UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
20-F





 ̈
              REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
      ACT OF 1934ORx
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                For
      the fiscal year ended December 31, 2008OR ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                For
      the transition period from __________ to __________OR ̈
              SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                Date
      of event requiring this shell company report
  __________





Commission
file number 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)


Yuan
Yuan
 China
Digital TV Holding Co., Ltd.
 Jingmeng
High-Tech Building B, 4th Floor
 No. 5
Shangdi East Road
 Haidian
District, Beijing 100085
 People’s
Republic of China
 Email:
ir@chinadtv.cn
 Telephone:
(+86 10) 6297 1199
 Fax: (+86
10) 6297 5009
 (Name,
Telephone, Email and/or Facsimile Number and Address of Company Contact
Person)




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




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










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




None


(Title of
Class)




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, 2008, 57,209,548 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 þ




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 þ




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  þ  No  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). 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  þ  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
þ




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  þ





TABLE
OF CONTENTS




INTRODUCTION
                1FORWARD-LOOKING
      STATEMENTS
                1PART
      I
                
                3Item
      1.
                Identity
      of Directors, Senior Management and Advisers
                3Item
      2.
                Offer
      Statistics and Expected Timetable
                3Item
      3.
                Key
      Information
                3Item
      4.
                Information
      on the Company
                27Item
      4A.
                Unresolved
      Staff Comments
                47Item
      5.
                Operating
      and Financial Review and Prospects
                47Item
      6.
                Directors,
      Senior Management and Employees
                67Item
      7.
                Major
      Shareholders and Related Party Transactions
                75Item
      8.
                Financial
      Information
                82Item
      9.
                The
      Offer and Listing
                83Item
      10.
                Additional
      Information
                84Item
      11.
                Quantitative
      and Qualitative Disclosures About Market Risks
                88Item
      12.
                Description
      of Securities Other than Equity Securities
                89PART
      II
                
                89Item
      13.
                Defaults,
      Dividend Arrearages and Delinquencies
                89Item
      14.
                Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
                89Item
      15.
                Controls
      and Procedures
                90Item
      16A.
                Audit
      Committee Financial Expert
                92Item
      16B.
                Code
      of Ethics
                92Item
      16C.
                Principal
      Accountant Fees and Services
                92Item
      16D.
                Exemptions
      from the Listing Standards for Audit Committees
                93Item
      16E.
                Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                93Item
      16F.
                Change
      in Registrant’s Certifying Accountant
                93Item
      16G.
                Corporate
      Governance
                93PART
      III
                
                93Item
      17.
                Financial
      Statements
                93Item
      18.
                Financial
      Statements
                93Item
      19.
                Exhibits
                94


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;




·
            “U.S.”
      or “US” refers to the United
States;




·
            “U.S.
      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, and its subsidiaries.




FORWARD-LOOKING
STATEMENTS




This
annual report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, 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;




1




·
            our
      expectations regarding demand for our products and
    services;




·
            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 and
  elsewhere;




·
            our
      future business development and economic performance;
  and




·
            our
      use of proceeds from our initial public
  offering.




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.


2




PART
I




Item
1.          Identity of
Directors, Senior Management and Advisers




Not
Applicable.




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, 2006,
2007 and 2008, and the selected consolidated balance sheet data as of December
31, 2007 and 2008 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 years ended December 31, 2004
and 2005 and the selected historical consolidated balance sheet data as of
December 31, 2004, 2005 and 2006 set forth below are derived from our audited
consolidated financial statements which are not included in this annual
report.




Our
audited historical consolidated financial statements have been prepared and
presented in accordance with U.S. 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
              
              
              2008(in
      thousands of U.S. dollars, except share and per share
data)Consolidated
      Statements of Operations Data:RevenuesProducts
              
              $
              1,388
              
              
              $
              9,291
              
              
              $
              26,443
              
              
              $
              49,741
              
              
              $
              64,412Services
              
              
              2,300
              
              
              
              3,855
              
              
              
              4,182
              
              
              
              6,011
              
              
              
              6,2853,688
              
              
              
              13,146
              
              
              
              30,625
              
              
              
              55,752
              
              
              
              70,697Business
      tax
              
              
              (61
              )
              
              
              (60
              )
              
              
              (255
              )
              
              
              (299
              )
              
              
              (363
              )Net
      revenues
              
              
              3,627
              
              
              
              13,086
              
              
              
              30,370
              
              
              
              55,453
              
              
              
              70,334Cost
      of revenuesProducts
              
              
              458
              
              
              
              1,936
              
              
              
              4,726
              
              
              
              8,100
              
              
              
              10,877Services
              
              
              1,339
              
              
              
              1,967
              
              
              
              1,859
              
              
              
              2,135
              
              
              
              2,8281,797
              
              
              
              3,903
              
              
              
              6,585
              
              
              
              10,235
              
              
              
              13,705Gross
      profit
              
              
              1,830
              
              
              
              9,183
              
              
              
              23,785
              
              
              
              45,218
              
              
              
              56,629Total
      operating expenses
              
              
              3,019
              
              
              
              3,830
              
              
              
              5,297
              
              
              
              12,107
              
              
              
              19,068(Loss)/
      income from operations
              
              
              (1,189
              )
              
              
              5,353
              
              
              
              18,488
              
              
              
              33,111
              
              
              
              37,561Interest
      income
              
              
              12
              
              
              
              117
              
              
              
              279
              
              
              
              2,790
              
              
              
              9,138Impairment
      of long-term investment
              
              
              (358
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Other
      income (expense)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              263
              
              
              
              (412
              )Recognition
      of the change in the fair value of the warrant
              
              
              (472
              )
              
              
              (18
              )
              
              
              (5,406
              )
              
              
              —
              
              
              
              —




3




Years
      ended December 31,2004(a)
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(in
      thousands of U.S. dollars, except share and per share
data)(Loss)/
      income before income taxes
                
                
                (2,007
                )
                
                
                5,452
                
                
                
                13,361
                
                
                
                36,164
                
                
                
                46,287Income
      tax benefit/ (expense)
                
                
                21
                
                
                
                66
                
                
                
                59
                
                
                
                (2,342
                )
                
                
                (3,235
                )(Loss)/
      income before minority interest
                
                
                (1,986
                )
                
                
                5,518
                
                
                
                13,420
                
                
                
                33,822
                
                
                
                43,052Minority
      interest
                
                
                1,319
                
                
                
                975
                
                
                
                430
                
                
                
                —
                
                
                
                (14
                )Net
      (loss) from equity method investments
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6
                
                
                
                4Net
      (loss)/ income
                
                
                (3,305
                )
                
                
                4,543
                
                
                
                12,990
                
                
                
                33,816
                
                
                
                43,062Deemed
      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
                
                
                $
                43,062Earnings
      per share data:Net
      (loss)/ income per share—basic ordinary shares
                
                $
                (0.36
                )
                
                $
                0.11
                
                
                $
                0.24
                
                
                $
                0.74
                
                
                $
                0.75Net
      income per share—basic participating preferred shares
                
                
                1.32
                
                
                
                0.11
                
                
                
                0.54
                
                
                
                0.66
                
                
                
                —Net
      (loss)/ income per ordinary share—diluted
                
                $
                (0.36
                )
                
                $
                0.11
                
                
                $
                0.21
                
                
                $
                0.68
                
                
                $
                0.72Weighted
      average shares used in calculating basic net (loss)/ income per
      share—ordinary shares
                
                
                30,000,000
                
                
                
                30,000,000
                
                
                
                30,488,889
                
                
                
                39,170,004
                
                
                
                57,138,985Weighted
      average shares used in calculating basic net income per share—preferred
      shares
                
                
                5,638,889
                
                
                
                10,000,000
                
                
                
                10,519,120
                
                
                
                7,389,394
                
                
                
                —Weighted
      average shares used in calculating basic net (loss)/ income per
      share
                
                
                30,000,000
                
                
                
                30,000,000
                
                
                
                34,225,321
                
                
                
                42,773,590
                
                
                
                60,058,724Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                
                $
                5,278
                
                
                $
                8,272
                
                
                $
                21,137
                
                
                $
                228,958
                
                
                $
                202,947Total
      assets
                
                
                9,545
                
                
                
                16,217
                
                
                
                33,505
                
                
                
                263,735
                
                
                
                297,976Total
      liabilities
                
                
                5,585
                
                
                
                6,362
                
                
                
                21,564
                
                
                
                11,884
                
                
                
                71,950Minority
      interest
                
                
                1,969
                
                
                
                2,944
                
                
                
                4,000
                
                
                
                4,000
                
                
                
                1,564Series A
      convertible redeemable preferred shares
                
                
                12,000
                
                
                
                12,000
                
                
                
                16,078
                
                
                
                —
                
                
                
                —Total
      shareholders’ (deficiency)/ equity
                
                
                (10,009
                )
                
                
                (5,089
                )
                
                
                (8,137
                )
                
                
                247,851
                
                
                
                224,462Total
      liabilities, minority interest, Series A convertible redeemable
      preferred shares and shareholders equity
                
                $
                9,545
                
                
                $
                16,217
                
                
                $
                33,505
                
                
                $
                263,735
                
                
                $
                297,976





(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.




In
December 2008, our board of directors declared a special cash dividend of $1.00
per ordinary share.  This special dividend in the aggregate amount of
$57.2 million was fully paid by the end of February 2009.




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
RMB6.8225, 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, 2008. 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.


4




OnMay 18, 2009, 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 RMB6.8265 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.




RMB
      per $1.00 Noon Buying RatePeriod
              
              Period
      End
              
              
              Average(1)
              
              
              Low
              
              
              High2004
              
              
              8.2765
              
              
              
              8.2768
              
              
              
              8.2764
              
              
              
              8.27742005
              
              
              8.0702
              
              
              
              8.1826
              
              
              
              8.0702
              
              
              
              8.27652006
              
              
              7.8041
              
              
              
              7.9579
              
              
              
              7.8041
              
              
              
              8.07022007
              
              
              7.2946
              
              
              
              7.5806
              
              
              
              7.2946
              
              
              
              7.81272008
              
              
              6.8225
              
              
              
              6.9193
              
              
              
              6.7800
              
              
              
              7.2946November
              
              
              6.8254
              
              
              
              6.8280
              
              
              
              6.8220
              
              
              
              6.8373December
              
              
              6.8225
              
              
              
              6.8538
              
              
              
              6.8225
              
              
              
              6.88422009January
              
              
              6.8392
              
              
              
              6.8360
              
              
              
              6.8225
              
              
              
              6.8403February
              
              
              6.8395
              
              
              
              6.8363
              
              
              
              6.8241
              
              
              
              6.8470March
              
              
              6.8329
              
              
              
              6.8360
              
              
              
              6.8240
              
              
              
              6.8438April
              
              
              6.8180
              
              
              
              6.8306
              
              
              
              6.8180
              
              
              
              6.8361May
      (through May 18)
              
              
              6.8265
              
              
              
              6.8215
              
              
              
              6.8176
              
              
              
              6.8265





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 45.1 million as of
December 31, 2008 to 110.5 million as of December 31, 2011. 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 revenues.




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 from several months
to several years 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 in the past may not be
sustainable.




In the
years immediately following the commencement of our operations in 2004, we
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, which have decreased over time, may not be representative
of future growth or be sustainable. Our net revenues increased 26.8% in 2008
compared to 2007, which is significantly lower than our growth rates in previous
years. 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;




·
            enhance
      the technical sophistication of the products we
  offer;




·
            respond
      effectively to competitive pressures;
and




·
            attract
      and retain qualified management and
employees.


7




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.




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.




We
depend, and expect to continue to depend, on a limited number of customers for a
significant portion of our revenues in any single period. If one customer defers
or cancels its orders or chooses our competitors’ products or services, our
revenues could decline significantly.  In addition, a significant
portion of our outstanding accounts receivable is derived from sales to a
limited number of customers.  Failure of any of these customers to
meet their payment obligations would materially and adversely affect our
financial position, liquidity and results of operations.




The
revenues generated by our top five customers for a particular year as a
percentage of our total revenues declined from 89.9% in 2004 to 29.1% in 2008.
However, we currently still 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, 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 each of 2007 and 2008,
representing 14.1% and 15.1% of our revenues, respectively, in such periods. 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.




In
addition, a significant portion of our outstanding accounts receivable is
derived from sales to a limited number of customers. For example, two of our
customers each accounted for 10% or more of our accounts receivable balance,
representing an aggregate of 23.5% of our accounts receivable balance, as of
December 31, 2008. The failure of any of these customers to meet its payment
obligations would materially and adversely affect our financial position,
liquidity and results of operations.




8




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 six 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 began operation in 2008. 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 or 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 could falter and we may not be able to sustain our current revenue
level.




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 perpetrator was convicted and sentenced to eight months in prison.
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.




9




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 Infineon Technologies AG, or
Infineon (prior to February 2009, indirectly through an agent of 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.




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 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 we could 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,
chairman of our board of directors and our chief executive officer,
Dr. Zengxiang Lu, member of our board of directors and former chairman and
chief strategy officer, Mr. Jian Han, our chief technology officer, and Mr.
Dong Li, our president and chief marketing 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 them 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.


10




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 have
been pursuing strategies to expand and diversify our revenues, including
cooperating with digital television network operators to offer premium cable
television services such as digital television-based advertising platforms,
high-definition content distribution services and digital television gaming
services. To this end, we established Beijing Novel-Super Media Investment Co.,
Ltd., or N-S Media Investment, and Guangdong SuperTV Digital Media Co.,
Ltd., or Guangdong SuperTV, as our wholly owned subsidiaries in December 2007
and October 2008, respectively, and 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 in June 2008. 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.




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, businesses or technologies 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.


11




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 and the license for the sale of encryption products until
September 2008. In February 2009, certain CA system products we developed by
using the algorithms designated by the encryption authority were certified by
the encryption authority. However, we have not decided when N-S Digital TV will
produce and sell those products using the designated algorithms and various
factors, in addition to the permissible transition period for adoption, will
affect this decision, including whether products using algorithms designated by
the encryption authority will be generally accepted by the cable television
industry (including CA system vendors and cable television operators). If N-S
Digital TV fails to adopt the algorithms designated by the encryption authority
for any of CA systems products it produces and sells by the end of the
transition period or at any time during the transition period at the request of
the government, it may be required to discontinue the production and sale of its
non-compliant CA systems. If the relevant PRC government authorities deem N-S
Digital TV’s production of encryption products prior to June 2006 or sale of
encryption products prior to September 2008 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.




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. The
CA systems we currently produce and sell have not been certified by the
encryption authority because we have not adopted the government-designated
algorithms for such 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. In February 2009,
certain CA system products we developed by using the algorithms designated by
the encryption authority were certified by the encryption authority.
However,as stated
above, we have not decided when N-S Digital TV will produce and sell those CA
system products certified by the encryption authority and various factors, in
addition to the permissible transition period for adoption, will affect this
decision. If we have not obtained the certification for the CA systems that we
produce and sell upon the expiration of the transition period or at an earlier
time the PRC encryption authority may otherwise require, enforcement of the
above-mentioned regulatory requirements could prevent our prospective customers
from purchasing our non-compliant CA systems. In addition, even if we produce
and sell products 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.


12




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 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 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
December 2008, we acquired for free the licensed graphic logo from N-T
Information Engineering. We are currently in the process of 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.




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.


13




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 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.  A significant portion of our quarterly revenues has generally
reflected orders from a small number of large customers for our CA systems.Our cost of revenues 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.




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.


14




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.




We are 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 concluded that our internal control over
financial reporting was effective as of December 31, 2008, the end of the period
covered by this annual report, and our independent registered public accounting
firm opined that we maintained effective internal control over financial
reporting of the same period.  However, we may fail to maintain
effective internal controls over financial reporting in the future, in which
case we and the independent registered public accounting firm may not be able to
conclude that we have effective internal control over financial
reporting.  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 unqualified 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.





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.


15




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 2008.  There can be no assurance
that we will not be a PFIC for the taxable year 2009 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 2009 will not be
determinable until the close of the taxable year ending December 31,
2009.




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 2009 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.




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
2009 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 Beijing
Super TV Co., Ltd., or 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.


16




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 licenses for the production and sale 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 licenses to produce and sell 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 licenses to produce and sell commercial encryption products as 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 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 licenses to produce
and sell commercial encryption products. The PRC encryption authority may
revoke, or refuse to renew, N-S Digital TV’s licenses to produce and sell
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
licenses 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.




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, who are
currently our employees. In addition, two 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
April 30, 2009, our three largest shareholders beneficially owned a total of
approximately 62.3% 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




Our
operations may be materially adversely affected by changes in the economic,
political and social conditions of the PRC.




Substantially
all of our non-cash 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 with respect to the extent of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth over the
past three decades, growth has been uneven across different regions and among
various economic sectors. The PRC government has implemented various measures to
encourage economic development 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. We cannot predict the possible impact
of any future economic policies of the PRC government on our business and
operations.




