 2006 from
      contracts performed in 2006. Revenues from our head-end system development
      services decreased by 51.4% to $0.3 million in 2007 from $0.6 million
      in 2006, primarily reflecting a decrease in demand for such services in 2007
      compared to 2006. Revenues from licensing income increased by 91.3% to
      $2.0 million in 2007 from $1.0 million in 2006, primarily due to a 87%
      increase in the number of new licensing contracts for our CA system terminal-end
      software that we entered into in 2007 as compared to 2006, reflecting the
      growing number of set-top box manufacturers that purchased services from us.
      Correspondingly, revenues from royalty income increased by 84.5% to
      $0.5 million in 2007 from $0.3 million in 2006.




***Net
      Revenues*** .
      Our net
      revenues increased by 82.6% to $55.5 million in 2007 from
      $30.4 million in 2006.




***Cost
      of Revenues*** .
      The
      following table sets forth cost of revenues by sources of revenues by amount
      and
      as a percentage of net revenues for 2006 and 2007:




**Years
                ended December 31,****2006**
            
            **2007****Revenues**
            
            **% of Net**
              **Revenues**
            
            **Revenues**
            
            **% of Net**
              **Revenues****(in
                thousands, except percentages)**Products
            
            $
            4,726
            
            
            15.6
            %
            $
            8,100
            
            
            14.6
            %Services
            
            
            1,859
            
            
            6.1
            
            
            2,135
            
            
            3.9**Total
                cost of revenues**
            
            $
            6,585
            
            
            21.7
            %
            $
            10,235
            
            
            18.5
            %





Cost
      of
      revenues increased by 55.4% to $10.2 million in 2007 from $6.6 million
      in 2006, primarily reflecting an increase in the costs relating to our products
      and, to a lesser extent, an increase in the cost relating to our services.
      Cost
      of revenues relating to our products increased by 71.4% to $8.1 million in
      2007 from $4.7 million in 2006, primarily due to an increase in raw
      material costs and personnel and related costs as the number of smart cards
      sold
      by us increased significantly during the period. Cost of revenues relating
      to
      our services increased by 14.8% to $2.1 million in 2007 from
      $1.9 million in 2006, primarily reflecting the increase in the
      corresponding revenues from our head-end system integration
      services.




Cost
      of
      revenues as a percentage of net revenues decreased to 18.5% in 2007 from 21.7%
      in 2006, primarily due to declining unit costs of some major raw materials,
      such
      as computer chips, and increased operating efficiency. The average unit cost
      of
      our smart cards decreased by approximately 6.3% in U.S. dollar terms from 2006
      to 2007 primarily due to a decrease in the price of computer chips.




***Gross
      Profit and Gross Margin*** .
      Gross
      profit increased by 90.1% to $45.2 million in 2006 from $23.8 million
      in 2007. Our gross margin increased to 81.5% in 2007 from 78.3% in
      2006.




***Operating
      Expenses*** .
      Our
      operating expenses increased by 128.6% to $12.1 million in 2007 from
      $5.3 million in 2006, primarily as a result of the expansion of our
      operations. Operating expenses, as a percentage of net revenues, increased
      to
      21.8% in 2007 from 17.4% in 2006, primarily due to an increase in the number
      of
      our employees to 424 as of December 31, 2007 from 270 as of December 31, 2006,
      as a result of expansion our operations.


59


*Research
      and Development Expenses* .
      Our
      research and development expenses increased by 109.0% to $4.6 million in
      2007 from $2.2 million in 2006. This significant increase was primarily
      attributable to an increase in the number of our research and development staff.
      Our research and development expenses, as a percentage of net revenues,
      increased to 8.4% in 2007 from 7.3% in 2006.




*Selling
      and Marketing Expenses* .
      Our
      selling and marketing expenses increased by 103.5% to $3.8 million in 2007
      from $1.8 million in 2006. This significant increase was primarily
      attributable to an increase in sales and marketing headcount and more active
      marketing campaigns. Our selling and marketing expenses, as a percentage of
      net
      revenues, increased to 6.8% in 2007 from 6.1% in 2006.




*General
      and Administrative Expenses* .
      Our
      general and administrative expenses increased by 201.8% to $3.7 million in
      2007 from $1.2 million in 2006. This significant increase was primarily
      attributable to an increase in administrative headcount as well as professional
      service fees relating to our initial public offering and annual audit in the
      fourth quarter of 2007. Our general and administrative expenses, as a percentage
      of net revenues, increased to 6.7% in 2007 from 4.0% in 2006.




***Income
      from Operations*** .
      As a
      result of the foregoing factors, our income from operations increased by 79.1%
      from $18.5 million in 2006 to $33.1 million in 2007.




***Other
      Income (Expenses)*** .
      We had
      other income of $3.1 million in 2007, compared to other expenses of
      $5.1 million in 2006. Our other expenses in 2006 consisted primarily of the
      expenses we incurred relating to the increase of in the fair market value of
      the
      warrant held by SAIF in an amount of $5.4 million, which was partially offset
      by
      interest income of $0.3 million from our bank deposits. Our other income in
      2007
      consisted of interest income of $2.8 million and a one-off award of $0.3 million
      granted by the Administration Committee of Beijing Zhongguancun Economic Zone
      for the consummation of our initial public offering.




***Net
      Income*** .
      As a
      result of the foregoing factors and taking into account $nil and
      $0.4 million in net income attributable to minority interest in 2007 and
      2006, respectively, net income increased by 160.3% to $33.8 million in 2007
      from $13.0 million in 2006.




Our
      net
      income attributable to holders of ordinary shares was $33.8 million in
      2007, while our net income attributable to holders of ordinary shares was
      $7.3 million in 2006, which reflected a cash dividend of $5.7 million
      to our Series A preferred shareholder in 2006.




**Comparison
      of Years Ended December 31, 2006 and December 31, 2005**




***Revenues*** .
      The
      following table sets forth revenues by sources and the percentage of our total
      revenues for 2005 and 2006:




**Years
                ended December 31,****2005**
            
            **2006****Revenues**
            
            **% of Total**
              **Revenues**
            
            **Revenues**
            
            **% of Total**
              **Revenues****(in
                thousands, except percentages)****Products**Smart
                cards
            
            $
            9,278
            
            
            70.6
            %
            $
            26,223
            
            
            85.6
            %Set-top
                boxes and others
            
            
            13
            
            
            0.1
            
            
            220
            
            
            0.7Subtotal
            
            $
            9,291
            
            
            70.7
            %
            $
            26,443
            
            
            86.3
            %


60





**Years
                ended December 31,****2005**
            
            **2006****Revenues**
            
            **%
                of Total Revenues**
            
            **Revenues**
            
            **%
                of Total Revenues****(in
                thousands, except percentages)****Services**Head-end
                system integration
            
            
            3,088
            
            
            23.5
            
            
            2,317
            
            
            7.6Head-end
                system development
            
            
            70
            
            
            0.5
            
            
            558
            
            
            1.8Licensing
                income
            
            
            697
            
            
            5.3
            
            
            1,037
            
            
            3.4Royalty
                income
            
            
            —
            
            
            —
            
            
            270
            
            
            0.9Subtotal
            
            $
            3,855
            
            
            29.3
            %
            $
            4,182
            
            
            13.7
            %**Total
                revenues**
            
            $
            13,146
            
            
            100.0
            %
            $
            30,625
            
            
            100.0
            %





Our
      total
      revenues increased by 133.0% to $30.6 million in 2006 from
      $13.1 million in 2005. This increase primarily resulted from a significant
      increase in the revenues from the sales of our products, in particular smart
      cards.




Revenues
      from the sales of our products increased by 184.6% to $26.4 million in 2006
      from $9.3 million in 2005, primarily due to a significant increase in the
      revenues from the sales of our smart cards, which continued to account for
      over
      99% of our revenues from the sales of products in 2006. The increase in the
      revenues from the sales of smart cards was primarily attributable to a 169.0%
      increase in the number of smart cards sold by us to 3.9 million in 2006
      from 1.5 million in 2005, which was partially offset by a 0.9% decrease in
      the average selling price of our smart cards in RMB terms from 2005 to 2006.
      The
      increase in our sales of smart cards resulted from the continued growth of
      the
      PRC television digitalization market as well as our leading market position.
      Sales generated by Jiangsu Qingda, our distributor for Jiangsu Province, as
      a
      percentage of our total revenues from the sales of smart cards, increased to
      15.1% in 2006 from 0.1% in 2005. The decrease in the average selling price
      of
      smart cards from 2005 to 2006 was primarily due to intensified
      competition.




Revenues
      from the sales of our services increased by 8.5% to $4.2 million in 2006
      from $3.9 million in 2005. The increase in the revenues from the sales of
      our services was primarily due to increases in the revenues from our head-end
      system development services, licensing income and royalty income, which were
      partially offset by a decrease in the revenues from our head-end system
      integration service. Revenue from our head-end system development services
      increased to $0.6 million in 2006 from $0.1 million in 2005, primarily
      reflecting an increase in demand from customers for such services in 2006
      compared to 2005. Revenues from licensing income increased by 48.8% to
      $1.0 million in 2006 from $0.7 million in 2005, primarily due to a
      78.0% increase in the average amount of licensing fees per contract we collected
      in that year, which was partially offset by a 16.4% decrease in the number
      of
      new licensing contracts for our CA systems terminal-end software. In addition,
      we started to collect royalties from set-top box manufacturers who licensed
      our
      CA system terminal-end software in 2006 and had $0.3 million in royalty
      income in that year, compared to nil in 2005. Revenues from our head-end system
      integration services decreased by 25.0% to $2.3 million in 2006 from
      $3.1 million in 2005, reflecting a $0.8 million decrease in revenue
      recognized in 2006 from contracts performed in 2006 compared to revenue
      recognized in 2005 from contracts performed in 2005. In addition, in light
      of
      the increasing competition in the CA system market, we continue to lower the
      price for our head-end system integration services to attract more digital
      television network operator customers in 2006.




***Net
      Revenues*** .
      Our net
      revenues increased by 132.1% to $30.4 million in 2006 from
      $13.1 million in 2005.




***Cost
      of Revenues*** .
      The
      following table sets forth cost of revenues by sources of revenues by amount
      and
      as a percentage of net revenues for 2005 and 2006:




61


**Years ended December 31,****2005**
            
            **2006****Revenues**
            
            **% of Net Revenues**
            
            **Revenues**
            
            **% of Net Revenues****(in thousands, except percentages)**Products
            
            $
            1,936
            
            
            14.8
            %
            $
            4,726
            
            
            15.6
            %Services
            
            
            1,967
            
            
            15.0
            
            
            1,859
            
            
            6.1**Total
                cost of revenues**
            
            $
            3,903
            
            
            29.8
            %
            $
            6,585
            
            
            21.7
            %





Cost
      of
      revenues increased by 68.7% to $6.6 million in 2006 from $3.9 million
      in 2005, reflecting an increase in the costs relating to our products, which
      was
      partially offset by a slight decrease in the costs relating to our services.
      Cost of revenues relating to our products increased by 144.1% to
      $4.7 million in 2006 from $1.9 million in 2005, primarily due to an
      increase in raw material costs and personnel and related costs as the number
      of
      smart cards sold by us increased significantly during the period. Cost of
      revenues relating to our services slightly decreased by 5.5% to
      $1.9 million in 2006 from $2.0 million in 2005, primarily due to a
      decrease in the proportion of our service revenues derived from head-end system
      integration services.




Cost
      of
      revenues as a percentage of net revenues decreased to 21.7% in 2006 from 29.8%
      in 2005, primarily driven by the increase, as a percentage of net revenues,
      in
      the revenues from the sales of our higher-margin products such as smart cards.
      This decrease of cost of revenues as a percentage of net revenues from 2005
      to
      2006 was also due to declining unit costs of some raw materials during the
      period as well as increased operating efficiency due to economies of scale.
      The
      average unit cost of our smart cards decreased by approximately 10.8% in U.S.
      dollar terms from 2005 to 2006, primarily due to a decrease in the price of
      computer chips.




***Gross
      Profit and Gross Margin*** .
      Gross
      profit increased by 159.0% to $23.8 million in 2006 from $9.2 million
      in 2005. Our gross margin increased to 78.3% in 2006 from 70.2% in
      2005.




***Operating
      Expenses*** .
      Our
      operating expenses consist of research and development expenses, selling and
      marketing expenses and general and administrative expenses. Our operating
      expenses increased by 38.3% to $5.3 million in 2006 from $3.8 million
      in 2005, primarily due to an increase in the average number of our employees
      to
      228 in 2006 from 188 in 2005 and the expansion of our operations. Operating
      expenses, as a percentage of net revenues, decreased to 17.4% in 2006 from
      29.3%
      in 2005, primarily reflecting increased operating efficiency due to our
      achieving economies of scale.




*Research
      and Development Expenses* .
      Our
      research and development expenses increased by 22.2% to $2.2 million in
      2006 from $1.8 million in 2005. This increase was primarily attributable to
      a $0.5 million increase in the compensation and benefits expenses,
      reflecting an increase in the average number of our research and development
      staff to 145 in 2006 from 87 in 2005, which was partially offset by a
      $0.2 million decrease in depreciation expenses. Our research and
      development expenses, as a percentage of net revenues, decreased to 7.3% in
      2006
      from 13.9% in 2005.




*Selling
      and Marketing Expenses* .
      Our
      selling and marketing expenses increased by 39.1% to $1.8 million in 2006
      from $1.3 million in 2005. This increase was primarily attributable to a
      $0.3 million increase in the compensation and benefits expenses, reflecting
      a larger amount of performance-based incentive payments to our sales and
      marketing staff in 2006. Our selling and marketing expenses, as a percentage
      of
      net revenues, decreased to 6.1% in 2006 from 10.1% in 2005.




*General
      and Administrative Expenses* .
      Our
      general and administrative expenses increased by 79.5% to $1.2 million in
      2006 from $0.7 million in 2005. This increase was primarily attributable to
      a $0.3 million increase in professional advisory fees and, to a lesser
      extent, a $0.1 million increase in compensation and benefits expenses for
      our general and administrative staff, reflecting a slight increase in number
      of
      employees in this function, and a $0.2 million in allowance for doubtful
      accounts in 2006. Our general and administrative expenses, as a percentage
      of
      net revenues, slightly decreased to 4.0% in 2006 from 5.2% in 2005.




***Income
      from Operations*** .
      As a
      result of the foregoing factors, our income from operations increased by 245.4%
      from $5.4 million in 2005 to $18.5 million in 2006.


62


***Other
      Income (Expenses)*** .
      We had
      other expenses of $5.1 million in 2006, compared to other income of
      $0.1 million in 2005. Our other expenses in 2006 consisted primarily of the
      change in the fair value of the warrant held by SAIF in the amount of
      $5.4 million, which was partially offset by interest income of
      $0.3 million on our bank deposits. Our other income in 2005 consisted
      primarily of interest income on our bank deposits.




***Net
      Income*** .
      As a
      result of the foregoing factors and taking into account $0.4 million and
      $1.0 million in net income attributable to minority interest in 2006 and
      2005, respectively, net income increased by 185.9% to $13.0 million in 2006
      from $4.5 million in 2005, while net margin increased to 42.8% in 2006 from
      34.7% in 2005.




Taking
      into account a cash dividend of $5.7 million to our Series A preferred
      shareholder in 2006, our net income attributable to holders of ordinary shares
      was $7.3 million in 2006, compared to $4.5 million in
      2005.




**B.**  **Liquidity
      and Capital Resources**




**Liquidity**




**Years ended December 31,****2005**
            
            **2006**
            
            **2007****(In
                thousands)**Cash
                and cash equivalents
            
            $
            8,272
            
            $
            21,137
            
            $
            228,958Net
                cash provided by operating activities
            
            
            5,933
            
            
            21,090
            
            
            33,838Net
                cash used in investing activities
            
            
            (3,065
            )
            
            (1,408
            )
            
            (19,263
            )Net
                cash provided by/(used in) financing activities
            
            $
            3
            
            $
            (7,273
            )
            $
            192,030





***Operating
      Activities*** .
      Net
      cash provided by/(used in) operating activities primarily consists of net income
      (loss), as adjusted for minority interest, depreciation and amortization,
      share-based compensation expense, change in fair value of the warrant, allowance
      for doubtful accounts, inventories, pre-paid expenses and other current assets,
      accounts receivable, deferred costs, amounts due from related parties, income
      tax payable, accounts payable, accrued expenses and other current liabilities
      and deferred revenues.




Net
      cash
      provided by operating activities was $33.8 million in 2007, which was
      primarily derived from our net income of $33.8 million, adjusted to reflect
      an increase in the accrued expenses and other current liabilities by
      $2.5 million, the adding back of $1.3 million in non-cash share-based
      compensation charges and a $0.7 million increase in the income tax payable.
      Net income was partially offset by a $3.1 million increase in accounts
      receivable and a $2.0 million decrease in deferred revenues, and a
      $0.4 million decrease in accounts payable. The significant increase in
      accrued expenses and other current liability reflected the increase in the
      amounts of year-end bonus payable, tax payable and fees payable incurred during
      the preparation of our initial public offering. The significant increase in
      accounts receivable reflected the rapid growth of the sales of our smart cards
      as well as the increase in the balance of accounts receivable from major
      customers. The significant decrease during 2007 in deferred revenues reflects
      a
      decrease in pre-payments from customers for smart cards.




Net
      cash
      provided by operating activities was $21.1 million in 2006, which was
      primarily derived from our net income of $13.0 million, adjusted to reflect
      the adding back of a $5.4 million non-cash charge relating to the change in
      the fair value of the warrant held by SAIF and a $3.8 million increase in
      deferred revenue. Net income was partially offset by a $1.5 million
      increase in inventories, a $1.0 million increase in accounts receivable and
      a $0.8 million increase in pre-paid expenses and other current assets. The
      significant increase in deferred revenue during 2006 was primarily due to a
      significant increase in advances from customers accompanying the rapid growth
      of
      the sales of our smart cards in 2006.




Net
      cash
      provided by operating activities was $5.9 million in 2005, which was
      primarily derived from our net income of $4.5 million, adjusted to reflect
      the adding back of non-cash charges relating to $1.0 million in net income
      attributable to minority interest and $0.6 million in non-cash depreciation
      and amortization costs. These were partially offset by a $0.9 million
      increase in accounts receivable. In 2005, we started to allow more flexible
      payment terms with respect to sales to major customers, which contributed to
      the
      increase in accounts receivable.


63


***Investing
      Activities*** .
      Investing activities primarily include purchases of property and equipment
      from
      time to time, long-term investment, placement of bank deposits maturing more
      than three months, restricted cash and historically also included the
      acquisitions of assets and businesses from N-T Information
      Engineering.




Net
      cash
      used in investing activities was $19.3 million in 2007, reflecting
      $17.1 million in bank deposits maturing over three months, a
      $1.5 million one-year term loan extended to N-T Information
      Engineering in April 2007, $1.2 million used for purchase of property and
      equipment, $0.6 million in restricted cash, $0.4 million used for
      capital contribution to a joint venture company with Jiangsu Qingda Technology
      Co. Limited and purchase from N-T Information Engineering of its 51% equity
      interest Guokai, which were partially offset by a $1.5 million refund
      received from N-T Information Engineering, resulting from the downward
      adjustment to the price paid by us to purchase its set-top box
      business.




Net
      cash
      used in investing activities was $1.4 million in 2006, primarily consisting
      of $3.8 million used for the acquisition of the set-top box design business
      from N-T Information Engineering, which was partially offset by a
      $2.0 million refund to us of the purchase price relating to an abandoned
      acquisition of certain equity interests in a start-up company through
      N-T Information Engineering and the repayment to us of a $0.7 million
      loan by N-T Information Engineering.




Net
      cash
      used in investing activities was $3.1 million in 2005, primarily consisting
      of $2.0 million paid to N-T Information Engineering relating to a
      then-proposed acquisition of certain equity interests in a start-up company
      and
      a $0.7 million loan to N-T Information Engineering.




***Financing
      Activities*** .
      Cash
      used in financing activities primarily consists of dividend payments, and cash
      provided by financing activities primarily consists of proceeds of issuance
      of
      ordinary shares, proceeds from the issuance of Series A preferred shares
      and the warrant to SAIF, capital contributions by equity shareholders and
      proceeds from the exercise of the warrant by SAIF.




Net
      cash
      provided by financing activities was $192.0 million in 2007, consisting of
      $220.8 million of proceeds we received from the issuance of ordinary shares
      in our initial public offering, which were offset by $17.5 million of costs
      and expenses incurred relating to our initial public offering and
      $11.3 million in dividends paid to our ordinary and preferred
      shareholders.




Net
      cash
      used in financing activities was $7.3 million in 2006, primarily consisting
      of $10.0 million used for dividend payments to both our preferred and
      ordinary shareholders, partially offset by $2.1 million in proceeds from
      the exercise of the warrant by SAIF to purchase additional Series A
      preferred shares from us and an aggregate of $0.6 million in a capital
      injection from N-T Information Engineering and SAIF through Ms. Li
      Yang, who at that time was a shareholder of N-S Digital TV.




We
      had no
      material financing activities in 2005.




Pursuant
      to relevant PRC laws and regulations applicable to our subsidiary and variable
      interest entity in the PRC, these entities are required to make appropriations
      from net income as determined in accordance with PRC GAAP to non-distributable
      reserves, also referred to as “statutory common reserves,” which included a
      statutory surplus reserve and a statutory welfare reserve as of December 31,
      2005. According to the revised PRC Company law which took effect on January
      1,
      2006, our subsidiaries and variable interest entity in the PRC are no longer
      required to make appropriations to the statutory welfare reserve, but
      appropriations to the statutory surplus reserve are still required to be made
      at
      the rate of 10% of profits after tax as determined under PRC GAAP until the
      balance of such reserve fund reaches 50% of the entities’ registered
      capital.




Our
      subsidiaries and our variable interest entity in the PRC may, upon a resolution
      passed by their respective shareholders, convert the statutory surplus reserve
      into capital. The statutory welfare reserve was used for the collective welfare
      of the employees of each of the subsidiaries and the variable interest entity.
      These reserves represent appropriations of retained earnings determined
      according to PRC law and may not be distributed. There were no appropriations
      to
      reserves other than to those of our subsidiaries and our variable interest
      entity in the PRC during any of the periods presented. However, as a result
      of
      these laws, approximately $2.4 million and $5.7 million of our
      retained earnings was not available for distribution as of each of December
      31,
      2006 and December 31, 2007, respectively.


64


**Capital
      Expenditures**




In
      2007,
      2006 and 2005, our capital expenditures totaled $1.2 million,
      $4.1 million and $0.3 million, respectively. Our capital expenditures
      in 2005 and 2006 primarily consisted of acquisitions of the smart card and
      CA
      systems business and the set-top box design business from N-T Information
      Engineering and purchases of equipment. Our capital expenditures in 2007 mainly
      related to purchases of equipment.




We
      believe that our current levels of cash and cash equivalents, which include
      the
      net proceeds from our initial public offering, and cash flows from operations
      in
      the near future, will be sufficient to meet our anticipated capital expenditure
      and other cash needs for at least the next 12 months. However, we may need
      additional cash resources in the future if we experience changed business
      conditions or other developments. We also may need additional cash resources
      in
      the future if we find and wish to pursue opportunities for investment,
      acquisition, strategic cooperation or other similar actions. If we ever
      determine that our cash requirements exceed our amounts of cash and cash
      equivalents on hand, we may seek to issue debt or equity securities or obtain
      a
      credit facility. Any issuance of equity securities could cause dilution for
      our
      shareholders. Any incurrence of indebtedness could increase our debt service
      obligations and cause us to be subject to restrictive operating and finance
      covenants. It is possible that, when we need additional cash resources,
      financing will be available to us only in amounts or on terms that would not
      be
      acceptable to us or financing will not be available at all.




**C.**  **Research
      and Development, Patents and Licenses, etc.**




See
      “Item 4. Information on the Company—B. Business Overview—Research and
      Development” for information relating to our research and development.




See
      “Item 4. Information on the Company—B. Business Overview—Intellectual
      Property” for information relating to our intellectual property.




**D.**  **Trend
      Information**




Other
      than as disclosed elsewhere in this annual report, we are not aware of any
      trends, uncertainties, demands, commitments or events for the period from
      January 1, 2005 to December 31, 2007 that are reasonably likely to have a
      material adverse effect on our net revenues, income, profitability, liquidity
      or
      capital resources, or that caused the disclosed financial information to be
      not
      necessarily indicative of future operating results or financial conditions.




**E.**  **Off-Balance
      Sheet Arrangements**




We
      have
      not entered into any financial guarantees or other commitments to guarantee
      the
      payment obligations of any third parties. We have not entered into any
      derivative contracts that are indexed to our shares and classified as
      shareholders’ equity or that are not reflected in our consolidated financial
      statements. Furthermore, we do not have any retained or contingent interest
      in
      assets transferred to an unconsolidated entity that serves as credit, liquidity
      or market risk support to such entity. We do not have any variable interest
      in
      any unconsolidated entity that provides financing, liquidity, market risk or
      credit support to us or engages in leasing, hedging or research and development
      services with us.




**F.**  **Tabular
      Disclosure of Contractual Obligations**




The
      following table sets forth our contractual obligations as of December 31,
      2007:


65





**Contractual Obligations****Less than 1 Year**
            
            **1-3 Years**
            
            **3-5 Years**
            
            **More than 5 Years**
            
            **Total****(In
                thousands)**Operating
                lease obligations(1)
            
            $
            590
            
            $
            143
            
            
            —
            
            
            —
            
            $
            733Purchase
                obligations
            
            
            2,775
            
            
            —
            
            
            —
            
            
            —
            
            
            2,775**Total**
            
            $
            3,365
            
            $
            143
            
            
            —
            
            
            —
            
            $
            3,508




(1)
      Operating leases generally relate to the lease of our office
      premises.




**Item
      6.**  **Directors,
      Senior Management and Employees**




**A.**  **Directors
      and Senior Management**




The
      following table sets forth certain information concerning our directors and
      executive officers as of May 31, 2008.




**Name**
            
            **Age**
            
            **Position**Zengxiang
                LU
            
            37
            
            Chairman
                and Chief Strategy OfficerJianhua
                ZHU
            
            38
            
            Director
                and Chief Executive OfficerAndrew
                Y. YAN
            
            50
            
            DirectorHua
                GUO
            
            42
            
            DirectorJames
                Hsiang Ming HO
            
            48
            
            DirectorLouis
                T. HSIEH
            
            42
            
            Independent
                DirectorGongquan
                WANG
            
            46
            
            Independent
                DirectorLiang
                XU
            
            33
            
            Chief
                Financial OfficerDong
                LI
            
            36
            
            Chief
                Marketing OfficerJian
                HAN
            
            34
            
            Chief
                Technology OfficerHuiqing
                CHEN
            
            35
            
            Chief
                Administrative Officer





*Zengxiang
      LU* ,
      one of
      our founders, has served as the chairman of our board of directors and chief
      strategy officer since December 2006 and has been a board member since 2004.
      He
      was chief executive officer from 2004 until December 2006. **** Dr. Lu
      was also the director of the Guangdong Digital Media Research Institute from
      2005 until 2007. Dr. Lu worked on the development of CA systems at Tsinghua
      Tongfang from 1999 to August 2001. He was deputy general manager of
      N-T Information Engineering from August 2001 until 2004, and has served on
      the board of N-T Information Engineering since 1998. Dr. Lu holds a
      bachelor’s degree in automation and a Ph.D. in signal processing from Tsinghua
      University.




*Jianhua
      ZHU* ,
      one of
      our founders, has served as chief executive officer of our company since
      December 2006 and has been a director since 2004. He was chairman of our board
      of directors from 2004 until December 2006. From 2001 until 2004, Mr. Zhu
      was general manager of N-T Information Engineering. From 1998 until 2001,
      he was deputy general manager of N-T Information Engineering. He has also
      been the supervisor of N-T Information Engineering since 2006. Mr. Zhu has
      been
      the executive director of the Guangdong Digital Media Research Institute since
      2005. He worked at the China Technology Import and Export Corp. from 1994 until
      1997. Mr. Zhu holds bachelor’s and master’s degrees in precision
      instrumentation from Tsinghua University.




*Andrew
      Y. YAN* has
      been
      a director of our company since 2004. He is currently the executive managing
      director of SAIF Advisors Ltd., an advisory company for SOFTBANK Inc., which
      is
      the management company of SB Asia Infrastructure Fund L.P. Mr. Yan is also
      currently the managing partner of SAIF Partners III L.P. and SB Asia Investment
      Fund II L.P. Mr. Yan was a managing director and the head of the Hong Kong
      office of Emerging Markets Partnership, the principal advisor to AIG Asian
      Infrastructure Funds. Mr. Yan was elected “Venture Capitalist of the Year”
in 2004 and “Top-Ten Venture Investors in 2005” by the China Venture Capital
      Association. Mr. Yan currently is a director of Acorn International, Inc.,
      China Resources Land, China Oilfield Services Ltd., Stone Group Holdings Ltd.
      and certain other PRC-based companies. Mr. Yan holds a master of arts
      degree from both Princeton University and Peking University and a bachelor’s
      degree in engineering from Nanjing Aeronautic Institute.


66


*Hua
      GUO* has
      been
      a director of our company since 2006. Mr. Guo has been the general manager
      of N-T Information Engineering since 2006. Mr. Guo was the general
      manager of Dongguan Huarong Science and Technology Company from 2004 to 2005
      and
      the general manager of Shenzhen Houde Investment Company from 2002 to 2003.
      He
      was the assistant to the president of the Research Institute of Tsinghua
      University in Shenzhen from 1998 to 2002. Mr. Guo received a bachelor’s
      degree in economics from Jiangxi Finance and Economic University and a master’s
      degree in finance from People’s University of China.




*James
      Hsiang Ming HO* has
      been
      a director of our company since November 2006. Mr. Ho is a vice president
      of Capital International, Inc., responsible for private equity in Asia. Prior
      to
      joining Capital International, Inc. in 1996, Mr. Ho was vice president of
      global equity investments at the Bank of America in Hong Kong. Mr. Ho has
      been a director of Pacific Textiles Holdings, Ltd., a Hong Kong-listed company,
      since December 2004 and was a director of On*Media Corporation, a South
      Korea-listed company, from June 2000 to March 2007. He received a bachelor’s
      degree in economics from the National Taiwan University and an MBA from the
      Wharton School of Business at the University of Pennsylvania.




*Louis
      T. HSIEH* has
      been
      an independent director of our company since October 2007. Mr. Hsieh is the
      chief financial officer and a member of the board of directors of New Oriental
      Education & Technology Group (NYSE: EDU). He also serves as an
      independent director of LDK Solar (NYSE: LDK) and of Perfect World Co., Ltd.
      (NASDAQ: PWRD). From April 2004 until he joined New Oriental in 2005,
      Mr. Hsieh was the chief financial officer of ARIO Data Networks, Inc. in
      San Jose, California. Mr. Hsieh was a managing director for the private
      equity firm Darby Asia Investors (HK) Limited from 2002 to 2003. From 2000
      to
      2002, he was managing director and Asia-Pacific tech/media/telecoms head of
      UBS
      Capital Asia Pacific, the private equity division of UBS AG. From 1997 to 2000,
      Mr. Hsieh was a technology investment banker at JP Morgan in San Francisco,
      California, where he was a vice president, and Credit Suisse First Boston in
      Palo Alto, California, where he was an associate. From 1990 to 1996,
      Mr. Hsieh was a corporate and securities attorney at White & Case
      LLP in Los Angeles and he is a member of the California bar. He holds a
      bachelor’s degree in engineering from Stanford University, an MBA from the
      Harvard Business School and a J.D. degree from the University of California
      at
      Berkeley.