Due to an
economic downturn caused by the recent global financial crisis, the PRC’s gross
domestic product, or GDP, growth rate decreased to 9.0% in 2008 and 6.1% in the
first quarter of 2009. In response to the global financial crisis, the PRC
government has adopted a series of measures to stimulate the economy. While such
measures may help create a positive policy environment for the economy in the
PRC, there are uncertainties with respect to the effects of such measures. Any
further slowdown in the economic growth of the PRC could lead to further reduced
business activities, including a slowing-down or decline in investment in cable
television networks, which in turn may result in a reduction of demand for our
products and services and thus adversely affect our business, as well as 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, or the SAT, 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, or the NYSE, 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, these 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 our 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, or SAFE Notice 75. 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, restrict our cross-border investment activities, 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 effectively utilize our revenues
as well as the ability of our PRC subsidiaries to obtain debt or equity
financing from financial institutions or investors outside the PRC, including
us.




Substantially
all of our operating revenues were denominated in Renminbi in 2008. 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.




In
addition, 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, and its
      subsidiaries 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 and its subsidiaries 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 and its
subsidiaries. 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 operating 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. dollar terms and the value of any U.S. dollar-denominated investments we
make in the future. In addition, since substantially all of our operating
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. For example, in order
to be able to enjoy the preferential income tax rate of 15%, Super TV and N-S
Digital TV must be qualified as “high-and-new technology enterprises strongly
supported by the State.” under the newly enacted PRC Enterprise Income Tax Law, or the 2008 EIT
Law, which took effect on January 1, 2008. Moreover, the government could
determine at any time to eliminate or reduce the scale of such preferential tax
policies. 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 subject to PRC income tax on our global income, or dividends we receive
from our PRC subsidiary may be subject to PRC withholding tax, depending on
whether we are recognized as a resident enterprise in the PRC.




Pursuant
to the 2008 EIT Law and Enterprise Income Tax
Law Implementation Rules, or the Implementation Rules, enacted by the
State Council on December 6, 2007 and which became effective on January 1, 2008,
an enterprise established under the laws of a foreign country or region whose
“de facto management body” is located within the PRC territory is considered a
resident enterprise and will generally 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. The SAT issued the Notice on Issues Relating to Determination of
Chinese-Controlled Offshore Enterprises as PRC Resident Enterprises by Applying
the “De Facto Management Body” Test, or the SAT Notice No.82, on April
22, 2009. The SAT Notice No.82 provides for certain specific criteria for
determining whether the “de facto management body” of a Chinese-controlled
offshore enterprise is located in the PRC. Although the SAT Notice No.82
provides that it only applies to offshore enterprises controlled by PRC
enterprises, not those controlled by PRC individuals, like our company, it is
generally believed that the determining criteria set forth in the SAT Notice
No.82 very likely reflect the SAT’s general position as to how the “de facto
management body” test should be applied to determine the tax residency of all
offshore enterprises, regardless of whether they are controlled by PRC
enterprises or individuals. With reference to the criteria set forth in the SAT
Notice No.82, we have preliminarily determined that we are not a PRC resident
enterprise. However, if we were considered a PRC resident enterprise, we would
be subject to the enterprise income tax at the rate of 25% on our global income.
In such case, our profitability and cash flow would be adversely affected as a
result of our global income being taxed under the 2008 EIT Law.


22




If we are
considered as a non-resident enterprise under the 2008 EIT Law, we will not be
subject to the enterprise income tax at the rate of 25% on our global income. In
such case, however, dividends we receive from our PRC subsidiary will be subject
to a PRC withholding tax, the standard rate of which is 10% and can be reduced
by an applicable tax treaty, under the 2008 EIT Law. According to the Arrangement for Avoidance of Double Taxation on
Income and Prevention of Tax Evasion entered into between the PRC and
Hong Kong in August 2006, as amended, dividends paid by a PRC foreign-invested
enterprise to its shareholder in Hong Kong are generally subject to a 5% PRC
withholding tax compared to the standard 10% PRC withholding tax under the 2008
EIT Law. We indirectly hold the 100% interest in our PRC subsidiary, Super TV,
through Golden Benefit Technology Limited, or Golden Benefit, a wholly-owned
subsidiary incorporated in Hong Kong. See “Item 5. Operating and Financial
Review and Prospects—A. Operating Results—Taxes and Incentives—Tax Arrangement
between PRC and Hong Kong.” As a result, to the extent we are considered as a
non-resident enterprise, dividends we receive from our PRC subsidiary will be
subject to the PRC withholding tax at the rate of 5%, instead of the standard
rate of 10%. Such withholding tax will increase our tax burden and reduce the
amount of cash available to our company.




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 Implementation 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 the operating subsidiary 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 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 addition, 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 six years, and more
recently in 2009, the outbreak of influenza (H1N1). 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.


23





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. On September 18, 2008,
the State Council of the PRC issued the Implementation Rules of the Labor Contract
Law, which became effective on the same day. The Labor Contract Law and
its implementation rules formalize workers’ rights concerning overtime hours,
pensions, layoffs, employment contracts and the role of trade unions and provide
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.





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 volatile and subject to wide fluctuations.
Since October 5, 2007, the closing prices of our ADSs on the NYSE has ranged
from $4.25 to $51.08 per ADS and the last reported sale price on May 18, 2009
was $8.63. 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.


24


As of
April 30, 2009, we had 57,489,318 ordinary shares outstanding (excluding 602,636
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 19,740,313 ordinary shares represented by 19,740,313 ADSs
(excluding the 602,636 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. 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 these 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, 2008, options to
purchase 2,244,197 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, of
which options to purchase 13,665 ordinary shares were outstanding as of December
31, 2008. 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, all of which remained outstanding as
of December 31, 2008. Therefore, as of December 31, 2008, options to purchase
2,297,862 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.




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.


25




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.




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.




26




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
may 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.




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




Our
holding company, China Digital TV Holding Co., Ltd., was incorporated as an
exempted limited liability company on April 19, 2007 under the laws of the
Cayman Islands. We are headquartered in Beijing, China, and provide CA systems
to the PRC’s digital television market. We conduct substantially all of our
business through our operating subsidiary in the PRC, Super TV, and through N-S
Digital TV, a PRC company that we control through contractual
arrangements.




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 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.


27




N-T Information
Engineering was established as a limited liability company under the PRC law 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 Co., Ltd., or 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 limited liability company under
the PRC law and 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
October 2007, we completed the initial public offering of our ADSs representing
our ordinary shares and listed the ADSs on the NYSE.




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—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 light of the PRC regulatory restrictions on foreign
investment in advertising business, which some of the value-added television
services to be offered by N-S Media Investment and its subsidiaries could be
categorized as,Super TV, a wholly
foreign owned company, transferred all of its equity interests in N-S Media
Investment to N-S Digital TV, which is wholly owned by PRC citizens, in October
2008.




In
February 2008, CDTV BVI established a wholly-owned subsidiary, China Super Media
Holdings Limited, or CSM Holdings, in Hong Kong.




In
addition, in June 2008, N-S Digital TV established a joint venture, Dongguan
SuperTV, with a PRC citizen to provide value-added services to television
viewers in Dongguan, Guangdong Province.  In October 2008, N-S Media
Investment established a wholly-owned subsidiary, Guangdong SuperTV, to provide
value-added services to television viewers in Guangdong Province.




In June
2008, Ms. Wei Gao transferred all of her equity interests in N-S Digital TV to a
PRC citizen who is currently our employee. In November 2008, N-T Information
Engineering transferred all of its equity interest in N-S Digital TV, our
variable interest entity, to two PRC citizens who are currently our
employees.  As a result of these transactions, these three PRC
citizens own all the equity interest of N-S Digital TV.




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 RMB29.4 million ($3.8 million), subject to certain
post-closing downward adjustments.  As an adjustment to the initial
purchase price, N-T Information Engineering refunded RMB12.1 million ($1.5
million) 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 Intellectual Property Rights—Asset Transfer Agreement, dated August 5, 2006,
between N-T Information Engineering and N-S Digital TV, as amended on
April 6, 2007.”




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
RMB2.4 million ($0.3 million).  The parties entered into a new
agreement in March 2007 to reduce the consideration to RMB2.3 million ($0.3
million).  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.




28


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.




In June
2008, N-S Digital TV and Xitao Lai, a PRC citizen, established 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 each
contributed cash of RMB 5.0 million ($0.7 million), representing 50% of equity
interest in the joint venture.  In September 2008, N-S Digital TV
exercised an option to purchase an additional 10% equity interest in the joint
venture from Xitao Lai.  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.




In August
2008, we acquired from N-T Information Engineering all of its intellectual
property rights relating to digital watermarking and image tracing technologies,
including one issued patent and five pending patent applications in the
PRC.  The purchase price was RMB21.2 million ($3.1 million), which was
fully paid by Super TV in September 2008.  A portion of this purchase
price in the amount of RMB8.8 million ($1.3 million) was attributable to the
acquisition of the intellectual property rights relating to the digital
watermarking and image tracing technologies and the remainder was reallocated to
the acquisition of N-T Information Engineering’s equity interest in N-S Digital
TV by two of our employees. For details of these acquisitions, see “Item 4.
Information on the Company—B. Business Overview—Intellectual Property” and “Item
7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Super TV and N-S Digital TV Arrangements.”




Capital
Expenditures and Divestitures




See
“Item 5. Operating and Financial Review and Prospects—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 expanding 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, 2008, we had installed CA systems at 200 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 2008, with a
market share of approximately 50%, according to Analysys International. We
derive a substantial majority of our revenues from sales of our smart cards,
which accounted for 89.1% and 90.8% of our total revenues in 2007 and 2008,
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.  With the establishment of N-S Media,
Dongguan SuperTV and Guangdong SuperTV, we are gradually rolling out the plan to
engage in the value-added television business by offering premium value-added
cable television services such as digital television-based advertising
platforms, high-definition content distribution services and digital television
gaming services through cooperation with digital television network
operators.  We have started offering digital television-based
advertising platforms targeting television advertisers in the second quarter of
2009.




29


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 2008 were Jiangsu Qingda, Dongguan
Broadcasting Network Media Development Stock Co., Ltd., Wuhan Broadcasting
Digital TV Co., Ltd., Qinhuangdao Bohai On-line Information Network Co., Ltd.
and Zhangzhou Broadcasting and TV Network Center. 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 $30.4 million in 2006 to $55.5 million in 2007 and $70.3 million
in 2008.  We sold 3.9 million, 7.3 million and 9.9 million
smart cards in 2006 to 2007 and 2008, respectively.  We grew our net
income from $13.0 million in 2006 to $33.8 million 2007 and $43.1
million in 2008.




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 support
or 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.




30


·
            Push
      video-on-demand.  Television
      network operators who do not yet have two-way transmission capacity can
      record programs onto subscribers’ local storage devices based on
      subscribers’ instructions, giving subscribers the flexibility to watch the
      programs at time of their own
choice.




·
            Personal
      video recorder.  A personal video recorder, or digital
      video recorder, is a device that records video in a digital format to a
      disk drive or other memory medium within the device. Access to the
      contents, such as television programs, recorded in the personal video
      recorder is controlled by the CA system module and the smart card
      installed in the personal video
recorder.




·
            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 year (or in some cases, during the first
two or three 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 3.9 million, 7.3 million and 9.9 million
smart cards in 2006, 2007 and 2008, 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.




31


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.




As of
December 31, 2008, our CA systems had been installed at 200 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, the contract price is
payable in installments with the respective installments due
on issuance of a preliminary acceptance, issuance of a final acceptance or
within a certain period thereafter, or, in the case of a single acceptance,
due prior, on and/or after the issuance of the acceptance.




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. One hundred eighteen 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, 2008, our SMS software had been installed by 66 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.




32


As of
December 31, 2008, our electronic program guide had been installed by 116
television network operators.  Our electronic program guide may be
sold 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.




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, 2008, we had a total of 54 technicians and engineers located in
Beijing and four 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 a smaller center serving customers in the
city of Dalian in the northeast.  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, 2008, we had 90 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.




Jiangsu
Qingda, a Nanjing-based company, is 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 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, 2007 and 2008.  In
addition to Jiangsu Qingda, we also engage fee-based sales agents to assist
us in marketing and selling our CA systems and smart cards in designated
regions or to designated customers. Such sales agents also provide
certain related services, including gathering market intelligence regarding
potential customers and pricing information in the relevant market.




33


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, 2008 were Jiangsu Qingda, Dongguan
Broadcasting Network Media Development Stock Co., Ltd., Wuhan Broadcasting
Digital TV Co., Ltd., Qinhuangdao Bohai On-line Information Network Co., Ltd.
and Zhangzhou Broadcasting and TV Network Center, which contributed 15.1%, 6.6%,
2.9%, 2.4% and 2.1%, 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.




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 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 in 2006.  Jiangsu
Qingda was our only customer that contributed more than 10% of our total
revenues in 2007 and 2008, representing 14.1% and 15.1% of our revenues in the
relevant periods, respectively.  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—We depend, and expect to
continue to depend, on a limited number of customers for a significant portion
of our revenues in any single period. If one customer defers or cancels its
orders or chooses our competitors’ products or services, our revenues could
decline significantly.  In addition, a significant portion of our
outstanding accounts receivable is derived from sales to a limited number of
customers.  Failure of any of these customers to meet their payment
obligations would materially and adversely affect our financial position,
liquidity and results of operations.”




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 $500 to $22,000 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. One hundred
eighteen 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, 20 set-top box manufacturers have licensed our
set-top box designs, including Motorola and Hisense.




34


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 Infineon, initially indirectly through AdvanIDe Pte. Ltd. (formerly known
as ACG Identification Technologies Asia Pte. Ltd.), an agent of Infineon, and
since February 2009, directly.




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.




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 any 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 we could 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.




35


Our main
domestic competitors are DVN Holdings Ltd., and Sumavision Technologies Co.,
Ltd., both 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.




According
to Analysys International, we were the leader in the PRC CA systems market in
2006, 2007 and 2008.  According to Analysys International, in 2008, we
had an approximately 50% market share based on the number of smart cards
shipped, followed by DVN Holdings Ltd. with approximately 17% market share,
Sumavision Technologies Co., Ltd. with approximately 13% market share and NDS
Group with approximately 6% market share, Conax AS and Irdeto Access BV each
with approximately 5% market share, Kudelski SA with approximately 2% market
share and others accounting for the remaining 2%.  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, 2008, our research and
development team consisted of 255 employees, up from 224 as of December 31,
2007 and 145 as of December 31, 2006, and we plan to further expand the team
during 2009.  Our investment in research and development increased
from $2.2 million in 2006 to $4.6 million in 2007 and $6.9 million in
2008.




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.




Our
research and development personnel are actively seeking ways to improve the
security of our CA systems, as well as to prevent content theft at other stages
of the television network operators’ chain of transmission.  Other
focuses of research include (i) adapting our CA systems for use on new
television platforms, such as satellite television, mobile television and IPTV,
(ii) enhancing our CA systems to support applications such as video-on-demand,
near video-on-demand, push video-on-demand and personal video recorders, (iii)
developing new value-added services that will enhance operator revenues and (iv)
developing a new line of products and technologies, including high-definition
and hybrid set-up box solutions and digital rights management products that
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.




36


As of
December 31, 2008, we had a total of six patents issued and 41 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 47
software programs for digital television in the PRC.




In
particular, in August 2008, we acquired from N-T Information Engineering all
intellectual property rights relating to the digital watermarking and image
tracing technologies, including one issued patent and five pending patent
applications in the PRC. Four of these pending patent applications relate to the
digital watermarking technology while the remaining pending patent application
and the issued patent relate to the image tracing technology.  The
digital watermarking technology is aimed to enhance cable television operators’
counterfeit tracking and broadcasting restriction capabilities and can also be
used to provide anti-piracy and TV rating services.  The image tracing
technology is used for remote control of personal computers, set-top boxes and
televisions as well as gaming consoles.




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.




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
December 2008, we acquired for free the licensed graphic logo from N-T
Information Engineering. We are currently in the process of applying to register
the trademarks of the English and Chinese names for “NOVEL SUPERTV” as well as
the trademark for a combination of Chinese and English names for “NOVEL SUPERTV”
and the graphic logo.




In
addition, we own five other trademarks; two of them are registered trademarks
and three of them are in the process of being registered.We have fourteen
registered domain names, including www.chinadtv.cn, www.novel-supertv.com,
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




We had
270, 424 and 499 full-time employees as of December 31, 2006, 2007 and 2008,
respectively.  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 and 2008:




37




As
      of December 31, 2007
              
              
              As
      of December 31, 2008Number
              
              
              Percent
              
              
              Number
              
              
              PercentResearch
      and
      development
              
              
              224
              
              
              
              52.8
              
              
              
              255
              
              
              
              51.2Technical
      service
              
              
              58
              
              
              
              13.7
              
              
              
              54
              
              
              
              10.8Sales
      and
      marketing
              
              
              67
              
              
              
              15.8
              
              
              
              90
              
              
              
              18.0General
      and
      administration
              
              
              48
              
              
              
              11.3
              
              
              
              70
              
              
              
              14.0Smart
      card
      production
              
              
              27
              
              
              
              6.4
              
              
              
              30
              
              
              
              6.0Total
              
              
              424
              
              
              
              100.0
              
              
              
              499
              
              
              
              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 2006, 2007 and 2008 was
approximately $0.4 million, $0.8 million and $1.5 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.




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 remains 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, that 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.




38


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
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.




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 and
the license for the sale of encryption products until September
2008.  For risk relating to the potential legal penalties against
N-S Digital TV for its operation prior to its obtaining the production and
sales licenses, 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.  Our CA systems that we currently
produce and sell have not been certified by the Encryption Bureau because we
have not adopted the government-designated algorithms for those 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 and sales 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 licenses to produce
and sell 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 licenses for the production
and sale of commercial encryption products, or refusing to issue any other
license required to engage in an encryption-related business.”




39


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:




·
            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.”




40


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 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.




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.




41


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 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.




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 MOFCOM, the State
Administration of State-owned Assets Supervision and Administration Commission,
the SAT, 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.




42


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 NYSE 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.”




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 BVI
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 citizens, to produce and sell
our CA systems in the PRC.  We do not have any equity interest in
N-S Digital TV, but instead enjoy the economic benefits derived from
N-S Digital TV through a series of contractual arrangements.




43


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














(1)
      Mr. Junming Wu, Mr. Shizhou Shen and Mr. Lei Zhang currently are our
      employees.


(2)
      Two of our directors, Dr. Zengxiang Lu and Mr. Jianhua Zhu, are also
      directors of N-S Digital TV.




44


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 BVI.  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 light of the PRC regulatory restrictions on foreign
investment in advertising business, which some of the value-added television
services to be offered by N-S Media Investment and its subsidiaries could be
categorized as, Super TV transferred all of its equity interests in N-S Media
Investment to N-S Digital TV in October 2008.  In February 2008, CDTV
BVI established a wholly-owned subsidiary, CSM Holdings, in Hong
Kong.  In addition, in June 2008, N-S Digital TV established a joint
venture, Dongguan SuperTV, with a PRC citizen to provide value-added services to
television viewers in Dongguan, Guangdong Province.  In October 2008,
N-S Media Investment established a wholly-owned subsidiary, Guangdong SuperTV,
to provide value-added services to television viewers in Guangdong
Province.




A SARFT
policy requires any cable 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 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 software products relating to smart cards 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 software
      products relating to smart cards required for N-S Digital TV’s CA
      systems;




45


·
            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 grants
      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




·
            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 Super TV or one of its
      directors 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 8,659 square meters of
office space pursuant to four two-year lease agreements with the same landlord
for separate portions of the total space.  The four lease agreements
are (i) a lease agreement of N-S Digital TV with respect to an area of
2,788 square meters for its operational use; (ii) a lease agreement of Super TV
with respect to an aggregate area of 5,194 square meters for its operational
use; (iii) a lease agreement of Super TV with respect to an aggregate area of
179 square meters used as a workroom for our set-top box manufacturer customers
to test our products; and (iv) a lease agreement of N-S Media Investment with
respect to an aggregate area of 498 square meters for its operational
use.  The lease agreement referred to in item (iii) above will expire
in April 2011, and the other lease agreements will expire in March 2011.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.




46


In
addition, we lease office space in Guangzhou and Dongguan for use by Guangdong
SuperTV and Dongguan SuperTV to conduct their business. We also lease office
space for service and support centers in Changsha, 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.




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, 2008,
we had installed CA systems at200 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
89.1% and 90.8% of our total revenues in 2007 and in 2008,
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 3.9 million, 7.3 million and 9.9 million
smart cards in 2006, 2007 and 2008, respectively.  Our net revenues
increased from $30.4 million in 2006 to $55.5 million in 2007 and
$70.3 million in 2008.  Our net income grew from $13.0 million in
2006 to $33.8 million in 2007 and $43.1 million in 2008.




47


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
      including as a result of the recent economic slow-down in the PRC, 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.




·
            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 2008, 2007 and 2006, the
Renminbi appreciated against the U.S. dollar by approximately 6.4%, 6.5% and
3.3%, 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
2006, 2007 and 2008, 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
Risks—Foreign Currency Risk.”




We have a
limited operating history upon which you can evaluate our
business.  Our rapid revenue growth in the years immediately following
the commencement of our operations in 2004 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.




48


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.




·
            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, subscriber 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 91.1% and 8.9%,
respectively, of our total revenues in 2008 and 89.2% and 10.8%, respectively,
of our total revenues in 2007.  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; fees paid to our sales agents and other
miscellaneous costs.  These costs are allocated to our two types of
revenue-generating activities as their respective costs of
revenues.  Cost of revenues related to the sales of our products and
to the sales of our services accounted for 79.4% and 20.6%, respectively, of our
total cost of revenues in 2008 and 79.1% and 20.9%, respectively, of our total
cost of revenues in 2007.  As a percentage of our net revenues, cost
of revenues increased from 18.5% in 2007 to 19.5% in 2008.




49


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. Our gross margin was 78.3%, 81.5% and
80.5% in 2006, 2007 and 2008, respectively.  The increase from 2006 to
2007 was primarily driven by the increase, as a percentage of total revenues,
from 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 that period 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 slight decrease in our gross
margin from 2007 to 2008 was primarily attributable to the decrease in the
average selling price of our smart cards, which was partially offset by a
decrease in the average unit cost of our smart cards during the same period. 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.  The average unit cost of our smart cards further
decreased by approximately 0.9%from 2007 to 2008
primarily as a result of a decrease in the price of computer chips, which was
partially offset by an increase in other related costs.




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.




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 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 8.4% and 9.8%
in 2007 and 2008, respectively. We expanded the size of our research and
development staff from 224 employees as of December 31, 2007 to 255 as of
December 31, 2008. We expect to hire additional personnel for our research and
development team during 2009 as part of our strategy to enhance our research and
development capabilities, including increasing our investment in the research
and development activities.




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 6.8% and 8.6% in 2007 and 2008, 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 6.7% and 8.7% in 2007 and 2008, 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.




50


We
adopted our 2005 and 2008 Stock Incentive Plans in February 2005 and September
2007, respectively, and as of December 31, 2008, options to purchase 2,244,197
ordinary shares had been granted and were outstanding under the plans. In
addition, in 2005, we granted options to purchase 143,474 ordinary shares to a
company affiliated with SAIF, of which options to purchase 13,665 ordinary
shares were outstanding as of December 31, 2008, 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, all of which remained outstanding as of December 31,
2008. In aggregate, options to purchase 2,297,862 ordinary shares were
outstanding as of December 31, 2008. We incurred $0.3 million, $1.3 million and
$1.0 million in share-based compensation expenses in 2006, 2007 and 2008,
respectively. For additional information regarding our share-based compensation
expenses, see Note 18 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:




Years
      ended December 31,Share-Based
      Compensation Related to:
              
              2006
              
              
              2007
              
              
              2008(In
      thousands)Cost
      of revenues
              
              $
              21
              
              
              $
              34
              
              
              $
              35Research
      and development expenses
              
              
              167
              
              
              
              391
              
              
              
              481Selling
      and marketing expenses
              
              
              56
              
              
              
              112
              
              
              
              186General
      and administrative expenses
              
              
              94
              
              
              
              724
              
              
              
              342Total
              
              $
              338
              
              
              $
              1,261
              
              
              $
              1,044




Income
from Operations




Income
from operations represents gross profit less operating expenses.




Non-operating
Income (Expenses)




Non-operating
income (expenses) includes interest income, recognition of the change in the
fair value of the warrant and other income or expenses, 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.  Our interest income
was $0.3 million, $2.8 million and $9.1 million in 2006, 2007 and 2008,
respectively.




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.”




51


Critical
Accounting Policies




We
prepare our financial statements in conformity with U.S. 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.




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, SMS 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 we 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.




52


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 the
estimated warranty provision is adjusted.




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.  Two customers as of
December 31, 2008 each accounted for 10% or more of our accounts receivable
balance, representing an aggregate of 23.5% of our accounts receivable balance
as of that date.




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 the graded
vesting attribution method, with a corresponding impact reflected in additional
paid-in capital.  We estimated the fair value of our share options at
the respective grant dates using the Black-Scholes option-pricing
model.




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 options
      granted prior to our initial public
offering.




For the
share options granted after our initial public offering, the fair value of our
ordinary share on the grant date is determined by the closing trade price of our
ADSs representing our ordinary shares on the grant date.  We estimated
the expected volatility of our ordinary share price based on the historical
stock price volatility of the publicly traded shares of four comparable
companies in the digital television and related businesses over a period
comparable to the expected term of the options and our own historical stock
price volatility.




For the
purpose of determining the estimated fair value of our share options that had
been granted prior to our initial public offering, 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 China Limited, or American Appraisal, an unrelated and
independent valuation firm, 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.  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.




53


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 believe
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.




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 arm’s 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.  The fair value of our ordinary shares has
been their market value since our initial public offering.




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.




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;




54


·
            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.




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 our indicative value 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, or
DLOM, 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 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;




55


·
            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.




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 American Institute of Certified Public Accountants
Audit and Accounting Practice Aid, “Valuation of Privately-Held-Company
Equity Securities Issued as Compensation”.  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 BVI, are not subject to any
income or capital gains tax under the current laws of the Cayman Islands and
BVI.  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.




PRC




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




Enterprise Income
Tax.  Prior to January
1, 2008, the effective date of the 2008 EIT Law, 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.  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.




56


Effective
from January 1, 2008, 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.  Under the 2008 EIT Law, “high-and-new technology enterprises
strongly supported by the State” are entitled to a preferential tax rate of
15%.  In December 2008, N-S Digital TV and Super TV successfully
obtained their respective high-and-new technology enterprise certificates under
the 2008 EIT Law and are therefore recognized as “high-and-new technology
enterprises strongly supported by the State” and qualified for a preferential
tax rate of 15%.  As a result, each of N-S Digital TV and Super TV
will continue to enjoy a 50% reduction of income tax until the end of 2009, and
thereafter, they will be entitled to a preferential enterprise income tax rate
of 15%.




N-S Media
Investment was subject to an enterprise income tax of 33% in 2007, and is
subject to an enterprise income tax rate of 25% starting from January 1, 2008.
Guangdong SuperTV and Dongguan Super TV are each subject to an enterprise income
tax rate of 25% upon their establishment in 2008.




In
addition, under the 2008 EIT Law, an enterprise established under the laws of a
foreign country or region whose “de facto management body” is located within the
PRC territory is considered a resident enterprise and will generally 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.  With reference to the SAT Notice No.82, we have
preliminarily determined that we are not a PRC resident enterprise. However, if
we were considered a PRC resident enterprise, we would be subject to the
enterprise income tax at the rate of 25% on our global income.  See
“Item 3. Key Information—D. Risk Factors—Risks Relating to the People’s
Republic of China—We may be subject to PRC income tax on our global income, or
dividends we receive from our PRC subsidiary may be subject to PRC withholding
tax, depending on whether we are recognized as a resident enterprise in the
PRC.”  In addition, the 2008 EIT Law and the Implementation 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 generally 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. To the extent we are not considered as a PRC resident
enterprise, the dividends our PRC subsidiary pays to us will be subject to this
withholding tax. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to the People’s Republic of China—We may be subject to PRC income tax
on our global income, or dividends we receive from our PRC subsidiary may be
subject to PRC withholding tax, depending on whether we are recognized as a
resident enterprise in the PRC.” In addition, this withholding tax may also
apply to dividends we pay to our non-PRC shareholders. 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 $2.5 million, $5.0 million and $6.5 million
in 2006, 2007 and 2008, respectively, accounting for 8.2%, 9.0% and 9.2%,
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.  Each of N-S Digital TV’s subsidiaries is subject to a
standard value-added tax rate of 17% without any tax refunds in
2008.




Business
Tax.  Each of N-S Digital TV and its subsidiaries is subject to
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.  Super TV is currently exempted from business tax at a rate of
5% on the revenues generated by the services it currently provides. As a
foreign-invested company, Super TV is not subject to any
surcharges.




57


Tax Arrangement between PRC and Hong
Kong




The Hong
Kong government and the PRC central government entered into the 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 do not consist 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 31,2006
                            
                            
                            2007
                            
                            
                            2008Amount
                            
                            
                            %
      of Net
                              Revenues
                            
                            
                            Amount
                            
                            
                            %
      of Net
                              Revenues
                            
                            
                            Amount
                            
                            
                            %
      of Net
                              Revenues(In
      thousands, except percentages)Revenues:Products
                            
                            $
                            26,443
                            
                            
                            
                            87.1
                            %
                            
                            $
                            49,741
                            
                            
                            
                            89.7
                            %
                            
                            $
                            64,412
                            
                            
                            
                            91.6
                            %Service
                            
                            
                            4,182
                            
                            
                            
                            13.8
                            
                            
                            
                            6,011
                            
                            
                            
                            10.8
                            
                            
                            
                            6,285
                            
                            
                            
                            8.9Total
      revenues
                            
                            
                            30,625
                            
                            
                            
                            100.8
                            
                            
                            
                            55,752
                            
                            
                            
                            100.5
                            
                            
                            
                            70,697
                            
                            
                            
                            100.5Business
      taxes
                            
                            
                            (255
                            )
                            
                            
                            (0.8
                            )
                            
                            
                            (299
                            )
                            
                            
                            (0.5
                            )
                            
                            
                            (363
                            )
                            
                            
                            (0.5
                            )Net
      revenues
                            
                            
                            30,370
                            
                            
                            
                            100.0
                            
                            
                            
                            55,453
                            
                            
                            
                            100.0
                            
                            
                            
                            70,334
                            
                            
                            
                            100.0Cost
      of revenues:(1)Products
                            
                            
                            4,726
                            
                            
                            
                            15.6
                            
                            
                            
                            8,100
                            
                            
                            
                            14.6
                            
                            
                            
                            10,877
                            
                            
                            
                            15.5Service
                            
                            
                            1,859
                            
                            
                            
                            6.1
                            
                            
                            
                            2,135
                            
                            
                            
                            3.9
                            
                            
                            
                            2,828
                            
                            
                            
                            4.0Total
      cost of revenues
                            
                            
                            6,585
                            
                            
                            
                            21.7
                            
                            
                            
                            10,235
                            
                            
                            
                            18.5
                            
                            
                            
                            13,705
                            
                            
                            
                            19.5Gross
      profit
                            
                            
                            23,785
                            
                            
                            
                            78.3
                            
                            
                            
                            45,218
                            
                            
                            
                            81.5
                            
                            
                            
                            56,629
                            
                            
                            
                            80.5Operating
      expenses:Research
      and development expenses(1)
                            
                            
                            2,222
                            
                            
                            
                            7.3
                            
                            
                            
                            4,643
                            
                            
                            
                            8.4
                            
                            
                            
                            6,921
                            
                            
                            
                            9.8Selling
      and marketing expenses(1)
                            
                            
                            1,847
                            
                            
                            
                            6.1
                            
                            
                            
                            3,758
                            
                            
                            
                            6.8
                            
                            
                            
                            6,063
                            
                            
                            
                            8.6General
      and administrative expenses(1)
                            
                            
                            1,228
                            
                            
                            
                            4.0
                            
                            
                            
                            3,706
                            
                            
                            
                            6.7
                            
                            
                            
                            6,084
                            
                            
                            
                            8.7Total
      operating expenses
                            
                            
                            5,297
                            
                            
                            
                            17.4
                            
                            
                            
                            12,107
                            
                            
                            
                            21.8
                            
                            
                            
                            19,068
                            
                            
                            
                            27.1Income
      from operations
                            
                            
                            18,488
                            
                            
                            
                            60.9
                            
                            
                            
                            33,111
                            
                            
                            
                            59.7
                            
                            
                            
                            37,561
                            
                            
                            
                            53.4Interest
      income
                            
                            
                            279
                            
                            
                            
                            0.9
                            
                            
                            
                            2,790
                            
                            
                            
                            5.0
                            
                            
                            
                            9,138
                            
                            
                            
                            13.0Other
      income/(expense)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            263
                            
                            
                            
                            0.5
                            
                            
                            
                            (412
                            )
                            
                            
                            (0.6
                            )Recognition
      of the change in the fair value of the warrant
                            
                            
                            (5,406
                            )
                            
                            
                            (17.8
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Income
      before income taxes
                            
                            
                            13,361
                            
                            
                            
                            44.0
                            
                            
                            
                            36,164
                            
                            
                            
                            65.2
                            
                            
                            
                            46,287
                            
                            
                            
                            65.8Income
      tax benefit/(expense)
                            
                            
                            59
                            
                            
                            
                            0.2
                            
                            
                            
                            (2,342
                            )
                            
                            
                            (4.2
                            )
                            
                            
                            3,235
                            
                            
                            
                            4.6Net
      income before minority interest
                            
                            
                            13,420
                            
                            
                            
                            44.2
                            
                            
                            
                            33,822
                            
                            
                            
                            61.0
                            
                            
                            