*Gongquan
      WANG* has
      been
      an independent director of our company since November 2007. Mr. Wang built
      and managed CDH Venture Partners from its inception in 2005. Prior to that,
      he
      was a general partner with IDG Technology Venture Investment, Inc. from 1999
      to
      2005, where Mr. Wang was responsible for overseeing the operational
      management of the portfolio companies of the firm’s various funds and also had
      an investment role. In 1991, he co-founded Vantone Industry Group, one of
      China’s leading real estate developers, which he managed from 1991 to 1995,
      serving in various capacities, including president, vice chairman of the board,
      honorary chairman of the board, and managing director. Mr. Wang is
      currently a director of Qihoo Technology Company Limited and CDG Holdings
      Limited, and was previously a director of China EDU, China Civilink, China
      Finance Online and 3721.com. Mr. Wang received a bachelor’s degree from
      Jilin University.




*Liang
      XU* has
      served as the chief financial officer of our company since November 2006.
      Mr. Xu was assistant vice president of CDH Venture Partners from 2005 to
      2006. He was strategic program manager of Intel (China) Ltd. from 2004 to 2005,
      and senior financial analyst at Intel (China) Ltd. from 2003 to 2004. He was
      deputy head of the sales and marketing department at N-T Information
      Engineering from 1998 to 2001. Mr. Xu holds bachelor’s degrees in economics
      and English from Tsinghua University and an MBA from the Harvard Business
      School.




*Dong
      LI* has
      served as the chief marketing officer of our company since our establishment
      in
      2004. From 2001 to 2004, he was the assistant to the general manager and chief
      marketing officer of N-T Information Engineering. He previously worked at
      China Technology Import and Export Corp. Mr. Li holds a bachelor’s degree
      in materials science and technology from Tsinghua University.




*Jian
      HAN* has
      served as the chief technology officer of our company since our establishment.
      From 2001 until joining our company, Dr. Han was chief technology officer
      at N-T Information Engineering. From 2000 to 2001, he was the digital
      broadcasting center project manager working on the development of CA systems
      at
      the Tsinghua Novel-Tongfang Research and Development Center. From 1999 to 2000,
      he was an associate researcher at the Microsoft China Research Institute.
      Dr. Han holds a Ph.D. in engineering and dual bachelor’s degrees in
      automation and mechanical engineering from Tsinghua University.


67


*Huiqing
      CHEN* has
      served as the chief administrative officer of our company since our
      establishment in 2004, and is responsible for administrative affairs and human
      resources management. From 1998 until 2004, she was manager of the general
      manager’s office at N-T Information Engineering. Ms. Chen holds a
      master’s degree in biochemical engineering from Tsinghua
      University.




There
      is
      no family relationship among any of our directors or executive officers. There
      is no shareholding qualification for directors.




According
      to our Second Amended and Restated Memorandum and Articles of Association,
      which
      were approved by our shareholders on September 13, 2007 and took effect upon
      the
      completion of our initial public offering, the number of our directors shall
      be
      determined by our board and shall not be fewer than five or more than eleven.
      Our board has agreed to comply with the corporate governance requirements of
      the
      New York Stock Exchange, pursuant to which we must have at least two independent
      directors as of 90 days from the completion of our initial public offering
      and a majority of independent directors as of one year from the completion
      of
      our initial public offering. We may increase the number of our directors from
      the current seven in order to comply with these requirements.




**B.**  **Compensation
      of Directors and Senior Officers**




Our
      executive officers receive compensation in the form of salaries, annual bonuses
      and share options. Some of our non-executive directors and our independent
      director, Mr. Louis T. Hsieh, have received compensation in the form of
      share options. We do not provide any benefits to our non-executive directors
      upon retirement. In 2007, the aggregate cash compensation to our executive
      officers and directors was $0.6 million.




**Stock
      Options**




Our
      Amended and Restated China Digital TV Holding Co., Ltd. 2005 Stock Incentive
      Plan, or the 2005 Plan, and China Digital TV Holding Co., Ltd. 2008 Stock
      Incentive Plan, or the 2008 Plan, are intended to provide incentives to our
      directors, officers and employees as well as consultants and advisers of our
      company and its present or future parent company or subsidiaries, or the related
      corporations.




***The
      Amended and Restated 2005 Stock Incentive Plan***




The
      2005
      Stock Incentive Plan was adopted by the board of directors of CDTV BVI on
      February 3, 2005 and the Amended and Restated 2005 Stock Incentive Plan was
      adopted by our board of directors and approved by our shareholders on September
      13, 2007 to amend and restate the 2005 Stock Incentive Plan. In 2005, CDTV
      BVI
      was the ultimate holding company of our business. As a result of our
      restructuring in May 2007, CDTV BVI became our wholly owned subsidiary and
      the
      options already granted under the 2005 Stock Incentive Plan were converted
      to
      options for the ordinary shares of our company. Pursuant to the 2005 Plan,
      we
      may issue stock options, stock appreciation rights, stock bonuses, restricted
      stock, performance stock, stock units, phantom stock, dividend equivalents
      or
      similar rights to purchase or acquire shares.




We
      reserved a total of 4,444,440 ordinary shares for issuance under the 2005 Plan,
      subject to any adjustments as contemplated by the plan. We granted stock options
      to purchase 2,971,942, 543,674 and 620,212 ordinary shares pursuant to the
      2005
      Stock Incentive Plan on February 3, 2005, September 22, 2006 and
      December 5, 2006, respectively, of which options to purchase 258,399
      ordinary shares were subsequently forfeited. Options to purchase 3,877,429
      ordinary shares remained outstanding as of December 31, 2007.




With
      respect to the stock options that we granted on February 3, 2005, two vesting
      schedules apply. The first vesting schedule is as follows: 50% vest at the
      end
      of the six-month period after the award date, and the remaining 50% vest in
      42
      equal monthly installments, beginning from the end of the six-month period
      after
      the award date. The second vesting schedule is as follows: 25% vest on the
      first
      anniversary of the award date and the remaining 75% vest in 36 substantially
      equal monthly installments, beginning on the last day of the month following
      the
      month in which the first anniversary of the award date occurs. The exercise
      price for all stock options granted on this date is $0.543 per
      share.


68


With
      respect to the stock options that we granted on April 13, 2006, the vesting
      schedule is as follows: 50% vest at the end of the six-month period after the
      award date, and the remaining 50% vest in 42 equal monthly installments,
      beginning from the end of the six-month period after the award date. The
      exercise price for all stock options granted on this date is $0.543 per
      share.




With
      respect to the stock options that we granted on September 22, 2006, the vesting
      schedule is as follows: 25% vest on the first anniversary of the award date
      and
      the remaining 75% vest in 36 substantially equal monthly installments, beginning
      on the last day of the month following the month in which the first anniversary
      of the award date occurs. The exercise price is $1.771 per share.




With
      respect to the stock options that we granted on December 5, 2006, with the
      exception of stock options that we granted to one of our executive officers,
      the
      vesting schedule is as follows: 25% vest on the first anniversary of the award
      date, and the remaining 75% vest in 36 substantially equal monthly installments,
      beginning on the last day of the month following the month in which the first
      anniversary of the award date occurs. The executive officer’s stock options vest
      according to the following schedule: 25% of 320,000 options vest upon the
      closing of our initial public offering, provided that such closing occurs within
      three years from the award date; 75% of 320,000 options vest in 36 substantially
      equal monthly installments, with the first installment vesting on the last
      day
      of the month following the month in which the executive officer took office;
      and
      32,000 options vest upon the achievement of certain financial targets. The
      exercise price for all stock options granted on this date is
      $4.172.




Our
      board
      of directors administers the 2005 Plan and has wide discretion in determining
      who will receive awards, the type and timing of awards, the vesting schedule
      and
      other terms and conditions of the awards, including the exercise price of stock
      option grants. Generally, if an outstanding stock option grant made under the
      2005 Plan has not vested by the date of termination of the recipient’s
      employment with us, no further installments of the recipient’s grant will become
      exercisable following the date of termination of employment, and the recipient
      will have 30 days from such date to exercise any stock options that had
      already vested but not yet been exercised. If any ordinary shares subject to
      a
      restricted stock award remain subject to restrictions by the date of termination
      of employment, no additional ordinary shares will vest following the date of
      termination of employment.




Our
      board
      of directors may amend or terminate the 2005 Plan at any time, provided,
      however, that our board of directors must seek the recipients’ approval with
      respect to any amendment or termination that would adversely affect the rights
      of such recipients under any award already made. Without further action by
      our
      board of directors, the 2005 Plan will terminate on February 2,
      2015.




The
      following table sets forth information on stock options that have been granted
      and were outstanding as of May 31, 2008 pursuant to the 2005
      Plan:




**Name of Directors and Executive Officers**
            
            **Number of**
              **Ordinary Shares to**
              **Be Issued Upon Exercise of Options**
            
            **Exercise Price per Ordinary Share**
            
            **Date of Grant**
            
            **Date of Expiration**Andrew
                Y. YAN
            
            
            114,584
            
            $
            0.543
            
            
            February
                3, 2005
            
            
            February
                2, 2015Liang
                XU
            
            
            352,000
            
            $
            4.172
            
            
            December
                5, 2006
            
            
            December
                4, 2016Dong
                LI
            
            
            195,560
            
            $
            0.543
            
            
            February
                3, 2005
            
            
            February
                2, 2015Jian
                HAN
            
            
            171,120
            
            $
            0.543
            
            
            February
                3, 2005
            
            
            February
                2, 2015Huiqing
                CHEN
            
            
            122,222
            
            $
            0.543
            
            
            February
                3, 2005
            
            
            February
                2, 2015Other
                grantees (comprising 67 individuals)
            
            
            2,126,724
            
            $
            0.543
            
            
            February
                3, 2005
            
            
            February
                2, 2015Other
                grantees (comprising 52 individuals)
            
            
            538,562
            
            $
            1.771
            
            
            September 22, 2006
            
            
            September 21, 2015Other
                grantees (comprising 24 individuals)
            
            
            256,657
            
            $
            4.172
            
            
            December
                5, 2006
            
            
            December
                4, 2016**Total**
            
            
            **3,877,429**





In
      addition to the options granted pursuant to the 2005 Plan, on May 15, 2007
      we
      granted options to purchase 40,000 ordinary shares to Mr. Louis T. Hsieh,
      who became an independent director of our company upon the completion of our
      initial public offering, at an exercise price of $4.172 per
      share.


69


***2008
      Stock Incentive Plan***




The
      2008
      Plan was adopted by our board of directors and approved by our shareholders
      on
      September 13, 2007. Pursuant to the 2008 Plan, we may issue stock options,
      stock appreciation rights, stock bonuses, restricted stock and restricted stock
      units, performance stock, stock units, phantom stock, dividend equivalents
      or
      similar rights to purchase or acquire shares.




We
      reserved a total of 1,200,000 ordinary shares for issuance under the 2008 Plan,
      subject to any adjustments as contemplated by the plan. The plan also provides
      for an annual increase, beginning in 2009, in the number of ordinary shares
      that
      may be delivered pursuant to awards under the plan, amounting to 2% of our
      issued and outstanding shares as of the first business day of the relevant
      calendar year. The maximum number of shares subject to awards that may be
      granted during any single calendar year is such number as equals 2% of our
      issued and outstanding shares as of the first business day of that calendar
      year. As of the date of this annual report, no awards have been granted under
      the 2008 Plan.




**C.**  **Board
      Practices**




**General**




The
      functions and powers of our board of directors include, among others:




·
            convening
                shareholders’ annual general meetings and reporting its work to
                shareholders at such meetings;




·
            implementing
                shareholders’ resolutions;




·
            determining
                our business plans and investment
                proposals;




·
            declaring
                dividends and distributions;




·
            exercising
                the borrowing powers of our company and mortgaging the property of
                our
                company;




·
            approving
                the transfer of shares of our company, including the registering
                of such
                shares in our share register; and




·
            exercising
                any other powers conferred by the shareholders’ meetings or under our
                Second Amended and Restated Memorandum and Articles of
                Association.




**Terms
      of Directors**




Our
      Second Amended and Restated Memorandum and Articles of Association provide
      for
      three classes of directors, each with three-year terms. As part of the process
      of setting up the classified board, however, the term of the Class I
      directors, who are Dr. Zengxiang Lu, Mr. Jianhua Zhu and
      Mr. Andrew Y. Yan, will expire upon the annual general meeting of
      shareholders to be held in 2008; the term of the Class II directors, who
      are Mr. Hua Guo, Mr. James Hsiang Ming Ho and Mr. Louis T. Hsieh,
      will expire upon the annual general meeting of shareholders to be held in 2009;
      and the term of the Class III directors, who are Mr. Gongquan Wang and
      other independent directors who are to be appointed by our board in order to
      comply with the rules of the U.S. Securities and Exchange Commission, or the
      SEC, and of the New York Stock Exchange, will expire upon the annual general
      meeting of shareholders to be held in 2010.




**Employment
      Agreements**




We
      have
      entered into five-year employment agreements with each of our executive
      officers. Under these agreements, we may terminate an executive officer’s
      employment for cause at any time, without notice or remuneration, for certain
      acts of the executive officer, including but not limited to material acts of
      fraud, material violations of our terms of employment, material dereliction
      of
      duty or engaging in graft to the material harm of the company. An executive
      officer may terminate employment if a government regulatory agency determines
      that working conditions are extremely deficient and injurious to health, if
      the
      executive has been subject to violence, threats or illegal constraints upon
      his
      liberty, or if we have failed to pay compensation on time. We and each executive
      officer may also decide to terminate such executive officer’s employment for
      other reasons or no reason after providing written notice at least 30 days
      in advance and after we have made arrangements for a successor. Our employment
      agreements do not provide any benefits to any of our executive officers upon
      termination.


70


Each
      executive officer who has executed an employment agreement with us has agreed
      to
      hold in confidence and not to use, both during and after such executive
      officer’s term of employment, any of our confidential information, including but
      not limited to information relating to important company policies, technological
      secrets, commercial secrets, company processes and any intellectual property
      discovered, invented or created by such executive officer during his or her
      term
      of employment. In addition, each of our executive officers has agreed to give
      us
      full rights to any work-related patents, inventions or
      achievements.




Each
      executive officer also has agreed that for one year after terminating employment
      with us, such executive officer will not, without our consent, accept employment
      by any of our competitors or engage in any activities that, directly or
      indirectly, compete with us. In addition, each executive officer has agreed
      that
      he or she will not, without our consent, induce any of our employees to
      terminate employment with us.




**Board
      Committees**




To
      enhance our corporate governance, our board of directors established three
      board
      committees: an audit committee, a nominations committee and a compensation
      committee.




***Audit
      Committee***




Our
      audit
      committee will be responsible for, among other things:




·
            recommending
                to our shareholders, if appropriate, the annual re-appointment of
                our
                independent auditors and pre-approving all audit and non-audit services
                permitted to be performed by our independent
                auditors;




·
            annually
                reviewing with our independent auditors any audit problems or difficulties
                and management’s response;




·
            reviewing
                and approving all proposed related-party transactions, as defined
                in
                Item 404 of Regulation S-K promulgated by the
                SEC;




·
            discussing
                the annual audited financial statements with management and our
                independent auditors;




·
            discussing
                with management and the independent auditors major issues regarding
                accounting principles and financial statement
                presentations;




·
            reviewing
                major issues as to the adequacy of our internal controls and any
                special
                audit steps adopted in light of material control
                deficiencies;




·
            discussing
                policies with respect to risk assessment and risk
                management;




·
            timely
                reviewing reports from the independent auditors regarding all critical
                accounting policies and practices to be used by our company, all
                alternative treatments of financial information within U.S. GAAP
                that have
                been discussed with management and all other material written
                communications between the independent auditors and
                management;




71


·
            establishing
                procedures for the receipt, retention and treatment of complaints
                received
                by us regarding accounting, internal accounting controls or auditing
                matters, and for the confidential, anonymous submission by our employees
                of concerns regarding questionable accounting or auditing
                matters;




·
            annually
                reviewing and reassessing the adequacy of our audit committee
                charter;




·
            meeting
                separately and periodically with management and our internal and
                independent auditors; and




·
            reporting
                regularly to our board of
                directors.




Our
      audit
      committee currently consists of Mr. Louis T. Hsieh, Mr. Gongquan
      Wang and Mr. Andrew Y. Yan, and has a formal written charter that sets
      forth its duties and powers. Our board has determined that each of
      Mr. Louis T. Hsieh and Mr. Gongquan Wang qualifies as an “independent”
director under the rules of the SEC and the New York Stock Exchange. Our audit
      committee will consist solely of independent directors within one year of the
      completion of our initial public offering. Our board also has determined that
      Mr. Louis T. Hsieh qualifies as an audit committee financial expert within
      the meaning of the rules of the SEC. Our audit committee meets at least once
      each quarter.




***Corporate
      Governance and Nominations Committee***




Our
      corporate governance and nominations committee consists of Mr. Louis T.
      Hsieh, Mr. Jianhua Zhu, Mr. Gongquan Wang and Mr. James Hsiang
      Ming Ho, and has a formal written charter that sets forth its duties and powers.
      It is intended that our corporate governance and nominations committee will
      consist solely of independent directors within one year of the completion of
      our
      initial public offering. Our corporate governance and nominations committee
      is
      responsible for identifying individuals qualified to become members of our
      board
      of directors and recommending them to our board for nomination. Our corporate
      governance and nominations committee is also responsible for implementing our
      Code of Business Conduct and Ethics.




***Compensation
      Committee***




Our
      compensation committee currently consists of Mr. Louis T. Hsieh,
      Mr. James Hsiang Ming Ho and Mr. Andrew Y. Yan, and has a formal
      written charter that sets forth its duties and powers. It is intended that
      our
      compensation committee will consist solely of independent directors within
      one
      year of the completion of our initial public offering. Our compensation
      committee assists the board in reviewing and approving our compensation
      structure, including all forms of compensation relating to our directors and
      executive officers, and administering our stock incentive plans.




**D.**  **Employees**




See
      “Item 4. Information on the Company—B. Business Overview—Employees.”




**E.**  **Share
      Ownership**




Under
      U.S. securities law, a person is deemed to be a “beneficial owner” of a security
      if that person has or shares “voting power,” which includes the power to vote or
      to direct the voting of such security, or “investment power,” which includes the
      power to dispose of or to direct the disposition of such security. A person
      is
      also deemed to be the beneficial owner of any securities of which that person
      has a right to acquire beneficial ownership within 60 days. Under these
      rules, more than one person may be deemed a beneficial owner of securities
      as to
      which such person has no economic interest.




The
      following table sets forth certain information with respect to the directors,
      officers and each of the persons known to us who own beneficially 5% or more
      of
      our ordinary shares as of May 31, 2008. The number of ordinary shares
      outstanding in calculating the percentages for each listed person includes
      the
      ordinary shares underlying share options held by such person. The percentage
      of
      beneficial ownership of each listed person is based on 57,374,049 ordinary
      shares outstanding (excluding the 1,922,883 ordinary shares that were issued
      and
      held for the Company’s account in preparation for exercise of share options by
      option holders under our employee stock incentive plans), as well as the
      ordinary shares underlying share options exercisable by such person within
      60 days of May 31, 2008.


72





**Shares beneficially owned****Number**
            
            **Percent****Directors
                and Executive Officers**Zengxiang
                LU(1)
            
            
            5,709,416
            
            
            10.0
            %Jianhua
                ZHU(2)
            
            
            5,709,416
            
            
            10.0
            %Hua
                GUO(3)
            
            
            2,400,416
            
            
            4.2
            %James
                Hsiang Ming HO
            
            
            —
            
            
            —Andrew
                Y. YAN(4)
            
            
            *
            
            
            *Louis
                T. Hsieh(5)
            
            
            *
            
            
            *Gongquan
                Wang
            
            
            —
            
            
            —Liang
                XU(6)
            
            
            *
            
            
            *Dong
                LI(7)
            
            
            *
            
            
            *Jian
                HAN(8)
            
            
            *
            
            
            *Huiqing
                CHEN(9)
            
            
            *
            
            
            *Directors
                and executive officers as a group(10)
            
            
            11,279,127
            
            
            19.7
            %**Principal
                Shareholders**Yuk
                Shing WONG(11)
            
            
            4,800,832
            
            
            8.4
            %China
                Capital(12)
            
            
            12,002,080
            
            
            20.9
            %China
                Cast(13)
            
            
            3,309,000
            
            
            5.8
            %Capital
                Funds(14)
            
            
            12,000,000
            
            
            20.9
            %SAIF(15)
            
            
            9,496,932
            
            
            16.6
            %




*
            Upon
                exercise of all share options exercisable within 60 days of May 31,
                2008, would beneficially own less than 1% of our ordinary
                shares.




(1)
            Represents
                20% of the 12,002,080 ordinary shares held by China Capital and 100%
                of
                the 3,309,000 ordinary shares held by China Cast. Dr. Zengxiang Lu,
                together with Mr. Jianhua Zhu, exercises investment and voting powers
                over these shares held by China Cast. Dr. Lu owns 20% of the equity
                interest of China Capital. He owns 50% of the equity interest of
                China
                Cast and disclaims beneficial ownership of those shares held by China
                Cast
                except to the extent of his pecuniary interest therein.




(2)
            Represents
                20% of the 12,002,080 ordinary shares held by China Capital and 100%
                of
                the 3,309,000 ordinary shares held by China Cast. Mr. Jianhua Zhu,
                together with Dr. Zengxiang Lu, exercises investment and voting
                powers over these shares held by China Cast. Mr. Zhu owns 20% of the
                equity interest of China Capital. He owns 50% of the equity interest
                of
                China Cast and disclaims beneficial ownership of those shares held
                by
                China Cast except to the extent of his pecuniary interest therein.




(3)
            Represents
                20% of the 12,002,080 ordinary shares held by China Capital. Mr. Hua
                Guo owns 20% of the equity interest of China
                Capital.




(4)
            Represents
                ordinary shares issuable upon exercise of options held by
                Mr. Yan.




(5)
            Represents
                ordinary shares issuable upon exercise of options held by Mr. Hsieh.




(6)
            Represents
                ordinary shares issuable upon exercise of options held by
                Mr. Xu.




(7)
            Represents
                the sum of ordinary shares issuable upon exercise of options held
                by
                Mr. Li.




(8)
            Represents
                the sum of ordinary shares issuable upon exercise of options held
                by
                Mr. Han.




(9)
            Represents
                ordinary shares issuable upon exercise of options held by
                Ms. Chen.




(10)
            Represents
                60% of the 12,002,080 ordinary shares held by China Capital (each
                of
                Dr. Lu, Mr. Zhu and Mr. Guo owns 20% of the equity interest
                of China Capital), 100% of the 3,309,000 ordinary shares held by
                China
                Cast (Dr. Lu and Mr. Zhu jointly exercise investment and voting
                powers over the shares held by China Cast), and ordinary shares issuable
                upon exercise of options held by Mr. Yan, Mr. Hsieh,
                Mr. Xu, Mr. Li, Mr. Han and
                Ms. Chen.




(11)
            Represents
                40% of the 12,002,080 ordinary shares held by China Capital. Mr. Yuk
                Shing Wong owns 40% of the equity interest of China
                Capital.




(12)
            The
                equity interests of China Capital are held as follows: 20% by
                Dr. Zengxiang Lu, 20% by Mr. Jianhua Zhu, 20% by Mr. Hua
                Guo and 40% by Mr. Yuk Shing Wong. Each of Dr. Lu, Mr. Zhu,
                Mr. Guo and Mr. Wong disclaims beneficial ownership of these
                shares held by China Capital except to the extent of his pecuniary
                interest therein. China Capital is a British Virgin Islands company
                and
                its address is: c/o Morgan & Morgan Trust Corporation Ltd., Pasea
                Estate, P.O. Box 3149, Road Town, Tortola, British Virgin
                Islands.




73


(13)
            Each
                of Dr. Zengxiang Lu and Mr. Jianhua Zhu owns 50% of the equity
                interests of China Cast Investment Holdings Limited, or China Cast,
                and
                they collectively exercise investment and voting power over the shares
                held by China Cast. Dr. Lu and Mr. Zhu hold the equity interests
                of China Cast on behalf of themselves and in trust for certain employees
                of our company. Each of Dr. Lu and Mr. Zhu disclaims beneficial
                ownership of these shares held by China Cast except to the extent
                of his
                pecuniary interest therein. China Cast is a British Virgin Islands
                company
                and its address is: c/o Morgan & Morgan Trust Corporation Ltd.,
                Pasea Estate, P.O. Box 3149, Road Town, Tortola, British Virgin
                Islands.




(14)
            Includes
                11,613,600 and 386,400 ordinary shares held by Capital International
                Private Equity Fund IV, L.P. and CGPE IV, L.P., respectively. Each
                of
                Capital International Private Equity Fund IV, L.P. and CGPE IV, L.P.
                is a
                limited partnership established in the State of Delaware, the United
                States. The address of each of the Capital Funds is 6455 Irvine Center
                Drive, Irvine, California 92618, U.S.A. The general partner of Capital
                International Private Equity Fund IV, L.P. is Capital International
                Investments IV, L.P. The general partner of Capital International
                Investments IV, L.P. is Capital International Investments IV, LLC,
                which
                is also the general partner of CGPE IV, L.P. Capital International
                Inc. is
                the investment manager of Capital International Private Equity Fund
                IV,
                L.P. as well as the managing member of Capital International Investments
                IV, LLC. Capital International, Inc. is a wholly owned subsidiary
                of
                Capital Group International, Inc. and a wholly owned indirect subsidiary
                of The Capital Group Companies, Inc.




(15)
            Represents
                ordinary shares issued to SAIF upon conversion of 8,600,000 Series A
                preferred shares held by SAIF. SAIF is a limited partnership organized
                in
                the Cayman Islands and has the following address: c/o Maples and
                Calder,
                Ugland House, P.O. Box 309, George Town, Grand Cayman, Cayman Islands.
                SOFTBANK Corporation is the sole shareholder of SB First Singapore
                Pte
                Ltd., which is a voting shareholder of Asia Infrastructure Investments
                Limited and exercises control with respect to Asia Infrastructure
                Investments Limited’s interest in SB Asia Pacific Investments Limited.
                Asia Infrastructure Investments Limited is the sole shareholder of
                SB Asia
                Pacific Investments Limited, the sole general partner of SB Asia
                Pacific
                Partners, L.P., which is the sole general partner of
                SAIF.




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




**A.**  **Major
      Shareholders**




Please
      refer to “Item 6. Directors, Senior Management and Employees—E. Share
      Ownership.”




None
      of
      our major shareholders has voting rights different from those of our other
      shareholders. To the best of our knowledge, we are not directly or indirectly
      controlled by another corporation, by any foreign government or by any other
      natural or legal person severally or jointly.




We
      are
      not aware of any arrangement that may, at a subsequent date, result in a change
      of control of our company.




For
      information regarding our shares held or beneficially owned by persons in the
      United States, see “Item 9. The Offer and Listing—A. Offering and Listing
      Details—Market Price Information” in this annual report.




**B.**  **Related
      Party Transactions**




**Super
      TV and N-S Digital TV Arrangements**




We
      operate our business in the PRC through N-S Digital TV, a PRC company owned
      by PRC citizens. We do not own any equity interest in N-S Digital TV.
      Through Super TV, our indirectly wholly owned subsidiary in the PRC, we have
      entered into a series of contractual arrangements with N-S Digital TV and
      its shareholders, including contracts relating to transfer of assets, supply
      of
      smart cards and related software products, provision of equipment and technical
      support and related services, technology development and licenses, and certain
      shareholder rights and corporate governance matters. In addition,
      N-S Digital TV and N-T Information Engineering have entered into
      certain agreements relating to transfer of assets, assignment of software
      copyrights and equity interests and trademark license.




The
      following is a summary of the material provisions of these agreements. For
      more
      complete information you should read these agreements in their
      entirety.




***Transfer
      of Assets and Equity Interests and Trademark License***




·
            ***Asset
                Transfer Agreement, dated June 7, 2004, between N-S Digital TV and
                N-T Information Engineering***.
                N-T Information Engineering transferred to N-S Digital TV assets
                and employees related to its smart card and digital television systems
                integration businesses (including assets and employees related to
                the
                design and delivery of systems integration products and services,
                software
                applications for CA systems, customer training and post-sale services)
                for
                an aggregate consideration of RMB10.6 million ($1.5 million).
                N-T Information Engineering covenanted not to engage in any business
                activities in the PRC or outside of the PRC that is directly or indirectly
                in competition with the business transferred to N-S Digital TV under
                this agreement.




74


·
            ***Equity
                Transfer Agreement, dated June 7, 2004, between N-S Digital TV and
                N-T Information Engineering***.
                N-T Information Engineering transferred to N-S Digital TV a 5%
                equity interest in Zhongshi Digital TV Technology Limited, or Zhongshi,
                for a consideration of RMB3.0 million ($0.4 million), subject to
                adjustment. In connection with this equity transfer, N-S Digital TV
                and N-T Information Engineering entered into an equity entrustment
                agreement, dated September 10, 2004, whereby N-T Information
                Engineering entrusted to N-S Digital TV the 5% equity interest
                acquired by N-S Digital TV, including shareholders’ voting rights
                over such equity interest, prior to the completion of the transfer
                of the
                title to such equity interest.




In
      addition, N-S Digital TV entered into an equity purchase entrustment
      agreement, dated April 1, 2005, with N-T Information Engineering to engage
      the latter to purchase an additional 25% equity interest in Zhongshi from a
      third party for N-S Digital TV’s benefits. This proposed transaction was
      abandoned subsequently and the total purchase consideration of
      RMB16.1 million ($2.2 million) paid through N-T Information
      Engineering was refunded to N-S Digital TV in 2006.




·
            ***Asset
                Purchase Agreement, dated June 8, 2004, between N-S Digital TV and
                Super TV***.
                N-S Digital TV transferred to Super TV the fixed assets relating to
                its digital television business for a purchase price of
                RMB5.7 million
                ($0.8 million).




·
            ***Equity
                Transfer Agreement, dated August 4, 2006, between N-T Information
                Engineering and N-S Digital TV***.
                N-T Information Engineering agreed to transfer to N-S Digital TV
                its 51% equity interest in Guokai for a consideration of
                RMB2.4 million ($0.3 million) which was subsequently reduced to
                RMB2.3 million ($0.3 million) by an agreement among
                N-S Digital TV, N-T Information Engineering and the other
                shareholder of Guokai. This transaction was approved by the relevant
                PRC
                governmental authorities and completed on July 27,
                2007.




·
            ***Asset
                Transfer Agreement, dated August 5, 2006, between N-T Information
                Engineering and N-S Digital TV, as amended on April 6,
                2007.***N-T Information Engineering transferred its set-top box-related
                assets and employees to N-S Digital TV for an initial purchase price
                of RMB29.4 million ($4.0 million). The initial purchase price is
                subject to an adjustment mechanism that will require N-T Information
                Engineering to refund to N-S Digital TV: (i) the difference between
                the initial purchase price and the first adjustment price, defined
                as ten
                times the total sales receipts during the period from August 1, 2006
                through December 31, 2006 with respect to the transferred set-top
                box
                business, if such difference is a positive number; and (ii) the difference
                between the initial purchase price and the second adjustment price,
                defined as six times the net profit of the transferred set-top box
                business for the year ending December 31, 2007, if the initial purchase
                price is greater than the second adjustment price. The net profit
                of the
                transferred set-top box business for the year ending December 31,
                2007 is
                required to be reviewed by a “big-four” accounting firm. As an adjustment
                to the initial purchase price, N-T Information Engineering refunded
                $1.5 million to N-S Digital TV in April 2007. In November 2007,
                N-S Digital TV waived the remaining amount that may be payable by
                N-T Information Engineering to Super TV under the adjustment
                mechanism. N-T Information Engineering covenanted not to engage in
                any business activities in the PRC or outside of the PRC that directly
                or
                indirectly is in competition with the business transferred to
                N-S Digital TV under this
                agreement.




·
            ***Fixed-assets
                Transfer Agreement, dated March 28, 2007, between N-S Digital TV and
                Super TV***.
                Super TV sold to N-S Digital TV certain fixed-assets relating to its
                digital television business for a cash consideration of
                RMB0.8 million
                ($0.1 million).




·
            ***Trademark
                Licensing Agreement entered into between N-T Information Engineering
                and N-S Digital TV in March 2007***.
                N-T Information Engineering granted N-S Digital TV a
                non-exclusive license to use certain trademarks free of charge. For
                details of this licensing agreement, see “Item 4. Information on the
                Company—B. Business Overview—Intellectual
                Property.”




75


**Technical
      Support, Smart Cards and Software, Licenses and Equipment**




·
            ***Equipment
                Leasing Agreement, dated June 7, 2004, between N-S Digital TV and
                Super TV***.
                Super TV leases to N-S Digital TV certain digital television
                business-related equipment for a monthly lease payment to be agreed
                by the
                parties on an arm’s-length basis. The aggregate lease payment payable for
                2007 was nil. Without Super TV’s written consent, N-S Digital TV may
                not sublease such equipment to any other parties. The term of the
                lease is
                ten years, which may be renewed by the parties one month before this
                agreement expires without any significant change to the terms and
                conditions of the original agreement. This agreement was terminated
                in
                March 2007.




·
            ***Technical
                Support and Related Services Agreement, dated June 7, 2004, between
                N-S Digital TV and Super TV***.
                Super TV exclusively provides N-S Digital TV and/or its customers
                with technical support, technical training, personnel services relating
                to
                N-S Digital TV’s marketing activities and services relating to the
                maintenance and optimization for the products and software of
                N-S Digital TV’s customers at N-S Digital TV’s request. The fees
                for such technical support and services are determined by agreement
                of the
                parties on an arm’s-length basis based on the nature and quality of
                individual technical support and services provided and payable within
                five days after the delivery of the support and services or at any
                other time agreed to by the parties. The amount payable by
                N-S Digital TV to Super TV was RMB0.3 million
                ($0.04 million) in 2007, with respect to technical support and
                related services provided under this agreement. The term of this
                agreement
                is 15 years, which may be renewed by the parties one month before
                this
                agreement expires without any significant change to the terms and
                conditions of the original
                agreement.




·
            ***Technology
                License Agreement, dated June 7, 2004, between N-S Digital TV and
                Super TV***.
                N-S Digital TV granted Super TV, free of charge, an exclusive license
                to use certain software copyrights, patents, unpatentable technology
                and
                technical secrets relating to the digital television business that
                was
                transferred from N-T Information Engineering to N-S Digital TV.
                The term of the license is ten
                years.




·
            ***Technology
                Development Agreement, dated June 7, 2004, between N-S Digital TV and
                Super TV***.
                N-S Digital TV engaged Super TV to develop all technology required by
                N-S Digital TV or its customers. The fees payable by N-S Digital
                TV to Super TV under the agreement will be calculated according to
                the
                following formula:




“Price
      at
      which N-S Digital TV sells the technology products developed by Super TV
      multiplied by a set percentage multiplied by the quantity of the products
      sold.”




The
      initial set percentage was 80%, subject to adjustments based on the level of
      technical sophistication and difficulty of particular development tasks, as
      determined on an arm’s-length basis. N-S Digital TV paid Super TV
      RMB0.25 million ($0.03 million) in 2007 under this agreement. The term
      of the agreement is ten years.




·
            ***Products
                and Software Purchase Agreement, dated June 7, 2004, between
                N-S Digital TV and Super TV***.
                N-S Digital TV exclusively purchased from Super TV all the smart
                cards and related software products required for its CA systems.
                The
                purchase price was RMB65 ($9) for each smart card (including related
                software) and may be adjusted by agreement between the parties on
                an
                arm’s-length basis annually. N-S Digital TV paid Super TV
                RMB317.3 million ($43.5 million) in 2007, primarily for
                purchases of smart cards and related software products under this
                agreement. The term of the agreement is 15
                years.




76


**Shareholder
      Rights and Corporate Governance**




***Option
      to Purchase Ownership Interest***




An
      equity
      transfer option agreement was entered into among Super TV, N-T Information
      Engineering and Ms. Li Yang on June 7, 2004, as amended by a supplemental
      agreement, dated September 1, 2005, among Super TV, N-T Information
      Engineering, Ms. Li Yang and N-S Digital TV, and further amended by a
      second supplemental agreement, dated August 18, 2007, among Super TV,
      N-T Information Engineering, Ms. Li Yang, N-S Digital TV and
      Ms. Wei Gao, referred to collectively as the Transfer Option Agreement.
      Pursuant to the Transfer Option Agreement, N-T Information Engineering and
      Ms. Wei Gao jointly grant Super TV an exclusive and irrevocable option to
      purchase all of their equity interests in N-S Digital TV at any time that
      Super TV deems fit. Super TV may purchase such equity interests by itself or
      designate another party to purchase such equity interests. The total
      consideration for the granting of the option was RMB10 ($1). The exercise price
      of the option will be determined among the parties at the time of the exercise,
      subject to the requirements of the PRC law or approval authorities with respect
      to the minimum purchase price and the basis for the determination of the
      purchase price. Following any exercise of the option, the parties will enter
      into a definitive equity interest transfer agreement within two days, or
      any period agreed to among the parties, after a written notice of exercise
      is
      delivered.




Pursuant
      to the Transfer Option Agreement, at all times before Super TV acquires 100%
      of
      the equity interests in N-S Digital TV, without Super TV’s consent,
      N-S Digital TV may not (i) amend its organizational documents, increase or
      reduce its registered capital or otherwise change its capital structure; (ii)
      sell, transfer, pledge or otherwise dispose of any legal or beneficial interest
      in any of its assets, business or revenues, or allow the creation of any
      encumbrance thereon; (iii) engage in any activities that may negatively impact
      its operations or the value of its assets; or (iv) incur, assume or guarantee
      any debts except in the ordinary course of business, extend any loan or credit
      to any person, enter into any material contracts, or engage in any merger or
      combination with, acquisition of, or make investment in, any other
      person.




Under
      the
      Transfer Option Agreement, N-T Information Engineering and Ms. Wei Gao
      undertake not to do any of the following without Super TV’s consent, at all
      times before Super TV acquires 100% of the equity interests in N-S Digital
      TV: (i) transfer or pledge to any third party their equity interests in
      N-S Digital TV; (ii) cause N-T Information Engineering and
      N-S Digital TV to issue new shares or engage in any transactions that will
      result in changes to their existing shareholding structures or transfer to
      any
      third party N-T Information Engineering’s or N-S Digital TV’s equity
      interests in their respective associated companies; (iii) receive any dividends,
      loan interest or other benefits from N-S Digital TV; or (iv) make any
      material adjustment or change to N-S Digital TV’s business and
      operations.




***Voting,
      Financial Support and Other Arrangements***




A
      business operating agreement, dated September 1, 2005, was entered into among
      Super TV, N-T Information Engineering, Ms. Li Yang and
      N-S Digital TV, as amended by a supplemental agreement, dated August 18,
      2007, among Super TV, N-S Information Engineering, Ms. Li Yang,
      N-S Digital TV and Ms. Wei Gao, referred to collectively as the
      Business Operating Agreement. Pursuant to the Business Operating Agreement,
      N-S Digital TV and its shareholders agreed to (i) accept the policies and
      guidelines furnished by Super TV from time to time with respect to the hiring
      and dismissal of employees, operational management and financial system of
      N-S Digital TV; (ii) appoint the candidates recommended by Super TV as
      directors of N-S Digital TV and appoint the senior management personnel of
      Super TV as the general manager, chief financial officer and other senior
      officers of N-S Digital TV based on Super TV’s recommendations; and (iii)
      seek a guarantee from Super TV first when any guarantee is required to secure
      performance by N-S Digital TV of any contract or working capital loans
      borrowed by N-S Digital TV. To date, N-S Digital TV has not sought any
      such guarantee from Super TV. In addition, Super TV has agreed with
      N-S Digital TV to serve as a guarantor of N-S Digital TV with respect
      to contracts or transactions entered into between N-S Digital TV and third
      parties in respect of N-S Digital TV’s business operations. However, as of
      the date of this annual report, N-S Digital TV has not asked Super TV to
      provide, and Super TV has not provided, any such guarantee in favor of a third
      party.


77


N-T Information
      Engineering executed a power of attorney, dated September 1, 2005, to appoint
      Dr. Zengxiang Lu as an attorney-in-fact to exercise all its voting rights
      as a shareholder of N-S Digital TV. Ms. Wei Gao executed a power of
      attorney, dated August 18, 2007, to appoint Mr. Ben Yam as an
      attorney-in-fact to exercise all her voting rights as a shareholder of
      N-S Digital TV. The authorization granted under the relevant power of
      attorney will terminate upon Dr. Zengxiang Lu or Mr. Ben Yam ceasing
      to be a director of Super TV. The term of each power of attorney is ten years,
      subject to earlier termination in the event of the termination of the business
      operating agreement among Super TV, N-S Digital TV, N-T Information
      Engineering and Ms. Wei Gao.




***Share
      Pledge Agreements***




Pursuant
      to the share pledge agreements, dated September 1, 2005, and August 18, 2007,
      N-T Information Engineering and Ms. Wei Gao have pledged all of their
      respective equity interests in N-S Digital TV to Super TV to secure the
      payment obligations of N-S Digital TV under certain contractual
      arrangements between N-S Digital TV and Super TV. Under such share pledge
      agreements, N-T Information Engineering and Ms. Wei Gao have agreed
      not to transfer their equity interests in N-S Digital TV or create, or
      allow the creation of, any pledge on their respective equity interests in
      N-S Digital TV that may affect Super TV’s interests without Super TV’s
      consent. Pursuant to such agreements, Super TV is entitled to receive the
      dividends on the pledged equity interests during the term of the
      pledges.




***Loan
      to N-T Information Engineering***




Pursuant
      to a loan agreement, dated April 4, 2007, between Super TV and
      N-T Information Engineering and a related entrusted loan agreement, dated
      April 12, 2007, among Super TV, N-T Information Engineering and the Bank of
      Beijing Shangdi Branch, Super TV, through the Bank of Beijing Shangdi Branch,
      provided a loan in the principal amount of RMB11.2 million
      ($1.5 million) to N-T Information Engineering to complete the plan
      that a portion of N-T Information Engineering’s capital contribution to
      N-S Digital TV be financed by Super TV to facilitate the establishment of
      N-S Digital TV as our vehicle to engage in the CA systems-related business
      in the PRC. N-T Information Engineering’s obligation to repay the loan
      shall be discharged only if: (i) N-T Information Engineering transfers its
      entire equity interests in N-S Digital TV to Super TV or its designee and
      (ii) all proceeds from the transfer of its equity interests in N-S Digital
      TV are used to offset its loan repayment obligation to Super TV or donated
      to
      N-S Digital TV as the parties may otherwise agree. The loan carries an
      interest rate of 5.75% per annum and has a term of one year, automatically
      renewable at Super TV’s option. As of December 31, 2007, the outstanding
      principal amount of the loan is RMB11.2 million
      ($1.5 million).




**Other
      Related Party Transactions**




***Shareholders
      Agreement***




Pursuant
      to the First Amended and Restated Shareholders Agreement of China Digital TV
      Holding Co., Ltd., or the Shareholders Agreement, dated September 13, 2007,
      among N-T Information Engineering, N-S Digital TV, CDTV BVI, China
      Capital, China Cast, SAIF, Capital Funds and certain other shareholders, at
      any
      time beginning six months after the closing of our initial public offering,
      each
      of SAIF, Capital Funds and China Capital may, on three occasions only, require
      us to effect the registration on a form other than Form F-3 of all or part
      of the registrable securities then outstanding. In addition, any holder of
      registrable securities may require us to effect a registration statement on
      Form F-3 (or any successor form or any comparable form for a registration
      in a jurisdiction other than the United States) for a public offering of
      registrable securities so long as we are entitled to use Form F-3 (or a
      comparable form) for such offering. Demand for a registration on Form F-3
      may be made on unlimited occasions, although we are not obligated to effect
      more
      than one such registration per shareholder in any six-month period.




Registrable
      securities are ordinary shares not previously sold to the public and issued
      or
      issuable or sold to SAIF, Capital Funds and China Capital, including: (a)
      ordinary shares issuable upon conversion or exercise of either (i) any of
      the Series A preferred shares, or (ii) any options or warrants to purchase
      ordinary shares or the Series A preferred shares of our company; (b)
      ordinary shares held by Capital Funds and China Capital; (c) ordinary shares
      issued pursuant to share splits, share dividends, and similar distributions
      to
      SAIF, Capital Funds and China Capital; and (d) any other securities of our
      company granted with registration rights pursuant to the Shareholders
      Agreement.


78


Holders
      of registrable securities also have “piggyback” registration rights, which may
      require us to register all or any part of the registrable securities then held
      by such holders when we register any of our ordinary shares.




We
      are
      generally required to bear all of the registration expenses incurred in
      connection with three demand registrations on a form other than Form F-3
      for each of SAIF, Capital Funds and China Capital, unlimited Form F-3 and
      piggyback registrations, except underwriting discounts and selling commissions,
      but including reasonable expenses of one counsel for the party exercising the
      registration right. The registration rights under the Shareholders Agreement
      shall terminate on the later of June 10, 2011 and three years after our initial
      public offering.




***Service
      Agreement***




Pursuant
      to a service agreement, dated April 2, 2007, between N-T Information
      Engineering and N-S Digital TV, N-T Information Engineering paid
      RMB1.0 million ($0.1 million) to N-S Digital TV as a one-off
      consideration for the services provided by N-S Digital TV to
      N-T Information Engineering in assisting the latter in performing certain
      customer agreements relating to the smart card and digital television businesses
      transferred by N-T Information Engineering to N-S Digital TV in June
      2004. Under the agreement for the business transfer, such customer agreements
      were not part of the transferred business and N-T Information Engineering
      undertook to continue to perform its obligations under those customer
      agreements.




***Interest
      Payment Agreement***




Pursuant
      to an agreement, dated November 30, 2006, between Super TV and N-S Digital
      TV, N-S Digital TV agreed to pay interest at a rate equal to commercial
      banks’ lending rate for one-year loans on the payments payable by
      N-S Digital TV to Super TV for the purchases of products from Super TV.
      Interest payable will start to accrue from the first day of the month following
      the confirmation of the corresponding sales until the actual payment. No
      interest was accrued as of December 31, 2007 under this agreement.




***Equity
      Transfer Agreement***




Pursuant
      to an agreement for equity transfer of Super TV, dated December 2007, between
      CDTV BVI and Golden Benefit, CDTV BVI agreed to transfer to Golden Benefit
      its
      100% equity interest in Super TV for a consideration of $4.5 million in
      cash. As a result of this transaction, Golden Benefit directly holds 100% equity
      interest in Super TV.




***Option
      Grant Agreement***




In
      2005,
      we granted options to purchase 143,474 ordinary shares to Tech Power
      Enterprises, a company affiliated with SAIF.




**C.**  **Interests
      of Experts and Counsel**




Not
      Applicable.




**Item
      8.**  **Financial
      Information**




**A.**  **Consolidated
      Statements and Other Financial Information**




**Consolidated
      Statements**




See
      “Item 18. Financial Statements.”


79


**Legal
      Proceedings**




We
      are
      not currently a party to any material legal proceeding, and, to our knowledge,
      there are no material legal proceedings threatened against us. From time to
      time, we may be subject to various claims and legal actions arising in the
      ordinary course of business.




**Dividend
      Policy**




We
      currently intend to retain all available funds and any future earnings for
      use
      in the operation and expansion of our business, and do not anticipate paying
      any
      cash dividends on our ordinary shares, or indirectly on our ADSs, for the
      foreseeable future. As a result of the substantial growth of our revenues in
      2005 and 2006, we generated cash in excess of our ordinary business needs.
      As we
      had not identified any immediate investment or acquisition opportunities at
      that
      time, we declared dividends to our shareholders in August 2006 and November
      2006
      and paid out such dividends in August 2006 and February 2007, respectively.
      We
      paid aggregate cash dividends of $10.0 million and $11.3 million in
      2006 and 2007, respectively.




Our
      board
      of directors has the discretion to determine the payment of any dividends.
      Even
      if our board of directors decides to pay dividends, the declaration and payment
      of dividends will depend upon, among other things, our future operations and
      earnings, capital requirements and surplus, our financial condition, contractual
      restrictions, general business conditions and other factors as our board of
      directors may deem relevant.




We
      may
      rely on our operating subsidiary, Super TV, for our cash needs, including the
      funds necessary to pay dividends to our shareholders. The payment of dividends
      by Super TV is subject to limitations. See “Item 3. Key
      Information—D. Risk Factors—Risks Relating to the People’s Republic of
      China—We may rely on dividends and other distributions on equity paid by our
      operating subsidiary to fund cash and financing requirements, and limitations
      on
      the ability of our operating subsidiary to pay dividends to us could have a
      material adverse effect on our ability to conduct our business.”




Holders
      of ADSs will be entitled to receive dividends, subject to the terms of the
      deposit agreement, less the fees and expenses payable under the deposit
      agreement. Cash dividends will be paid by the depositary to holders of ADSs
      in
      U.S. dollars. Other distributions, if any, will be paid by the depositary to
      holders of our ADSs in any means it deems legal, fair and practical.




**B.**  **Significant
      Changes**




There
      have been no significant changes since December 31, 2007, the date of the annual
      financial statements in this annual report.




**Item
      9.**  **The
      Offer and Listing**




**A.**  **Offering
      and Listing Details**




**Market
      and Share Price Information**




Our
      ADSs,
      each representing one ordinary share, have been listed on the New York Stock
      Exchange since October 5, 2007. Our ADSs trade under the symbol “STV.” The
      New York Stock Exchange is the principal trading market for our ADSs, which
      are
      not listed on any other exchanges in or outside the United
      States.


80


The
      high
      and low closing prices of our ADSs on the New York Stock Exchange since listing
      are as follows:




**Price per ADS (US$)****High**
            
            **Low**Quarterly:Fourth
                Quarter, 2007(1)
            
            
            51.08
            
            
            25.6First
                Quarter, 2008
            
            
            27.55
            
            
            15.6MonthlyDecember
                2007
            
            
            34.5
            
            
            26.98January
                2008
            
            
            27.55
            
            
            21.24February
                2008
            
            
            24.99
            
            
            21.74March
                2008
            
            
            21.26
            
            
            15.6April
                2008
            
            
            20.57
            
            
            15.47May
                2008
            
            
            20.29
            
            
            16.71June
                2008 (through June 16)
            
            
            17.44
            
            
            14.64





(1)
            Our
                ADSs commenced trading on the New York Stock Exchange on October
                5, 2007.




As
      of May
      31, 2008, a total of 20,090,037 ADSs were outstanding, excluding the 1,922,883
      ADSs that were held for our account in preparation for exercise of share options
      by option holders under our employee stock incentive plans. As of May 31, 2008,
      20,090,037 ordinary shares were registered in the name of Deutsche Bank Trust
      Company Americas, the depositary under the deposit agreement, excluding
      1,922,883 ordinary shares that were issued and held for our account in
      preparation for exercise of share options by option holders under our employee
      stock incentive plans.




**B.**  **Plan
      of Distribution**




Not
      Applicable.




**C.**  **Markets**




Our
      ADSs,
      each representing one ordinary share, have been listed on the New York Stock
      Exchange since October 5, 2007 under the symbol “STV.”




**D.**  **Selling
      Shareholders**




Not
      Applicable.




**E.**  **Dilution**




Not
      Applicable.




**F.**  **Expenses
      of the Issue**




Not
      Applicable.




**Item
      10.**   **Additional
      Information**




**A.**  **Share
      Capital**




Not
      Applicable.




**B.**  **Memorandum
      and Articles of Association**




We
      incorporate by reference into this annual report the description of our Second
      Amended and Restated Memorandum and Articles of Association contained in our
      registration statement on Form F-1 (File No. 333-146072), as amended. Our
      shareholders adopted our Second Amended and Restated Memorandum and Articles
      of
      Association on September 13, 2007.


81


**C.**  **Material
      Contracts**




Other
      than the contracts described elsewhere in this annual report, we and our
      operating companies have not entered into any material contracts that are not
      in
      the ordinary course of business within the two years preceding the date of
      this
      annual report.




**D.**  **Exchange
      Controls**




The
      Cayman Islands currently have no exchange control restrictions. Also see “Item
      4. Information on the Company—B. Business Overview—Regulation—Foreign Currency
      Exchange” for information of foreign currency exchange in the PRC.




**E.**  **Taxation**




The
      following discussion of the material Cayman Islands and United States federal
      income tax consequences of an investment in the ADSs is based upon laws and
      relevant interpretations thereof in effect as of the date of this annual report,
      all of which are subject to change. This summary does not deal with all possible
      tax consequences relating to an investment in the ADSs, such as the tax
      consequences under state, local and other tax laws.




**Cayman
      Islands Taxation**




To
      the
      extent the following discussion relates to Cayman Islands law with respect
      to
      the income tax consequence of an investment in our ADSs, it represents the
      opinion of Conyers Dill & Pearman.




The
      Cayman Islands currently levies no taxes on individuals or corporations based
      upon profits, income, gains or appreciations and there is no taxation in the
      nature of inheritance tax or estate duty or withholding tax applicable to us
      or
      to any holder of ADSs or ordinary shares. There are no other taxes likely to
      be
      material to us levied by the Government of the Cayman Islands except for stamp
      duties which may be applicable on instruments executed in, or after execution
      brought within the jurisdiction of, the Cayman Islands. No stamp duty is payable
      in the Cayman Islands on transfers of shares of Cayman Islands companies except
      those which hold interests in land in the Cayman Islands. The Cayman Islands
      is
      not party to any double tax treaties. There are no exchange control regulations
      or currency restrictions in the Cayman Islands.




Pursuant
      to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands,
      we have obtained an undertaking from the Governor-in-Cabinet:




·
            that
                no law which is enacted in the Cayman Islands imposing any tax to
                be
                levied on profits or income or gains or appreciations shall apply
                to the
                Company or its operations; and




·
            that
                the aforesaid tax or any tax in the nature of estate duty or inheritance
                tax shall not be payable on the shares, debentures or other obligations
                of
                the Company.




The
      undertaking for us is for a period of twenty years from May 1, 2007.




**United
      States Federal Income Taxation**




This
      section describes the material United States federal income tax consequences
      of
      owning ADSs. It applies to you only if you are a U.S. holder as defined below,
      and you hold your ADSs as capital assets for tax purposes. This section does
      not
      apply to you if you are a member of a special class of holders subject to
      special rules, including:




·
            a
                dealer in securities,




82


·
            a
                trader in securities that elects to use a mark-to-market method of
                accounting for securities holdings,




·
            a
                tax-exempt organization,




·
            a
                life insurance company,




·
            a
                person liable for alternative minimum
                tax,




·
            a
                person that actually or constructively owns 10% or more of our voting
                stock,




·
            a
                person that holds ADSs as part of a straddle or a hedging or conversion
                transaction, or




·
            a
                person whose functional currency is not the U.S.
                dollar.




This
      section is based on the Internal Revenue Code of 1986, as amended, its
      legislative history, existing and proposed Treasury regulations, published
      rulings and court decisions, all as currently in effect. These laws are subject
      to change, possibly on a retroactive basis. In addition, this section is based
      in part upon the representations of the depositary and the assumption that
      each
      obligation in the Deposit Agreement and any related agreement will be performed
      in accordance with its terms.




You
      are a
      U.S. holder if you are a beneficial owner of ADSs and you are:




·
            a
                citizen or resident of the United
                States,




·
            a
                corporation (or other entity taxable as a corporation for United
                States
                federal income tax purposes) organized under the laws of the United
                States, any State or the District of
                Columbia,




·
            an
                estate whose income is subject to United States federal income tax
                regardless of its source, or




·
            a
                trust if a United States court can exercise primary supervision over
                the
                trust’s administration and one or more United States persons are
                authorized to control all substantial decisions of the
                trust.




In
      general, and taking into account the earlier assumptions, for United States
      federal income tax purposes, if you hold ADRs evidencing ADSs, you will be
      treated as the owner of the shares represented by those ADRs. Exchanges of
      shares for ADRs, and ADRs for shares, generally will not be subject to United
      States federal income tax. The tax treatment of holding shares is identical
      to
      that of holding ADSs.




***Taxation
      of Dividends***




Under
      the
      United States federal income tax laws, and subject to PFIC rules discussed
      below, the gross amount of any dividend we pay out of our current or accumulated
      earnings and profits (as determined for United States federal income tax
      purposes) is subject to United States federal income taxation. If you are a
      non-corporate U.S. holder, including an individual, dividends paid to you in
      taxable years beginning before January 1, 2011 that constitute qualified
      dividend income will be taxable to you at a maximum tax rate of 15% provided
      that you hold the ADSs for more than 60 days during the 121-day period
      beginning 60 days before the ex-dividend date and meet other holding period
      requirements. Dividends we pay with respect to the ADSs generally will be
      qualified dividend income provided that, in the year that you receive the
      dividend, the ADSs are readily tradable on an established securities market
      in
      the United States. The New York Stock Exchange would likely qualify as an
      established securities market in the United States.




The
      dividend is taxable to you when the depositary receives the dividend, actually
      or constructively. The dividend will not be eligible for the dividends-received
      deduction generally allowed to United States corporations in respect of
      dividends received from other United States corporations. Distributions in
      excess of current and accumulated earnings and profits, as determined for United
      States federal income tax purposes, will be treated as a non-taxable return
      of
      capital to the extent of your basis in the ADSs and thereafter as capital
      gain.


83


Dividends
      will be income from sources outside the United States, but dividends paid in
      taxable years beginning before January 1, 2007 generally will be “passive” or
“financial services” income, and dividends paid in taxable years beginning after
      December 31, 2006 will, depending on your circumstances, be “passive” or
“general” category income which, in either case, is treated separately from
      other types of income for purposes of computing the foreign tax credit allowable
      to you.




***Taxation
      of Capital Gains***




Subject
      to the PFIC rules discussed below, if you sell or otherwise dispose of your
      ADSs, you will recognize capital gain or loss for United States federal income
      tax purposes equal to the difference between the U.S. dollar value of the amount
      that you realize and your tax basis, determined in U.S. dollars, in your ADSs.
      Capital gain of a non-corporate U.S. holder, including an individual, that
      is
      recognized in taxable years beginning before January 1, 2011 is generally taxed
      at a maximum rate of 15% where the holder has a holding period greater than
      one
      year. The gain or loss will generally be income or loss from sources within
      the
      United States for foreign tax credit limitation purposes.




**PFIC
      Rules** .
      We
      believe that our ADSs should not be treated as stock of a PFIC for United States
      federal income tax purposes, but this conclusion is a factual determination
      that
      is made annually and thus may be subject to change.




In
      general, we will be a PFIC with respect to you if for any taxable year in which
      you held our ADSs:




·
            at
                least 75% of our gross income for the taxable year is passive income,
                or




·
            at
                least 50% of the value, determined on the basis of a quarterly average,
                of
                our assets is attributable to assets that produce or are held for
                the
                production of passive income.




Passive
      income generally includes dividends, interest, royalties, rents (other than
      certain rents and royalties derived in the active conduct of a trade or
      business), annuities and gains from assets that produce passive income. If
      a
      foreign corporation owns at least 25% by value of the stock of another
      corporation, the foreign corporation is treated for purposes of the PFIC tests
      as owning its proportionate share of the assets of the other corporation, and
      as
      receiving directly its proportionate share of the other corporation’s
      income.




If
      we are
      treated as a PFIC, and you are a U.S. holder, you will be subject to special
      rules with respect to:




·
            any
                gain you realize on the sale or other disposition of your ADSs,
                and




·
            any
                excess distribution that we make to you (generally, any distributions
                to
                you during a single taxable year that are greater than 125% of the
                average
                annual distributions received by you in respect of the ADSs during
                the
                three preceding taxable years or, if shorter, your holding period
                for the
                ADSs).




Under
      these rules:




·
            the
                gain or excess distribution will be allocated ratably over your holding
                period for the ADSs,




·
            the
                amount allocated to the taxable year in which you realized the gain
                or
                excess distribution will be taxed as ordinary
                income,




·
            the
                amount allocated to each prior year, with certain exceptions, will
                be
                taxed at the highest tax rate in effect for that year,
                and




·
            the
                interest charge generally applicable to underpayments of tax will
                be
                imposed in respect of the tax attributable to each such
                year.




Special
      rules apply for calculating the amount of the foreign tax credit with respect
      to
      excess distributions by a PFIC.


84


If
      you
      own ADSs in a PFIC that are treated as marketable stock, you may make a
      mark-to-market election. If you make this election, you will not be subject
      to
      the PFIC rules described above. Instead, in general, you will include as
      ordinary income each year the excess, if any, of the fair market value of your
      ADSs at the end of the taxable year over your adjusted basis in your ADSs.
      These
      amounts of ordinary income will not be eligible for the favorable tax rates
      applicable to qualified dividend income or long-term capital gains. You will
      also be allowed to take an ordinary loss in respect of the excess, if any,
      of
      the adjusted basis of your ADSs over their fair market value at the end of
      the
      taxable year (but only to the extent of the net amount of previously included
      income as a result of the mark-to-market election). Your basis in the ADSs
      will
      be adjusted to reflect any such income or loss amounts.