                            43,052
                            
                            
                            
                            61.2Minority
      interest
                            
                            
                            430
                            
                            
                            
                            1.4
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            14
                            
                            
                            
                            0.0Net
      income
                            
                            $
                            12,990
                            
                            
                            
                            42.8
                            %
                            
                            $
                            33,816
                            
                            
                            
                            61.0
                            %
                            
                            $
                            43,062
                            
                            
                            
                            61.2
                            %Cash
      dividend to participating preferred shareholder
                            
                            
                            (5,731
                            )
                            
                            
                            (18.9
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Net
      income attributable to holders of ordinary shares
                            
                            $
                            7,259
                            
                            
                            
                            23.9
                            %
                            
                            $
                            33,816
                            
                            
                            
                            61.0
                            %
                            
                            $
                            43,062
                            
                            
                            
                            61.2
                            %




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




58




Years
      ended December 31,2006
                
                
                2007
                
                
                2008Amount
                
                
                %
      of Net
                    Revenues
                
                
                Amount
                
                
                %
      of Net
                    Revenues
                
                
                Amount
                
                
                %
      of Net
                    Revenues(In
      thousands, except percentages)Cost
      of revenues
                
                $
                21
                
                
                
                0.1
                %
                
                $
                34
                
                
                
                0.1
                %
                
                $
                35
                
                
                
                0.0
                %Research
      and development expenses
                
                
                167
                
                
                
                0.5
                
                
                
                391
                
                
                
                0.7
                
                
                
                481
                
                
                
                0.7Selling
      and marketing expenses
                
                
                56
                
                
                
                0.2
                
                
                
                112
                
                
                
                0.2
                
                
                
                186
                
                
                
                0.3General
      and administrative expenses
                
                $
                94
                
                
                
                0.3
                %
                
                $
                724
                
                
                
                1.3
                %
                
                $
                342
                
                
                
                0.5
                %




Comparison
of Years Ended December 31, 2008 and December 31, 2007




Revenues.  The
following table sets forth revenues by sources and the percentage of our total
revenues for 2007 and 2008:




Years
      ended December 31,2007
                
                
                2008Revenues
                
                
                %
      of Total
                    Revenues
                
                
                Revenues
                
                
                %
      of Total
                    Revenues(in
      thousands, except percentages)ProductsSmart
      cards
                
                $
                49,651
                
                
                
                89.1
                %
                
                $
                64,216
                
                
                
                90.8
                %Set-top
      boxes and others
                
                
                90
                
                
                
                0.2
                %
                
                
                196
                
                
                
                0.3
                %Subtotal
                
                
                49,741
                
                
                
                89.2
                %
                
                
                64,412
                
                
                
                91.1
                %ServicesHead-end
      system integration
                
                
                3,258
                
                
                
                5.8
                %
                
                
                3,461
                
                
                
                4.9
                %Head-end
      system development
                
                
                271
                
                
                
                0.5
                %
                
                
                573
                
                
                
                0.8
                %Licensing
      income
                
                
                1,984
                
                
                
                3.6
                %
                
                
                1,610
                
                
                
                2.3
                %Royalty
      income
                
                
                498
                
                
                
                0.9
                %
                
                
                641
                
                
                
                0.9
                %Subtotal
                
                
                6,011
                
                
                
                10.8
                %
                
                
                6,285
                
                
                
                8.9
                %Total
      revenues
                
                $
                55,752
                
                
                
                100.0
                %
                
                $
                70,697
                
                
                
                100.0
                %




59




Our total
revenues increased by 26.8% to $70.7 million in 2008 from $55.8 million in 2007.
This increase primarily resulted from an increase in the revenues from the sales
of our products, in particular, smart cards.




Revenues
from the sales of our products increased by 29.5% to $64.4 million in 2008 from
$49.7 million in 2007, primarily due to an 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 2007 and 2008. The increase in the
revenues from the sales of smart cards was primarily attributable to a 34.8%
increase in the number of smart cards sold by us to 9.9 million in 2008 from 7.3
million in 2007, which was partially offset by a 13.9% decrease in the average
selling price of our smart cards in RMB terms from 2007 to 2008 (including
value-added tax refunds). 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 2007 to 2008 was primarily due to intensified
competition and pricing discounts we offered to a number of large customers in
2008.




Revenues
from the sales of our services increased by 4.6% to $6.3 million in 2008 from
$6.0 million in 2007. The increase in the revenues from the sales of our
services was primarily due to increases in the revenues from our head-end system
integration services, head-end system development and royalty income, which were
partially offset by a decrease in revenues from our licensing income. Revenues
from our head-end system integration services increased by 6.2% to $3.5 million
in 2008 from $3.3 million in 2007, primarily reflecting a $0.2 million increase
in revenue recognized in 2008 from the contracts we performed in 2008 compared
to revenue recognized in 2007 from contracts performed in 2007. Revenues from
our head-end system development services increased by 111.4% to $0.6 million in
2008 from $0.3 million in 2007, primarily reflecting an increase in demand for
such services in 2008 compared to 2007. Revenues from licensing income decreased
by 18.9% to $1.6 million in 2008 from $2.0 million in 2007, primarily due to a
42.1%decrease in the
number of new licensing contracts for our CA system terminal-end software that
we entered into in 2008 as compared to 2007.




Net
Revenues. Our net revenues increased by 26.8% to $70.3 million in 2008
from $55.5 million in 2007.




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 2007 and
2008:




Years
      ended December 31,2007
              
              
              2008Revenues
              
              
              %
      of Net
                  Revenues
              
              
              Revenues
              
              
              %
      of Net
                  Revenues(in
      thousands, except percentages)Products
              
              $
              8,100
              
              
              
              14.6
              %
              
              $
              10,877
              
              
              
              15.5
              %Services
              
              
              2,135
              
              
              
              3.9
              
              
              
              2,828
              
              
              
              4.0Total
      cost of revenues
              
              $
              10,235
              
              
              
              18.5
              %
              
              $
              13,705
              
              
              
              19.5
              %





Cost of
revenues increased by 33.9% to $13.7 million in 2008 from $10.2 million in 2007,
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 34.3% to $10.9 million in 2008
from $8.1 million in 2007, primarily due to an increase in raw material costs
and personnel and related costs as the number of smart cards sold by us
increased during the period. Cost of revenues relating to our services increased
by 32.5% to $2.8 million in 2008 from $2.1 million in 2007, primarily reflecting
the increase in the corresponding revenues from our head-end system integration
and development services.




Cost of
revenues as a percentage of net revenues increased to 19.5% in 2008 from 18.5%
in 2007, primarily due to a decrease in the average selling price of our smart
cards in 2008 as compared to 2007. The average unit cost of our smart cards
decreased slightly by approximately 0.9% in U.S. dollar terms from 2007 to 2008
primarily due to a decrease in the price of computer chips, which was partially
offset by an increase in other related costs.




Gross Profit and
Gross Margin. Gross profit increased by 25.2% to $56.6 million in 2008
from $45.2 million in 2007. Our gross margin decreased slightly to 80.5% in 2008
from 81.5% in 2007.




60




Operating
Expenses. Our operating expenses increased by 57.5% to $19.1 million in
2008 from $12.1 million in 2007. This increase was attributable to a combination
of factors including a significant increase in the number of employees, an
increase in marketing activities and an increase in professional service fees
associated with the Company being in its first full year of operations as a
public company. Operating expenses, as a percentage of net revenues, increased
to 27.1% in 2008 from 21.8% in 2007.




Research and Development
Expenses. Our research and development expenses increased by 49.1% to
$6.9 million in 2008 from $4.6 million in 2007. This 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 9.8% in 2008 from 8.4% in 2007.




Selling and Marketing
Expenses. Our selling and marketing expenses increased by 61.3% to $6.1
million in 2008 from $3.8 million in 2007. This increase was primarily
attributable to increases in marketing activities and compensation costs
associated with hiring additional experienced staff. Our selling and marketing
expenses, as a percentage of net revenues, increased to 8.6% in 2008 from 6.8%
in 2007.




General and Administrative
Expenses. Our general and administrative expenses increased by 64.2% to
$6.1 million in 2008 from $3.7 million in 2007. This increase was primarily
attributable to substantial increases in professional service fees associated
with being a public company and compensation costs associated with hiring
additional experienced staff in the finance and legal departments. Our general
and administrative expenses, as a percentage of net revenues, increased to 8.7%
in 2008 from 6.7% in 2007.




Income from
Operations. As a result of the foregoing factors, our income from
operations increased by 13.4% from $33.1 million in 2007 to $37.6 million in
2008.




Non-operating
Income (Expenses). We had non-operating income of $8.7 million in 2008,
compared to $3.1 million in 2007. Our non-operating income in 2008. primarily
reflected interest income of $9.1 million and other expenses of $0.4
million.




Net
Income. As a result of the foregoing factors and taking into account
$0.01 million and $nil in net income attributable to minority interest in 2008
and 2007, respectively, net income increased by 27.3% to $43.1 million in 2008
from $33.8 million in 2007. Our basic and diluted earnings per ordinary share in
2008 were $0.75 and $0.72, respectively.




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
              
              
              2007Revenues
              
              
              %
      of Total
                  Revenues
              
              
              Revenues
              
              
              %
      of Total
                  Revenues(in
      thousands, except percentages)ProductsSmart
      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
              %ServicesHead-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
              %




61




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 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 1.7% decrease in the
average selling price of our smart cards in RMB terms from 2006 to 2007
(including value-added tax refunds). 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.




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 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
              
              
              2007Revenues
              
              
              %
      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
              
              
              
              3.9Total
      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.




62




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 of our operations.




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.




Non-operating
Income (Expenses). We had non-operating income of $3.1 million in 2007,
compared to non-operating expenses of $5.1 million in 2006. Our non-operating
expenses in 2006 consisted primarily of the expenses we incurred relating to the
increase of 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 non-operating 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.




B.        Liquidity
and Capital Resources




Liquidity




Years
      ended December 31,2006
              
              
              2007
              
              
              2008(In
      thousands)Cash
      and cash equivalents
              
              $
              21,137
              
              
              $
              228,958
              
              
              $
              202,947Net
      cash provided by operating activities
              
              
              21,090
              
              
              
              33,838
              
              
              
              38,403Net
      cash used in investing activities
              
              
              (1,408
              )
              
              
              (19,263
              )
              
              
              (51,922
              )Net
      cash (used in)/provided by financing activities
              
              $
              (7,273
              )
              
              $
              192,030
              
              
              $
              (13,929
              )




63




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 the 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 $38.4 million in 2008, which was primarily
derived from our net income of $43.1 million, adjusted to reflect an increase in
the accrued expenses and other current liabilities by $3.6 million and adding
back of $1.3 million in depreciation and amortization costs and $1.0 million in
non-cash share-based compensation charges. Net income was partially offset by a
$5.9 million increase in accounts receivable, a $2.5 million decrease in
deferred revenues, pre-paid expenses and other current assets of $3.5 million
and a $1.0 million increase in inventories. The significant increase in accrued
expenses and other current liability primarily reflected the increase in
proceeds to the employees from their exercise of our stock options that were
temporarily deposited with our company and other tax payable. The significant
increase in accounts receivable primarily reflected the more favorable
credit terms we granted to our major customers in light
of competition and recent economic downturn. Such increase was also attributable
to the growth of the sales of our smart cards. While we expect our
accounts receivable balance to continue to increase as a result of our current
customer credit policies, we are currently introducing measures intended to
control such increase. The significant decrease during 2008 in deferred revenues
reflected a decrease in advance payments from customers who purchase our smart
cards.




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 reflected 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.




Investing
Activities. Investing activities primarily include purchases of property
and equipment from time to time, purchase of intellectual property assets, loans
to employees, long-term investment, placement of bank deposits maturing over
three months, restricted cash and also include the acquisitions of assets from
N-T Information Engineering.




Net cash
used in investing activities was $52.0 million in 2008, reflecting $48.3 million
in bank deposits maturing over three months, two $0.9 million long-term loans to
Shizhou Shen and Lei Zhang, our employees, to support their acquisition of
certain equity stake in N-S Digital TV from N-T Information Engineering, an
aggregate of $3.1 million used to purchase the digital watermarking and image
tracing technologies and the equity interest in N-S Digital TV from N-T
Information Engineeringand $1.0 million used to purchase property and equipment, which were
partially offset by a receipt of $1.6 million loan repayment from N-T
Information Engineering and $0.8 million reduction of restricted
cash.




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
purchasing property and equipment, $0.6 million in restricted cash, $0.4 million
used for capital contribution to a joint venture company with Jiangsu Qingda 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 of the price
paid by us to purchase its set-top box business.




64




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.




Financing
Activities. Cash used in financing activities primarily consists of
dividend payments and repurchase of our ordinary shares, 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
used in financing activities was $14.0 million in 2008, consisting of $16.3
million used to repurchase our ordinary shares and $0.7 million of costs and
expenses incurred relating to our initial public offering, which were offset by
$0.7 million capital injection by an individual minority shareholder in Dongguan
SuperTV and $2.3 million in proceeds from the exercise of our stock options by
our employees and Tech Power Enterprise.




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.




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 the generally accepted
accounting principles in the PRC, or 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 $5.7 million and $10.2 million of our retained
earnings was not available for distribution as of December 31, 2007 and December
31, 2008, respectively.




Capital
Expenditures




In 2008,
2007 and 2006, our capital expenditures totaled $6.0 million, $1.2 million and
$4.1 million, respectively. Our capital expenditures in 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. Our
capital expenditures in 2008 primarily consisted of the long-term loans of $1.8
million in aggregate which we extended to Shizhou Shen and Lei Zhang, our
employees, to support their acquisition of a certain equity stake in N-S Digital
TV from N-T Information Engineering, an aggregate of $3.1 million used to
purchase the digital watermarking and image tracing technologies and the equity
interest of N-S Digital TV from N-T Information Engineering, $0.1 million used
to purchase additional equity interest in Dongguan SuperTV and $1.0 million used
to purchase property and equipment.




65




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, 2006 to December 31, 2008 that are reasonably likely to have a
material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that would cause 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,
2008:




Contractual ObligationsLess than
                  1 Year
              
              
              1-3 Years
              
              
              3-5 Years
              
              
              More than
                  5 Years
              
              
              Total(In
      thousands)Operating
      lease obligations(1)
              
              $
              367
              
              
              $
              26
              
              
              
              —
              
              
              
              —
              
              
              $
              393Purchase
      obligations
              
              
              1,719
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,719Total
              
              $
              2,086
              
              
              $
              26
              
              
              
              —
              
              
              
              —
              
              
              $
              2,112





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




66




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 18, 2009.




Name
                      
                      Age
                      
                      PositionJianhua
      ZHU
                      
                      39
                      
                      Chairman
      and Chief Executive OfficerZengxiang
      LU
                      
                      38
                      
                      DirectorJames
      Hsiang Ming HO
                      
                      49
                      
                      DirectorLouis
      T. HSIEH
                      
                      43
                      
                      Independent
      DirectorRui
      LU
                      
                      44
                      
                      Independent
      DirectorGongquan
      WANG
                      
                      47
                      
                      Independent
      DirectorSongzuo
      XIANG
                      
                      44
                      
                      Independent
      DirectorLiang
      XU
                      
                      34
                      
                      Chief
      Financial OfficerDong
      LI
                      
                      37
                      
                      President
      and Chief Marketing OfficerJian
      HAN
                      
                      35
                      
                      Chief
      Technology OfficerHuiqing
      CHEN
                      
                      36
                      
                      Chief
      Administrative
Officer





Jianhua ZHU, one of our
founders, has served as the chairman of our board of directors since November
2008 and as chief executive officer of our company since December 2006 and has
been a director since 2004. He was the 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.




Zengxiang LU, one of our
founders, has been a board member since 2004. He was chairman of our board of
directors and our chief strategy officer from December 2006 until November 2008
and 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
doctorate degree in signal processing from Tsinghua University.




James Hsiang Ming HOhas 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. and Renhe Commercial Holdings
Company Limited, both of which are Hong Kong-listed companies, since December
2004 and December 2007, respectively. Mr. Ho 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. HSIEHhas 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), or, New Oriental. 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 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.




67




Rui LU has been an
independent director of our company since September 2008. Dr. Rui Lu currently
is a Vice President of and a professor at the Communication University of China.
Previously, Dr. Rui Lu spent over ten years as the director of the Engineering
Research Center of TV Digitalization, an institution sponsored by the Ministry
of Education of China. Active in a number of government-sponsored industry
organizations, Dr. Rui Lu is also a member of the Mobile TV and Multimedia
National Standard Expert Evaluation Commission and a member of the Committee of
Science and Technology under the SARFT. Dr. Rui Lu was a recipient of the
special government allowance in 2001. Dr. Lu received his doctorate degree in
engineering from the National University of Defense Technology of China in
1991.




Gongquan
WANGhas 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 he 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, CDG Holdings Limited, CDH Venture GP I Company
Limited and CDH Venture GP II Company 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.