In
      addition, notwithstanding any election you make with regard to the ADSs,
      dividends that you receive from us will not constitute qualified dividend income
      to you if we are a PFIC either in the taxable year of the distribution or the
      preceding taxable year. Moreover, your ADSs will be treated as stock in a PFIC
      if we were a PFIC at any time during your holding period in your ADSs, even
      if
      we are not currently a PFIC. For purposes of this rule, if you make a
      mark-to-market election with respect to your ADSs, you will be treated as having
      a new holding period in your ADSs beginning on the first day of the first
      taxable year beginning after the last taxable year for which the mark-to-market
      election applies. Dividends that you receive that do not constitute qualified
      dividend income are not eligible for taxation at the 15% maximum rate applicable
      to qualified dividend income. Instead, you must include the gross amount of
      any
      such dividend paid by us out of our accumulated earnings and profits (as
      determined for United States federal income tax purposes) in your gross income,
      and it will be subject to tax at rates applicable to ordinary
      income.




**F.**  **Dividends
      and Paying Agents**




Not
      Applicable.




**G.**  **Statement
      by Experts.**




Not
      Applicable.




**H.**  **Documents
      on Display**




You
      can
      read and copy documents referred to in this annual report that have been filed
      with the SEC at the SEC’s public reference room located at 100 F Street, NE,
      Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
      information on the public reference rooms and their copy charges. The SEC also
      maintains a web site at www.sec.gov that
      contains reports, proxy and information statements, and other information
      regarding registrants that make electronic filings with the SEC using its EDGAR
      system.




**I.**  **Subsidiary
      Information**




Not
      Applicable.




**Item
      11.**  **Quantitative
      and Qualitative Disclosures About Market Risks**




**Interest
      Rate Risk**




As
      of
      December 31, 2007, we had no short-term or long-term borrowings. If we borrow
      money in future periods, we may be exposed to interest rate risk. Our exposure
      to market risk for changes in interest rates relates primarily to the interest
      income generated by our cash deposits with our banks and short-term investments.
      We have not used any derivative financial instruments in our investment
      portfolio. Interest earnings instruments carry a degree of interest rate risk.
      We have not been exposed, nor do we anticipate being exposed to material risks
      due to changes in interest rates. However, our future interest income may fall
      short of expectations due to changes in interest rates.


85


**Foreign
      Currency Risk**




Although
      the conversion of the Renminbi is highly regulated in the PRC, the value of
      the
      Renminbi against the value of the U.S. dollar (or any other currency)
      nonetheless may fluctuate and be affected by, among other things, changes in
      the
      political and economic conditions in the PRC. Under the currency policy in
      effect in the PRC today, the Renminbi is permitted to fluctuate in value within
      a narrow band against a basket of certain foreign currencies. The PRC is
      currently under significant international pressures to liberalize this
      government currency policy, and if such liberalization were to occur, the value
      of the Renminbi could appreciate or depreciate against the U.S.
      dollar.




Fluctuations
      in exchange rates may affect our costs, profit margins and net income. For
      example, in 2007, substantially all of our revenues were denominated in Renminbi
      and 46.1% of our cost of revenues was denominated in U.S. dollars. In 2007,
      fluctuations in the exchange rates between the Renminbi and U.S. dollar and
      other foreign currencies resulted in an increase in our net income of
      approximately $754.




Fluctuations
      in exchange rates may also affect our balance sheet. For example, to the extent
      that we need to convert U.S. dollars received in our initial public offering
      into the Renminbi for our operations, appreciation of the Renminbi against
      the
      U.S. dollar would have an adverse effect on the Renminbi amount that we receive
      from the conversion. Conversely, if we decide to convert our Renminbi into
      U.S.
      dollars for the purpose of making payments for dividends on our ordinary shares
      or ADSs or for other business purposes, appreciation of the U.S. dollar against
      the Renminbi would have a negative effect on the U.S. dollar amount available
      to
      us. Considering the amount of our cash and cash equivalents as of December
      31,
      2007, a 1.0% appreciation of the Renminbi against the U.S. dollar will result
      in
      an estimated increase of approximately $220,238 in our total amount of cash
      and
      cash equivalents, and a 1.0% appreciation of the U.S. dollar against the
      Renminbi will result in a decrease of approximately $215,878 in our total amount
      of cash and cash equivalents.




Also
      see
“Item 3. Key Information—D. Risk Factors—Risks Relating to the People’s Public
      of China—Fluctuations in exchange rates could result in foreign exchange
      currency losses.”




We
      have
      not used any forward contracts or currency borrowings to hedge our exposure
      to
      foreign currency exchange risk and do not currently intend to do
      so.




**Inflation**




In
      recent
      years, the PRC has not experienced significant inflation, and thus inflation
      has
      not had a material impact on our results of operations. According to the
      National Bureau of Statistics of China, the change in Consumer Price Index
      in
      the PRC was 1.8%, 1.5% and 4.8% in 2005, 2006 and 2007,
      respectively.




**Item
      12.**  **Description
      of Securities Other than Equity Securities**




Not
      Applicable.




**PART
      II**




**Item
      13.**  **Defaults,
      Dividend Arrearages and Delinquencies**




None.




**Item
      14.**  **Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds**




**Material
      Modifications to the Rights of Security Holders**




See
      “Item 10. Additional Information” for a description of the rights of
      securities holders, which remain unchanged.


86


**Use
      of Proceeds**




The
      following use of proceeds information relates to our registration statement
      on
      Form F-1 (File No. 333-146072) filed by us in connection with our initial
      public offering. The registration statement, which became effective on October
      4, 2007, registered 13,800,000 of our ordinary shares, represented by 13,800,000
      ADSs, the aggregate offering price of which was $220.8 million. The offering
      was
      terminated after all of the registered securities were sold.




Morgan
      Stanley & Co. International plc and Credit Suisse Securities (USA) LLC
      acted as the representatives of the underwriters.




The
      amount of expenses incurred by us in connection with the issuance and
      distribution of the registered securities totaled approximately consists of
      approximately $15.5 million for underwriting discounts and commissions and
      approximately $3.1 million for other expenses. The net proceeds from our
      initial public offering to us, after deduction of fees and expenses, was
      approximately $202.2 million. As of May 31, 2008, approximately $465,579 of
      the net proceeds from our initial public offering have been used for general
      corporate purposes.




None
      of
      the payments described in this Item were direct or indirect payments to our
      directors, officers, general partners or their associates, or any persons owning
      10% or more of our ordinary shares, or our affiliates.




We
      are
      continuously examining opportunities to expand our business through merger
      and
      acquisitions, organic growth and strategic alliance with our business partners,
      and anticipate that the remaining amount of the net proceeds from our initial
      public offering may be used for such purposes.




**Item
      15.**  **Controls
      and Procedures**




This
      annual report does not include a report of management’s assessment regarding
      internal control over financial reporting or an attestation report of our
      registered public accounting firm due to a transition period established by
      rules of the Securities and Exchange Commission for newly public
      companies.




**Disclosure
      Controls and Procedures**




Our
      chief
      executive officer and chief financial officer have evaluated the effectiveness
      of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the
      end
      of the period covered by this annual report. They have concluded that, as of
      the
      end of the fiscal year covered by this annual report, our disclosure controls
      and procedures were adequate and effective to ensure that material information
      relating to us and our consolidated subsidiaries was made known to them by
      others within our company and our consolidated subsidiaries.




In
      connection with the audits of our consolidated financial statements for the
      year
      ended December 31, 2007, our independent registered public accounting firm
      identified several significant deficiencies in our internal control over
      financial reporting, as defined in the standards established by the Public
      Company Accounting Oversight Board (United States). See “Item 3. Key
      Information—D. Risk Factors—Risks Relating to Our Business and Industry—In the
      course of preparing our consolidated financial statements for the year ended
      December 31, 2007, several significant deficiencies in our internal control
      over
      financial reporting were noted. We expect to incur extra costs in implementing
      measures to address such deficiencies. If we fail to maintain an effective
      system of internal control over financial reporting, our ability to accurately
      and timely report our financial results or prevent fraud may be adversely
      affected. As a result, investor confidence and the trading price of our ADSs
      may
      be adversely impacted.”




**Changes
      in Internal Control over Financial Reporting**




There
      were no significant changes in our internal controls over financial reporting
      identified in connection with the evaluation required by paragraph (d) of 17
      CFR
      240.13a-15 or 240.15d-15 that occurred during the period covered by this annual
      report that have materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.


87




**Item
      16A.**  **Audit
      Committee Financial Expert** ****




Upon
      the
      completion of our initial public offering, Mr. Louis T. Hsieh has become a
      member of the Audit Committee. Our board determined that Mr. Hsieh, who is
      one of our independent directors under the applicable rules of the Securities
      and Exchange Commission and the New York Stock Exchange, is an audit committee
      financial expert within the meaning of the rules of the Securities and Exchange
      Commission. See “Item 6. Directors, Senior Management and
      Employees.”




**Item
      16B.**  **Code
      of Ethics** ****




We
      have
      adopted a Code of Business Conduct and Ethics that applies to all our directors,
      officers and employees, including our chief executive officer, chief financial
      officer and financial controller. We have filed the Code of Business Conduct
      and
      Ethics as an exhibit to this annual report.




**Item
      16C.**  **Principal
      Accountant Fees and Services** ****




Deloitte
      Touche Tohmatsu CPA Ltd. has served as our independent registered public
      accounting firm for each of the fiscal years ending on December 31, 2005,
      December 31, 2006, and December 31, 2007, for which audited financial statements
      appear in this annual report on Form 20-F. The auditor is appointed by our
      board of directors and will hold office until our board of directors appoint
      another auditor.




**Audit
      Fees**




The
      aggregate fees billed in each of 2007 and 2006 for professional services
      rendered by our principal accountant for the audit of our annual financial
      statements or services that are normally provided by the accountant in
      connection with statutory or regulatory filings or engagements were $1.3 million
      and $0.3 million, respectively.




**Audit-Related
      Fees**




The
      aggregate fees billed in each of 2007 and 2006 for assurance and related
      services rendered by our principal accountant that are reasonably related to
      the
      performance of the audit or review of our financial statements and are not
      reported under the caption “Audit Fees” above were $0.1 million and nil,
      respectively.




**Tax
      Fees**




The
      aggregate fees billed in each of 2007 and 2006 for professional services
      relating to tax compliance, tax advice and tax planning rendered by our
      principal accountant were $0.1 million and $0.1 million, respectively.




**All
      Other Fees**




The
      aggregate fees billed in each of 2007 and 2006 for products and services
      provided by our principal accountant, other than the services reported above
      under the captions “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” were nil
      and nil, respectively.




**Audit
      Committee’s Pre-approval Policies and Procedures**




The
      Audit
      Committee of our board of directors is directly responsible for the appointment,
      compensation, retention and oversight of the work of the independent auditors.
      Pursuant to the Audit Committee Charter adopted by the board of directors on
      September 13, 2007, the committee has the authority and responsibility to
      appoint, retain and terminate our independent auditors (subject, if applicable,
      to shareholder approval), and has sole authority to approve all audit engagement
      fees and terms. The Audit Committee has the power to pre-approve, or to adopt
      appropriate procedures to pre-approve, all audit and non-audit services to
      be
      provided by the independent auditors, and to consider whether the outside
      auditor’s provision of non-audit services to us is compatible with maintaining
      the independence of the outside auditors. The Audit Committee may, in its
      discretion, delegate to one or more of its members the authority to pre-approve
      any audit or non-audit services to be performed by the independent auditors,
      provided that such approvals are presented to the Audit Committee at its next
      scheduled meeting.


88


**Item
      16D.**  **Exemptions
      from the Listing Standards for Audit Committees** ****




Not
      Applicable.




**Item
      16E.**  **Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers**




None.




**PART
      III**




**Item
      17.**  **Financial
      Statements**




We
      have
      elected to provide financial statements and related information specified in
      Item 18.




**Item
      18.**  **Financial
      Statements**




See
      “Index to Consolidated Financial Statements” for a list of all financial
      statements filed as part of this annual report.




**Item
      19.**  **Exhibits**




**Number**
            
            **Description
                of Exhibit**1.1*
            
            Second
                Amended and Restated Memorandum and Articles of Association of China
                Digital TV Holding Co., Ltd.2.1*
            
            Specimen
                of Share Certificate.2.2*
            
            Form of
                Deposit Agreement, including form of American Depositary
                Receipts.2.3*
            
            First
                Amended and Restated Shareholders Agreement of China Digital TV Holding
                Co., Ltd., dated September 13, 2007, among Novel-Tongfang Information
                Engineering Co., Ltd., Beijing Novel-Tongfang Digital TV Technology
                Co.,
                Ltd., China Digital TV Technology Co., Ltd., China Capital Investment
                Holdings Limited, China Cast Investment Holdings Limited, SB Asia
                Infrastructure Fund L.P., Capital International Private Equity Fund
                IV,
                L.P., CGPE IV, L.P. and certain other shareholders.4.1*
            
            Asset
                Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Novel-Tongfang Information Engineering
                Co., Ltd.4.2*
            
            Equity
                Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Novel-Tongfang Information Engineering
                Co., Ltd. and related (i) Equity Entrustment Agreement, dated
                September 10, 2004, and (ii) Equity Purchase Entrustment Agreement,
                dated
                April 1, 2004, both between the same parties.4.3*
            
            Asset
                Purchase Agreement, dated June 8, 2004, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Beijing Super TV Co., Ltd.4.4*
            
            Equity
                Transfer Agreement, dated August 4, 2006, between Novel-Tongfang
                Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital
                TV
                Technology Co., Ltd. and related Equity Transfer Agreement, dated
                March
                15, 2007, among Novel-Tongfang Information Engineering Co., Ltd.,
                Beijing
                Novel-Tongfang Digital TV Technology Co., Ltd. and Panasonic Corporation
                of China.


89





**Number**
            
            **Description
                of Exhibit**4.5*
            
            Asset
                Transfer Agreement, dated August 5, 2006, between Novel-Tongfang
                Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital
                TV
                Technology Co., Ltd. and the Supplemental Agreement thereto, dated
                April
                6, 2007.4.6*
            
            Trademark
                Licensing Agreement entered into in March 2007 between Beijing
                Novel-Tongfang Information Engineering Co., Ltd. and Beijing
                Novel-Tongfang Digital TV Technology Co., Ltd.4.7*
            
            Equipment
                Leasing Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
                Ltd.4.8*
            
            Technical
                Support and Related Service Agreement, dated June 7, 2004, between
                Beijing
                Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super
                TV Co.,
                Ltd.4.9*
            
            Technology
                License Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
                Ltd.4.10*
            
            Technology
                Development Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
                Ltd.4.11*
            
            Products
                and Software Purchase Agreement, dated June 7, 2004, between Beijing
                Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super
                TV Co.,
                Ltd.4.12*
            
            Equity
                Transfer Option Agreement, dated June 7, 2004, among Beijing Super
                TV Co.,
                Ltd., Novel-Tongfang Information Engineering Co., Ltd. and Ms. Li
                Yang; the Supplemental Agreement thereto, dated September 1, 2005,
                among
                Beijing Super TV Co., Ltd., Novel-Tongfang Information Engineering
                Co.,
                Ltd., Ms. Li Yang and Beijing Novel-Tongfang Digital TV Technology
                Co., Ltd. and the No. 2 Supplemental Agreement thereto, dated
                August 18, 2007, among Beijing Super TV Co., Ltd., Novel-Tongfang
                Information Engineering Co., Ltd., Ms. Li Yang, Beijing
                Novel-Tongfang Digital TV Technology Co., Ltd. and Ms. Wei
                Gao.4.13*
            
            Share
                Pledge Agreement, dated September 1, 2005, between Novel-Tongfang
                Information Engineering Co., Ltd. and Beijing Super TV Co.,
                Ltd.4.14*
            
            Share
                Pledge Agreement, dated September 1, 2005, between Ms. Li Yang and
                Beijing Super TV Co., Ltd.; and the Supplemental Agreement thereto,
                dated
                August 18, 2007, among Ms. Li Yang, Beijing Super TV Co., Ltd. and
                Ms. Wei Gao.4.15*
            
            Business
                  Operating Agreement, dated September 1, 2005, among Beijing Super
                TV Co.,
                Ltd., Novel-Tongfang Information Engineering Co., Ltd., Ms. Li Yang
                and Beijing Novel-Tongfang Digital TV Technology Co., Ltd.; and the
                Supplemental Agreement thereto, dated August 18, 2007, among Beijing
                Super TV Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
                Ms. Li Yang, Beijing Novel-Tongfang Digital TV Technology Co., Ltd.
                and Ms. Wei Gao.4.16*
            
            Power
                of Attorney, dated September 1, 2005, of Novel-Tongfang Information
                Engineering Co., Ltd.4.17*
            
            Power
                of Attorney, dated August 18, 2007, of Ms. Wei
                Gao.4.18*
            
            Entrusted
                Loan Agreement, dated August 23, 2004, among Beijing Super TV Co.,
                Ltd.,
                Beijing Novel-Tongfang Digital TV Technology Co., Ltd. and Bank of
                Beijing, Shangdi Branch.4.19*
            
            Entrusted
                Loan Agreement, dated July 13, 2004, among Beijing Super TV Co.,
                Ltd.,
                Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
                Shangdi Branch.


90





**Number**
            
            **Description
                of Exhibit**4.20*
            
            Entrusted
                Loan Agreement, dated August 25, 2005, among Beijing Super TV Co.,
                Ltd.,
                Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
                Shangdi Branch.4.21*
            
            Loan
                Agreement, dated April 4, 2007, between Beijing Super TV Co., Ltd.
                and
                Novel-Tongfang Information Engineering Co., Ltd. and the related
                Entrusted
                Loan Agreement, dated April 12, 2007, among Beijing Super TV Co.,
                Ltd.,
                Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
                Shangdi Branch.4.22*
            
            Service
                Agreement, dated April 2, 2007, between Novel-Tongfang Information
                Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV Technology
                Co., Ltd.4.23*
            
            Interest
                Payment Agreement, dated November 30, 2006, between Beijing Novel-Tongfang
                Digital TV Technology Co., Ltd. and Beijing Super TV Co., Ltd.4.24*
            
            Form of
                Property Lease Agreement.4.25*
            
            Fixed
                Assets Transfer Agreement, dated March 28, 2007, between Beijing
                Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super
                TV Co.,
                Ltd.4.26*
            
            Form of
                Employment Agreement and related Form of Agreement on Confidentiality
                and Intellectual Property.4.27*
            
            Form of
                Non-Disclosure, Non-Competition, Commitment and Proprietary Information
                Agreement.4.28*
            
            Form of
                Indemnification Agreement for Directors.4.29*
            
            Amended
                and Restated 2005 Stock Incentive Plan of China Digital TV Holding
                Co.,
                Ltd. and form of stock option agreement.4.30††*
            
            Cooperation
                Agreement, dated January 5, 2007, between Beijing Novel-Tongfang
                Digital
                TV Technology Co., Ltd. and Jiangsu Qingda Science and Technology
                Industries Co., Ltd.4.31*
            
            Cooperation
                Agreement, dated July 18, 2007, between Beijing Novel-Tongfang Digital
                TV
                Technology Co., Ltd. and China Electronics Smart Card Co.,
                Ltd.4.32*
            
            2008
                Stock Incentive Plan of China Digital TV Holding Co.,
                Ltd.4.33
            
            Agreement
                for Equity Transfer of Beijing Novel-Super Digital TV Technology
                Co.,
                Ltd., dated December 2007, between China Digital TV Technology Co.,
                Ltd.
                and Golden Benefit Technology Co., Ltd.8.1
            
            List
                of Subsidiaries of China Digital TV Holding Co., Ltd.11.1*
            
            Code
                of Business Conduct and Ethics of China Digital TV Holding Co.,
                Ltd.12.1
            
            CEO
                Certification pursuant to Rule 13a - 14(a).12.2
            
            CFO
                Certification pursuant to Rule 13a - 14(a).13.1
            
            CEO
                Certification pursuant to Rule 13a - 14(b).13.2
            
            CFO
                Certification pursuant to Rule 13a - 14(b).23.1
            
            Consent
                of Deloitte Touche Tohmatsu CPA
                Ltd.


91





**Number**
            
            **Description
                of Exhibit**23.2
            
            Consent
                of American Appraisal China Limited.23.3
            
            Consent
                of King & Wood, PRC
                Lawyers.





††
            Portions
                of the agreement have been omitted pursuant to a confidential treatment
                request and have been filed with the Securities and Exchange Commission
                separately with a confidential treatment
                request.




*
            Previously
                filed as an exhibit to the Registration Statement on Form F-1 (File
                No. 333-146072) of China Digital TV Holding Co., Ltd. and incorporated
                herein by reference thereto.


92


**SIGNATURES**




The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to
      sign this annual report on its behalf.




**CHINA
                DIGITAL TV HOLDING CO., LTD.**By:
            /s/
                Jianhua ZhuName:
                Jianhua ZhuTitle:
                Director and Chief Executive
                Officer





Date:
      June 18, 2008







**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





CONTENTS
            
            PAGE(S)REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
            F-1CONSOLIDATED
                BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2007
            
            F-2CONSOLIDATED
                STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2006
                AND
                2007
            
            F-3CONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE
                YEARS
                ENDED DECEMBER 31, 2005, 2006 AND 2007
            
            F-4CONSOLIDATED
                STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005, 2006
                AND
                2007
            
            F-5NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            
            F-6
                - F-48





DTTBJ(A)(08)U0008





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





TO
      THE
      BOARD OF DIRECTORS AND SHAREHOLDERS OF


CHINA
      DIGITAL TV HOLDING CO., LTD .





We
      have
      audited the accompanying consolidated balance sheets of China Digital TV Holding
      Co., Ltd. (the "Company" or "CDTV Holding"), its subsidiaries and variable
      interest entity (collectively, the "Group") as of December 31, 2006 and 2007
      and
      the related consolidated statements of operations, shareholders' equity and
      comprehensive income, and cash flows for the years ended December 31, 2005,
      2006
      and 2007. These financial statements are the responsibility of the Group's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Group is not required to
      have,
      nor were we engaged to perform, an audit of its internal control over financial
      reporting. Our audits included consideration of internal control over financial
      reporting as a basis for designing audit procedures that are appropriate in
      the
      circumstances, but not for the purpose of expressing an opinion on the
      effectiveness of the Group's internal control over financial reporting.
      Accordingly, we express no such opinion. An audit also includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, such consolidated financial statements present fairly, in all material
      respects, the financial position of the Group as of December 31, 2006 and 2007,
      and the results of its operations and its cash flows for the years ended
      December 31, 2005, 2006 and 2007 in conformity with accounting principles
      generally accepted in the United States of America.





/s/
      Deloitte Touche Tohmatsu CPA Ltd.


Beijing,
      The People's Republic of China


June
      16,
      2008


F-1


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**CONSOLIDATED**  **BALANCE
      SHEETS**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





December
                31,2006
            
            2007ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            21,137
            
            $
            228,958Restricted
                cash
            
            
            51
            
            
            706Bank
                deposit maturing over three months
            
            
            -
            
            
            17,948Accounts
                receivable, net of allowance for doubtful accounts of $215 and $399
                as of
                December 31, 2006 and 2007 respectively
            
            
            2,862
            
            
            6,118Inventories
            
            
            2,759
            
            
            2,967Prepaid
                expenses and other current assets
            
            
            1,351
            
            
            1,254Amounts
                due from related parties
            
            
            1,668
            
            
            1,277Deferred
                costs-current
            
            
            580
            
            
            541Deferred
                income taxes-current
            
            
            63
            
            
            184Total
                current assets
            
            
            30,471
            
            
            259,953Property
                and equipment, net
            
            
            538
            
            
            1,379Intangible
                assets, net
            
            
            1,464
            
            
            1,002Goodwill
            
            
            432
            
            
            467Long-term
                investments
            
            
            -
            
            
            396Deferred
                costs-non-current
            
            
            600
            
            
            488Deferred
                income taxes - non-current
            
            
            -
            
            
            50Total
                assets
            
            $
            33,505
            
            $
            263,735TOTAL
                LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS'
                EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            885
            
            $
            485Accrued
                expenses and other current liabilities
            
            
            1,360
            
            
            4,757Deferred
                revenue-current
            
            
            6,900
            
            
            4,784Dividend
                payable
            
            
            11,300
            
            
            -Income
                tax payable
            
            
            -
            
            
            722Total
                current liabilities
            
            
            20,445
            
            
            10,748Deferred
                revenue-non-current
            
            
            1,079
            
            
            1,136Deferred
                income taxes - non-current
            
            
            40
            
            
            -Total
                Liabilities
            
            
            21,564
            
            
            11,884Commitments
                (Note 21)Minority
                interest
            
            $
            4,000
            
            $
            4,000Series
                A convertible redeemable preferred shares ($0.0005 par value; 8,600,000,
                and 8,600,000 shares authorized, 8,600,000 and nil shares issued
                and
                outstanding as of December 31, 2006 and 2007, respectively) (liquidation
                value of $10,320 and nil as of December 31, 2006 and 2007,
                respectively)
            
            
            16,078
            
            
            -Shareholders'
                equity (deficiency)Ordinary
                shares ($0.0005 par value; 91,400,000 and 200,000,000 shares authorized,
                34,000,000 and 57,296,932 shares issued and outstanding as of December
                31,
                2006 and 2007, respectively)
            
            
            17
            
            
            29Additional
                paid-in capital
            
            
            4,887
            
            
            224,863Statutory
                reserve
            
            
            2,353
            
            
            5,688Retained
                earning (accumulated deficit)
            
            
            (16,137
            )
            
            14,344Accumulated
                other comprehensive income
            
            
            743
            
            
            2,927Total
                shareholders' equity/(deficiency)
            
            
            (8,137
            )
            
            247,851TOTAL
                LIABILITIES, MINORITY INTEREST, SERIES A CONVERTIBLE REDEEMABLE PREFERRED
                SHARES AND SHAREHOLDERS' EQUITY
            
            $
            33,505
            
            $
            263,735





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


F-2


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**CONSOLIDATED**  **STATEMENTS
      OF OPERATIONS**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





For
                the years ended December 31,2005
            
            2006
            
            2007RevenuesProducts
            
            $
            9,291
            
            $
            26,443
            
            $
            49,741Services
            
            
            3,855
            
            
            4,182
            
            
            6,01113,146
            
            
            30,625
            
            
            55,752Business
                taxes
            
            
            (60
            )
            
            (255
            )
            
            (299
            )Net
                revenues
            
            
            13,086
            
            
            30,370
            
            
            55,453Cost
                of revenues (including share-based compensation of $10, $21 and $34
                for
                2005, 2006 and 2007, respectively)Products
            
            
            1,936
            
            
            4,726
            
            
            8,100Services
            
            
            1,967
            
            
            1,859
            
            
            2,1353,903
            
            
            6,585
            
            
            10,235Gross
                profit
            
            
            9,183
            
            
            23,785
            
            
            45,218Operating
                expensesResearch
                and development (including share-based compensation of $103, $167,
                and
                $391 for 2005, 2006 and 2007, respectively)
            
            
            1,818
            
            
            2,222
            
            
            4,643Selling
                and marketing (including share-based compensation of $32, $56 and
                $112 for
                2005, 2006 and 2007, respectively)
            
            
            1,328
            
            
            1,847
            
            
            3,758General
                and administrative (including share-based compensation of $67, $94,
                and
                $724 for 2005, 2006 and 2007, respectively)
            
            
            684
            
            
            1,228
            
            
            3,706Total
                operating expenses
            
            
            3,830
            
            
            5,297
            
            
            12,107Income
                from operations
            
            
            5,353
            
            
            18,488
            
            
            33,111Interest
                income
            
            
            117
            
            
            279
            
            
            2,790Other
                income
            
            
            -
            
            
            -
            
            
            263Recognition
                of the change in fair value of the warrant
            
            
            (18
            )
            
            (5,406
            )
            
            -Income
                before income taxes
            
            
            5,452
            
            
            13,361
            
            
            36,164Income
                tax:Income
                tax-current
            
            
            -
            
            
            -
            
            
            (2,554
            )Income
                tax-deferred
            
            
            66
            
            
            59
            
            
            212Total
                income tax
            
            
            66
            
            
            59
            
            
            (2,342
            )Net
                income before minority interest and net loss from equity method
                investments
            
            
            5,518
            
            
            13,420
            
            
            33,822Minority
                interest
            
            
            975
            
            
            430
            
            
            -Net
                loss from equity method investments
            
            
            -
            
            
            -
            
            
            (6
            )Net
                income
            
            
            4,543
            
            
            12,990
            
            
            33,816Cash
                dividend to participating preferred shareholder
            
            
            -
            
            
            (5,731
            )
            
            -Net
                income attributable to holders of ordinary shares
            
            $
            4,543
            
            $
            7,259
            
            $
            33,816Net
                income per share-basic ordinary shares
            
            
            0.11
            
            
            0.24
            
            
            0.74Net
                income per share-basic participating preferred shares
            
            
            0.11
            
            
            0.54
            
            
            0.66Net
                income per ordinary share-diluted
            
            $
            0.11
            
            $
            0.21
            
            $
            0.68Weighted
                average shares used in calculating basic net income per share-ordinary
                shares
            
            
            30,000,000
            
            
            30,488,889
            
            
            39,170,004Weighted
                average shares used in calculating basic net income per share-preferred
                shares
            
            
            10,000,000
            
            
            10,519,120
            
            
            7,389,394Weighted
                average shares used in calculating diluted net income per ordinary
                share
            
            
            30,000,000
            
            
            34,225,321
            
            
            42,773,590





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


F-3


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**CONSOLIDATED**  **STATEMENTS
      OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**


Accumulated
              
              
              
              Retained
              
              TotalAdditional
              
              other
              
              
              
              earning
              
              shareholders'Ordinary
              
              paid-in
              
              comprehensive
              
              Statutory
              
              (Accumulated
              
              equity/
              
              ComprehensiveShares
              
              Amount
              
              capital
              
              income
              
              reserve
              
              deficit)
              
              (deficiency)
              
              incomeBalance at
                  January 1, 2005
              
              
              30,000,000
              
              $
              15
              
              $
              (8
              )
              $
              -
              
              $
              -
              
              $
              (10,017
              )
              $
              (10,010
              )
              $
              -Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              212
              
              
              -
              
              
              -
              
              
              -
              
              
              212
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,543
              
              
              4,543
              
              
              4,543Provision
                  for statutory reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              388
              
              
              (388
              )
              
              -
              
              
              -Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              165
              
              
              -
              
              
              -
              
              
              165
              
              
              165Balance
                  at December 31, 2005
              
              
              30,000,000
              
              
              15
              
              
              204
              
              
              165
              
              
              388
              
              
              (5,862
              )
              
              (5,090
              )
              
              4,708Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              338
              
              
              -
              
              
              -
              
              
              -
              
              
              338
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,990
              
              
              12,990
              
              
              12,990Provision
                  for statutory reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,965
              
              
              (1,965
              )
              
              -
              
              
              -Dividend
                  paid
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,000
              )
              
              (10,000
              )
              
              -Dividend
                  declared
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (11,300
              )
              
              (11,300
              )
              
              -Conversion
                  of preferred shares into ordinary shares
              
              
              4,000,000
              
              
              2
              
              
              4,345
              
              
              -
              
              
              -
              
              
              -
              
              
              4,347
              
              
              -Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              578
              
              
              -
              
              
              -
              
              
              578
              
              
              578Balance
                  at December 31, 2006
              
              
              34,000,000
              
              
              17
              
              
              4,887
              
              
              743
              
              
              2,353
              
              
              (16,137
              )
              
              (8,137
              )
              
              13,568Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              1,261
              
              
              -
              
              
              -
              
              
              -
              
              
              1,261
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              33,816
              
              
              33,816
              
              
              33,816Provision
                  for statutory reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,335
              
              
              (3,335
              )
              
              -
              
              
              -Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              2,184
              
              
              -
              
              
              -
              
              
              2,184
              
              
              2,184Issuance
                  of ordinary shares upon IPO
              
              
              13,800,000
              
              
              7
              
              
              220,793
              
              
              -
              
              
              -
              
              
              -
              
              
              220,800
              
              
              -IPO
                  costs and related expenses
              
              
              -
              
              
              -
              
              
              (18,151
              )
              
              -
              
              
              -
              
              
              -
              
              
              (18,151
              )
              
              -Conversion
                  of preferred shares to ordinary shares
              
              
              9,496,932
              
              
              5
              
              
              16,073
              
              
              -
              
              
              -
              
              
              -
              
              
              16,078
              
              
              -Balance
                  at December 31, 2007
              
              
              57,296,932
              
              $
              29
              
              $
              224,863
              
              $
              2,927
              
              $
              5,688
              
              $
              14,344
              
              $
              247,851
              
              $
              36,000




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


F-4


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**CONSOLIDATED**  **STATEMENTS
      OF CASH FLOWS**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





For
                the years ended December 31,2005
            
            2006
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            4,543
            
            $
            12,990
            
            $
            33,816Minority
                interest
            
            
            975
            
            
            430
            
            
            -Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            586
            
            
            556
            
            
            926Stock-based
                compensation
            
            
            212
            
            
            338
            
            
            1,261Fair
                value change of warrant
            
            
            18
            
            
            5,406
            
            
            -Loss
                on disposal of property and equipment
            
            
            -
            
            
            36
            
            
            -Allowance
                for doubtful account
            
            
            -
            
            
            215
            
            
            184Write-down
                of inventory value
            
            
            -
            
            
            24
            
            
            137Accrue
                warranty
            
            
            9
            
            
            27
            
            
            (6
            )Equity
                investment loss from equity method investments
            
            
            -
            
            
            -
            
            
            6Accrue
                interest income
            
            
            -
            
            
            -
            
            
            (122
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (907
            )
            
            (1,046
            )
            
            (3,091
            )Inventories
            
            
            (142
            )
            
            (1,548
            )
            
            (161
            )Prepaid
                expenses and other current assets
            
            
            (85
            )
            
            (840
            )
            
            185Deferred
                cost
            
            
            (20
            )
            
            168
            
            
            226Amount
                due from related parties
            
            
            87
            
            
            (125
            )
            
            (70
            )Accounts
                payable
            
            
            237
            
            
            337
            
            
            (444
            )Income
                tax payable
            
            
            -
            
            
            -
            
            
            692Accrued
                expenses and other current liabilities
            
            
            266
            
            
            408
            
            
            2,533Deferred
                revenue
            
            
            220
            
            
            3,773
            
            
            (2,033
            )Deferred
                income taxes
            
            
            (66
            )
            
            (59
            )
            
            (201
            )Net
                cash provided by operating activities
            
            
            5,933
            
            
            21,090
            
            
            33,838CASH
                FLOWS FROM INVESTING ACTIVITIES:Payment/
                receipt from N-T Information Engineering on Zhongshi Digital TV Technology
                Co., Ltd. (see note 22b)
            
            
            (1,997
            )
            
            1,997
            
            
            -Short-term
                loan to N-T Information Engineering (see notes 22a and
                22c)
            
            
            (743
            )
            
            743
            
            
            (1,471
            )Long-term
                investments
            
            
            -
            
            
            -
            
            
            (399
            )Purchase
                of property and equipment
            
            
            (342
            )
            
            (376
            )
            
            (1,219
            )Payment/receipt
                for acquisition of set-top box design business (see note
                4)
            
            
            -
            
            
            (3,770
            )
            
            1,543Bank
                deposit maturing over three months
            
            
            -
            
            
            -
            
            
            (17,092
            )Restricted
                cash
            
            
            17
            
            
            (2
            )
            
            (625
            )Net
                cash used in investing activities
            
            
            (3,065
            )
            
            (1,408
            )
            
            (19,263
            )CASH
                FLOW FROM FINANCING ACTIVITIES:Capital
                injection by SAIF in N-S Digital TV
            
            
            -
            
            
            350
            
            
            -Capital
                injection by N-T Information Engineering in N-S Digital TV
            
            
            -
            
            
            276
            
            
            -Proceeds
                from issuance of ordinary shares
            
            
            3
            
            
            -
            
            
            220,800IPO
                costs and related expenses paid
            
            
            -
            
            
            -
            
            
            (17,470
            )Exercise
                of warrant
            
            
            -
            
            
            2,101
            
            
            -Dividend
                paid to ordinary shareholders
            
            
            -
            
            
            (7,309
            )
            
            (8,260
            )Dividend
                paid to participating preferred shareholders
            
            
            -
            
            
            (2,691
            )
            
            (3,040
            )Net
                cash provided by/ (used in) financing activities
            
            
            3
            
            
            (7,273
            )
            
            192,030Effect
                of exchange rate changes
            
            
            123
            
            
            456
            
            
            1,216NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            2,994
            
            
            12,865
            
            
            207,821CASH
                AND CASH EQUIVALENTS, BEGINNING OF THE YEAR
            
            
            5,278
            
            
            8,272
            
            
            21,137CASH
                AND CASH EQUIVALENTS, END OF THE YEAR
            
            $
            8,272
            
            $
            21,137
            
            $
            228,958SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONIncome
                tax paid
            
            
            -
            
            
            -
            
            
            1,942NON-CASH
                FINANCING ACTIVITIES:Conversion
                of Series A convertible redeemable preferred shares to ordinary
                shares
            
            
            -
            
            
            4,347
            
            
            16,078





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


F-5


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES**





China
      Digital TV Technology Co., Ltd. ("CDTV BVI") was incorporated in the British
      Virgin Islands ("BVI") as a limited liability company on March 9, 2004 by the
      shareholders of Novel-Tongfang Information Engineering Co., Ltd. ("N-T
      Information Engineering") and SB Asia Infrastructure Fund L.P. ("SAIF"), a
      third-party investor. The principal activities of CDTV BVI are to install and
      integrate conditional access systems, subscriber management systems and
      electronic program guidance systems to cable TV operators in the People's
      Republic of China ("PRC") and to sell digital TV intelligent cards ("smart
      cards") to these operators.





The
      development, production and sale of commercial encryption products in the PRC
      are regulated by the PRC National Encryption Administrative Bureau. Currently,
      foreign-invested enterprises incorporated in the PRC are not expressly
      prohibited from conducting encryption-related businesses; however, they may
      have
      difficulty obtaining the licenses or permits required for conducting such
      businesses from the Encryption Bureau due to the PRC Encryption Authority's
      generally restrictive approach towards foreign participation in the PRC
      encryption industry. In consideration of the PRC Encryption Authority's
      preferences, CDTV BVI conducts substantially all of its operations through
      its
      subsidiary, Beijing Super TV Co., Ltd. ("Super TV"), and Novel-Tongfang Digital
      TV Technology Co., Ltd. ("N-T Digital TV"), a variable interest entity ("VIE"),
      which is 100% owned by PRC citizens and has obtained the license to operate
      such
      business in the PRC. N-T Digital TV was established in the PRC on May 31, 2004
      by the shareholders of N-T Information Engineering (who contributed 75% of
      the
      paid-in capital) and Ms. Li Yang, who is a PRC citizen representing SAIF (which
      contributed 25% of the paid-in capital). N-T Digital TV was subsequently renamed
      to Beijing Novel-Super Digital TV Technology Co., Ltd. ("N-S Digital TV") in
      December 2007. In August 2007, Ms. Li Yang transferred her entire equity
      interest in N-S Digital TV to Ms. Wei Gao, a PRC citizen representing SAIF.
      CDTV
      BVI does not have a direct equity interest in N-S Digital TV, but instead enjoys
      the economic benefits of N-S Digital TV through a series of contractual
      arrangements entered into between Super TV and N-S Digital TV.





A
      majority of the Group's customers are provincial and municipal cable network
      operators in the PRC, which are primarily state-owned enterprises (SOEs). Due
      to
      the above-mentioned regulatory considerations, these SOEs tend to purchase
      CA
      systems from PRC local companies, rather than from companies with foreign
      investment such as Super TV. In order to comply with PRC regulations and
      participate in the smart card and CA systems business (for the benefit of the
      Group), the Company arranged for Super TV to enter into the following agreements
      with N-S Digital TV:





Ÿ
            **Asset
                Purchase Agreement:**N-T Information Engineering transferred to Super TV the fixed assets
                relating to its smart card and CA systems business for a purchase
                price of
                $698.





Ÿ
            **Equipment
                Leasing Agreement:**Super TV leases to N-S Digital TV certain smart card and CA systems
                business-related equipment. The term of the lease is ten years, which
                may
                be renewed by the parties one month before this agreement expires
                without
                any significant change to the terms and conditions of the original
                agreement. This agreement was terminated in March
                2007.


F-6


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES -
                continued**





Ÿ
            **Technical
                Support and Related Services Agreement:**Super TV exclusively provides N-S Digital TV and/or its customers
                with
                technical support, technical training, personnel services relating
                to N-S
                Digital TV's marketing activities and services relating to the maintenance
                and optimization for the products and software of N-S Digital TV's
                customers at N-S Digital TV's
                request.





Ÿ
            **Technology
                License Agreement:**N-S Digital TV granted Super TV, free of charge, an exclusive license
                to
                use certain software copyrights, patents, unpatentable technology
                and
                technical secrets relating to the smart card and CA systems business
                that
                was transferred from N-T Information Engineering to N-S Digital TV.
                The
                term of the license is ten years.





Ÿ
            **Technology
                Development Agreement:**N-S Digital TV engaged Super TV to develop all technology required
                by N-S
                Digital TV or its customers.





Ÿ
            **Products
                and Software Purchase Agreement:**N-S Digital TV exclusively purchased from Super TV all the smart
                cards and
                related software products required for its CA systems. The purchase
                price
                was agreed by the two parties and may be adjusted by agreement between
                the
                parties annually on an arm's-length basis. The term of the agreement
                is 15
                years.





Ÿ
            **Equity
                Transfer Option Agreement:**Pursuant to the transfer option agreement, N-T Information Engineering
                and
                Ms. Wei Gao (representing SAIF) jointly granted Super TV an exclusive
                and
                irrevocable option to purchase all of their equity interest in N-S
                Digital
                TV at any time that Super TV deems fit. Super TV may purchase such
                equity
                interest by itself or designate another party to purchase such equity
                interests. The exercise price of the option will be determined among
                the
                parties at the time of the exercise and should satisfy the requirements
                of
                the PRC law or approval authorities with respect to the minimum purchase
                price and the basis for the determination of the purchase
                price.





Ÿ
            **Business
                Operating Agreement**:
                N-T Information Engineering, Ms. Wei Gao and N-S Digital TV agreed
                to (1)
                accept the policies and guidelines furnished by Super TV from time
                to time
                with respect to the hiring and dismissal of employees, operational
                management and financial systems of N-S Digital TV, (2) appoint the
                candidates recommended by Super TV as directors of N-S Digital TV
                and
                appoint the senior management personnel of Super TV as the general
                manager, chief financial officer and other senior officers of N-S
                Digital
                TV based on Super TV's recommendations, and (3) seek a guarantee
                from
                Super TV first when any guarantee is required to secure performance
                by N-S
                Digital TV of any contract or working capital loans borrowed by N-S
                Digital TV. In return, N-S Digital TV agreed to pledge its assets
                and
                receivables to Super TV.


F-7


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES -
                continued**





Ÿ
            **Share
                Pledge Agreements**:
                Pursuant to the share pledge agreements, dated September 1, 2005
                and
                August 18, 2007, respectively, N-T Information Engineering and Ms.
                Wei Gao
                have pledged all of their respective equity interests in N-S Digital
                TV to
                Super TV to secure the payment obligations of N-S Digital TV under
                certain
                contractual arrangements between N-S Digital TV and Super TV. Under
                such
                share pledge agreements, N-T Information Engineering and Ms. Wei
                Gao have
                agreed not to transfer their equity interests in N-S Digital TV or
                create,
                or allow the creation of, any pledge on their respective equity interest
                in N-S Digital TV that may affect Super TV's interests without Super
                TV's
                consent. Pursuant to such agreements, Super TV is entitled to receive
                the
                dividends on the pledged equity interests during the term of the
                pledges.





Pursuant
      to such agreements, Super TV has received 100% of N-S Digital TV shareholders'
      voting interest in N-S Digital TV and has the right to receive any dividends
      declared and paid by N-S Digital TV. In addition, since its formation in May
      2004, N-S Digital TV has not declared or distributed any dividends to any
      shareholders, and the shareholders of Super TV do not have an intention for
      N-S
      Digital TV to declare or distribute any dividends in the future. As a result,
      Super TV absorbs a majority of N-S Digital TV's expected residual returns and
      holds variable interests in N-S Digital TV. Since Super TV is the primary
      beneficiary of the VIE arrangement, it consolidates N-S Digital TV under
      Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46(R),
      "Consolidation of Variable Interest Entities-an interpretation of Accounting
      Research Bulletin ("ARB') No. 51", which requires certain variable interest
      entities to be consolidated by the primary beneficiary of the entity if the
      equity investors in the entity do not have characteristics of a controlling
      financial interest or do not have sufficient equity at risk for the entity
      to
      finance its activities without additional subordinated financial support from
      other parties.





In
      April
      2007, the shareholders of CDTV BVI established China Digital TV Holding Co.,
      Ltd. ("CDTV Holding") as a new holding Company of CDTV BVI and its subsidiary
      and VIE, CDTV Holding was incorporated in the Cayman Islands.





In
      May
      2007, CDTV BVI executed a 40-for-1 share split which applies to all of its
      ordinary shares, Series A convertible redeemable preferred shares, warrants
      and
      stock options. The impact of the share split has been retroactively reflected
      in
      the Group's consolidated financial statements.





Following
      this share split, the shareholders of CDTV BVI exchanged all of their shares
      of
      CDTV BVI for shares of CDTV Holding in proportion to their percentage interests
      in CDTV BVI. As a result, CDTV BVI became a wholly owned subsidiary of CDTV
      Holding. CDTV Holding, CDTV BVI, Super TV and N-S Digital TV are collectively
      referred to as the Group. As the incorporation of CDTV Holding is a transaction
      between entities under common control, for financial statement presentation
      purposes, the Group prepared its consolidated financial statements with CDTV
      Holding as the holding company for the years ended December 31, 2005, 2006
      and
      2007 as if CDTV Holding had been in existence for all periods
      presented.


F-8


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES -
                continued**





In
      October 2007, the Group completed an initial public offering ("IPO") of
      13,800,000 American depositary shares representing 13,800,000 of the Company's
      ordinary shares. Upon the completion of the IPO, all of the Company's
      outstanding 8,600,000 preferred shares were automatically converted into
      9,496,932 ordinary shares.





In
      December 2007, the Group established two 100% owned subsidiaries, Golden Benefit
      and N-S Media Investment in Hong Kong and the PRC respectively.





As
      of
      December 31, 2007, CDTV Holding's subsidiaries and VIE include the following
      entities:





Subsidiary
            
            Date
                of incorporation/establishment
            
            Place
                of incorporation/ establishmentCDTV
                BVI
            
            March
                9, 2004
            
            BVISuper
                TV
            
            May
                31, 2004
            
            the
                PRCGolden
                Benefit
            
            December
                6, 2007
            
            Hong
                KongN-S
                Media Investment
            
            December
                19, 2007
            
            the
                PRCVIEN-S
                Digital TV
            
            May
                31, 2004
            
            the
                PRC





**Recapitalization**





Prior
      to
      its transfer to N-S Digital TV in June 2004, the smart card and CA systems
      business was owned and operated by N-T Information Engineering. N-T Information
      Engineering is a private company incorporated in the PRC and was engaged in
      the
      business of development and sales of digital television technologies and
      broadband and satellite data broadcasting systems. It was formed in 1998 and
      in
      June 2004 it was owned by Yunxi Group, Dongguan Huarong Science and Technology
      Company ("Huarong") and Beijing Huakai Science and Technology Company ("Huakai")
      with an equity interest of 70%, 19% and 11%, respectively. Yunxi Group is a
      PRC
      stateowned enterprise. Huarong was owned by five individuals, Dr. Zengxiang
      Lu,
      Mr. Jianhua Zhu, Mr. Hua Guo, Mr. Jiang Lin and Mr. Weixuan Zhang, with 20%
      equity interest each. Huakai was owned by three individuals, Dr. Zengxiang
      Lu,
      Mr. Jianhua Zhu and Mr. Zhenwen Liang, with 33.3% equity interest each. N-T
      Information Engineering was therefore controlled by Yunxi Group.





Through
      the following series of integrated steps, the business was transferred from
      N-T
      Information Engineering to N-S Digital TV and N-S Digital TV became an entity
      consolidated by Super TV and ultimately by CDTV Holding. This series of
      interrelated and anticipated transactions has been accounted for as a
      recapitalization of the smart card and CA systems business with no change in
      basis because no single shareholder obtained control of CDTV
      BVI.


F-9


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES -
                continued**





**Recapitalization** -
      continued





·
            In
                March 2004, CDTV BVI was formed with a nominal cash investment by
                all but
                two of the ultimate owners of N-T Information Engineering. In June
                2004,
                SAIF contributed $5,000 to CDTV BVI in exchange for a 25% interest
                in
                convertible redeemable preferred shares of CDTV BVI. Upon SAIF's
                investment, CDTV BVI was owned by Yunxi Group, China Capital, China
                Cast
                and SAIF with an equity interest (on an as-converted basis) of 30%,
                40%,
                5% and 25%, respectively. China Capital was owned by three individuals,
                Dr. Zengxiang Lu, Mr. Jianhua Zhu and Mr. Hua Guo, with 33.3% equity
                interest each. China Cast was owned by three individuals, Dr. Zengxiang
                Lu, Mr. Jianhua Zhu and Mr. Zhenwen Liang, with 33.3% equity interest
                each. No one shareholder therefore controlled CDTV
                BVI.





·
            In
                May 2004, N-T Information Engineering and SAIF formed N-S Digital
                TV, a
                PRC entity.





·
            On
                June 7, 2004, N-T Information Engineering and N-S Digital TV entered
                into
                an asset transfer agreement, whereby N-T Information Engineering
                transferred its smart card and CA systems business including tangible
                assets, patents and software to N-S Digital TV for a cash consideration
                of
                $1,284. The carrying value of the assets transferred was $946 and
                the
                difference between the cash consideration and the carrying value
                of the
                assets transferred ($338) was recorded as a distribution to the
                shareholders of N-T Information
                Engineering.





·
            On
                June 7, 2004, CDTV BVI formed Super TV and Super TV and N-S Digital
                TV
                entered into the contractual arrangements described above under which
                Super TV enjoys the economic ownership of N-S Digital
                TV.





The
      Group
      has consolidated the results of the smart card and CA systems business for
      the
      years ended December 31, 2004, 2005 and 2006 and 2007. As N-S Digital TV was
      established on May 31, 2004 with no prior operating activities, for the purpose
      of financial statement presentation, the smart card and CA systems related
      financial information, including revenues, costs and expenses, that was
      originally recorded on N-T Information Engineering's books before the transfer
      of its smart card and CA systems business to N-S Digital TV in early June 2004
      was carved out from N-T Information Engineering's historical financial
      statements and included in the Group's consolidated financial
      statements.


F-10


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**








**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES -
                continued**





**Recapitalization** -
      continued





In
      addition, at the time that N-T Information Engineering agreed to transfer its
      smart card and CA systems business to N-S Digital TV, there was a list of
      uncompleted sales agreements (the "sales agreements") entered into by N-T
      Information Engineering with its customers. It was agreed that N-T Information
      Engineering would continue to fulfill the sales agreements and receive the
      full
      economic benefits. It was also agreed that the economic benefits (net income)
      derived from the sales agreements would belong solely to N-T Information
      Engineering and N-T Information Engineering would use the net cash generated
      from the sales agreements after deducting payments on purchases and direct
      costs
      and expenses related to the sales agreements as its capital contributions to
      N-S
      Digital TV. As a result, the net income generated from the fulfillment of the
      sales agreements of $1,319 in 2004, $975 in 2005, $430 in 2006, respectively,
      is
      presented as net income attributable to the minority interest in the
      consolidated statements of operations. In addition, N-T Information Engineering
      contributed $276 in cash in 2006. The $3,000 capital contribution made by N-T
      Information Engineering was presented by the Group as a minority interest as
      the
      funds were put in by N-T Information Engineering's shareholders without recourse
      to CDTV BVI.





In
      June
      2004, SAIF made a capital contribution of $5,000 in CDTV BVI and received Series
      A convertible redeemable preferred shares and a detachable warrant on
      convertible redeemable preferred shares in CDTV BVI. SAIF also made a capital
      contribution of $1,000 in N-S Digital TV through a nominee, initially Ms. Li
      Yang and, from August 2007, Ms. Wei Gao. The Company allocated the $5,000
      capital contribution in CDTV BVI between the preferred shares and the warrant
      based on the respective fair value of each instrument when the preferred shares
      and the warrant were issued in June 2004. See Note 17 and Note 18 for a more
      detailed description of this transaction and the related accounting for the
      preferred shares and the warrant. The $1,000 capital injected by SAIF was also
      presented as a minority interest in the consolidated balance sheet as this
      was
      injected by SAIF using its own funds without recourse to CDTV BVI.








2.
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





***(a)***
            ***Basis
                of presentation***





The
      consolidated financial statements of the Group have been prepared in accordance
      with the accounting principles generally accepted in the United States of
      America ("US GAAP").





***(b)***
            ***Basis
                of consolidation***





The
      consolidated financial statements of the Group include the financial statements
      of CDTV Holding, its subsidiaries and its variable interest entity. All
      inter-company transactions and balances have been eliminated upon
      consolidation.


F-11


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued**





***(c)***
            ***Cash
                and cash equivalents***





Cash
      and
      cash equivalents consist of cash on hand and highly liquid investments which
      are
      unrestricted as to withdrawal or use and which have maturities of three months
      or less when purchased.





***(d)***
            ***Use
                of estimates***





The
      preparation of financial statements in conformity with US GAAP requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and revenues and expenses in the financial statements
      and
      accompanying notes. Significant accounting estimates reflected in the Group's
      consolidated financial statements include useful life of CA system, allowance
      for doubtful accounts, accrual of warranty, the useful lives and impairment
      of
      property and equipment, useful lives and impairment of intangible assets,
      allowance for obsolete inventories, valuation allowance for deferred tax assets,
      impairment of goodwill, collectibility of amounts due from related parties,
      impairment of long-term investments, and the fair values of Series A convertible
      redeemable preferred shares and the detachable warrant.





***(e)***
            ***Significant
                risks and
                uncertainties***





The
      Group
      participates in a dynamic industry and believes that the following risks, among
      other things, could have a material adverse effect on the Group's future
      financial position, results of operations, or cash flows: the Group's limited
      operating history, advances and trends in new technologies and industry
      standards, competition from other competitors, regulatory or other PRC-related
      factors, risks associated with the Group's ability to attract and retain
      employees necessary to support its growth, risks associated with the Group's
      growth strategies, and general risks associated with the digital TV
      industry.





***(f)***
            ***Inventories***





Inventories
      are stated at the lower of cost (weighted average) or market value. The Group
      writes down the inventory for excess and obsolete inventories determined
      primarily by future demand forecasts. For the years ended December 31, 2005,
      2006 and 2007, the Group wrote down inventory by $Nil, $24 and $137
      respectively.





***(g)***
            ***Property
                and equipment, net***





Property
      and equipment are carried at cost less accumulated depreciation and
      amortization. Depreciation and amortization are calculated on a straight-line
      basis over the following estimated useful lives:





Computer
                and electronic equipment
            
            3
                yearsFurniture
                and fixture
            
            5
                yearsLeasehold
                improvement
            
            shorter
                of useful life of the asset or the lease termMotor
                vehicles
            
            5
                years


F-12


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued**





***(h)***
            ***Impairment
                of long-lived assets***





The
      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 flows 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 did not incur any impairment
      loss for the years ended December 31, 2005, 2006 and 2007,
      respectively.





***(i)***
            ***Goodwill***





Goodwill
      is not amortized but tested for impairment on an annual basis and between annual
      tests in certain circumstances. Goodwill impairment is tested using a two-step
      approach. The first step compares the fair value of a reporting unit to its
      carrying amount, including goodwill. If the fair value of the reporting unit
      is
      greater than its carrying amount, goodwill is not considered impaired and the
      second step is not required. If the fair value of the reporting unit is less
      than its carrying amount, the second step of the impairment test measures the
      amount of the impairment loss, if any, by comparing the implied fair value
      of
      goodwill to its carrying amount. If the carrying amount of goodwill exceeds
      its
      implied fair value, an impairment loss is recognized equal to that excess.
      The
      implied fair value of goodwill is calculated in the same manner that goodwill
      is
      calculated in a business combination, whereby the fair value of the reporting
      unit is allocated to all of the assets and liabilities of that unit, with the
      excess purchase price over the amounts assigned to assets and liability
      representing the implied fair value of goodwill. Estimating fair value is
      performed by utilizing various valuation techniques, with the primary technique
      being a discounted cash flow. The Group has one reporting unit and has
      determined to perform the annual impairment test on December 31 of each year.
      The Group did not incur any impairment loss on goodwill for the years ended
      December 31, 2006 or 2007. Exchange realignment of $35 was debited to goodwill
      for year ended December 31, 2007.





***(j)***
            ***Long-term
                investments***





Investee
      companies over which the Company has an equity interest over 50%, but the
      minority shareholders have substantive
      rights to participate in significant operating decisions are accounted for
      using
      the equity method under Financial Accounting Standards Board ("FASB") Emerging
      Issues Task Force 96-16 ("EITF 96-16") "Investor's Accounting for an Investee
      When the Investor Has a Majority of the Voting Interest but the Minority
      Shareholder or Shareholders Have Certain Approval or Veto
      Rights"


F-13


**CHINA
      DIGITAL TV HOLDING CO., L** **TD.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(I** **n** **** **U.S.
      dollars in thousands, except share data** **)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued**





***(j)***
            ***Long-term
                investments***-
                continued





Investee
      companies over which the Company has the ability to exercise significant
      influence, but does not have a controlling interest are accounted for using
      the
      equity method. Significant influence is generally considered to exist when
      the
      Company has an ownership interest in the voting stock of the investee between
      20% and 50%, and other factors, such as representation on the investee's Board
      of Directors, voting rights and the impact of commercial arrangements, are
      considered in determining whether the equity method of accounting is
      appropriate.





***(k)***
            ***Revenue
                recognition***





The
      Group's revenues are principally derived from sales of products and services.
      Specifically, sales of products include 1) sales of smart cards, and 2) sales
      of
      set-top boxes and other products. Sales of services include the following four
      arrangements:





(1)
            Head-end
                software, hardware and related system integration service ("SI
                service");


(2)
            Head-end
                system development service ("SD
                service");


(3)
            Licensing
                income; and


(4)
            Royalty
                income.





*Sales
      of smart cards*





Smart
      cards are manufactured by third-party manufacturers based on the Group's
      blueprints. When the Group receives these products from the manufacturers,
      the
      Group programs each one with a unique security code so that it can communicate
      with the Group's CA systems. A substantial majority of the smart cards sold
      by
      the Group are paid for pursuant to contractual terms requiring payment either
      prior to or upon delivery. Revenue from sales of smart cards is recognized
      in
      accordance with Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition".
      Specifically, revenue is recognized after a sales agreement is signed, the
      price
      is fixed or determinable, products are delivered to customers, and collection
      of
      the resulting receivables is assured. The Group also offers some of its
      customers a lower price when the cumulative volume of smart card purchases
      from
      the same customer is greater than a set volume during a specific period. The
      Group takes into account this arrangement and defers recognition of revenue
      in
      accordance with EITF Issue No. 00-22, "Accounting for "Points" and Certain
      Other
      Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
      or Services to Be Delivered in the Future". The Group accounts for cumulative
      volume customer incentives as deferred revenue and that is deducted from the
      initial revenue.





The
      Group
      generally guarantees the quality of smart cards for periods ranging from one
      to
      three years, and if any smart cards are found to have defects during the
      warranty period, the Group is obligated to replace them at the Group's cost.
      Historically the defect rate of smart cards has been low and the Group accrues
      warranty liabilities based on historical information.


F-14




**CHINA
        DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
        dollars in thousands, except share data** **)**
 
 **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued**
 
 ***(k)***
              ***Revenue
                  recognition***-
                  continued
 
 *Set-top
        box and others*
 
 The
        Group
        also derives revenues from the sales of products other than smart cards,
        such as
        set-top boxes and other related products. Revenue from sales of set-top box
        and
        other products is also recognized in accordance with SAB 104. Revenue is
        recognized after a sales agreement is signed, the price is fixed or
        determinable, products are delivered to customers, and collection of the
        resulting receivables is assured.
 
 *SI
        service*
 
 For
        the
        SI service, the Group signs contracts with cable network operators to install
        and integrate the Group's software with the hardware and software purchased
        from
        third-party suppliers. The Group's software includes CA system software,
        subscriber management system software and head-end electronic program guide
        software.
 
 CA
        system
        software consists of software that is installed at the premises of the
        television network operator, or the head end. CA systems enable television
        network operators to deliver secured contents and services to their
        subscribers.
 
 Subscriber
        management system is software used by television network operators to support
        their operation, archive subscriber information and operational information,
        and
        to generate billings to subscribers.
 
 Head-end
        electronic program guide software is software that enables television network
        operators to distribute DVB standard Program Specific Information and Service
        Information to the subscribers.
 