Songzuo XIANG has been an
independent director of our company since September 2008. Dr. Xiang is the
editor-in-chief of the Global Business & Finance magazine, a Chinese
business publication sponsored by the Development Research Center of the State
Council. Dr. Xiang is currently a director and the chief executive officer of
Hurray! Solutions Ltd. and a director of AirMedia Group Inc., both of which are
listed on the Nasdaq Global Market. Dr. Xiang was also the chairman of Hurray!
Solutions Ltd. from 2000 to 2003. From 1995 to 1998, Dr. Xiang was deputy
director of the Fund Planning Department at the Shenzhen branch office of the
People’s Bank of China. Dr. Xiang holds a master’s degree in international
affairs from Columbia University, a doctorate degree and a master’s degree in
economics from Renmin University of China and a bachelor’s degree in mechanical
engineering from Huazhong University of Science and Technology.





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 LIhas served as our
president since March 2009 and 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 HANhas 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 doctorate
degree in engineering and dual bachelor’s degrees in automation and mechanical
engineering from Tsinghua University.




Huiqing CHENhas 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.




68




Mr.
Andrew Y. Yan and Mr. Hua Guo, two former directors of our company, both
resigned from our board of directors in September 2008. Dr. Rui Lu and Mr.
Songzuo Xiang were appointed as our independent directors on September 17, 2008
and September 25, 2008, respectively. As a result, we have a majority of
independent directors on our board of directors.




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




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 current and formernon-executive directors and
our independent directors, have received compensation in the form of share
options. We do not provide any benefits to our non-executive directors upon
retirement. In 2008, the aggregate cash compensation to our executive officers
and directors was $0.9 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, 620,212 and 53,280ordinary shares pursuant to
the 2005 Stock Incentive Plan on February 3, 2005, September 22, 2006, December
5, 2006 and October 5, 2008, respectively, of which options to purchase 261,314
ordinary shares were subsequently forfeited. Options to purchase 1,837,421
ordinary shares remained outstanding as of December 31, 2008 under the 2005
Plan.




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.




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.




69




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.




With
respect to the stock options that we granted on October 5, 2008, 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 $0.543 per share.




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. We granted stock options to purchase 406,776 ordinary shares on October 5,
2008. Options to purchase 406,776 ordinary shares remained outstanding as of
December 31, 2008 under the 2008 Plan.




With
respect to the stock options that we granted on October 5, 2008, 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 $7.89 per share.




The
2005 and 2008 Plans




Our board
of directors administers the 2005 and 2008 Plans 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 plans 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 or the 2008 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 and the 2008 Plan will terminate on September 12,
2017.




70




The
following table sets forth information on stock options that have been granted
and are outstanding as of April 30, 2009 pursuant to the 2005 Plan and the 2008
Plan:




Number
      of
                    Ordinary
      Shares
                    Underlying
      Outstanding
                    Options
                
                
                Exercise
                    Price
      per
                    Ordinary
                    Share
                
                Date
      of Grant
                
                Date
      of ExpirationDirectors
      and Executive OfficersAndrew
      Y. YAN(1)
                
                
                114,584
                
                
                $
                0.543
                
                February 3, 2005
                
                June
      10, 2009Liang
      XU
                
                
                105,333
                
                
                $
                4.172
                
                December
      5, 2006
                
                December 4, 201642,880
                
                
                $
                0.543
                
                October
      5, 2008
                
                October
      4, 2018Dong
      LI
                
                
                5,503
                
                
                $
                0.543
                
                February
      3, 2005
                
                February
      2, 201546,554
                
                
                $
                7.890
                
                October
      5, 2008
                
                October
      4, 2018Jian
      HAN
                
                
                4,683
                
                
                $
                0.543
                
                February
      3, 2005
                
                February
      2, 201516,748
                
                
                $
                7.890
                
                October
      5, 2008
                
                October
      4, 2018Huiqing
      CHEN
                
                
                3,240
                
                
                $
                0.543
                
                February
      3, 2005
                
                February
      2, 201515,228
                
                
                $
                7.890
                
                October
      5, 2008
                
                October
      4, 2018Other
      GranteesOther
      grantees (comprising 66 individuals)
                
                
                609,253
                
                
                $
                0.543
                
                February
      3, 2005
                
                February
      2, 2015Other
      grantees (comprising 53 individuals)
                
                
                465,762
                
                
                $
                1.771
                
                September 22, 2006
                
                September 21, 2016Other
      grantees (comprising 22 individuals)
                
                
                184,535
                
                
                $
                4.172
                
                December
      5, 2006
                
                December
      4, 2016Other
      grantees (comprising 61 individuals)
                
                
                327,446
                
                
                $
                7.890
                
                October
      5, 2008
                
                October
      4, 2018Other
      grantees (comprising one individual)
                
                
                10,400
                
                
                $
                0.543
                
                October
      5, 2008
                
                October
      4, 2018Total
                
                
                1,952,149







(1)
Andrew Y. Yan resigned as a director of our company on September 17,
2008.





In
addition to the options granted pursuant to the 2005 Plan and the 2008 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. All
these options remained outstanding as of April 30, 2009.




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.




71




Terms
of Directors




Our
Second Amended and Restated Memorandum and Articles of Association provide for
three classes of directors, each with three-year terms. The term of the Class I
directors, who are Dr. Zengxiang Lu and Mr. Jianhua Zhu, will expire upon the
annual general meeting of shareholders to be held in 2011 after both of them
were reelected as directors at the annual general meeting of shareholders held
in 2008 upon which their initial term expired; the term of the Class II
directors, who are 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, Dr. Rui Lu and Mr.
Songzuo Xiang, 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.




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 corporate governance and nominations committee
and a compensation committee. The charters of each of our audit committee,
corporate governance and nominations committee and compensation committee are
publicly available on our website at http://ir.chinadtv.cn and are also
available in print to any shareholder who requests any of them.




Audit
Committee




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




·
            recommending
      to our shareholders, if appropriate, the annual reappointment 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;




72


·
              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;
  ·
              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 Dr. Rui Lu, and has a formal written charter that sets forth its
duties and powers.  Our board has determined that each of
Mr. Louis T. Hsieh, Mr. Gongquan Wang and Dr. Rui Lu qualifies as an
“independent” director under the rules of the U.S. Securities and Exchange
Commission, or the SEC, and the NYSE.  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. Gongquan Wang and Dr. Rui Lu, and has a formal written
charter that sets forth its duties and powers.  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. Gongquan Wang and Dr. Rui Lu, and has a formal written charter
that sets forth its duties and powers.  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.
  Corporate
Governance Guidelines
  Our board
of directors has adopted a set of corporate governance guidelines. These
guidelines reflect certain guiding principles with respect to the composition,
selection and performance evaluation of our board of directors, the board
committees, management succession and executive compensation. They are publicly
available on our website at http://ir.chinadtv.cn and are also available in
print to any shareholder who requests it.
  73
  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 April 30, 2009 unless otherwise
indicated.  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 57,489,318 ordinary shares
outstanding (excluding the 602,636 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 April 30, 2009.
  Shares beneficially ownedNumber
                
                
                PercentDirectors
      and Executive OfficersJianhua
      ZHU (1)
                
                
                3,390,734
                
                
                
                5.9
                %Zengxiang
      LU(2)
                
                
                3,390,734
                
                
                
                5.9
                %James
      Hsiang Ming HO
                
                
                —
                
                
                
                —Louis
      T. HSIEH(3)
                
                
                *
                
                
                
                *Rui
      LU
                
                
                —
                
                
                
                —Gongquan
      WANG
                
                
                —
                
                
                
                —Songzuo
      XIANG
                
                
                —
                
                
                
                —Liang
      XU(4)
                
                
                *
                
                
                
                *Dong
      LI(5)
                
                
                *
                
                
                
                *Jian
      HAN(6)
                
                
                *
                
                
                
                *Huiqing
      CHEN(7)
                
                
                *
                
                
                
                *Directors
      and executive officers as a group(8)
                
                
                7,430,806
                
                
                
                12.9
                %Principal
      ShareholdersYuk
      Shing WONG(9)
                
                
                4,800,832
                
                
                
                8.4
                %China
      Capital(10)
                
                
                12,002,080
                
                
                
                20.9
                %Capital
      Funds(11)
                
                
                12,000,000
                
                
                
                20.9
                %SAIF(12)
                
                
                11,833,335
                
                
                
                20.6
                %
 
 *
                Upon
      exercise of all share options exercisable within 60 days of April 30,
      2009, would beneficially own less than 1% of our ordinary
      shares.
 (1)
              Represents:
      (i) the 464,977 ordinary shares held by Smart Live Group Limited, which is
      wholly owned by Mr. Jianhua Zhu; (ii) 20% of the 12,002,080 ordinary
      shares held by China Capital; and (iii) the 525,341 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.
  (2)
              Represents:
      (i) the 464,977 ordinary shares held by Polar Light Group Limited, which
      is wholly owned by Dr. Zengxiang Lu; (ii) 20% of the 12,002,080 ordinary
      shares held by China Capital; and (iii) the 525,341 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.
  74
  (3)
              Represents
      the sum of ordinary shares issuable upon exercise of options held by
      Mr. Hsieh.
  (4)
              Represents
      the sum of ordinary shares owned by Mr. Xu and ordinary shares issuable
      upon exercise of options held by
Mr. Xu.
  (5)
              Represents
      the sum of ordinary shares owned by Mr. Li and ordinary shares issuable
      upon exercise of options held by
Mr. Li.
  (6)
              Represents
      the sum of ordinary shares owned by Mr. Han and ordinary shares issuable
      upon exercise of options held by
Mr. Han.
  (7)
              Represents
      the sum of ordinary shares owned by Ms. Chen and ordinary shares issuable
      upon exercise of options held by
Ms. Chen.
  (8)
              Represents
      40% of the 12,002,080 ordinary shares held by China Capital (each of
      Mr. Jianghua Zhu and Dr. Zengxiang Lu owns 20% of the equity interest
      of China Capital), 100% of the 525,341 ordinary shares held by China Cast
      (Mr. Jianhua Zhu and Dr. Zengxiang Lu jointly exercise investment and
      voting powers over the shares held by China Cast), an aggregate of
      1,090,141 ordinary shares held by Mr. Xu, Mr. Li, Mr. Han
      and Ms. Chen and an aggregate of 84,538 ordinary shares issuable upon
      exercise of options held by Mr. Hsieh, Mr. Xu, Mr. Li,
      Mr. Han and Ms. Chen.
  (9)
              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.
  (10)
              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 BVI company and its
      address is: c/o Morgan & Morgan Trust Corporation Ltd., Pasea
      Estate, P.O. Box 3149, Road Town, Tortola, British Virgin
      Islands.
  (11)
              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, 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.
  (12)
              Represents
      the ordinary shares held by SAIF as of March 17, 2009 reported on the
      Amendment No. 2 of Schedule 13D, which was filed by SAIF with the SEC on
      March 17, 2009.  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.  SB Asia Pacific Partners L.P., or the GP, is the sole
      general partner of SAIF.  SB Asia Pacific Investments Limited,
      or SB Investments, is the sole general partner of the GP.  SB
      Asia Pacific Investments Limited is the sole shareholder of SB
      Investments.  Asia Infrastructure Investments Limited, or Asia
      Investments, is the sole shareholder of SB Investments.  Asia
      Investments is controlled, in respect of its authority over SB
      Investments, by SB First Singapore Pte. Ltd., or SB
      Singapore.  SOFTBANK Corporation is the sole shareholder of SB
      Singapore.  Mr. Ronald D. Fisher is the sole director of SB
      Investments.  As of February 2, 2009, SAIF beneficially owned
      11,239,241 ordinary shares as reported on Amendment No. 1 of Schedule 13D,
      which was filed by SAIF with the SEC on February 4, 2009.  As of
      May 31, 2008, SAIF beneficially owned 9,496,932 ordinary shares, including
      those issued to SAIF upon conversion of 8,600,000 series A preferred
      shares it held upon the completion of our initial public offering in
      October 2007.
  In
January 2009, China Cast Investment Holdings Limited, or China Cast, which owned
3,309,000 ordinary shares of our company as of December 31, 2008, transferred
2,783,659 of our ordinary shares to certain employees of our
company.  As a result, China Cast ceased to hold more than 5% of our
ordinary shares.
  Item
      7.
              Major
      Shareholders and Related Party
Transactions
  A.        Major
Shareholders
  Please
refer to “Item 6. Directors, Senior Management and Employees—E. Share
Ownership” in this annual report.
  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.
  75
  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 and Share 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 intellectual property rights and equity
interests.
  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 Intellectual Property Rights
  ·
              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
      ($1.3 million).  N-T Information Engineering
      covenanted not to engage in any business activities in the PRC or outside
      of the PRC that are directly or indirectly in competition with the
      business transferred to N-S Digital TV under this
      agreement.
  ·
              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 ($2.0 million) paid through N-T Information
Engineering was refunded to N-S Digital TV in 2006.
  ·
              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.
  76
  ·
              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
      ($3.8 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 are 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 and Transfer of a Graphic Logo by
      N-T Information Engineering to N-S Digital TV in December
      2008.  N-T Information Engineering granted
      N-S Digital TV a non-exclusive license to use certain trademarks free
      of charge. In December 2008, N-T Information Engineering transferred to
      Super TV, free of charge, the trademark for the graphic logo that was
      previously licensed to N-S Digital TV under this agreement. For details of
      this licensing agreement and the transfer of the trademark for the graphic
      logo, see “Item 4. Information on the Company—B. Business
      Overview—Intellectual Property.”
  ·
              Intellectual
      Property Rights Transfer Agreement, dated August 13, 2008, between N-T
      Information Engineering and Super TV.N-T Information Engineering
      transferred all of its intellectual property rights relating to the
      digital watermarking and image tracing technologies to Super TV, including
      one patent issued and five pending patent applications in the PRC. The
      transfer price is RMB21.2 million ($3.1 million), which was fully paid by
      Super TV in September 2008. See “Item 4. Information on the
      Company—B. Business Overview—Intellectual Property”. A portion of the
      transfer price under this agreement in the amount of RMB8.8 million ($1.3
      million) was attributable to the acquisition of the intellectual property
      rights relating to the digital watermarking and image tracing technologies
      and the remainder was reallocated to the acquisition of N-T Information
      Engineering’s equity interest in N-S Digital TV by two of our
      employees.
  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 value of the transactions between N-S
      Digital TV and Super TV under this agreement was RMB7.5 million
      ($1.1 million) in 2008.  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.
  77
  ·
              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.  In 2008, N-S Digital TV
paid nil to Super TV 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 ($9.5) for each smart card (including related software)
      and may be adjusted by agreement between the parties on an arm’s-length
      basis annually. The term of the agreement is 15 years. N-S Digital TV
      subsequently obtained Super TV’s consent to produce by itself or purchase
      from a third party smart cards beginning March 2006. The aggregate value
      of transactions between N-S Digital TV and Super TV under this
      agreement was RMB312.2 million ($45.8 million) in
      2008.
  ·
              Framework
      Agreement for Purchase of Computer Chips, dated December 12, 2008, between
      N-S Digital TV and Super TV.Pursuant to this
      agreement, N-S Digital TV will purchase computer chips from Super TV,
      which in turn will source such computer chips from suppliers such as STM
      and Infineon. The term of this agreement is indefinite and is terminable
      by agreement between the parties. N-S Digital TV intends to purchase
      substantially all computer chips it needs through Super
  TV.
  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, a third supplemental agreement, dated June 20, 2008, among
Super TV, N-S Digital TV, N-T Information Engineering, Ms. Wei Gao and Mr.
Junming Wu, and a fourth supplemental agreement, dated November 24, 2008, among
Super TV, N-S Digital TV, N-T Information Engineering, Mr. Junming Wu, Mr. Lei
Zhang and Mr. Shizhou Shen, referred to collectively as the Transfer Option
Agreement.  Pursuant to the Transfer Option Agreement, Mr. Junming Wu,
Mr. Lei Zhang and Mr. Shizhou Shen, being all the shareholders of N-S Digital
TV, 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 ($1.5).  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.
  78
  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, Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen
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, and further amended by a second
supplemental agreement, dated June 20, 2008, among Super TV, N-S Digital TV, N-T
Information Engineering, Ms. Wei Gao and Mr. Junming, and a third supplemental
agreement, dated November 24, 2008, among Super TV, N-S Digital TV, N-T
Information Engineering, Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen,
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.
  Mr.
Junming Wu executed a power of attorney, dated June 20, 2008, to appoint
Mr. Jianhua Zhu as an attorney-in-fact to exercise all its voting rights as
a shareholder of N-S Digital TV. The authorization granted under the
relevant power of attorney will terminate upon Mr. Jianhua Zhu ceasing to
be a director of Super TV.  The term of this power of attorney is 10
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 Mr. Junming Wu. Mr. Lei Zhang and
Mr. Shizhou Shen each executed a power of attorney, dated November 24, 2008, to
appoint Super TV or a third party designated by Super TV as an attorney-in-fact
to exercise all their voting rights as a shareholder of N-S Digital
TV.  The term of the power of attorney executed by Mr. Lei Zhang or
Mr. Shizhou Shen is 10 years, subject to earlier termination in the event of the
termination of the loan agreement between Super TV and Mr. Lei Zhang or the loan
agreement between Super TV and Mr. Shizhou Shen, as the case may
be.
  79
  Share
Pledge Agreements
  N-T
Information Engineering and Super TV entered into a share pledge agreement,
dated September 1, 2005, pursuant to which N-T Information Engineering had
pledged all of its 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.  This agreement was terminated on
November 24, 2008, following the transfer by N-T Information Engineering of all
of its equity interests in N-S Digital TV to Mr. Lei Zhang and Mr. Shizhou
Shen.  On November 24, 2008, Mr. Lei Zhang and Mr. Shizhou Shen each
entered into a share pledge agreement with Super TV, pursuant to which Mr. Lei
Zhang and Mr. Shizhou Shen have pledged all of their respective equity interests
in N-S Digital TV to Super TV to secure their respective payment
obligations under their respective loan agreements with Super TV, each dated
November 24, 2008.  Under such share pledge agreements, Mr. Lei Zhang
and Mr. Shizhou Shen 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.
  Pursuant
to the share pledge agreement, dated September 1, 2005, between Super TV and Ms.
Li Yang, as amended by a supplemental agreement, dated August 18, 2007, between
Super TV, Ms. Li Yang and Ms. Wei Gao, and further amended by a second
supplemental agreement, dated June 20, 2008, among Super TV, Ms. Wei Gao and Mr.
Junming Wu, Mr. Junming Wu has pledged all of his 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,
Mr. Junming Wu has 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 pledge.
  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 repaid in full the loan
to Super TV in December 2008.
  Loans
to Mr. Lei Zhang and Mr. Shizhou Shen
  Pursuant
to two loan agreements, each dated November 24, 2008, between Super TV and each
of  Mr. Lei Zhang and Mr. Shizhou Shen, respectively, Super TV
provided a loan in the principal amount of RMB6.2 million
($0.9 million) to each of Mr. Lei Zhang and Mr. Shizhou
Shen.  The term of each loan is 10 years, renewable upon consent by
the parties, and the interest rate of each loan is nil.  Super TV
provided such loans to Mr. Lei Zhang and Mr. Shizhou Shen to fund their
acquisitions of N-T Information Engineering’s equity interests in N-S Digital
TV.
  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.
  80
  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.
  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, 2008 under this
agreement.
  Equity
Transfer Agreement (Super TV)
  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.
  Equity
Transfer Agreement (N-S Media Investment)
  Pursuant
to an agreement for equity transfer of N-S Media Investment, dated October 5,
2008, between Super TV and N-S Digital TV, Super TV agreed to transfer to N-S
Digital TV its 100% equity interest in N-S Media Investment for a consideration
of RMB50 million ($7.3 million) in cash.  As a result of this
transaction, N-S Digital TV directly holds 100% equity interest in N-S Media
Investment.
  81
  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.”
  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
  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.
  In
December 2008, in the belief that a special dividend is an efficient use of our
cash to maximize shareholder value, our board of directors determined to declare
and pay a special cash dividend of $1.00 per ordinary share of the company. This
special dividend in the amount of $57.2 million was fully paid by the end of
February 2009.
  Our board
of directors has the discretion to determine the payment of any dividends. As a
matter of company policy, our board of directors will consider declaring and
paying dividends at least once every two years following the declaration of the
special dividend in 2008, for a given period, subject to the board of directors’
determination that (i) we have sufficient profit attributable to shareholders
for such period and (ii) our funding requirements can be fully satisfied if a
proposed dividend is declared and paid. In addition, our board of directors will
review and decide whether to revise our dividend policy, from time to time, in
light of our future operations and earnings, capital requirements and surplus,
financial condition, contractual restrictions, general business conditions and
other factors as the board of directors may deem relevant. We expect any such
dividends that our board of directors may declare in the future to be paid with
funds from sources other than our earnings because we currently intend to retain
all available 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, from such earnings, for the foreseeable
future.
  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.
  82
  B.        Significant
Changes
  There
have been no significant changes since December 31, 2008, 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 NYSE since
October 5, 2007.  Our ADSs trade under the symbol “STV.” The NYSE
is the principal trading market for our ADSs, which are not listed on any other
exchanges in or outside the United States.
  The high
and low closing prices of our ADSs on the NYSE since listing are as
follows:
  Price per ADS (US$)High
                  