 Deliverables
        of SI service include: software, hardware, integration, installation, training
        and post-contract customer support ("PCS"). When the provision of services
        is
        substantially completed, i.e., when the Group delivers its software, purchases
        the hardware and software from third-party suppliers, integrates them together,
        and provides installation and training to customers, customers sign the
        preliminary acceptance. Final acceptance is typically signed six months to
        one
        year after the issuance of the preliminary acceptance if no major technical
        problems are discovered. Software is considered delivered to customers when
        preliminary acceptance is signed because only at that time are customers
        able to
        use the software in the integrated system. For majority of the contracts,
        the
        Group offers one-year free PCS, including telephone support and bug-fixing
        beginning from preliminary acceptance. However, in some of the contracts,
        the
        Group offers free PCS for a period of more than one year beginning from
        preliminary acceptance; while in some other contracts, the PCS does not have
        a
        specified definite period.
  F-15
  **CHINA
        DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
        dollars in thousands, except share data** **)**
 
 
 **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued**
 
 ***(k)***
              ***Revenue
                  recognition***-
                  continued
 
 *SI
        service* -
        continued
 
 The
        SI
        service includes a significant software portion. The software is not regarded
        as
        incidental to the provision of services as a whole because the marketing
        of such
        services focuses on the internally developed technologies included in the
        software. Therefore, Statement of Position ("SOP") 97-2, "Software Revenue
        Recognition", is applicable for these services. The Group cannot establish
        vendor-specific objective evidence of the fair values of the deliverables;
        therefore, according to SOP 97-2, revenue is recognized when the last
        deliverable in the arrangement is delivered and when all of the following
        criteria have been met:
 
 (1)
              Persuasive
                  evidence of an arrangement exists;
 (2)
              Delivery
                  has occurred;
 (3)
              The
                  vendor's fee is fixed or determinable;
                  and
 (4)
              Collectibility
                  is probable.
 
 The
        systems are installed and tested at the customers' sites. Generally all the
        technical issues are identified and resolved before the preliminary acceptance
        is issued by the customers. Afterwards, the customers will begin to use the
        installed systems for operation.
 
 For
        the
        contracts where the Group offers free PCS for one year or less, the cost
        incurred between the issuance of the preliminary acceptance and the end of
        the
        free PCS period has historically been insignificant. Therefore revenue is
        recognized when the entire installation and integration of software is
        completed, which is indicated by obtaining the preliminary acceptance from
        customers. In limited situations where there is only one acceptance from
        the
        customer, rather than a preliminary and final acceptance, revenue is recognized
        when the single acceptance is obtained. For contracts where the Group offers
        free PCS for more than one year, although the cost incurred during the PCS
        term
        has been historically insignificant, the Group is contractually obligated
        to
        provide not only telephone support and bug-fixing, but also free upgrade
        for
        customers when there is a change in the national or industry standards related
        to cable digital television and in situations where there is a security breach
        of the Group's software contained in the SI service. Therefore, the Group
        defers
        the revenue for the contracts and recognizes it over the PCS term. Where
        the PCS
        term has no specified definite period, the Group recognizes such revenue
        over
        the estimated useful life of the CA system, which the Group has determined
        to be
        five years.
  F-16
  **CHINA
          DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
          THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
          dollars in thousands, except share data** **)**
 
 
 **2.**
                **SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES -
                    continued**
 
 ***(k)***
                ***Revenue
                    recognition***-
                    continued
 
 *SD
          service*
 
 The
          Group
          develops head-end system applications relating to digital TV technology
          for its
          customers.
 
 Deliverables
          in SD service include the completed software application. A few arrangements
          also include one-year free PCS starting from customer acceptance, but no
          arrangement includes free PCS for more than one year. Payment terms vary
          based
          on the stage of the service. Normally a portion of the contract amount
          is paid
          when the contract is signed, and the remainder is paid upon the completion
          of
          the project and customer acceptance. The cost of providing free PCS has
          historically been insignificant.
 
 Because
          a
          system development arrangement requires significant production, modification,
          or
          customization of software, the Group refers to ARB 45, "Long-Term
          Construction-Type Contracts", and SOP 81-1, "Accounting for Performance
          of
          Construction-Type and Certain Production-Type Contracts". As the Group
          cannot
          properly measure progress toward completion, the completed-contract method
          is
          used. Revenue for system development is recognized when the system development
          is finished and accepted by the customer.
 
 *Licensing
          income*
 
 The
          Group
          coordinates with network operators to produce set-top boxes compatible
          with the
          Group's CA systems. The Group enters into contracts with set-top box
          manufacturers selected by customers and provides these manufacturers with
          either
          a set-top design or CA system terminal-end software that is integrated
          in the
          set-top boxes and which permits the unscrambling of digital TV broadcasts
          that
          have been transmitted by TV network operators who use the Group's CA systems.
          The set-top box manufacturers pay the Group a one-time license fee, which
          includes a testing and certifying fee, for obtaining the blueprints and
          technologies in the form of software. According to the contracts, these
          manufacturers are required to provide a set-top box prototype to the Group
          in
          order to obtain a certificate from the Group which indicates the set-top
          box is
          compatible with the Group's CA systems and suitable for mass-production.
          The
          licenses to set-top box manufacturers are perpetual once provided. No PCS
          is
          offered in the licensing arrangement.
 
 Licensing
          income is recognized when all revenue recognition criteria according to
          SOP 97-2
          have been met, which is indicated by the issuance of a certificate to the
          set-top box manufacturer by the Group.
 
 In
          addition, all advances from customers and prepaid fees received from customers
          or set-top box manufacturers are initially recognized as deferred revenue
          and
          revenue is recognized when the above revenue recognition criteria are
          met.
  F-17
  **CHINA
            DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
            THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
            dollars in thousands, except share data** **)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES -
                      continued**
 
 ***(k)***
                  ***Revenue
                      recognition***-
                      continued
 
 *Royalty
            income*
 
 Other
            than the one-time license fee, the Group also receives royalties for
            each
            set-top box sold. Royalties are received either from set-top box manufacturers,
            or from television network operators who purchase the Group's CA systems,
            depending on which party the Group enters the contracts with.
 
 Royalty
            revenue is recognized when earned and collectibility is reasonably
            assured.
 
 For
            royalty income collected from set-top box manufacturers, royalty revenue
            is
            recognized upon the receipt of sales reports from set-top box manufacturers
            and
            when payment is received.
 
 For
            royalty income received from television network operators, the Group
            requests
            the television network operators to pay the royalty to the Group directly
            when
            they purchase the Group's smart cards, in which case all the revenue
            is
            recognized as part of the smart card sales when these smart cards are
            delivered
            to the customers.
 
 ***(l)***
                  ***Deferred
                      costs***
 
 Deferred
            costs are the incremental costs that are directly associated with revenue
            from
            SI service contracts that provide free PCS for more than one year. Deferred
            costs mainly consist of hardware and software purchased from third-party
            suppliers. Deferred costs are recoverable through the future revenue
            streams and
            are recorded as an asset and amortized to cost of revenue over the same
            period
            that the revenue is recognized. Amortization of deferred costs for the
            period
            for the years ended December 31, 2005, 2006, 2007 totaled $498, $561
            and $660
            respectively.
 
 ***(m)***
                  ***Value
                      added tax ("VAT") and VAT
                      refund***
 
 VAT
            on
            sales is calculated at 17% on revenue from product sales and SI Services
            and
            paid after deducting input VAT on purchases. The net VAT balance between
            input
            VAT and output VAT is reflected in the accounts under other taxes
            payable.
 
 For
            certain software related products that are qualified as "software products"
            by
            PRC tax authorities, the Group can pay VAT at 17% first and then receive
            14%
            refund after it is paid. The Group records VAT refund receivables on
            accrual
            basis. VAT refund is recorded in revenue in the statement of
            operations.
  F-18
  **CHINA
              DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
              THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
              dollars in thousands, except share data** **)**
 
 **2.**
                    **SUMMARY
                        OF SIGNIFICANT ACCOUNTING POLICIES -
                        continued**
 
 ***(n)***
                    ***Business
                        tax***
 
 The
              Group's PRC subsidiary and VIE are subject to business tax and related
              surcharges at the rate of 5.5% on revenue related to certain types
              of services.
              Business tax is recorded as a deduction from revenue when in the same
              period in
              which revenue is recognized.
 
 ***(o)***
                    ***Operating
                        leases***
 
 Leases
              where substantially all the rewards and risks of ownership of assets
              remain with
              the lessor are accounted for as operating leases. Payments made under
              operating
              leases are charged to the consolidated statements of operations on
              a
              straight-line basis over the lease periods.
 
 ***(p)***
                    ***Foreign
                        currency translation***
 
 The
              functional and reporting currency of the Company is US dollar. The
              functional
              currency of the Company's subsidiaries in the PRC is Renminbi
              ("RMB").
 
 Monetary
              assets and liabilities denominated in currencies other than the applicable
              functional currencies are translated into the functional currencies
              at the
              prevailing rates of exchange at the balance sheet date. Nonmonetary
              assets and
              liabilities are remeasured into the applicable functional currencies
              at
              historical exchange rates. Transactions in currencies other than the
              applicable
              functional currencies during the year are converted into the functional
              currencies at the applicable rates of exchange prevailing at the transaction
              dates. Transaction gains and losses are recognized in the consolidated
              statements of operations.
 The
              functional currency of the Company's subsidiaries in the PRC is Renminbi
              ("RMB").
 
 For
              translating the results of the PRC subsidiaries into the functional
              currency of
              the Company, assets and liabilities are translated from each subsidiary's
              functional currency to the reporting currency at the exchange rate
              on the
              balance sheet date. Equity amounts are translated at historical exchange
              rates,
              and revenues, expenses, gains, and losses are translated using the
              average rate
              for the year. Translation adjustments are reported as cumulative translation
              adjustments and are shown as a separate component of other comprehensive
              income
              in the consolidated statements of shareholders' equity and comprehensive
              income.
 
 ***(q)***
                    ***Income
                        taxes***
 
 Deferred
              income taxes are provided using the asset and liability method. Under
              this
              method, deferred income taxes are recognized for tax credits and net
              operating
              losses available for carry-forwards and significant temporary differences.
              Deferred tax assets and liabilities are classified as current or non-current
              based upon the classification of the related asset or liability in
              the financial
              statements or the expected timing of their reversal if they do not
              relate to a
              specific asset or liability. A valuation allowance is provided to reduce
              the
              amount of deferred tax assets if it is considered more likely than
              not that some
              portion of, or all of, the deferred tax assets will not be realized.
              Current
              income taxes are provided for in accordance with the laws and regulations
              applicable to the Group as enacted by the relevant tax
              authorities.
  F-19
  **CHINA
                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                dollars in thousands, except share data** **)**
 
 **2.**
                      **SUMMARY
                          OF SIGNIFICANT ACCOUNTING POLICIES -
                          continued**
 
 ***(q)***
                      ***Income
                          taxes***-
                          continued
 
 In
                June
                2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting
                for
                Uncertainty in Income Taxes - an interpretation of FASB Statement
                No. 109". FIN
                48 prescribes a recognition threshold and measurement attribute for
                the
                financial statement recognition and measurement of a tax position
                taken or
                expected to be taken in a tax return. FIN 48 is effective for fiscal
                years
                beginning after December 15, 2006, with early adoption permitted.
                The Group has
                elected to adopt FIN 48 from January 1, 2004. The adoption of FIN
                48 had no
                significant impact on the Group's accounting for income taxes for
                the years
                ended December 31, 2004, 2005, 2006 and 2007.
 
 ***(r)***
                      ***Comprehensive
                          income***
 
 Comprehensive
                income includes net income and foreign currency translation adjustments.
                Comprehensive income is reported in the statements of shareholders'
                equity and
                other comprehensive income.
 
 ***(s)***
                      ***Fair
                          value of financial
                          instruments***
 
 The
                carrying amounts of cash equivalents, restricted cash, accounts receivable,
                accounts payable, amounts due from (to) related parties, and warrants
                approximate their fair values due to the short-term maturity of these
                instruments.
 
 ***(t)***
                      ***Net
                          income per share***
 
 The
                Group
                has determined that its convertible redeemable preferred shares were
                participating securities as the preferred shares participate in undistributed
                earnings on an as-if-converted basis. Accordingly, the Group has
                used the
                two-class method of computing net income per share, for ordinary
                and preferred
                shares according to participation rights in undistributed earnings.
                Under this
                method, undistributed net income is allocated on a pro rata basis
                to the
                ordinary and preferred shares to the extent that each class may share
                income for
                the period; whereas undistributed net loss is allocated to ordinary
                shares only
                because preferred shares were not contractually obligated to share
                the
                loss.
 
 Diluted
                net income per ordinary share is computed using the more dilutive
                of (a) the
                two-class method or (b) the if-converted method. For the years end
                December 31,
                2006 and 2007, the application of the two-class method was more dilutive
                than
                the if-converted method. The Group had options and warrant outstanding
                which
                could potentially dilute basic net income per share in the future.
                Their
                dilutive effect is computed using the treasury stock method.
  F-20
  **CHINA
                  DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                  THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                  dollars in thousands, except share data** **)**
 
 **2.**
                        **SUMMARY
                            OF SIGNIFICANT ACCOUNTING POLICIES -
                            continued**
 
 ***(u)***
                        ***Intangible
                            assets***
 
 Intangible
                  assets consist of core technology, complete technology, contract
                  backlog, and
                  customer relationships, which are carried at cost less accumulated
                  amortization.
                  Amortization is computed using the straight-line method over the
                  useful lives of
                  the assets ranging from 1 to 7.5 years.
 
 ***(v)***
                        ***Research
                            and development
                            expenses***
 
 Research
                  and development costs are incurred in the development of the digital
                  TV and
                  set-top box technologies, including significant improvements and
                  refinements to
                  existing products and services. The Group applies Statement of
                  Financial
                  Accounting Standards ("SFAS") No. 86, "Accounting for the Costs
                  of Computer
                  Software to Be Sold, Leased, or Otherwise Marketed". In particular,
                  nearly all
                  of the research and development expenditure incurred since the
                  Group's formation
                  has been to establish the technological feasibility of the Group's
                  software. As
                  a result, all research and development costs are expensed as
                  incurred.
 
 ***(w)***
                        ***Share-based
                            compensation***
 
 Share-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
                  SFAS No. 123(R), "Share-Based Payment", and recognized as compensation
                  expense
                  over the requisite service period based on the graded vesting attribution
                  method, with a corresponding impact reflected in additional paid-in
                  capital.
 
 ***(x)***
                        ***Concentration
                            of credit risk***
 
 Financial
                  instruments that potentially expose the Group to concentrations
                  of credit risk
                  consist primarily of cash and cash equivalents and accounts receivable.
                  The
                  Group places their 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 customers. The Group establishes
                  an allowance
                  for doubtful accounts primarily based upon the age of the receivables
                  and
                  factors relevant to determining the credit risk of specific customers.
                  The
                  amount of receivables ultimately not collected by the Group has
                  generally been
                  consistent with management's expectations and the allowance established
                  for
                  doubtful accounts.
  F-21
  **CHINA
                    DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                    THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                    dollars in thousands, except share data** **)**
 
 **2.**
                          **SUMMARY
                              OF SIGNIFICANT ACCOUNTING POLICIES -
                              continued**
 
 ***(x)***
                          ***Concentration
                              of credit risk***-
                              continued
 
 Details
                    of the customers accounting for 10% or more of total revenues
                    are as
                    follows:
 
 Years ended December 31,Customer
                          
                          2005
                          
                          2006
                          
                          2007%
                          
                          
                          %
                          
                          
                          %A
                          
                          
                          -
                          
                          
                          14.5
                          
                          
                          14.1B
                          
                          
                          12.6
                          
                          
                          13.0
                          
                          
                          -C
                          
                          
                          20.0
                          
                          
                          -
                          
                          
                          -D
                          
                          
                          11.5
                          
                          
                          -
                          
                          
                          -
 
 Details
                    of the customers accounting for 10% or more of accounts receivable
                    are as
                    follows:
 
 December
                              31,Customer
                          
                          
                          2006
                          
                          
                          2007%
                          
                          
                          %E
                          
                          
                          17.4
                          
                          
                          -
 
 ***(y)***
                          ***Recently
                              issued accounting
                              standards***
 
 In
                    September 2006, the FASB issued SFAS No. 157 *Fair
                    Value Measurements* .
                    This
                    statement defines fair value, establishes a framework of measuring
                    fair value,
                    and expands disclosures about fair value measurements. SFAS No.
                    157 is effective
                    for financial statements to be issued for fiscal years beginning
                    after November
                    15, 2007. The Group does not expect the adoption of SFAS No.
                    157 to have a
                    material impact on its financial statements.
 
 In
                    February 2007, the FASB issued SFAS No. 159 *The
                    Fair Value Option for Financial Assets and Financial
                    Liabilities* .
                    SFAS
                    No. 159 provides entities with an option to report selected financial
                    assets and
                    liabilities at fair value, with the objective to reduce both
                    the complexity in
                    accounting for financial instruments and the volatility in earnings
                    caused by
                    measuring related assets and liabilities differently. SFAS No.
                    159 is effective
                    for financial statements to be issued for fiscal years beginning
                    after November
                    15, 2007. The Group does not expect the adoption of SFAS No.
                    159 to have a
                    material impact on its financial statements.
  F-22
  **CHINA
                      DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                      dollars in thousands, except share data** **)**
 
 **2.**
                            **SUMMARY
                                OF SIGNIFICANT ACCOUNTING POLICIES -
                                continued**
 
 ***(y)***
                            ***Recently
                                issued accounting standards***-
                                continued
 
 In
                      December 2007, the FASB issued SFAS No. 141 (R), "Business
                      Combination", to
                      improve reporting creating greater consistency in the accounting
                      and financial
                      reporting of business combinations. The standard requires the
                      acquiring entity
                      in a business combination to recognize all (and only) the assets
                      acquired and
                      liabilities assumed in the transaction; establishes the acquisition-date
                      fair
                      value as the measurement objective for all assets acquired
                      and liabilities
                      assumed; and requires the acquirer to disclose to investors
                      and other users all
                      of the information they need to evaluate and understand the
                      nature and financial
                      effect of the business combination. SFAS No. 141(R) applies
                      prospectively to
                      business combinations for which the acquisition date is on
                      or after the
                      beginning of the first annual reporting period beginning on
                      or after December
                      15, 2008. An entity may not apply it before that date. The
                      Company is currently
                      evaluating whether the adoption of SFAS No. 141(R) will have
                      a significant
                      effect on its consolidated financial position, results of operations
                      or cash
                      flows.
 
 In
                      December 2007, the FASB issued SFAS No. 160, "Noncontrolling
                      Interests in
                      Consolidated Financial Statements" to improve the relevance,
                      comparability, and
                      transparency of financial information provided to investors
                      by requiring all
                      entities to report noncontrolling (minority) interests in subsidiaries
                      in the
                      same way as required in the consolidated financial statements.
                      Moreover, SFAS
                      No. 160 eliminates the diversify that currently exists in accounting
                      for
                      transactions between an entity and noncontrolling interests
                      by requiring they be
                      treated as equity transaction. SFAS No. 160 is effective for
                      fiscal years, and
                      interim periods within those fiscal years, beginning on or
                      after December 15,
                      2008. Earlier adoption is prohibited. The Company is currently
                      evaluating
                      whether the adoption of SFAS No. 160 will have a significant
                      effect on its
                      consolidated financial position, results of operations or cash
                      flows.
 
 
 **3.**
                            **SEGMENT
                                INFORMATION AND REVENUE
                                ANALYSIS**
 
 In
                      accordance with SFAS No. 131, "Disclosures About Segments of
                      an Enterprise and
                      Related Information", the Group's chief operating decision
                      maker is the Chief
                      Executive Officer, who reviews consolidated results of operations
                      prepared in
                      accordance with US GAAP when making decisions about allocating
                      resources and
                      assessing performance of the Group; hence, the Group has only
                      one operating
                      segment. The Group has internal reporting that does not distinguish
                      between
                      markets or segments.
 
 The
                      Group
                      operates in the PRC and all of the Group's long-lived assets
                      are located in the
                      PRC.
  F-23
  **CHINA
                        DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                        THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                        dollars in thousands, except share data** **)**
 
 **3.**
                              **SEGMENT
                                  INFORMATION AND REVENUE ANALYSIS -
                                  continued**
 
 The
                        gross
                        revenues consist of the following products and services:
 
 Years ended December 31,2005
                              
                              2006
                              
                              2007Products:Smart
                                  Cards
                              
                              $
                              9,278
                              
                              $
                              26,223
                              
                              $
                              49,651Set-top
                                  box and others
                              
                              
                              13
                              
                              
                              220
                              
                              
                              90Subtotal
                              
                              
                              9,291
                              
                              
                              26,443
                              
                              
                              49,741Services:Head-end
                                  system integration
                              
                              
                              3,088
                              
                              
                              2,317
                              
                              
                              3,258System
                                  development
                              
                              
                              70
                              
                              
                              558
                              
                              
                              271Licensing
                                  income
                              
                              
                              697
                              
                              
                              1,037
                              
                              
                              1,984Royalty
                                  income
                              
                              
                              -
                              
                              
                              270
                              
                              
                              498Subtotal
                              
                              
                              3,855
                              
                              
                              4,182
                              
                              
                              6,011Total
                              
                              $
                              13,146
                              
                              $
                              30,625
                              
                              $
                              55,752
 
 Revenues
                        include VAT refunds of $1,030, $2,509, and $5,030 for the
                        years ended December
                        31, 2005, 2006 and 2007, respectively.
 
 **4.**
                              **ACQUISITION**
 
 In
                        August
                        2006, the Group acquired the set-top box design business
                        from N-T Information
                        Engineering to expand its business in designing set-top boxes
                        for set-top box
                        manufacturers. This transaction was accounted for using the
                        purchase method of
                        accounting under SFAS No. 141, "Business Combination". The
                        purchase price was
                        initially agreed at $3,770 with an adjustment clause set
                        forth in the asset
                        purchase agreements which allows the buyer to reduce the
                        purchase price if the
                        cash collection from the set-top box business after the acquisition
                        does not
                        reach a certain level. The $3,770 purchase price was paid
                        in August 2006. In
                        April 2007, the Group and N-T Information Engineering reached
                        an agreement to
                        adjust the purchase price to $2,227 according to the terms
                        agreed upon between
                        the Group and N-T Information Engineering. The difference
                        of $1,543 was recorded
                        as an "amount due from related party-N-T Information Engineering'"
                        as of
                        December 31, 2006, which was paid in full by N-T Information
                        Engineering in
                        April 2007 (see Note 22a). According to this amendment of
                        agreement, if the
                        performance of the acquired set-top box business continued
                        to fail to meet the
                        criteria set forth in the asset purchase agreement and the
                        related amendments,
                        the purchase price might be further reduced in the future.
                        In November 2007, the
                        Group decided to eliminate this clause in the amended agreement
                        primarily due to
                        the excessive costs and efforts that would be involved in
                        determining and
                        assessing the performance of the acquired set-top box business
                        and the
                        subsequent negotiation of any purchase price adjustment.
                        As a result, the
                        purchase consideration will not be subject to further
                        revisions.
  F-24
  **CHINA
                          DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                          THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                          dollars in thousands, except share data** **)**
 
 **4.**
                                **ACQUISITION
                                    - continued**
 
 As
                          a
                          result of the purchase method of accounting, the acquired
                          assets and liabilities
                          were recorded at their estimated fair market value at the
                          date of acquisition.
                          The following table summarizes the estimated fair values
                          of the assets acquired
                          and liabilities assumed on the date of the acquisition
                          of the set-top box design
                          business based on a purchase allocation, including the
                          reduction in purchase
                          consideration.
 
 Assets
                                    acquired:Accounts
                                    receivable
                                
                                $
                                3Prepayments
                                    to suppliers
                                
                                
                                2Inventories
                                
                                
                                324Property
                                    and equipment
                                
                                
                                29Intangible
                                    assets
                                
                                
                                1,734Total
                                
                                
                                2,092Liabilities
                                    assumed:Accounts
                                    payable
                                
                                
                                173Deferred
                                    taxes
                                
                                
                                124Total
                                
                                
                                297Net
                                    assets acquired
                                
                                
                                1,795Initial
                                    consideration paid in 2006
                                
                                
                                3,770Reduction
                                    in purchase consideration
                                
                                
                                (1,543
                                )Revised
                                    purchase consideration
                                
                                
                                2,227Goodwill
                                
                                $
                                432
 
 Intangible
                          assets comprised of:
 
 Estimated useful livesCore
                                    technology
                                
                                $
                                384
                                
                                
                                7.5 yearsComplete
                                    technology
                                
                                
                                62
                                
                                
                                2.5 yearsContract
                                    backlog
                                
                                
                                284
                                
                                
                                1 yearCustomer
                                    relationship
                                
                                
                                1,004
                                
                                
                                3.5 yearsTotal
                                
                                $
                                1,734
  F-25
  **CHINA
                            DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                            TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                            THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                            dollars in thousands, except share data** **)**
 
 **4.**
                                  **ACQUISITION
                                      - continued**
 
 **Pro
                            forma**
 
 The
                            following pro forma information summarizes the effect
                            of the acquisition, if the
                            acquisition of the set-top box business from N-T Information
                            Engineering had
                            occurred as of January 1, 2005 and January 1, 2006. This
                            pro forma information
                            is presented for information purposes only. It is based
                            on historical
                            information and does not purport to represent the actual
                            results that may have
                            occurred had the Group consummated the acquisitions on
                            January 1, 2005 and
                            January 1, 2006, nor is it necessarily indicative of
                            future results of
                            operations of the Group:
 
 Pro forma for the years
                                    ended December 31,2005
                                  
                                  2006(Unaudited)
                                  
                                  (Unaudited)Net
                                      revenues
                                  
                                  $
                                  13,343
                                  
                                  $
                                  31,539Net
                                      income attributable to holders of ordinary
                                      shares
                                  
                                  
                                  4,256
                                  
                                  
                                  7,204Net
                                      income per share - basic ordinary shares
                                  
                                  
                                  0.11
                                  
                                  
                                  0.24Net
                                      income per share - basic preferred shares
                                  
                                  
                                  0.11
                                  
                                  
                                  0.54Net
                                      income per share - diluted
                                  
                                  
                                  0.11
                                  
                                  
                                  0.21
 
 **5.**
                                  **RESTRICTED
                                      CASH**
 
 Restricted
                            cash represents cash deposited in a bank account opened
                            by the Group at the
                            request of potential customers before the Group is invited
                            to attend bidding of
                            certain projects. The use of cash in such an account
                            is normally restricted for
                            more than three months.
 
 
 **6.**
                                  **ACCOUNTS
                                      RECEIVABLE, NET**
 
 Accounts
                            receivable, net, consists of the following:
 
 December
                                      31,2006
                                  
                                  2007Billed
                                      receivable
                                  
                                  $
                                  2,584
                                  
                                  $
                                  5,064Unbilled
                                      receivable
                                  
                                  
                                  278
                                  
                                  
                                  1,054$
                                  2,862
                                  
                                  $
                                  6,118
  F-26
  **CHINA
                              DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                              TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                              THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                              dollars in thousands, except share data** **)**
 
 **6.**
                                    **ACCOUNTS
                                        RECEIVABLE, NET -
                                        continued**
 
 Unbilled
                              receivable represents amounts earned by the provision
                              of head-end hardware and
                              software integration and installation services but
                              not billable at the
                              respective balance sheet dates. The unbilled amounts
                              become billable according
                              to the contract terms. Pursuant to the contracts of
                              SI services, customers
                              generally pay the final 10% of contract amounts upon
                              issuance of the final
                              acceptance, while the Group recognizes revenue when
                              the preliminary acceptance
                              is obtained. The Group generally anticipates that substantially
                              all unbilled
                              amounts as of a given balance sheet date would be billed
                              within twelve months of
                              such balance sheet dates.
 
 Movement
                              of allowance for doubtful accounts is as follows:
  Balance at
                                      beginning
                                      of the year
                                    
                                    Charge to
                                      expenses
                                    
                                    Deductions
                                    
                                    Balance at
                                      end of the
                                      year2006
                                    
                                    
                                    -
                                    
                                    $
                                    215
                                    
                                    
                                    -
                                    
                                    $
                                    2152007
                                    
                                    $
                                    215
                                    
                                    $
                                    225
                                    
                                    $
                                    (41
                                    )
                                    $
                                    399
 
 
 **7.**
                                    **INVENTORIES**
 
 Inventories
                              consist of the following:
  December
                                        31,2006
                                    
                                    2007Raw
                                        materials
                                    
                                    $
                                    2,293
                                    
                                    $
                                    2,259Finished
                                        goods
                                    
                                    
                                    466
                                    
                                    
                                    708$
                                    2,759
                                    
                                    $
                                    2,967
 
 
 **8.**
                                    **PREPAID
                                        EXPENSES AND OTHER CURRENT
                                        ASSETS**
 
 Prepaid
                              expenses and other current assets consist of the following:
 
 December
                                        31,2006
                                    
                                    2007VAT
                                        refund receivables
                                    
                                    $
                                    274
                                    
                                    $
                                    661Deposits
                                    
                                    
                                    382
                                    
                                    
                                    331Prepayments
                                        to suppliers
                                    
                                    
                                    692
                                    
                                    
                                    174Prepaid
                                        expenses
                                    
                                    
                                    3
                                    
                                    
                                    88$
                                    1,351
                                    
                                    $
                                    1,254
  F-27
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **9.**
                                      **PROPERTY
                                          AND EQUIPMENT, NET**
 
 Property
                                and equipment, net consist of the following:
 
 December
                                          31,2006
                                      
                                      2007Computers
                                          and office equipment
                                      
                                      $
                                      1,282
                                      
                                      $
                                      2,119Furniture
                                          and fixture
                                      
                                      
                                      38
                                      
                                      
                                      76Leasehold
                                          improvements
                                      
                                      
                                      42
                                      
                                      
                                      156Motor
                                          vehicles
                                      
                                      
                                      136
                                      
                                      
                                      4561,498
                                      
                                      
                                      2,807Less:
                                          accumulated depreciation and amortization
                                      
                                      
                                      (960
                                      )
                                      
                                      (1,428
                                      )$
                                      538
                                      
                                      $
                                      1,379
 
 For
                                the
                                years ended December 31, 2005, 2006 and 2007, depreciation
                                expense was $586,
                                $287 and $384 respectively.
 
 **10.**
                                      **INTANGIBLE
                                          ASSETS, NET**
 
 Intangible
                                assets, net consist of the following:
 
 December
                                          31,2006
                                      
                                      2007Core
                                          technology
                                      
                                      $
                                      384
                                      
                                      $
                                      411Complete
                                          technology
                                      
                                      
                                      62
                                      
                                      
                                      66Contract
                                          backlogs
                                      
                                      
                                      284
                                      
                                      
                                      304Customer
                                          relationship
                                      
                                      
                                      1,004
                                      
                                      
                                      1,0751,734
                                      
                                      
                                      1,856Less:
                                          accumulated amortization
                                      
                                      
                                      (270
                                      )
                                      
                                      (854
                                      )$
                                      1,464
                                      
                                      $
                                      1,002
  As
                                a
                                result of the acquisition of the set-top box business
                                from N-T Information
                                Engineering in August 2006 (see Note 4), the Group
                                recorded amortization expense
                                of $Nil, $269 and $542 for the years ended December
                                31, 2005, 2006 and 2007,
                                respectively.
  F-28
  **CHINA
                                  DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **11.**
                                      **LONG-TERM
                                          INVESTMENTS**
 
 Long-term
                                investments consist of the following equity method
                                investments:
 
 December
                                          31,Notes
                                      
                                      2006
                                      
                                      2007Nanjing
                                          Qingda Yongxin Culture Media Co., Ltd.
                                          ("Qingda Yongxin")
                                      
                                      
                                      (a)
                                      
                                      $
                                      -
                                      
                                      $
                                      105Foshan
                                          Nanhai Guokai Digital TV Technology Co.,
                                          Ltd. ("Nanhai
                                          Guokai")
                                      
                                      
                                      (b)
                                      
                                      
                                      -
                                      
                                      
                                      291$
                                      -
                                      
                                      $
                                      396
 
 (a)
                                      In
                                          March, 2007, the Group and Jiangsu Qingda
                                          Technology Co. Limited ("Jiangsu
                                          Qingda"), one of its customers, set up
                                          a joint venture Qingda Yongxin, in
                                          which the Group contributed cash of $103,
                                          representing 40% of equity
                                          interest in the joint venture. Jiangsu
                                          Qingda contributed cash of $155
                                          representing 60% of equity interest in
                                          the joint
                                          venture.
 