                  
                  LowYearly:2008
                  
                  
                  27.55
                  
                  
                  
                  4.25Quarterly:Fourth
      Quarter, 2007(1)
                  
                  
                  51.08
                  
                  
                  
                  25.6First
      Quarter, 2008
                  
                  
                  27.55
                  
                  
                  
                  15.6Second
      Quarter, 2008
                  
                  
                  20.57
                  
                  
                  
                  13.91Third
      Quarter, 2008
                  
                  
                  13.79
                  
                  
                  
                  7.42Fourth
      Quarter, 2008
                  
                  
                  8.55
                  
                  
                  
                  4.25MonthlyNovember
      2008
                  
                  
                  6.82
                  
                  
                  
                  4.66December
      2008
                  
                  
                  8.38
                  
                  
                  
                  4.25January
      2009
                  
                  
                  8.69
                  
                  
                  
                  5.85February
      2009
                  
                  
                  6.76
                  
                  
                  
                  6.06March
      2009
                  
                  
                  7.81
                  
                  
                  
                  6.22April
      2009
                  
                  
                  8.70
                  
                  
                  
                  6.28May
      2009 (through May 18)
                  
                  
                  11.31
                  
                  
                  
                  7.93
 
 (1)
              Our
      ADSs commenced trading on the NYSE on October 5,
  2007.
  As of
April 30, 2009, a total of 19,740,313 ADSs were outstanding, excluding the
602,636 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 April 30, 2009, 19,740,313 ordinary shares were
registered in the name of Deutsche Bank Trust Company Americas, the depositary
under the deposit agreement, excluding 602,636 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 NYSE since
October 5, 2007 under the symbol “STV.”
  83
  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.
  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.
  84
  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 20 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,
  ·
              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.
  85
  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 NYSE 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.
  Dividends
will be income from sources outside the United States, and, depending on your
circumstances, will be either “passive” or “general” category 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.
  86
  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.
  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.
  87


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, 2008, 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.




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 2008, substantially all of our revenues were
denominated in Renminbi and 44.8% of our cost of revenues was denominated in
U.S. dollars.  In 2008, fluctuations in the exchange rates between the
Renminbi and U.S. dollar and other foreign currencies resulted in a decrease in
our net income of approximately $269,853.




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, 2008, a 1.0% appreciation of the Renminbi
against the U.S. dollar will result in an estimated increase of approximately
$989,557 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 $969,962 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.


88




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 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008,
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.




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 became effective on
October 4, 2007.




The net
proceeds from our initial public offering to us, after deduction of fees and
expenses, were approximately $202.2 million.  As of April 30,
2009, we spent an aggregate of $3.1 million to purchase the digital watermarking
and image tracing technologies from N-T Information Engineering and the equity
interest in N-S Digital TV from N-T Information Engineering, $16.3 million on
our share repurchase plan and related transaction cost, $57.3 million on payment
of a special cash dividend declared in December 2008 and related transaction
cost, and $23.5 millionon general corporate
purposes.




We used
the offering proceeds for our share repurchase plan in 2008.  As a
consequence, a portion of the offering proceeds might be used, through share
repurchase plan, as direct or indirect payment to our directors, officers, or
their associates, to persons owning 10% or more of any class of our equity
securities, and to our affiliates, since the ordinary shares beneficially owned
by such persons might be purchased by usin the open market as
part of our repurchase plan.




We also
used the offering proceeds for payment of the special cash dividend we declared
in December 2008 to those holders of our ordinary shares whose names appear on
the register of members of our company on January 8, 2009.  As a
consequence, a portion of the offering proceeds were used, through the dividend
payment, as direct or indirect payments to our directors, officers, or their
associates, to persons owning 10% or more of any class of our equity securities,
and to our affiliates, who beneficially owned our ordinary shares on January 8,
2009.




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.


89




Item
15.       Controls and
Procedures




Disclosure
Controls and Procedures




Our management, with the
participation of our chief executive officer and chief financial officer, has
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934)
as of the end of the period covered by this annual report.  Based on
this evaluation, our chief executive officer and chief financial officer have
concluded that, as of the end of the fiscal year covered by this annual report,
our disclosure controls and procedures were designed, and were effective, to
give reasonable assurance that the information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC, and were also effective to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosure.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended, for our
company.  Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements in accordance
with generally accepted accounting principles, and includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of a
company’s assets, (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that a
company’s receipts and expenditures are being made only in accordance with
authorizations of a company’s management and directors, and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of a company’s assets that could have a material
effect on the consolidated financial statements.




Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance with respect to consolidated
financial statement preparation and presentation, and may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.




As
required by Section 404 of the Sarbanes-Oxley Act and related rules as
promulgated by the SEC, our management, with the participation of our chief
executive officer and chief financial officer, assessed the effectiveness of the
internal control over financial reporting as of December 31, 2008 using criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.




Based on
this evaluation, our management has concluded that the internal control over
financial reporting was effective as of December 31, 2008 based on the criteria
established in Internal Control–Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.




The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent
registered public accounting firm, as stated in their report which is included
herein.




90




Attestation
Report of the Independent Registered Public Accounting Firm




To the
Board of Directors and Shareholders of China Digital TV Holding Co.,
Ltd.


We have audited the internal control
over financial reporting of China Digital TV Holding Co., Ltd. (the “Company”),
its subsidiaries, its variable interest entity (the “VIE”) and the VIE’s
subsidiaries (collectively, the “Group”) as of December 31, 2008, based on
the criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Group’s internal control over financial reporting
based on our audit.




We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of director, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Group maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008 of the Group and our report dated May
19, 2009 expressed an unqualified opinion on those consolidated financial
statements.




/s/Deloitte Touche Tohmatsu CPA
Ltd.




Beijing,
The People’s Republic of China




May 19,
2009




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.


91




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 SEC and the NYSE, is an audit committee financial expert within the
meaning of the rules of the SEC. 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 our registration statement on Form F-1 (No.
333-146072) and have posted the text of such codes on our Internet website at
http://ir.chinadtv.cn. Our Code of Business Conduct and Ethics is also available
in print to any shareholder who requests it.




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, 2006,
December 31, 2007, and December 31, 2008, 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 2008, 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 $1.1
million, $1.3 million and $0.3 million, respectively.




Audit-Related
Fees




The
aggregate fees billed in each of 2008, 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, $0.1 million
and nil, respectively.




Tax
Fees




The
aggregate fees billed in each of 2008, 2007 and 2006 for professional services
relating to tax compliance, tax advice and tax planning rendered by our
principal accountant were $0.1 million, $0.1 million and $0.1 million,
respectively.




All
Other Fees




The
aggregate fees billed in each of 2008, 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,
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 preapprove, or to adopt appropriate procedures to preapprove, 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 preapprove 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.


92




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




Not
Applicable.




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




Period
                
                Total Number of
                    ADSs Purchased(1)
                
                
                Average Price
                    Paid Per ADS
                
                
                ADSs Purchased as
                    Part of Publicly
                    Announced Plans
                    or Programs(1)
                
                Approximate
                    Dollar Value of
                    ADSs that May
                    Yet Be
                    Purchased Under
                    the ProgramsSeptember
      15 through September 30, 2008(2)
                
                
                344,667
                
                
                $
                8.19
                
                
                
                344,667
                
                $37.2 millionOctober
      1 through October 31, 2008
                
                
                1,141,943
                
                
                
                7.32
                
                
                
                1,141,943
                
                28.8
      millionNovember
      1 through November 21, 2008
                
                
                820,956
                
                
                
                5.90
                
                
                
                820,956
                
                $
      24.0 millionTotal
                
                
                2,307,566
                
                
                $
                6.94
                
                
                
                2,307,566





(1)
            On
      September 17, 2008, we announced a share repurchase program, pursuant to
      which we were authorized by the board of directors to repurchase up to $40
      million worth of our outstanding ADSs from time to time until November 21,
      2008.




(2)
            Our
      ADS to ordinary share ratio is one ADS for one ordinary
    share.




Item
16F.     Change in Registrant’s Certifying
Accountant




Not
applicable.




Item
16G.    Corporate Governance




As our
ADSs are registered with the SEC and are listed on the NYSE, we are subject to
corporate governance requirements imposed by both the SEC and the
NYSE.




We are
incorporated in the Cayman Islands. Under Section 303A of the NYSE Listed
Company Manual, NYSE-listed non-U.S. companies may, in general, follow their
home country corporate governance practices in lieu of some of the NYSE
corporate governance requirements. A NYSE-listed non-U.S. company is required to
provide a general summary of the significant differences to its U.S. investors
either on the company website or its annual report distributed to its U.S.
investors.




We are
committed to a high standard of corporate governance and endeavor to comply with
most of the NYSE corporate governance practices.  We believe that
there are no significant differences with our corporate governance policies as
compared to what the NYSE requires of domestic listed companies.




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.


93




Item
19.       Exhibits




Number
              
              Description of Exhibit1.1*
              
              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.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.


94





Number
              
              Description of Exhibit4.12
              
              Letter
      of Consent, dated April 30, 2009, issued by Beijing Super TV Co., Ltd. to
      Beijing Novel-Super Digital TV Technology Co., Ltd.4.13
              
              Equity
      Transfer Agreement, dated June 20, 2008 between Ms. Wei Gao and Mr.
      Junming Wu for Beijing Novel-Super Digital TV Technology Co.,
      Ltd.4.14
              
              Equity
      Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
      Information Engineering Co., Ltd. and Mr. Shizhou Shen for Beijing
      Novel-Super Digital TV Technology Co., Ltd.4.15
              
              Equity
      Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
      Information Engineering Co., Ltd. and Mr. Lei Zhang for Beijing
      Novel-Super Digital TV Technology Co., Ltd.4.16
              
              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. *; 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*; the
      No. 3 Supplemental Agreement thereto, dated June 20, 2008, among Beijing
      Super TV Co., Ltd., Beijing Novel-Super Digital TV Technology Co., Ltd.,
      Novel-Tongfang Information Engineering Co., Ltd., Ms. Wei Gao and Mr.
      Junming Wu; and the No. 4 Supplemental Agreement thereto, dated November
      24, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super Digital TV
      Technology Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
      Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen.4.17*
              
              Share
      Pledge Agreement, dated September 1, 2005, between Novel-Tongfang
      Information Engineering Co., Ltd. and Beijing Super TV Co.,
      Ltd.4.18
              
              Termination
      Agreement of Share Pledge, dated November 24, 2008, between Beijing Super
      TV Co., Ltd. and Novel-Tongfang Information Engineering Co.,
      Ltd.4.19
              
              Share
      Pledge Agreement, dated September 1, 2005, between Ms. Li Yang and
      Beijing Super TV Co., Ltd.*; the Supplemental Agreement thereto, dated
      August 18, 2007, among Ms. Li Yang, Beijing Super TV Co., Ltd. and
      Ms. Wei Gao*; and the No.2 Supplemental Agreement thereto, dated June
      20, 2008, among Beijing Super TV Co., Ltd., Ms. Wei Gao and Mr. Junming
      Wu.4.20
              
              Share
      Pledge Agreement, dated November 24, 2008, between Mr. Shizhou Shen and
      Beijing Super TV Co., Ltd.4.21
              
              Share
      Pledge Agreement, dated November 24, 2008, between Mr. Lei Zhang and
      Beijing Super TV Co.,
Ltd.


95





Number
              
              Description of Exhibit4.22
              
              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. *; 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*; the No.2 Supplemental Agreement thereto, dated June
      20, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super Digital TV
      Technology Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
      Ms. Wei Gao and Mr. Junming Wu; and the No. 3 Supplemental Agreement
      thereto, dated November 24, 2008, among Beijing Super TV Co., Ltd.,
      Beijing Novel-Super Digital TV Technology Co., Ltd., Novel-Tongfang
      Information Engineering Co., Ltd., Mr. Junming Wu, Mr. Lei Zhang and Mr.
      Shizhou Shen.4.23*
              
              Power
      of Attorney, dated September 1, 2005, of Novel-Tongfang Information
      Engineering Co., Ltd.4.24*
              
              Power
      of Attorney, dated August 18, 2007, of Ms. Wei
Gao.4.25
              
              Power
      of Attorney, dated June 20, 2008, of Mr. Junming Wu.4.26
              
              Power
      of Attorney, dated November 24, 2008, of Mr. Shizhou
  Shen.4.27
              
              Power
      of Attorney, dated November 24, 2008, of Mr. Lei Zhang.4.28*
              
              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.4.29*
              
              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.4.30*
              
              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.4.31*
              
              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.4.32
              
              Loan
      Agreement, dated November 24, 2008, between Mr. Shizhou Shen and Beijing
      Super TV Co., Ltd.4.33
              
              Loan
      Agreement, dated November 24, 2008, between Mr. Lei Zhang and Beijing
      Super TV Co., Ltd.4.34*
              
              Service
      Agreement, dated April 2, 2007, between Novel-Tongfang Information
      Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV Technology
      Co., Ltd.4.35*
              
              Interest
      Payment Agreement, dated November 30, 2006, between Beijing Novel-Tongfang
      Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
    Ltd.4.36*
              
              Form of
      Property Lease Agreement.4.37*
              
              Fixed
      Assets Transfer Agreement, dated March 28, 2007, between Beijing
      Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
      Ltd.