 In
                                three
                                years after the establishment of Qingda Yongxin,
                                the Group has the option to
                                purchase up to additional 30% of the equity interest
                                of Qingda Yongxin. The
                                purchase price of the an additional interest will
                                be determined based on the
                                valuation of the JV on the date of purchase, which
                                will be the higher of 10
                                times of its net profits in the year prior to the
                                purchase, and the net asset
                                value of Qingda Yongxin on the last fiscal year end
                                date prior to the
                                purchase.
 
 The
                                Group
                                has accounted for this long-term investment under
                                the equity method of
                                accounting because the Group does not control the
                                investee but has the ability
                                to exercise significant influence over operating
                                and financial policies of the
                                investee. As of December 31, 2007, Qingda Yongxin
                                has not commenced
                                operations.
 
 (b)
                                      In
                                          August 2006, the Group entered into an
                                          equity transfer agreement to
                                          purchase from N-T Information Engineering
                                          its 51% equity interest in
                                          Nanhai Guokai, for a cash consideration
                                          of $311. The parties entered into
                                          a new agreement in March 2007 to reduce
                                          the consideration to $296. Nanhai
                                          Guokai is a company primarily engaged in
                                          research, development and sales
                                          of digital TV-related systems, software
                                          and products. A Japanese
                                          multinational company holds the remaining
                                          49% equity interest in Nanhai
                                          Guokai. This transaction was completed
                                          in July
                                          2007.
 
 The
                                Group
                                has accounted for this long-term investment under
                                the equity method of
                                accounting because the Group does not control the
                                investee but has the ability
                                to exercise significant influence over operating
                                and financial policies of the
                                investee. The Group controls three out of five seats
                                in the board of directors
                                of Nanhai Guokai. The remaining two seats are controlled
                                by the minority
                                shareholder. According to the article of association
                                of Nanhai Guokai,
                                two-thirds of directors' approval is required for
                                the appointment and dismissal
                                of the general manager and vice general manager.
                                Therefore the minority
                                shareholder has substantive rights to participate
                                in significant operating
                                decisions in Nanhai Guokai. Accordingly, the Group
                                accounts for its investment
                                in Nanhai Guokai using the equity method of accounting
                                pursuant to EITF
                                96-16.
  F-29
 **CHINA
                                  DIGITAL TV HOLDING CO., L** **TD.**
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 
 **11.**
                                      **LONG-TERM
                                          INVESTMENTS - continued**
 
 The
                                combined financial information for the equity method
                                investments as of and for
                                the year ended December 31, 2007 is as follows
 
 Total
                                          current assets
                                      
                                      $
                                      899Total
                                          assets
                                      
                                      
                                      924Total
                                          current liabilities
                                      
                                      
                                      52Total
                                          liabilities
                                      
                                      
                                      52Total
                                          net revenue
                                      
                                      
                                      1Loss
                                          from operations
                                      
                                      $
                                      8
  **12.**
                                      **ACCRUED
                                          EXPENSES AND OTHER CURRENT
                                          LIABILITIES**
 
 Accrued
                                expenses and other current liabilities consist of
                                the following:
 
 December
                                          31,2006
                                      
                                      2007Accrued
                                          payroll and bonus
                                      
                                      $
                                      697
                                      
                                      $
                                      1,657Other
                                          taxes payable
                                      
                                      
                                      76
                                      
                                      
                                      1,300Other
                                          accrued expenses
                                      
                                      
                                      493
                                      
                                      
                                      1,049Accrued
                                          initial public offering expenses
                                      
                                      
                                      -
                                      
                                      
                                      681Social
                                          insurance withholding
                                      
                                      
                                      56
                                      
                                      
                                      38Accrued
                                          warranty
                                      
                                      
                                      38
                                      
                                      
                                      32$
                                      1,360
                                      
                                      $
                                      4,757
  Movement
                                of accrual for warranty is as follows:
 
 Balance
                                          at
                                      
                                      
                                      
                                      
                                      
                                      Balance
                                          atbeginning
                                      
                                      Charge
                                          to
                                      
                                      
                                      
                                      end
                                          of theof
                                          the year
                                      
                                      expenses
                                      
                                      Deductions
                                      
                                      year2006
                                      
                                      $
                                      11
                                      
                                      $
                                      27
                                      
                                      $
                                      -
                                      
                                      $
                                      382007
                                      
                                      $
                                      38
                                      
                                      $
                                      32
                                      
                                      $
                                      (38
                                      )
                                      $
                                      32
  F-30
 **CHINA
                                  DIGITAL TV HOLDING CO., L** **TD.**
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **13.**
                                      **DEFERRED
                                          REVENUE**
 
 Deferred
                                revenue consists of the following:
 
 December
                                          31,2006
                                      
                                      2007Current:Advance
                                          from customers
                                      
                                      $
                                      5,236
                                      
                                      $
                                      3,431Incentive
                                          offered to customers
                                      
                                      
                                      148
                                      
                                      
                                      205Deferred
                                          revenue for SI service contracts with free
                                          PCS period greater than one
                                          year
                                      
                                      
                                      1,516
                                      
                                      
                                      1,148$
                                      6,900
                                      
                                      $
                                      4,784Non-current:Deferred
                                          revenue for SI service contracts with free
                                          PCS period greater than one
                                          year
                                      
                                      
                                      1,079
                                      
                                      
                                      1,136Total
                                      
                                      $
                                      7,979
                                      
                                      $
                                      5,920
  Incentive
                                offered to customers represented the incentive provided
                                to customer when
                                cumulative purchase volume from the same customer
                                reached a certain level as of
                                December 31, 2006, and 2007. See Note 2(k) for a
                                more detailed description and
                                related accounting for deferred revenue.
 
 **14.**
                                      **OTHER
                                          INCOME**
 
 In
                                December 2007, the Group received a cash bonus of
                                $263 from the Administration
                                Committee of Beijing Zhongguancun Economic Zone as
                                a one-off award for the
                                consummation of the Group's IPO in the United States.
                                This cash bonus is
                                received for no conditions or contingencies and is
                                not refundable. It is
                                reflected as other income in the 2007 statement of
                                operations.
 
 
 **15.**
                                      **INCOME
                                          TAXES**
 
 CDTV
                                BVI
                                is a tax-exempted company incorporated in the British
                                Virgin
                                Islands.
 
 Golden
                                Benefit is subject to Hong Kong Profits Tax on its
                                activities conducted in Hong
                                Kong. No provision for Hong Kong Profits tax has
                                been made in the consolidated
                                financial statements as Golden Benefit has no assessable
                                profits in
                                2007.
 
 Super
                                TV,
                                N-S Digital TV and N-S Media Investment were registered
                                in the PRC and are
                                subject to PRC Enterprise Income Tax ("EIT") on the
                                taxable income in accordance
                                with the relevant PRC income tax laws.
  F-31
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **15.**
                                      **INCOME
                                          TAXES - continued**
 
 Both
                                Super TV and N-S Digital TV were certified "new or
                                high-technology enterprise"
                                located in a high-tech zone in Beijing. As a result,
                                both of them were entitled
                                to a three-year exemption from EIT beginning from
                                2004, their first year of
                                operation and a 7.5% EIT rate in 2007.
 
 N-S
                                Media
                                Investment was loss making in 2007 and therefore
                                not subjected to
                                EIT.
 
 Deferred
                                income taxes reflect the net tax effects of temporary
                                differences between the
                                carrying amount of assets and liabilities for financial
                                reporting purposes and
                                the amounts used for income tax purposes.
 
 Income
                                tax benefits/(expense) are as follows:
 
 Years
                                          ended December 31,2005
                                      
                                      2006
                                      
                                      2007Income
                                          tax benefits/(expense)Current
                                      
                                      $
                                      -
                                      
                                      $
                                      -
                                      
                                      $
                                      (2,554
                                      )Deferred
                                      
                                      
                                      66
                                      
                                      
                                      59
                                      
                                      
                                      212Total
                                      
                                      $
                                      66
                                      
                                      $
                                      59
                                      
                                      $
                                      (2,342
                                      )
 
 The
                                principal components of the deferred income tax assets
                                (liabilities) are as
                                follows:
 
 December
                                          31,2006
                                      
                                      2007CurrentWrite-down
                                          of inventory value
                                      
                                      $
                                      2
                                      
                                      $
                                      21Deferred
                                          revenue-current
                                      
                                      
                                      86
                                      
                                      
                                      212Deferred
                                          cost-current
                                      
                                      
                                      (25
                                      )
                                      
                                      (49
                                      )Current
                                          deferred tax assets
                                      
                                      
                                      63
                                      
                                      
                                      184Non-currentProperty
                                          and equipment
                                      
                                      
                                      25
                                      
                                      
                                      75Deferred
                                          revenue-non-current
                                      
                                      
                                      97
                                      
                                      
                                      212Amortization
                                          of intangible assets
                                      
                                      
                                      (124
                                      )
                                      
                                      (80
                                      )Deferred
                                          cost-non current
                                      
                                      
                                      (38
                                      )
                                      
                                      (157
                                      )Non
                                          current deferred tax assets (liabilities)
                                      
                                      $
                                      (40
                                      )
                                      $
                                      50
  As
                                management believes that the Group will generate
                                taxable PRC statutory income in
                                the near future and it is more likely than not that
                                all of the deferred tax
                                assets will be realized, a valuation allowance has
                                not been provided for the
                                deferred tax assets at December 31, 2006 and 2007.
  F-32
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
  **15.**
                                      **INCOME
                                          TAXES - continued**
 
 Reconciliation
                                between the provision for income taxes computed by
                                applying the PRC EIT rate of
                                33% to income before income taxes and the actual
                                provision of income taxes is as
                                follows:
 
 Years
                                          ended December 31,2005
                                      
                                      2006
                                      
                                      2007Net
                                          income before provision for income taxes
                                      
                                      $
                                      5,452
                                      
                                      $
                                      13,361
                                      
                                      $
                                      36,164PRC
                                          statutory tax rate
                                      
                                      
                                      33
                                      %
                                      
                                      33
                                      %
                                      
                                      33
                                      %Income
                                          tax at statutory tax rate
                                      
                                      
                                      1,799
                                      
                                      
                                      4,409
                                      
                                      
                                      11,934Expenses
                                          not deductible for tax purposes:Salaries
                                          and employees' benefits
                                      
                                      
                                      53
                                      
                                      
                                      123
                                      
                                      
                                      439Other
                                          expenses not deductable
                                      
                                      
                                      2
                                      
                                      
                                      43
                                      
                                      
                                      189Effect
                                          of income tax exemptions
                                      
                                      
                                      (1,866
                                      )
                                      
                                      (2,709
                                      )
                                      
                                      (10,175
                                      )Effect
                                              of income tax rate difference in other
                                              jurisdictions
                                      
                                      
                                      (54
                                      )
                                      
                                      (1,925
                                      )
                                      
                                      (45
                                      )Income
                                          tax expense/(benefit)
                                      
                                      $
                                      (66
                                      )
                                      $
                                      (59
                                      )
                                      $
                                      2,342
  If
                                N-S
                                Digital TV and Super TV were not in a tax holiday
                                period for the years ended
                                December 31, 2005 and 2006, and 2007, earnings per
                                share amounts would be as
                                follows:
 
 Years
                                          ended December 31,2005
                                      
                                      2006
                                      
                                      2007Increase
                                          in income tax expense
                                      
                                      $
                                      1,866
                                      
                                      $
                                      2,709
                                      
                                      $
                                      10,175Net
                                          income per share - basic ordinary shares
                                      
                                      
                                      0.07
                                      
                                      
                                      0.15
                                      
                                      
                                      0.52Net
                                          income per share - basic preferred shares
                                      
                                      
                                      0.07
                                      
                                      
                                      0.54
                                      
                                      
                                      0.46Net
                                          income per share-diluted
                                      
                                      $
                                      0.07
                                      
                                      $
                                      0.13
                                      
                                      $
                                      0.48
  On
                                March
                                16, 2007, the National People's Congress adopted
                                the Enterprise Income Tax Law
                                (the "New Income Tax Law"), which became effective
                                from January 1, 2008 and
                                replaced the existing separate income tax laws for
                                domestic enterprises and
                                foreign-invested enterprises, which are PRC subsidiaries
                                of the Group, by
                                adopting a unified income tax rate of 25% for most
                                enterprises.
 
 The
                                existing preferential tax treatments granted to Super
                                TV and N-S Digital TV
                                which each previously qualified as a "high and new
                                technology enterprise"
                                entitled them to a tax rate of 15%. Under the New
                                Income Tax Law if they wish to
                                qualify for such a preferential rate for years commencing
                                on January 1, 2008
                                they will need to qualify as a "high and new technology
                                enterprise strongly
                                supported by the State" under the new rules. Until
                                these subsidiaries receive
                                official approval for this new status, they will
                                be subject to the statutory 25%
                                tax rate and therefore have used such rate in the
                                calculation of our deferred
                                tax balances.
  F-33
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **15.**
                                      **INCOME
                                          TAXES - continued**
 
 Due
                                to
                                the changes in the New Income Tax Law in March 2007,
                                the Group's deferred tax
                                balances were calculated based on the newly enacted
                                tax rate to be effective
                                January 1, 2008. The impact on the deferred taxes
                                resulting from the rate change
                                in the tax charge for the year ended December 31,
                                2007 is an increase to the net
                                deferred tax assets and deferred tax benefit of $57.
 
 Under
                                the
                                New Income Tax Law effective from January 1, 2008,
                                the rules for determining
                                whether an entity is resident in the PRC for tax
                                purposes have changed and the
                                determination of residence depends amongst other
                                things on the "place of actual
                                management". If the Company, or its non-PRC subsidiaries,
                                were to be determined
                                to be PRC resident for tax purposes it, or they,
                                would be liable to tax in the
                                PRC on worldwide income including the income arising
                                in jurisdictions outside
                                the PRC. The Company is still evaluating its resident
                                status under the new law
                                and related guidance.
 
 If
                                the
                                Company were to be non-resident for PRC tax purposes,
                                dividends paid to it out
                                of profits earned after January 1, 2008 would be
                                subject to a withholding tax.
                                In the case of dividends paid by PRC subsidiaries
                                the withholding tax would be
                                10% and in the case of a subsidiary 25% or more directly
                                owned by Golden
                                Benefit, resident in the Hong Kong SAR the withholding
                                tax would be
                                5%.
  **16.**
                                      **NET
                                          INCOME PER SHARE**
 
 For
                                          the years ended December 31,2005
                                      
                                      2006
                                      
                                      2007Net
                                          income per share-basic:Net
                                          income
                                      
                                      $
                                      4,543
                                      
                                      $
                                      12,990
                                      
                                      $
                                      33,816Dividend
                                          to ordinary shares
                                      
                                      
                                      -
                                      
                                      
                                      15,569
                                      
                                      
                                      -Dividend
                                          to preferred shares
                                      
                                      
                                      -
                                      
                                      
                                      5,731
                                      
                                      
                                      -Total
                                          dividends
                                      
                                      
                                      -
                                      
                                      
                                      21,300
                                      
                                      
                                      -Undistributed
                                          income (loss)
                                      
                                      $
                                      4,543
                                      
                                      $
                                      (8,310
                                      )
                                      $
                                      33,816Shares
                                          (denominator):Weighted
                                          average ordinary shares outstanding
                                      
                                      
                                      30,000,000
                                      
                                      
                                      30,488,889
                                      
                                      
                                      39,170,004Weighted
                                          average preferred shares outstanding on
                                          an as-if-converted
                                          basis
                                      
                                      
                                      10,000,000
                                      
                                      
                                      10,519,120
                                      
                                      
                                      7,389,39440,000,000
                                      
                                      
                                      41,008,009
                                      
                                      
                                      46,559,398Allocation
                                          of undistributed income/(loss) (numerator):To
                                          ordinary shares
                                      
                                      $
                                      3,407
                                      
                                      $
                                      (8,310
                                      )
                                      $
                                      28,907To
                                          preferred shares
                                      
                                      
                                      1,136
                                      
                                      
                                      -
                                      
                                      
                                      4,9094,543
                                      
                                      
                                      (8,310
                                      )
                                      
                                      33,816
  F-34
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
  **16.**
                                      **NET
                                          INCOME PER SHARE -
                                          continued**
 
 For
                                          the years ended December 31,2005
                                      
                                      2006
                                      
                                      2007Undistributed
                                          income/(loss) per share to ordinary shares
                                      
                                      
                                      0.11
                                      
                                      
                                      (0.27
                                      )
                                      
                                      0.74Undistributed
                                          income per share to preferred shares
                                      
                                      
                                      0.11
                                      
                                      
                                      -
                                      
                                      
                                      0.66Distributed
                                          income per share to ordinary share
                                      
                                      
                                      -
                                      
                                      
                                      0.51
                                      
                                      
                                      -Distributed
                                          income per share to preferred share
                                      
                                      
                                      -
                                      
                                      
                                      0.54
                                      
                                      
                                      -Net
                                          income per share-basic ordinary shares
                                      
                                      
                                      0.11
                                      
                                      
                                      0.24
                                      
                                      
                                      0.74Net
                                          income per share-basic participating preferred
                                          shares
                                      
                                      $
                                      0.11
                                      
                                      $
                                      0.54
                                      
                                      
                                      0.66Net
                                          income per ordinary share-diluted:Income
                                          to ordinary shares (numerator):Distributed
                                          income allocated to ordinary shares
                                      
                                      $
                                      -
                                      
                                      $
                                      15,569
                                      
                                      $
                                      -Undistributed
                                          income (loss) allocated to ordinary
                                      
                                      
                                      3,407
                                      
                                      
                                      (8,310
                                      )
                                      
                                      33,816Distributed
                                          and undistributed income allocated to ordinary
                                          shares
                                      
                                      
                                      3,407
                                      
                                      
                                      7,259
                                      
                                      
                                      28,907Undistributed
                                          income allocated to preferred shares
                                      
                                      
                                      1,136
                                      
                                      
                                      -
                                      
                                      
                                      4,909Less
                                          undistributed income reallocated to preferred
                                          shares taking into account
                                          the dilutive effect to ordinary shares
                                      
                                      
                                      (1,136
                                      )
                                      
                                      -
                                      
                                      
                                      (4,554
                                      )$
                                      3,407
                                      
                                      $
                                      7,259
                                      
                                      $
                                      29,262Shares
                                          (denominator):Weighted
                                          average ordinary shares outstanding
                                      
                                      
                                      30,000,000
                                      
                                      
                                      30,488,889
                                      
                                      
                                      39,170,004Plus
                                          incremental weighted average ordinary shares
                                          from assumed conversion of
                                          warrant using the treasury stock method
                                      
                                      
                                      -
                                      
                                      
                                      1,463,114
                                      
                                      
                                      -Plus
                                          incremental weighted average ordinary shares
                                          from assumed exercise of
                                          stock options using the treasury stock
                                          method
                                      
                                      
                                      -
                                      
                                      
                                      2,273,318
                                      
                                      
                                      3,603,586Weighted
                                          average ordinary shares outstanding used
                                          in computing diluted net income
                                          per ordinary share
                                      
                                      
                                      30,000,000
                                      
                                      
                                      34,225,321
                                      
                                      
                                      42,773,590Net
                                          income per ordinary share-diluted
                                      
                                      $
                                      0.11
                                      
                                      $
                                      0.21
                                      
                                      $
                                      0.68
  F-35
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **17.**
                                      **CONVERTIBLE
                                          REDEEMABLE PREFERRED
                                          SHARES**
 
 In
                                June
                                2004, 10,000,000 Series A convertible redeemable
                                preferred shares were issued to
                                SAIF. Key features of the Series A preferred shares
                                were as
                                follows:
 
 *Redemption*
 
 Beginning
                                on the fifth anniversary of the date on which the
                                Series A convertible
                                redeemable preferred shares were first issued, CDTV
                                BVI shall, at the election
                                of any holder of Series A convertible redeemable
                                preferred shares, redeem all or
                                part of the Series A convertible redeemable preferred
                                shares held by such
                                redeeming holder. The redemption price shall be 200%
                                of the purchase price per
                                share plus all declared but unpaid dividends thereon
                                up to the date of
                                redemption, proportionally adjusted for share subdivisions,
                                share dividends,
                                reorganizations, reclassifications, consolidations,
                                or mergers.
 
 The
                                redemption value was $12,000. The difference of $7,427
                                between the redemption
                                value and carrying value of the preferred shares
                                represented a deemed dividend
                                to preferred shareholder, and it was recognized immediately
                                as the preferred
                                shares were issued in 2004.
 
 *Conversion*
 
 Each
                                shareholder of the Series A preferred shares will
                                have the right, at its sole
                                discretion, to convert all or any portion of its
                                Series A preferred shares into
                                the ordinary shares at any time after the closing
                                date of the preferred share
                                purchasing transaction at the conversion ratio.
 
 The
                                conversion ratio used to calculate the number of
                                conversion shares is 0.9055556,
                                subject to general anti-dilution adjustments. The
                                number of the conversion
                                shares to be issued to SAIF equals the number of
                                Series A preferred shares held
                                by SAIF divided by the conversion ratio.
 
 As
                                the
                                effective conversion price exceeded the fair value
                                of ordinary shares on
                                issuance day, there was no beneficial conversion
                                feature upon issuance of Series
                                A convertible redeemable preferred shares in 2004.
 
 *Voting
                                rights*
 
 Each
                                Series A preferred share will be entitled to vote
                                on all matters submitted to a
                                vote of the shareholders and will be entitled to
                                the number of votes equal to
                                the number of ordinary shares then issuable upon
                                conversion at the applicable
                                conversion ratio.
  F-36
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **17.**
                                      **CONVERTIBLE
                                          REDEEMABLE PREFERRED SHARES -
                                          continued**
 
 *Dividends
                                preference*
 
 No
                                dividend, whether in cash, in property, in shares
                                of the Company or otherwise,
                                shall be paid on any class or series of shares of
                                the Company in the next ten
                                years after the closing date of the sale of Series
                                A preferred shares, until a
                                qualified initial public offering or unless and until
                                a dividend in like amount
                                is first paid in full on the Series A preferred shares
                                on an as-if-converted
                                basis. Qualified initial public offering means the
                                Company's ordinary shares
                                become publicly traded in an internationally recognized
                                securities exchange,
                                provided that (i) at a pre-offering, the valuation
                                of the Company is at least
                                US$100,000 and (ii) such transaction or listing shall
                                result in aggregate
                                proceeds to the Company in excess of US$25,000 (before
                                deduction of
                                underwriters' commissions and expenses).
 
 *Liquidation
                                preference*
 
 In
                                the
                                event of liquidation, the shareholder of the Series
                                A preferred shares would be
                                entitled to receive in preference to the shareholders
                                of the ordinary shares a
                                per share amount equal to 2 times the purchase price
                                per share and any declared
                                but unpaid dividends, proportionately adjusted for
                                share splits, share
                                dividends, and recapitalization. After the full preference
                                amount has been paid
                                on all the Series A preferred shares, any remaining
                                assets of the Company or
                                proceeds received by the Company or its shareholders
                                shall be distributed to the
                                shareholders of the ordinary shares and the preferred
                                shares pro rata on an
                                as-if-converted basis.
 
 **18.**
                                      **WARRANT**
 
 In
                                June
                                2004, in conjunction with the issuance of Series
                                A preferred shares, CDTV BVI
                                issued a warrant to SAIF to purchase additional Series
                                A preferred shares for
                                $2,000 as adjusted for appreciation of Renminbi against
                                U.S. dollars from March
                                25, 2004 to the exercise date of the warrant. The
                                exercise price per share for
                                the warrant is 150% of the aggregate purchase price
                                per Series A preferred
                                share, subject to adjustments made in accordance
                                with the anti-dilution
                                provisions applicable to the preferred share. The
                                Warrant is not subject to any
                                conditions on its exercise after the closing of the
                                preferred share financing
                                until the earlier of (i) 5 years after the closing
                                date of sale of the Series A
                                preferred share; or (ii) the consummation of an initial
                                public offering in an
                                international capital market. The warrant was recorded
                                as a liability based on
                                its estimated fair value in accordance with SFAS
                                150, "Accounting for Certain
                                Financial Instruments with Characteristics of Both
                                Liabilities and Equity", and
                                remeasured to its fair value at every subsequent
                                reporting date until the
                                warrant was exercised.
  F-37
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
  **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 
 **18.**
                                      **WARRANT
                                          - continued**
 
 The
                                fair
                                value of the warrant was $900, $ 918 and $ 6,324
                                on December 31, 2004, 2005 and
                                the exercise date, November 16, 2006, respectively.
                                The fair value was estimated
                                on the basis of the Black-Scholes option pricing
                                model with the following
                                assumptions:
 
 December
                                          31,
                                      
                                      November
                                          16,2004
                                      
                                      2005
                                      
                                      2006Expected
                                          price volatility
                                      
                                      
                                      59.4
                                      %
                                      
                                      31.5
                                      %
                                      
                                      34.9
                                      %Risk-free
                                          interest rate
                                      
                                      
                                      3.6
                                      %
                                      
                                      4.7
                                      %
                                      
                                      5.5
                                      %Expected
                                          life of the warrant (years)
                                      
                                      
                                      2.5
                                      
                                      
                                      1.5
                                      
                                      
                                      0.62Expected
                                          dividends
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -Fair
                                          value of preferred share
                                      
                                      $
                                      0.97
                                      
                                      $
                                      1.22
                                      
                                      $
                                      3.72
 
 On
                                November 16, 2006, SAIF exercised the warrant and
                                obtained 2,222,222 Series A
                                preferred shares for a net cash consideration of
                                $2,101 at a price of $0.95 per
                                share after the stock split effect. There is no beneficial
                                conversion feature in
                                connection with the exercise of the warrant as the
                                fair value of ordinary shares
                                into which the preferred shares can be converted
                                is lower than the sum of the
                                carrying value of the warrant and the proceeds received
                                from SAIF for exercise
                                of the warrant. The fair value of the ordinary shares
                                and the carrying value of
                                the warrant on the date the warrant was exercised
                                were determined using the
                                estimated fair market value.
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION**
 
 *Options
                                granted to employees*
 
 Pursuant
                                to the directors' resolution, the Group adopted Share
                                Incentive Plans in 2005,
                                under which the Group may grant options to purchase
                                up to 4,135,828 ordinary
                                shares of the Group, to its employees, directors,
                                and consultants, subject to
                                vesting requirements. There are three schemes of
                                the options granted: Scheme I,
                                Scheme II, and Scheme III, which were granted on
                                February 3, 2005, September 22,
                                2006 and December 5, 2006, respectively.
 
 Details
                                of the Share Incentive Plans are as follows:
 
 *Scheme
                                I*
 
 Grant
                                date: February 3, 2005
 Exercise
                                price per share: $0.543
 Expiration
                                date: February 2, 2015
 Number
                                of
                                options granted: 2,971,942
  F-38
   **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION - continued**
 
 *Options
                                granted to employees* -
                                continued
 
 Type
                                I
                                under Scheme I:
 
 Number
                                of
                                options granted: 2,303,054
 
 Vesting
                                schedule: 50% of the total number of option shares
                                at the end of the six-month
                                period after the grant date, and the remaining 50%
                                of the option shares shall
                                vest in a series of 42 successive equal monthly installments
                                over the 42-month
                                period measured from the end of the six-month period
                                after the grant date, with
                                the first installment vesting on the first day of
                                the month following the end of
                                the six-month period of after the Grant date and
                                an additional installment
                                vesting on the first day of each of the 41 months
                                thereafter.
 
 Type
                                II under Scheme I:
 
 Number
                                of
                                options granted: 668,888
 
 Vesting
                                schedule: The options shall become vested as to 25%
                                of the total number of
                                ordinary shares subject to the options on the first
                                anniversary of the grant
                                date. The remaining 75% of the total number of ordinary
                                shares subject to the
                                options shall vest in 36 substantially equal monthly
                                installments, with the
                                first installment vesting on the last day of the
                                month following the month in
                                which the first anniversary of the grant date occurs
                                and an additional
                                installment vesting on the last day of each of the
                                35 months
                                thereafter.
 
 *Scheme
                                II*
 
 Grant
                                date: September 22, 2006
 Exercise
                                price per share: $1.771
 Expiration
                                date: September 21, 2016
 Number
                                of
                                options granted: 543,674
 
 Vesting
                                schedule: The option shall become vested as to (1)
                                25% of the total number of
                                ordinary shares subject to the option shares on the
                                first anniversary of the
                                grant date and (2) the remaining 75% of the option
                                shares shall vest in 36
                                substantially equal monthly installments, with the
                                first installment vesting on
                                the last day of the month following the month in
                                which the first anniversary of
                                the grant date occurs and an additional installment
                                vesting on the last day of
                                each of the 35 months thereafter.
  F-39
  **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION - continued**
 
 *Options
                                granted to employees* -
                                continued
 
 *Scheme
                                III*
 
 Grant
                                date: December 5, 2006
 Exercise
                                price per share: $4.172
 Expiration
                                date: December 4, 2016
 Number
                                of
                                options granted: 620,212
 
 Among
                                the
                                620,212 Scheme III options granted, 352,000 options
                                were granted to one officer
                                of the Group and the remaining 268,212 options were
                                granted to other employees
                                and directors.
 
 Vesting
                                schedule of the 268,212 options granted to employees
                                and directors:
 
 The
                                option shall become vested as to (1) 25% of the total
                                number of the option
                                shares on the first anniversary of the grant date
                                and (2) the remaining 75% of
                                the Option Shares shall vest in 36 substantially
                                equal monthly installments,
                                with the first installment vesting on the last day
                                of the month following the
                                month in which the first anniversary of the Grant
                                date occurs and an additional
                                installment vesting on the last day of each of the
                                35 months
                                thereafter.
 
 Vesting
                                schedule of the 352,000 options granted the officer:
 
 320,000
                                shares subject to the options shall become vested
                                as to (1) 25% of such 320,000
                                ordinary shares on the closing of an initial public
                                offering in an international
                                stock exchange, provided such initial public offering
                                shall occur within 3 years
                                from the grant date, and (2) the remaining 75% of
                                such 320,000 shall vest in 36
                                substantially equal monthly installments, with the
                                first installment vesting on
                                the last day of the month following the month in
                                which the officer starts its
                                employment and an additional installment vesting
                                on the last day of each of the
                                35 months thereafter. The vesting of the remaining
                                32,000 shares is conditional
                                upon whether the performance of non-smart card and
                                CA systems business in the
                                fiscal years from 2007 to 2009 can meet certain financial
                                targets. As of
                                December 31, 2007, the financial target has not been
                                met. However management
                                believes the financial target is still probable being
                                met during 2008 to 2009.
                                As a result, a compensation expense of $14 in connection
                                with these 32,000
                                shares was recognized in 2007.
 
 Option
                                granted to an independent director
 
 The
                                Group
                                granted 40,000 options to an independent director
                                who became the Company's
                                independent director upon the IPO of the Company.
 
 Grant
                                date: May 15, 2007
 Exercise
                                price per share: $4.172
 Expiration
                                date: May 14, 2017
 
 The
                                option shall become vested as to (1) 50% on the day
                                of the IPO, and (2) the
                                remaining 50% would be vested in 36 substantially
                                equal monthly installments
                                thereafter, with the first installment vesting on
                                the last day of the month
                                following the month of the IPO and an additional
                                installment vesting on the last
                                day of each of the 35 months thereafter.
  F-40
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION - continued**
 
 *Options
                                granted to non-employees*
 
 Option
                                granted to Tech Power Enterprises
 
 The
                                Group
                                granted 143,474 options to Tech Power Enterprises,
                                an affiliated company of
                                SAIF. The vesting schedule and other details of the
                                options are the same as
                                those in Type I options under Scheme I of Share Incentive
                                Plans.
 
 The
                                related share-based compensation was accounted for
                                as compensation expense in
                                accordance with EITF Issue No. 96-18, "Accounting
                                for Equity Instruments That
                                Are Issued to Other Than Employees for Acquiring,
                                or in Conjunction with
                                Selling, Goods or Services".
 
 *Termination
                                of options*
 
 If
                                the
                                grantee ceases to be employed by or ceases to provide
                                services to the Group, (a)
                                the grantee will have until the date that is 30 days
                                after his or her severance
                                date to exercise the options (or portion thereof)
                                to the extent that they were
                                vested on the severance date; (b) the options, to
                                the extent not vested on the
                                severance date, shall terminate on the severance
                                date; (c) the options, to the
                                extent exercisable for the 30-day period following
                                the severance date and not
                                exercised during such period, shall terminate at
                                the close of the business on
                                the last day of the 30-day period.
 
 *Option
                                exercise*
 
 The
                                option shall be exercisable by the delivery to the
                                secretary of corporation of a
                                written notice, in the form approved by the Group,
                                stating the number of
                                ordinary shares to be purchased pursuant to the option
                                and payment in full for
                                the exercise price of the shares to be purchased
                                in cash, by check or by
                                electronic funds transfer to the Group.
 
 Management
                                used the Black-Scholes option pricing model, with
                                the assistance of American
                                Appraisal China Limited, to estimate the fair value
                                of the options on their
                                respective grant date with the following assumptions:
 
 Options grantedto an independentScheme I
                                      
                                      Scheme II
                                      
                                      Scheme III
                                      
                                      directorExpected
                                          price volatility range
                                      
                                      
                                      56.3%-58.1
                                      %
                                      
                                      50.5%-50.6
                                      %
                                      
                                      49.8%-52.4
                                      %
                                      
                                      45.4%-48.1
                                      %Risk-free
                                          interest rate range
                                      
                                      
                                      4.17%-4.36
                                      %
                                      
                                      5.77%-5.81
                                      %
                                      
                                      5.77%-5.83
                                      %
                                      
                                      4.99%-5.03
                                      %Expected
                                          life range
                                      
                                      
                                      5.25-6.33
                                      
                                      
                                      5.50-6.26
                                      
                                      
                                      5.28-6.54
                                      
                                      
                                      5.19-5.94Expected
                                          dividends
                                      
                                      
                                      -
                                      
                                      
                                      1.00
                                      %
                                      
                                      1.00
                                      %
                                      
                                      -Fair
                                          value of ordinary share at grant date
                                      
                                      $
                                      0.27
                                      
                                      $
                                      3.56
                                      
                                      $
                                      3.56
                                      
                                      $
                                      9.15
  F-41
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION - continued**
 
 *Option
                                exercise* -
                                continued
 
 The
                                fair
                                value of the option at the grant date was $0.11,
                                $2.38, $1.67 and $6.48 for each
                                option for Scheme I, Scheme II, Scheme III option
                                plans, and the options granted
                                to the independent director, respectively.
 
 In
                                calculating the fair value of the options using the
                                Black-Scholes option pricing
                                model, the following major assumptions were used:
 
 (1)
                                      Volatility
 
 The
                                volatility of the underlying ordinary shares during
                                the life of the options was
                                estimated based on the historical stock prices volatility
                                of listed comparable
                                companies over a period comparable to the expected
                                term of the options. The
                                companies selected for reference were Comcast Corporation,
                                Cablevision Systems
                                Corporation, Thomson, and NDS Group plc.
 
 (2)
                                      Risk
                                          free interest rate
 
 Risk
                                free
                                interest rate was estimated based on the yield to
                                maturity of China
                                international government bonds with a maturity period
                                close to the expected term
                                of the options.
 
 (3)
                                      Expected
                                          term
 
 As
                                the
                                Company did not have historical share option exercise
                                experience, it estimated
                                the expected term as the average between the vesting
                                term of the options and the
                                original contractual term.
 
 (4)
                                      Dividend
                                          yield
 
 The
                                dividend yield was estimated by the Company based
                                on its expected dividend
                                policy over the expected term of the options.
 
 (5)
                                      Exercise
                                          price
 
 The
                                exercise price of the options was determined by the
                                Company's board of
                                directors.
  F-42
  **A
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION - continued**
 
 *Option
                                exercise* -
                                continued
 
 (6)
                                      Fair
                                          value of underlying ordinary shares
 
 The
                                estimated fair value of the ordinary shares underlying
                                the options as of the
                                respective grant dates, except for the options to
                                purchase 40,000 of the
                                Company's ordinary shares granted on May 15, 2007,
                                was determined based on (i) a
                                contemporaneous valuation performed by American Appraisal
                                China Limited with
                                respect to option grants made on September 22, 2006
                                and (ii) a retrospective
                                valuation performed by American Appraisal China Limited
                                with respect to option
                                grants made on February 3, 2005, as indicated in
                                its valuation reports dated
                                January 2, 2007. As the Company believed that there
                                was no material change in
                                its operations in the short period between September
                                22, 2006 and December 5,
                                2006 that would materially impact the fair value
                                of its ordinary shares, the
                                estimated fair value of share options granted on
                                December 5, 2006 was determined
                                based on the estimated fair value of its ordinary
                                shares as of September 22,
                                2006. The estimated fair value of share options granted
                                on May 15, 2007 was
                                determined based on the price paid by investors to
                                purchase the Company's
                                ordinary shares from China Capital in eight separate
                                transactions in March and
                                April 2007. Since such sales and purchases of the
                                Company's ordinary shares took
                                place between unrelated parties at arm's length and
                                the aggregate number of
                                ordinary shares sold in those transactions accounted
                                for more than 10% of the
                                Company's total issued and outstanding shares, the
                                Company believes that the
                                purchase price paid by the investors in those transactions
                                represents the fair
                                value of its ordinary shares at the time of those
                                transactions. In light of the
                                fact that no significant changes in the financial,
                                business and other conditions
                                of the Company occurred between April and May 2007,
                                the Company determined that
                                such purchase price continued to represent the fair
                                value of the Company's
                                ordinary shares on May 15, 2007.
 
 A
                                summary
                                of stock option activity is as follows:
 
 Weighted averageNumber of options
                                      
                                      exercise priceOptions
                                          outstanding as at December 31, 2005
                                      
                                      
                                      2,873,684
                                      
                                      $
                                      0.54Granted
                                      
                                      
                                      1,163,886
                                      
                                      
                                      3.05Exercised
                                      
                                      
                                      -
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      (5,111
                                      )
                                      
                                      1.77Options
                                          outstanding as at December 31, 2006
                                      
                                      
                                      4,032,459
                                      
                                      
                                      1.27Granted
                                      
                                      
                                      40,000
                                      
                                      
                                      4.17Exercised
                                      
                                      
                                      -
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      (11,556
                                      )
                                      
                                      4.17Options
                                          outstanding as at December 31, 2007
                                      
                                      
                                      4,060,903
                                      
                                      $
                                      1.29
  F-43
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **19.**
                                      **SHARE-BASED
                                          COMPENSATION - continued**
 
 *Option
                                exercise* -
                                continued
 
 The
                                following table summarizes information with respect
                                to share options outstanding
                                at December 31, 2007:
 
 Weighted-average
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Weighted-averageRange of
                                      
                                      Number
                                      
                                      remaining
                                      
                                      weighted-average
                                      
                                      Intrinsic
                                      
                                      Number
                                      
                                      exercise
                                      
                                      Intrinsicexercise price
                                      
                                      outstanding
                                      
                                      contractual life
                                      
                                      exercise price
                                      
                                      value
                                      
                                      exerciable
                                      
                                      price
                                      
                                      value$        
                                          0.54
                                      
                                      
                                      2,873,683
                                      
                                      
                                      7.10
                                          years
                                      
                                      $
                                      0.54
                                      
                                      $
                                      26.44
                                      
                                      
                                      2,504,013
                                      
                                      $
                                      0.54
                                      
                                      $
                                      26.441.77
                                      
                                      
                                      538,562
                                      
                                      
                                      8.73
                                          years
                                      
                                      
                                      1.77
                                      
                                      
                                      25.21
                                      
                                      
                                      169,898
                                      
                                      
                                      1.77
                                      
                                      
                                      25.214.17
                                      
                                      
                                      608,658
                                      
                                      
                                      8.93
                                          years
                                      
                                      
                                      4.17
                                      
                                      
                                      22.81
                                      
                                      
                                      221,135
                                      
                                      
                                      4.17
                                      
                                      
                                      22.81$        
                                          4.17
                                      
                                      
                                      40,000
                                      
                                      
                                      9.38
                                          years
                                      
                                      $
                                      4.17
                                      
                                      $
                                      22.81
                                      
                                      
                                      21,041
                                      
                                      
                                      4.17
                                      
                                      
                                      22.814,060,903
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,916,087
 
 The
                                aggregate intrinsic value of options outstanding
                                and vested as of December 31,
                                2007 was $104,353 and $76,013, respectively.
 
 The
                                Group
                                recorded a related compensation expense of $212,
                                $338 and $1,261 for the years
                                ended December 31, 2005, 2006 and 2007, respectively.
                                The total grant-date fair
                                value for options vested during the years ended December
                                31, 2005, 2006 and 2007
                                was $154, $206 and $1,464, respectively.
 
 As
                                of
                                December 31, 2007, total unrecognized compensation
                                expense related to the
                                unvested share options was $991, which is expected
                                to be recognized over a
                                weighted-average period of 1.62 years according to
                                the graded vesting
                                schedule.
 
 *2008
                                Stock Incentive Plan*
 
 On
                                September 13, 2007, the shareholders of CDTV Holding
                                approved the 2008 Stock
                                Incentive Plan. Pursuant to the 2008 Stock Incentive
                                Plan, the Company may issue
                                stock options, stock appreciation rights, stock bonuses,
                                restricted stock and
                                restricted stock units, performance stock, stock
                                units, phantom stock, dividend
                                equivalents or similar rights to directors, officers,
                                employees, consultants and
                                advisors to purchase or acquire shares. The Company
                                reserved a total of
                                1,200,000 ordinary shares for issuance under the
                                2008 Stock Incentive Plan,
                                subject to any adjustments as contemplated by the
                                plan. As of December 31, 2007,
                                no awards have been granted under the 2008 Stock
                                Incentive
                                Plan.
  F-44
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **20.**
                                      **MAINLAND
                                          CHINA CONTRIBUTION PLAN**
 
 Full
                                time
                                employees of the Group in the PRC participate in
                                a government-mandated
                                multiemployer defined contribution plan pursuant
                                to which certain pension
                                benefits, medical care, unemployment insurance, employee
                                housing fund and other
                                welfare benefits are provided to employees. PRC labor
                                regulations require the
                                Group to accrue for these benefits based on certain
                                percentages of the
                                employees' salaries. The total contribution for such
                                employee benefits was $294,
                                $392 and $784 for the years ended December 31, 2005,
                                2006 and 2007,
                                respectively.
  **21.**
                                      **COMMITMENT**
 
 Lease
                                commitment
 
 The
                                Group
                                has operating lease agreements principally for its
                                office spaces in the PRC.
                                These leases expire through 2009 and are renewable
                                upon negotiation. Rental
                                expense under operating leases for the years ended
                                December 31, 2005 and 2006
                                and 2007 was $304, $306, and $535, respectively.
 
 Future
                                minimum lease payments under non-cancelable operating
                                lease agreements are as
                                follows:
 
 2008
                                      
                                      $
                                      5902009
                                      
                                      
                                      143$
                                      733
 
 **22.**
                                      **CONTINGENT
                                          LIABILITIES**
 
 a.
                                      The
                                          Group's variable interest entity, N-S Digital
                                          TV has engaged in certain
                                          business activities without necessary permits.
                                          The PRC government
                                          introduced regulations in 1999 generally
                                          requiring a company that engages
                                          in the production and sale of encryption
                                          products to obtain two licenses,
                                          one for the production of encryption products
                                          and the other for the sale
                                          and distribution of encryption products.
                                          The implementation rules for
                                          issuing such two licenses were promulgated
                                          in December 2005. N-S Digital
                                          TV has engaged in the production and sale
                                          of encryption products since its
                                          establishment in May 2004, but it did not
                                          obtain the license for the
                                          production of encryption products until
                                          June 2006. It has also applied for
                                          a license for the sale of encryption products
                                          but its application may not
                                          be successful. If its application is unsuccessful,
                                          N-S Digital TV may be
                                          required to discontinue selling encryption
                                          products and consequently, the
                                          Group's business and operating results
                                          may be materially adversely
                                          affected. The Group did not accrue a loss
                                          contingency under SFAS No. 5,
                                          "Accounting for Contingencies" for the
                                          years ended December 31, 2005 and
                                          2006 or 2007 as it is not probable that
                                          the Group will not obtain the
                                          required license and the amount of loss
                                          for failing to obtain such license
                                          can not be reasonably
                                          estimated.
  F-45
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **22.**
                                      **CONTINGENT
                                          LIABILITIES - continued**
 
 b.
                                      The
                                          Group's CA systems business uses encryption
                                          technology and thus is
                                          required by the relevant PRC laws and regulations
                                          to obtain a license to
                                          produce commercial encryption products.
                                          Although foreign-invested
                                          enterprises incorporated in the PRC, such
                                          as CDTV BVI's subsidiary, Super
                                          TV, are not expressly prohibited from conducting
                                          a business that uses
                                          encryption technology, foreign-invested
                                          enterprises may have difficulty
                                          obtaining the necessary license due to
                                          the PRC encryption authority's
                                          generally restrictive approach towards
                                          foreign participation in the PRC
                                          encryption industry. N-S Digital TV, which
                                          is wholly owned by PRC citizens
                                          and through which the Group conducts the
                                          Group's CA system business, has
                                          obtained a license to produce commercial
                                          encryption products as required
                                          for the Group's business. The Group's contractual
                                          arrangements with N-S
                                          Digital TV and its shareholders provide
                                          the Group with the economic
                                          benefits of, and substantive control over,
                                          N-S Digital TV. If the PRC
                                          encryption authority determines that the
                                          Group's control over, or
                                          relationship with, N-S Digital TV through
                                          those contractual arrangements
                                          is contrary to their generally restrictive
                                          approach towards foreign
                                          participation in the PRC encryption industry,
                                          it may revoke, or refuse to
                                          renew, N-S Digital TV's license to produce
                                          commercial encryption products,
                                          or refuse to grant any other encryption-related
                                          license that may be
                                          required for the Group's business in the
                                          future. If that were to happen,
                                          the Company might have to discontinue all
                                          or a substantial portion of the
                                          Group's business pending the re-issuance,
                                          extension or issuance of the
                                          required license and consequently, the
                                          Group's business, financial
                                          condition or operating results could be
                                          materially adversely affected. The
                                          Group did not accrue a loss contingency
                                          under SFAS No. 5 for
                                          Contingencies" for the years ended December
                                          31, 2005 and 2006 or 2007 as
                                          it is not probable that the PRC authority
                                          will revoke the Group's license
                                          due to the contractual arrangement currently
                                          in place and the amount of
                                          loss for the possible revocation of license
                                          can not be reasonably
                                          estimated.
 
 **23.**
                                      **RELATED
                                          PARTY BALANCES AND
                                          TRANSACTIONS**
 
 a.
                                      Amounts
                                          due from related parties
 
 December 31,2006
                                      
                                      2007Amount
                                            due from N-T Information
                                            Engineering
                                      
                                      $
                                      1,668
                                      
                                      $
                                      1,277
  F-46
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **22.**
                                      **RELATED
                                          PARTY BALANCES AND TRANSACTIONS -
                                          continued**
 
 a.
                                      Amounts
                                          due from related parties -
                                          continued
 
 Ÿ
                                      For
                                          the balance as at December 31, 2006, $1,543
                                          represented receivable from
                                          N-T Information Engineering for the purchase
                                          consideration that was
                                          originally paid by N-S Digital TV relating
                                          to the set-top box acquisition
                                          (see Note 4). This amount was fully paid
                                          by N-T Information Engineering in
                                          April 2007. The remaining balance of $125
                                          was for goods sold to N-T
                                          Information Engineering.
 
 Ÿ
                                      For
                                          the balance as at December 31, 2007, $1,471
                                          represented a loan provided to
                                          N-T Information Engineering in April 2007.
                                          The loan is interest bearing at
                                          a rate of 0.47925% per month and is repayable
                                          in April 2008. The remaining
                                          balance of $194 was advance from customers
                                          for goods sold to N-T
                                          Information Engineering.
 
 b.
                                      In
                                          2005, the Group paid $1,997 to N-T Information
                                          Engineering with the
                                          original intention to acquire certain equity
                                          interests in Zhongshi Digital
                                          TV Technology Co., Ltd. ("Zhongshi"). The
                                          amount was paid back in 2006 as
                                          the Group decided not to pursue this transaction
                                          for business
                                          reasons.
 
 c.
                                      In
                                          August 2005, N-T Information borrowed a
                                          short-term loan of $743 from the
                                          Group with an interest rate of 0.435% per
                                          month. The loan was for
                                          operating purpose and was repaid in February
                                          2006.
 
 d.
                                      The
                                          Group granted 143,474 Type I options under
                                          Scheme I of Share Incentive
                                          Plans to Tech Power Enterprises, an affiliated
                                          company of SAIF, and
                                          accordingly the Group incurred $11, $3,
                                          $ 41 of share-based compensation
                                          expense in 2005, 2006 and 2007,
                                          respectively.
 
 e.
                                      Pursuant
                                          to an agreement entered into in March 2007,
                                          N-T Information Engineering
                                          granted the Group a non-exclusive license
                                          to use certain trademarks free
                                          of charge.
 
 **24.**
                                      **DIVIDENDS**
 
 In
                                August
                                2006, the Group declared and paid $10,000 cash dividend
                                to its shareholders, of
                                which $2,691 was paid to its Series A preferred shareholder,
                                SAIF, and $7,309 to
                                its ordinary shareholders.
 
 In
                                November 2006, the Group declared $11,300 cash dividend
                                to its shareholders, of
                                which $3,040 was declared to its Series A preferred
                                shareholder, SAIF, and
                                $8,260 to its ordinary shareholders. The amount was
                                paid in full in February
                                2007.
  F-47
 
 **CHINA
                                DIGITAL TV HOLDING CO., L** **TD.**
 
 **NOTES
                                TO CONSOLIDATED FINANCIAL STATEMENTS - continued**
 **FOR
                                THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**
 **(I** **n** **** **U.S.
                                dollars in thousands, except share data** **)**
 
 **25.**
                                      **STATUTORY
                                          RESERVES**
 
 As
                                stipulated by the relevant law and regulations in
                                the PRC, the Company's
                                subsidiary and variable interest entity in the PRC
                                are required to maintain
                                non-distributable statutory surplus reserve. Appropriations
                                to the statutory
                                surplus reserve are required to be made at not less
                                than 10% of profit after
                                taxes as reported in these entities' statutory financial
                                statements prepared
                                under PRC GAAP. Once appropriated, these amounts
                                are not available for future
                                distribution to owners or shareholders. Once the
                                general reserve is accumulated
                                to 50% of these entities registered capital, these
                                entities can choose not to
                                provide more reserves. The statutory reserve may
                                be applied against prior year
                                losses, if any, and may be used for general business
                                expansion and production
                                and an increase in registered capital of these entities.
                                Amounts contributed to
                                the statutory reserve were $388 and $1,965 and $3,335
                                for 2005, 2006 and 2007
                                respectively.
 
 **26.**
                                      **SUBSEQUENT
                                          EVENT**
 
 On
                                May
                                28, 2008, the Company, through its variable interest
                                entity, N-S Digital TV
                                entered an agreement with Mr. Xitao Lai, a PRC citizen,
                                to establish a limited
                                liability company in the PRC, Dongguan SuperTV Video
                                Info Co., Ltd., to engage
                                in provision of valued added services to digital
                                TV users in the PRC. N-S
                                Digital TV and Mr. Xitao Lai will each contribute
                                cash of RMB 5 million
                                representing 50% of equity interest in the joint
                                venture. The formal
                                establishment of Dongguan SuperTV is subject to certain
                                approval procedures of
                                relevant government authorities in the PRC.
  F-48


EXHIBIT
        INDEX
  **Number**
              ****
              **Description
                  of Exhibit**1.1*
              
              Second
                  Amended and Restated Memorandum and Articles of Association of
                  China
                  Digital TV Holding Co., Ltd.2.1*
              
              Specimen
                  of Share Certificate.2.2*
              
              Form
                  of Deposit Agreement, including form of American Depositary
                  Receipts.2.3*
              
              First
                  Amended and Restated Shareholders Agreement of China Digital TV
                  Holding
                  Co., Ltd., dated September 13, 2007, among Novel-Tongfang Information
                  Engineering Co., Ltd., Beijing Novel-Tongfang Digital TV Technology
                  Co.,
                  Ltd., China Digital TV Technology Co., Ltd., China Capital Investment
                  Holdings Limited, China Cast Investment Holdings Limited, SB Asia
                  Infrastructure Fund L.P., Capital International Private Equity
                  Fund IV,
                  L.P., CGPE IV, L.P. and certain other shareholders.4.1*
              
              Asset
                  Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                  Digital TV Technology Co., Ltd. and Novel-Tongfang Information
                  Engineering
                  Co., Ltd.4.2*
              
              Equity
                  Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                  Digital TV Technology Co., Ltd. and Novel-Tongfang Information
                  Engineering
                  Co., Ltd. and related (i) Equity Entrustment Agreement, dated September
                  10, 2004, and (ii) Equity Purchase Entrustment Agreement, dated
                  April 1,
                  2004, both between the same parties.4.3*
              
              Asset
                  Purchase Agreement, dated June 8, 2004, between Beijing Novel-Tongfang
                  Digital TV Technology Co., Ltd. and Beijing Super TV Co., Ltd.4.4*
              
              Equity
                  Transfer Agreement, dated August 4, 2006, between Novel-Tongfang
                  Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital
                  TV
                  Technology Co., Ltd. and related Equity Transfer Agreement, dated
                  March
                  15, 2007, among Novel-Tongfang Information Engineering Co., Ltd.,
                  Beijing
                  Novel-Tongfang Digital TV Technology Co., Ltd. and Panasonic Corporation
                  of China.
 4.5*
                
                Asset
                    Transfer Agreement, dated August 5, 2006, between Novel-Tongfang
                    Information Engineering Co., Ltd. and Beijing Novel-Tongfang
                    Digital TV
                    Technology Co., Ltd. and the Supplemental Agreement thereto,
                    dated April
                    6, 2007.4.6*
                
                Trademark
                    Licensing Agreement entered into in March 2007 between Beijing
                    Novel-Tongfang Information Engineering Co., Ltd. and Beijing
                    Novel-Tongfang Digital TV Technology Co., Ltd.4.7*
                
                Equipment
                    Leasing Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                    Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
                    Ltd.4.8*
                
                Technical
                    Support and Related Service Agreement, dated June 7, 2004, between
                    Beijing
                    Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super
                    TV Co.,
                    Ltd.4.9*
                
                Technology
                    License Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                    Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
                    Ltd.4.10*
                
                Technology
                    Development Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
                    Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
                    Ltd.
 
  **Number**
              ****
              **Description
                  of Exhibit**
 4.11*
              
              Products
                  and Software Purchase Agreement, dated June 7, 2004, between Beijing
                  Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super
                  TV Co.,
                  Ltd.4.12*
              
              Equity
                  Transfer Option Agreement, dated June 7, 2004, among Beijing Super
                  TV Co.,
                  Ltd., Novel-Tongfang Information Engineering Co., Ltd. and Ms.
                  Li Yang;
                  the Supplemental Agreement thereto, dated September 1, 2005, among
                  Beijing
                  Super TV Co., Ltd., Novel-Tongfang Information Engineering Co.,
                  Ltd., Ms.
                  Li Yang and Beijing Novel-Tongfang Digital TV Technology Co., Ltd.
                  and the
                  No. 2 Supplemental Agreement thereto, dated August 18, 2007, among
                  Beijing
                  Super TV Co., Ltd., Novel-Tongfang Information Engineering Co.,
                  Ltd., Ms.
                  Li Yang, Beijing Novel-Tongfang Digital TV Technology Co., Ltd.
                  and Ms.
                  Wei Gao.4.13*
              
              Share
                  Pledge Agreement, dated September 1, 2005, between Novel-Tongfang
                  Information Engineering Co., Ltd. and Beijing Super TV Co.,
                  Ltd.4.14*
              
              Share
                  Pledge Agreement, dated September 1, 2005, between Ms. Li Yang
                  and Beijing
                  Super TV Co., Ltd.; and the Supplemental Agreement thereto, dated
                  August
                  18, 2007, among Ms. Li Yang, Beijing Super TV Co., Ltd. and Ms.
                  Wei
                  Gao.4.15*
              
              Business
                  Operating Agreement, dated September 1, 2005, among Beijing Super
                  TV Co.,
                  Ltd., Novel-Tongfang Information Engineering Co., Ltd., Ms. Li
                  Yang and
                  Beijing Novel-Tongfang Digital TV Technology Co., Ltd.; and the
                  Supplemental Agreement thereto, dated August 18, 2007, among Beijing
                  Super
                  TV Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
                  Ms. Li
                  Yang, Beijing Novel-Tongfang Digital TV Technology Co., Ltd. and
                  Ms. Wei
                  Gao.4.16*
              
              Power
                  of Attorney, dated September 1, 2005, of Novel-Tongfang Information
                  Engineering Co., Ltd.4.17*
              
              Power
                  of Attorney, dated August 18, 2007, of Ms. Wei Gao.4.18*
              
              Entrusted
                  Loan Agreement, dated August 23, 2004, among Beijing Super TV Co.,
                  Ltd.,
                  Beijing Novel-Tongfang Digital TV Technology Co., Ltd. and Bank
                  of
                  Beijing, Shangdi Branch.4.19*
              
              Entrusted
                  Loan Agreement, dated July 13, 2004, among Beijing Super TV Co.,
                  Ltd.,
                  Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
                  Shangdi Branch.
  4.20*
                
                Entrusted
                    Loan Agreement, dated August 25, 2005, among Beijing Super TV
                    Co., Ltd.,
                    Novel-Tongfang Information Engineering Co., Ltd. and Bank of
                    Beijing,
                    Shangdi Branch.4.21*
                
                Loan
                    Agreement, dated April 4, 2007, between Beijing Super TV Co.,
                    Ltd. and
                    Novel-Tongfang Information Engineering Co., Ltd. and the related
                    Entrusted
                    Loan Agreement, dated April 12, 2007, among Beijing Super TV
                    Co., Ltd.,
                    Novel-Tongfang Information Engineering Co., Ltd. and Bank of
                    Beijing,
                    Shangdi Branch.4.22*
                
                Service
                    Agreement, dated April 2, 2007, between Novel-Tongfang Information
                    Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV Technology
                    Co., Ltd.4.23*
                
                Interest
                    Payment Agreement, dated November 30, 2006, between Beijing Novel-Tongfang
                    Digital TV Technology Co., Ltd. and Beijing Super TV Co., Ltd.4.24*
                
                Form
                    of Property Lease Agreement.4.25*
                
                Fixed
                    Assets Transfer Agreement, dated March 28, 2007, between Beijing
                    Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super
                    TV Co.,
                    Ltd.4.26*
                
                Form
                    of Employment Agreement and related Form of Agreement on Confidentiality
                    and Intellectual Property.4.27*
                
                Form
                    of Non-Disclosure, Non-Competition, Commitment and Proprietary
                    Information
                    Agreement.
 
  **Number**
              ****
              **Description
                  of Exhibit**
 4.28*
              
              Form
                  of Indemnification Agreement for Directors.4.29*
              
              Amended
                  and Restated 2005 Stock Incentive Plan of China Digital TV Holding
                  Co.,
                  Ltd. and form of stock option agreement.4.30††*
              
              Cooperation
                  Agreement, dated January 5, 2007, between Beijing Novel-Tongfang
                  Digital
                  TV Technology Co., Ltd. and Jiangsu Qingda Science and Technology
                  Industries Co., Ltd.4.31*
              
              Cooperation
                  Agreement, dated July 18, 2007, between Beijing Novel-Tongfang
                  Digital TV
                  Technology Co., Ltd. and China Electronics Smart Card Co.,
                  Ltd.4.32*
              
              2008
                  Stock Incentive Plan of China Digital TV Holding Co.,
                  Ltd.4.33
              
              Agreement
                  for Equity Transfer of Beijing Novel-Super Digital TV Technology
                  Co.,
                  Ltd., dated December 2007, between China Digital TV Technology
                  Co., Ltd.
                  and Golden Benefit Technology Co., Ltd.8.1
              
              List
                  of Subsidiaries of China Digital TV Holding Co., Ltd.11.1*
              
              Code
                  of Business Conduct and Ethics of China Digital TV Holding Co.,
                  Ltd.12.1
              
              CEO
                  Certification pursuant to Rule 13a - 14(a).12.2
              
              CFO
                  Certification pursuant to Rule 13a - 14(a).13.1
              
              CEO
                  Certification pursuant to Rule 13a - 14(b).13.2
              
              CFO
                  Certification pursuant to Rule 13a - 14(b).23.1
              
              Consent
                  of Deloitte Touche Tohmatsu CPA
                  Ltd.
 23.2
                
                Consent
                    of American Appraisal China Limited.23.3
                
                Consent
                    of King & Wood, PRC Lawyers.
 
 ††
                Portions
                    of the agreement have been omitted pursuant to a confidential
                    treatment
                    request and have been filed with the Securities and Exchange
                    Commission
                    separately with a confidential treatment request.*
                Previously
                    filed as an exhibit to the Registration Statement on Form F-1
                    (File No.
                    333-146072) of China Digital TV Holding Co., Ltd. and incorporated
                    herein
                    by reference thereto.