96





Number
              
              Description of Exhibit4.38*
              
              Form of
      Employment Agreement and related Form of Agreement on Confidentiality
      and Intellectual Property.4.39*
              
              Form of
      Non-Disclosure, Non-Competition, Commitment and Proprietary Information
      Agreement.4.40*
              
              Form of
      Indemnification Agreement for Directors.4.41*
              
              Amended
      and Restated 2005 Stock Incentive Plan of China Digital TV Holding Co.,
      Ltd. and form of stock option agreement.4.42††*
              
              Cooperation
      Agreement, dated January 5, 2007, between Beijing Novel-Tongfang Digital
      TV Technology Co., Ltd. and Jiangsu Qingda Science and Technology
      Industries Co., Ltd.4.43*
              
              Cooperation
      Agreement, dated July 18, 2007, between Beijing Novel-Tongfang Digital TV
      Technology Co., Ltd. and China Electronics Smart Card Co.,
      Ltd.4.44*
              
              2008
      Stock Incentive Plan of China Digital TV Holding Co.,
  Ltd.4.45#
              
              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.4.46
              
              Intellectual
      Property Transfer Agreement, dated August 13, 2008, between Novel-Tongfang
      Information Engineering Co., Ltd. and Beijing Super TV Co.,
      Ltd.4.47
              
              Equity
      Transfer Agreement, dated October 5, 2008, between Beijing Super TV Co.,
      Ltd. and Beijing Novel-Super Digital TV Technology Co.,
    Ltd.4.48
              
              Framework
      Agreement for Purchase of Computer Chips, dated December 12, 2008, between
      Beijing Super TV Co., Ltd. and Beijing Novel-Super Digital TV 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 King & Wood, PRC
Lawyers.








††
            Portions
      of the agreement have been omitted pursuant to a confidential treatment
      request and have been filed with the SEC 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.




#
            Previously
      filed as an exhibit to the annual report on Form 20-F (File No. 001-33692)
      of China Digital TV Holding Co., Ltd. filed with the SEC on June 18, 2008
      and incorporated herein by reference
thereto.


97


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:  Chairman
      and Chief Executive
Officer





Date: May
20, 2009








CHINA
DIGITAL TV HOLDING CO., LTD.


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





CONTENTS
                          
                          PAGE(S)REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                          
                          F-1CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2006, 2007 AND 2008
                          
                          F-2CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND
      2008
                          
                          F-3CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS
      ENDED DECEMBER 31, 2006, 2007 AND 2008
                          
                          F-4CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND
      2008
                          
                          F-5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                          
                          F-6
      –F-
51









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”), its subsidiaries, its variable interest entity (the
“VIE”) and the VIE’s subsidiaries (collectively, the “Group”) as of December 31,
2007 and 2008 and the related consolidated statements of operations,
shareholders’ equity and comprehensive incomes, and cash flows for the years
ended December 31, 2006, 2007 and 2008. These consolidated financial statements
are the responsibility of the Company’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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 consolidated financial position of the Group as of December 31,
2007 and 2008, and the consolidated results of its operations and its cash flows
for the years ended December 31, 2006, 2007 and 2008 in conformity with
accounting principles generally accepted in the United States of
America.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Group’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated May 19, 2009 expressed an
unqualified opinion on the Group’s internal control over financial
reporting.





/s/
Deloitte Touche Tohmatsu CPA Ltd.


Beijing,
The People's Republic of China


May 19,
2009


F-1




CHINA
DIGITAL TV HOLDING CO., LTD.
  CONSOLIDATED BALANCE
SHEETS


(In
U.S. dollars in thousands, except share data)





December 31,2007
                
                
                2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                228,958
                
                
                $
                202,947Restricted
      cash
                
                
                706
                
                
                
                24Bank
      deposits maturing over three months
                
                
                17,948
                
                
                
                68,887Accounts
      receivable, net of allowance for doubtful accounts of $399 and $685 as of
      December 31, 2007 and 2008 respectively
                
                
                6,118
                
                
                
                12,509Inventories
                
                
                2,967
                
                
                
                4,014Prepaid
      expenses and other current assets
                
                
                1,254
                
                
                
                3,974Amounts
      due from related parties
                
                
                1,277
                
                
                
                -Deferred
      costs-current
                
                
                541
                
                
                
                326Deferred
      income taxes-current
                
                
                184
                
                
                
                201Total
      current assets
                
                
                259,953
                
                
                
                292,882Property
      and equipment, net
                
                
                1,379
                
                
                
                1,880Intangible
      assets, net
                
                
                1,002
                
                
                
                1,854Goodwill
                
                
                467
                
                
                
                499Long-term
      investments
                
                
                396
                
                
                
                437Deferred
      costs-non-current
                
                
                488
                
                
                
                338Deferred
      income taxes - non-current
                
                
                50
                
                
                
                86Total
      assets
                
                $
                263,735
                
                
                $
                297,976TOTAL
      LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                485
                
                
                $
                1,103Accrued
      expenses and other current liabilities
                
                
                4,757
                
                
                
                7,888Deferred
      revenue-current
                
                
                4,784
                
                
                
                3,704Payable
      to shareholders
                
                
                -
                
                
                
                57,210Income
      tax payable
                
                
                722
                
                
                
                1,088Total
      current liabilities
                
                
                10,748
                
                
                
                70,993Deferred
      revenue-non-current
                
                
                1,136
                
                
                
                957Total
      Liabilities
                
                
                11,884
                
                
                
                71,950Commitments
      (Note 21)Minority
      interest
                
                $
                4,000
                
                
                $
                1,564Shareholders'
      equityOrdinary
      shares ($0.0005 par value; 200,000,000 and 200,000,000 shares authorized,
      57,296,932 and 57,209,548 shares issued and outstanding as of December 31,
      2007 and 2008, respectively)
                
                
                29
                
                
                
                29Additional
      paid-in capital
                
                
                224,863
                
                
                
                154,643Statutory
      reserve
                
                
                5,688
                
                
                
                10,184Retained
      earnings
                
                
                14,344
                
                
                
                52,910Accumulated
      other comprehensive income
                
                
                2,927
                
                
                
                6,696Total
      shareholders' equity
                
                
                247,851
                
                
                
                224,462TOTAL
      LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
                
                $
                263,735
                
                
                $
                297,976




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


F-2


CHINA
DIGITAL TV HOLDING CO., LTD.
  CONSOLIDATED STATEMENTS OF
OPERATIONS


(In
U.S. dollars in thousands, except share data)





For the years ended December
      31,2006
                
                
                2007
                
                
                2008RevenuesProducts
                
                $
                26,443
                
                
                $
                49,741
                
                
                $
                64,412Services
                
                
                4,182
                
                
                
                6,011
                
                
                
                6,28530,625
                
                
                
                55,752
                
                
                
                70,697Business
      taxes
                
                
                (255
                )
                
                
                (299
                )
                
                
                (363
                )Net
      revenues
                
                
                30,370
                
                
                
                55,453
                
                
                
                70,334Cost
      of revenues (including share-based compensation of $21, $34 and $35 for
      2006, 2007 and 2008, respectively)Products
                
                
                4,726
                
                
                
                8,100
                
                
                
                10,877Services
                
                
                1,859
                
                
                
                2,135
                
                
                
                2,8286,585
                
                
                
                10,235
                
                
                
                13,705Gross
      profit
                
                
                23,785
                
                
                
                45,218
                
                
                
                56,629Operating
      expensesResearch
      and development (including share-based compensation of $167, $391, and
      $481 for 2006, 2007 and 2008, respectively)
                
                
                2,222
                
                
                
                4,643
                
                
                
                6,921Selling
      and marketing (including share-based compensation of $56, $112 and $186
      for 2006, 2007 and 2008, respectively)
                
                
                1,847
                
                
                
                3,758
                
                
                
                6,063General
      and administrative (including share-based compensation of $94, $724, and
      $342 for 2006, 2007 and 2008, respectively)
                
                
                1,228
                
                
                
                3,706
                
                
                
                6,084Total
      operating expenses
                
                
                5,297
                
                
                
                12,107
                
                
                
                19,068Income
      from operations
                
                
                18,488
                
                
                
                33,111
                
                
                
                37,561Interest
      income
                
                
                279
                
                
                
                2,790
                
                
                
                9,138Other
      income/(expense)
                
                
                -
                
                
                
                263
                
                
                
                (412
                )Recognition
      of the change in fair value of the warrant
                
                
                (5,406
                )
                
                
                -
                
                
                
                -Income
      before income taxes
                
                
                13,361
                
                
                
                36,164
                
                
                
                46,287Income
      tax benefit/(expense):Income
      tax-current
                
                
                -
                
                
                
                (2,554
                )
                
                
                (3,271
                )Income
      tax-deferred
                
                
                59
                
                
                
                212
                
                
                
                36Total
      income tax benefit/(expense)
                
                
                59
                
                
                
                (2,342
                )
                
                
                (3,235
                )Net
      income before minority interest and net loss from equity method
      investments
                
                
                13,420
                
                
                
                33,822
                
                
                
                43,052Minority
      interest
                
                
                430
                
                
                
                -
                
                
                
                (14
                )Net
      loss from equity method investments
                
                
                -
                
                
                
                6
                
                
                
                4Net
      income
                
                
                12,990
                
                
                
                33,816
                
                
                
                43,062Cash
      dividend to participating preferred shareholder
                
                
                (5,731
                )
                
                
                -
                
                
                
                -Net
      income attributable to holders of ordinary shares
                
                $
                7,259
                
                
                $
                33,816
                
                
                $
                43,062Net
      income per share-basic ordinary shares
                
                
                0.24
                
                
                
                0.74
                
                
                
                0.75Net
      income per share-basic participating preferred shares
                
                
                0.54
                
                
                
                0.66
                
                
                
                -Net
      income per ordinary share-diluted
                
                $
                0.21
                
                
                $
                0.68
                
                
                $
                0.72Weighted
      average shares used in calculating basic net income per share-ordinary
      shares
                
                
                30,488,889
                
                
                
                39,170,004
                
                
                
                57,138,985Weighted
      average shares used in calculating basic net income per share-preferred
      shares
                
                
                10,519,120
                
                
                
                7,389,394
                
                
                
                -Weighted
      average shares used in calculating diluted net income per ordinary
      share
                
                
                34,225,321
                
                
                
                42,773,590
                
                
                
                60,058,724





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


F-3


CHINA
DIGITAL TV HOLDING CO., LTD.
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME


(In
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, 2006
                        
                        
                        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
                        )
                        
                        
                        -
                        
                        
                        
                        -Issuance
      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
                        
                        
                        
                        -Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,184
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,184
                        
                        
                        
                        2,184Balance
      at December 31, 2007
                        
                        
                        57,296,932
                        
                        
                        
                        29
                        
                        
                        
                        224,863
                        
                        
                        
                        2,927
                        
                        
                        
                        5,688
                        
                        
                        
                        14,344
                        
                        
                        
                        247,851
                        
                        
                        
                        36,000Share-based
      compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,044
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,044
                        
                        
                        
                        -Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        43,062
                        
                        
                        
                        43,062
                        
                        
                        
                        43,062Provision
      for statutory reserve
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,496
                        
                        
                        
                        (4,496
                        )
                        
                        
                        -
                        
                        
                        
                        -Exercise
      of stock option
                        
                        
                        2,220,182
                        
                        
                        
                        1
                        
                        
                        
                        2,287
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,288
                        
                        
                        
                        -ADSs
      repurchase and retirement
                        
                        
                        (2,307,566
                        )
                        
                        
                        (1
                        )
                        
                        
                        (16,254
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (16,255
                        )
                        
                        
                        -Cash
      distribution to shareholders
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (57,210
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (57,210
                        )
                        
                        
                        -Adjustment
      to 2007 accrued IPO costs and related expenses
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (87
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (87
                        )
                        
                        
                        -Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,769
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,769
                        
                        
                        
                        3,769Balance
      at December 31, 2008
                        
                        
                        57,209,548
                        
                        
                        $
                        29
                        
                        
                        $
                        154,643
                        
                        
                        $
                        6,696
                        
                        
                        $
                        10,184
                        
                        
                        $
                        52,910
                        
                        
                        $
                        224,462
                        
                        
                        $
                        46,831





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


F-4


CHINA
DIGITAL TV HOLDING CO., LTD.




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In
U.S. dollars in thousands, except share data)





For the years ended December
      31,2006
                
                
                2007
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                12,990
                
                
                $
                33,816
                
                
                $
                43,062Minority
      interest
                
                
                430
                
                
                
                -
                
                
                
                (14
                )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                556
                
                
                
                926
                
                
                
                1,254Stock-based
      compensation
                
                
                338
                
                
                
                1,261
                
                
                
                1,044Fair
      value change of warrant
                
                
                5,406
                
                
                
                -
                
                
                
                -Loss
      on disposal of property and equipment
                
                
                36
                
                
                
                -
                
                
                
                -Allowance
      for doubtful account
                
                
                215
                
                
                
                184
                
                
                
                286Write-down
      of inventory value
                
                
                24
                
                
                
                137
                
                
                
                127Warranty
      accrual
                
                
                27
                
                
                
                (6
                )
                
                
                56Equity
      investment loss from equity method investments
                
                
                -
                
                
                
                6
                
                
                
                4Accrued
      interest income
                
                
                -
                
                
                
                (122
                )
                
                
                -Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (1,046
                )
                
                
                (3,091
                )
                
                
                (5,926
                )Inventories
                
                
                (1,548
                )
                
                
                (161
                )
                
                
                (975
                )Prepaid
      expenses and other current assets
                
                
                (840
                )
                
                
                185
                
                
                
                (3,472
                )Deferred
      cost
                
                
                168
                
                
                
                226
                
                
                
                420Amount
      due from related party
                
                
                (125
                )
                
                
                (70
                )
                
                
                581Accounts
      payable
                
                
                337
                
                
                
                (444
                )
                
                
                586Income
      tax payable
                
                
                -
                
                
                
                692
                
                
                
                280Accrued
      expenses and other current liabilities
                
                
                408
                
                
                
                2,533
                
                
                
                3,623Deferred
      revenue
                
                
                3,773
                
                
                
                (2,033
                )
                
                
                (2,497
                )Deferred
      income taxes
                
                
                (59
                )
                
                
                (201
                )
                
                
                (36
                )Net
      cash provided by operating activities
                
                
                21,090
                
                
                
                33,838
                
                
                
                38,403CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment/receipt
      from N-T Information Engineering on Zhongshi Digital TV Technology Co.,
      Ltd. (see note 22b)
                
                
                1,997
                
                
                
                -
                
                
                
                -Short-term
      loan to N-T Information Engineering (see notes 22a and
22c)
                
                
                743
                
                
                
                (1,471
                )
                
                
                1,635Long-term
      investments
                
                
                -
                
                
                
                (399
                )
                
                
                -Purchase
      of property and equipment
                
                
                (376
                )
                
                
                (1,219
                )
                
                
                (1,001
                )Payment/receipt
      for acquisition of set-top box design business (see note
    4a)
                
                
                (3,770
                )
                
                
                1,543
                
                
                
                -Bank
      deposits maturing over three months
                
                
                -
                
                
                
                (17,092
                )
                
                
                (48,260
                )Restricted
      cash
                
                
                (2
                )
                
                
                (625
                )
                
                
                767Long-term
      loan to individuals (nominee shareholders) for acquisition of equity
      interests in N-S Digital TV from N-T Information
    Engineering
                
                
                -
                
                
                
                -
                
                
                
                (1,803
                )Purchase
      of intangible assets from N-T Information Engineering
                
                
                -
                
                
                
                -
                
                
                
                (1,299
                )Acquisition
      of equity interests in N-S Digital TV from N-T Information
      Engineering
                
                
                -
                
                
                
                -
                
                
                
                (1,815
                )Aquisition
      of additional interests from a minority shareholder (see note
      4b)
                
                
                -
                
                
                
                -
                
                
                
                (146
                )Net
      cash used in investing activities
                
                
                (1,408
                )
                
                
                (19,263
                )
                
                
                (51,922
                )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 upon IPO
                
                
                -
                
                
                
                220,800
                
                
                
                -IPO
      costs and related expenses paid
                
                
                -
                
                
                
                (17,470
                )
                
                
                (681
                )Exercise
      of warrant
                
                
                2,101
                
                
                
                -
                
                
                
                -Dividend
      paid to ordinary shareholders
                
                
                (7,309
                )
                
                
                (8,260
                )
                
                
                -Dividend
      paid to the participating preferred shareholder
                
                
                (2,691
                )
                
                
                (3,040
                )
                
                
                -Proceeds
      from stock option exercise
                
                
                -
                
                
                
                -
                
                
                
                2,288ADSs
      repurchase and retirement
                
                
                -
                
                
                
                -
                
                
                
                (16,255
                )Capital
      injection by a minority shareholder
                
                
                -
                
                
                
                -
                
                
                
                719Net
      cash (used in)/provided by financing activities
                
                
                (7,273
                )
                
                
                192,030
                
                
                
                (13,929
                )Effect
      of exchange rate changes
                
                
                456
                
                
                
                1,216
                
                
                
                1,437NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                12,865
                
                
                
                207,821
                
                
                
                (26,011
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF THE YEAR
                
                
                8,272
                
                
                
                21,137
                
                
                
                228,958CASH
      AND CASH EQUIVALENTS, END OF THE YEAR
                
                $
                21,137
                
                
                $
                228,958
                
                
                $
                202,947SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONSIncome
      tax paid
                
                
                -
                
                
                
                1,942
                
                
                
                2,988NON-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., LTD.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
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.  In June 2008, Ms. Wei Gao transferred her entire equity
interest in N-S Digital TV to Mr. Junming Wu, a PRC citizen employed by Super
TV.  In November 2008, N-T Information Engineering transferred its
entire equity interest in N-S Digital TV to Mr. Lei Zhang and Mr. Shizhou Shen,
two PRC citizens employed by Super TV.  After these two transfers, N-S
Digital TV is owned by Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen with
an equity interest of 25%, 37.5% and 37.5%, respectively.  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 among Super TV, N-S Digital TV and its equity
holders.


F-6


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES -
continued





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 Group arranged for Super TV to
enter into the following agreements with N-S Digital TV and its equity
holders:





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.





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.


F-7


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES -
continued





Ÿ
            Equity Transfer Option
      Agreement: Pursuant to the transfer option agreement, Mr. Lei
      Zhang, Mr. Shizhou Shen and Mr. Junming Wu 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: Mr. Lei Zhang, Mr. Shizhou Shen , Mr. Junming Wu 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.





Ÿ
            Share Pledge Agreements:
      Pursuant to the share pledge agreements Mr. Junming Wu, Mr. Lei Zhang and
      Mr. Shizhou Shen 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, Mr. Junming
      Wu, Mr. Lei Zhang and Mr. Shizhou Shen 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.


F-8


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES -
continued





The
following financial statement amounts and balances of the VIE were included in
the accompanying consolidated financial statements as of and for the years ended
December 31:




December 31,2007
                  
                  
                  2008Total
      assets
                  
                  $
                  15,098
                  
                  
                  $
                  29,958Total
      liabilities
                  
                  
                  9,904
                  
                  
                  
                  25,883




For the years ended December
      31,2006
                  
                  
                  2007
                  
                  
                  2008Net
      revenue
                  
                  $
                  27,325
                  
                  
                  $
                  50,472
                  
                  
                  $
                  64,108Net
      income
                  
                  
                  574
                  
                  
                  
                  1,131
                  
                  
                  
                  178





In April
2007, the shareholders of CDTV BVI established China Digital TV Holding Co.,
Ltd. (the "Company" or "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.  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, 2006, 2007 and 2008 as if CDTV
Holding had been in existence for all periods presented.





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
October 2008, Super TV transferred all of its equity interests in N-S Media
Investment to N-S Digital TV.


F-9


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES -
continued





As of
December 31, 2008, CDTV Holding's subsidiaries, VIE and VIE's subsidiaries
include the following entities:




Date
      of incorporation
                                          
                                          Place
      of incorporation
                                          
                                          Percentage
      of/establishment
                                          
                                          /establishment
                                          
                                          economic
      ownershipSubsidiariesCDTV
      BVI
                                          
                                          March
      9, 2004
                                          
                                          BVI
                                          
                                          100%Super
      TV
                                          
                                          May
      31, 2004
                                          
                                          the
      PRC
                                          
                                          100%Golden
      Benefit Technology Limited
                                          
                                          December
      6, 2007
                                          
                                          Hong
      Kong
                                          
                                          100%("Golden
      Benefit")China
      Super Media Holdings Limited
                                          
                                          February
      25, 2008
                                          
                                          Hong
      Kong
                                          
                                          100%("CSM
      Holdings")VIEN-S
      Digital TV
                                          
                                          May
      31, 2004
                                          
                                          the
      PRC
                                          
                                          100%VIE's
      subsidiariesN-S
      Media Investment Co., Ltd
                                          
                                          December
      19, 2007
                                          
                                          the
      PRC
                                          
                                          100%("N-S
      Media Investment")Dongguan
      SuperTV Video Info Co., Ltd
                                          
                                          June
      11, 2008
                                          
                                          the
      PRC
                                          
                                          60%
      Note4 (b)("Dongguan
      SuperTV")Guangdong SuperTV
      Digital Media Co., Ltd
                                          
                                          October
      17, 2008
                                          
                                          the
      PRC
                                          
                                          100%("Guangdong
      SuperTV")




In August
2008, the Group entered into an agreement with N-T Information Engineering to
acquire two intangible assets, digital watermarking and image tracing
technologies.  In November 2008, N-T Information Engineering signed a
series of contracts with Mr. Lei Zhang and Mr. Shizhou Shen, two employees
designated by the Group, to transfer N-T Information Engineering's entire 75%
equity interest in N-S Digital TV to these two individuals.  The
acquisition of the two intangible assets and transfer of the equity interest in
N-S Digital TV were negotiated by management of the Group and N-T Information
Engineering as one deal with a total consideration of $4,917, in which $3,618
was paid for the 75% equity interest in N-S Digital TV with the RMB equivalent
amount as paid by N-T Information Engineering in 2004 during the reorganization
process.  The remaining $1,299 was allocated to the cost of these two
technologies based on the relative fair value of each technology.





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.


F-10


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES -
continued





Recapitalization -
continued





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.





·
            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.  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 from 2004 to 2008.  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-11


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
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 16 and Note 17 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-12


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
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, 2006, 2007 and 2008, the Group wrote down inventory by
$24, $137 and $127 respectively.


F-13


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(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 assetor
      the lease termMotor
      vehicles
              5
      years





(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, 2006, 2007 and 2008, 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, 2007 or 2008.  Exchange
realignment of nil, $35 and $32 was debited to goodwill for years ended December
31, 2006, 2007 and 2008 respectively.


F-14


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(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".





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 or
a certain amount of free cards 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.


F-15


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(k)
            Revenue
      recognition - continued





Sales of smart cards -
continued





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.





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.


F-16


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(k)
            Revenue
      recognition - continued





SI service -
continued





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.





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.


F-17


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(k)
            Revenue
      recognition - continued





SI service -
continued





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.





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.


F-18


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(k)
            Revenue
      recognition - continued





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.





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.


F-19


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(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 years ended
December 31, 2006, 2007 and 2008 totaled $561, $660 and $441
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.





(n)
            Business
      tax





The
Group's PRC subsidiary and VIE are subject to business tax at the rate of 5.0%
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.


F-20


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(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.





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.





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 from 2004 to 2008.


F-21


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(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





Basic net
income (loss) per share are computed by dividing net income/(loss) attributable
to holders of ordinary shares by the weighted average number of ordinary shares
outstanding during the year.  Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue ordinary
shares (convertible preferred stock, forward contract, warrants to purchase
ordinary shares, contingently issuable shares, common stock options and warrants
and their equivalents using the treasury stock method) were exercised or
converted into ordinary shares.  Potential common shares in the
diluted net income/(loss) per share computation are excluded in periods of
losses from continuing operations, as their effect would be
antidilutive.





The
holders of Series A preferred was entitled to share dividends on a pro rata
basis, as if their shares had been converted into ordinary
shares.  Accordingly, the Group used the two-class method in computing
net income (loss) per share for the year 2006 and 2007.  Under the
two-class method, net income was allocated on a pro rata basis to each class of
ordinary shares and other participating securities based on their participating
rights.  Net losses applicable to holders of ordinary shares were
allocated to ordinary shares because the Series A preferred shares was not
contractually obligated to participate in sharing losses.





(u)
            Intangible
      assets





Intangible
assets consist of core technology, complete technology, contract backlog,
customer relationships, digital watermarking technology and image tracing
technology, 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.


F-22


CHINA
DIGITAL TV HOLDING CO., LTD.
  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(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.





Details
of the customers accounting for 10% or more of total revenues are as
follows:





Years ended December 31,Customer
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008%
                      
                      
                      %
                      
                      
                      %A
                      
                      
                      14.5
                      
                      
                      
                      14.1
                      
                      
                      
                      15.1B
                      
                      
                      13.0
                      
                      
                      
                      -
                      
                      
                      
                      -


F-23




CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
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 accounts receivable are as
follows:





Years ended December 31,Customer
                  
                  2007
                  
                  
                  2008%
                  
                  
                  %A
                  
                  
                  -
                  
                  
                  
                  12.9C
                  
                  
                  -
                  
                  
                  
                  10.6





(y)
            Fair
      value





The Group
adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair
Value Measurements" ("SFAS 157") on January 1, 2008 for all financial assets and
liabilities and nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually).  SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.





SFAS 157
defines fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Group considers the principal or most advantageous market in
which it would transact and it considers assumptions that market participants
would use when pricing the asset or liability.




SFAS 157
establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.  A financial instrument's categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement.  SFAS 157 establishes three levels of
inputs that may be used to measure fair value:





Level
1





Level 1
applies to assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities.




F-24




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(y)
            Fair
      value - continued





Level
2





Level 2
applies to assets or liabilities for which there are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived
principally from, or corroborated by, observable market data.





Level
3





Level 3
applies to assets or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.





The Group
did not have any financial assets and liabilities or nonfinancial assets and
liabilities that are measured at fair value on recurring basis as of December
31, 2008.





(z)
            Recently
      issued accounting standards





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 will
have a material impact on its consolidated financial position or results of
operations.





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 impact of the adoption of SFAS No. 141(R) on the Group’s
consolidated financial position and results of operations will be largely
dependent on the size and nature of the business combinations completed after
the adoption of this statement.




F-25




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





(z)
            Recently
      issued accounting standards -
continued





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 Group does not
expect the adoption of SFAS No. 160 will have a material impact on its
consolidated financial position or results of operations, other than certain
changes to the presentation of the financial statements.





In April
2008, the FASB issued FASB Staff Position ("FSP") FAS142-3, "Determination of
the Useful Life of Intangible Assets".  This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, "Goodwill and Other Intangible Assets".  This FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years.  Early adoption is
prohibited.  The guidance for determining the useful life of a
recognized intangible asset in this FSP shall be applied prospectively to
intangible assets acquired after the effective date.  The Group is in
the process of assessing the potential impact of the adoption of FSP 142-3 may
have on its consolidated financial position or results of
operations.





At the
November 24, 2008 meeting, the FASB ratified the consensus reached by the Task
Force in Issue No. 08-6, "Equity Method Investment Accounting Considerations"
("EITF 08-6").  Because of the significant changes to the guidance on
subsidiary acquisitions and subsidiary equity transactions and the increased use
of fair value measurements as a result of SFAS No. 141R and SFAS No. 160,
questions have arisen regarding the application of that accounting guidance to
equity method investments.  EITF 08-6 provides guidance for entities
that acquire or hold investments accounted for under the equity
method.  This issue is effective for transactions occurring in fiscal
years and interim periods beginning on or after December 15,
2008.  Early adoption is not permitted. The Group is in the process of
assessing the potential impact of the adoption of EITF 08-6 may have on its
consolidated financial position or results of operations.




F-26


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





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.





The gross
revenues consist of the following products and services:





For the years ended December
      31,2006
                              
                              
                              2007
                              
                              
                              2008Products:Smart
      cards
                              
                              $
                              26,223
                              
                              
                              $
                              49,651
                              
                              
                              $
                              64,216Set-top
      box and others
                              
                              
                              220
                              
                              
                              
                              90
                              
                              
                              
                              196Subtotal
                              
                              
                              26,443
                              
                              
                              
                              49,741
                              
                              
                              
                              64,412Services:Head-end
      system integration
                              
                              
                              2,317
                              
                              
                              
                              3,258
                              
                              
                              
                              3,461System
      development
                              
                              
                              558
                              
                              
                              
                              271
                              
                              
                              
                              573Licensing
      income
                              
                              
                              1,037
                              
                              
                              
                              1,984
                              
                              
                              
                              1,610Royalty
      income
                              
                              
                              270
                              
                              
                              
                              498
                              
                              
                              
                              641Subtotal
                              
                              
                              4,182
                              
                              
                              
                              6,011
                              
                              
                              
                              6,285Total
                              
                              $
                              30,625
                              
                              
                              $
                              55,752
                              
                              
                              $
                              70,697





There
were VAT refunds of $2,509, $5,030, and $6,513 included in revenues for the
years ended December 31, 2006, 2007 and 2008, respectively.




F-27




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





4.
            ACQUISITION





(a)
            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.  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.





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




F-28




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





4.
            ACQUISITION
      - continued





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





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, 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, 2006, nor is
it necessarily indicative of future results of operations of the
Group:





Pro forma for theyear endedDecember 31, 2006(Unaudited)Net
      revenues
                        
                        $
                        31,539Net
      income attributable to holders of ordinary shares
                        
                        
                        7,204Net
      income per share - basic ordinary shares
                        
                        
                        0.24Net
      income per share - basic preferred shares
                        
                        
                        0.54Net
      income per share - diluted
                        
                        $
                        0.21





(b)
            In
      May 2008, the Group and a third party entered into an agreement to set up
      Dongguan SuperTV in PRC to provide value-added services to TV viewers in
      China.  The Group and this individual each contributed $719
      cash, representing 50% of equity interest in Dongguan
      SuperTV.  The Group is entitled of 70% of shareholders' voting
      rights and controls three out of five seats in the board of directors of
      Dongguan Super TV.  According to the articles of association of
      Dongguan Super TV, significant decisions in the ordinary course of
      business are subject to two-thirds of shareholders' approval or simple
      majority of directors' approval.  Therefore, the Group has
      control over Dongguan Super TV and accounts for it as a consolidated
      subsidiary.  Pursuant to the agreement, the Group has an option
      to purchase an additional 10% equity interest in Dongguan Super TV from
      the third party if certain conditions are met.  The
      consideration for the additional 10% equity interest consists of four
      installments.  In September 2008, the Group exercised the option
      and paid the first installment of $146 in October 2008.  The
      remaining three installments are contingent on certain percentage of the
      net profit of Dongguan SuperTV in the three succeeding
    years.




F-29




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





5.
            RESTRICTED
      CASH





Restricted
cash represents bank deposits pledged as security for issuing letters of credit
to overseas suppliers and bank deposits pledged as security for issuing letters
of guarantee to customers for performance security. 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 31,2007
                            
                            
                            2008Billed
      receivable
                            
                            $
                            5,064
                            
                            
                            $
                            10,050Unbilled
      receivable
                            
                            
                            1,054
                            
                            
                            
                            2,459$
                            6,118
                            
                            
                            $
                            12,509





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 pay certain percentage 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
                    
                    
                    
                    
                    
                    
                    
                    
                    Balance
      atbeginning
                    
                    
                    Charge
      to
                    
                    
                    
                    
                    
                    end
      of theof
      the year
                    
                    
                    expenses
                    
                    
                    Deductions
                    
                    
                    year2007
                    
                    $
                    215
                    
                    
                    $
                    225
                    
                    
                    $
                    (41
                    )
                    
                    $
                    3992008
                    
                    $
                    399
                    
                    
                    $
                    286
                    
                    
                    
                    -
                    
                    
                    $
                    685




F-30




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





7.
            INVENTORIES





Inventories
consist of the following:


December
      31,2007
                          
                          
                          2008Raw
      materials
                          
                          $
                          2,259
                          
                          
                          $
                          3,030Finished
      goods
                          
                          
                          708
                          
                          
                          
                          984$
                          2,967
                          
                          
                          $
                          4,014





8.
            PREPAID
      EXPENSES AND OTHER CURRENT ASSETS





Prepaid
expenses and other current assets consist of the following:





December
      31,2007
                              
                              
                              2008VAT
      refund receivables
                              
                              $
                              661
                              
                              
                              $
                              844Deposits
                              
                              
                              292
                              
                              
                              
                              680Interest
      receivables
                              
                              
                              39
                              
                              
                              
                              1,915Prepayments
      to suppliers
                              
                              
                              174
                              
                              
                              
                              333Prepaid
      expenses
                              
                              
                              88
                              
                              
                              
                              202$
                              1,254
                              
                              
                              $
                              3,974





9.
            PROPERTY
      AND EQUIPMENT, NET





Property
and equipment, net consist of the following:




December
      31,2007
                                  
                                  
                                  2008Computers
      and office equipment
                                  
                                  $
                                  2,119
                                  
                                  
                                  $
                                  2,945Furniture
      and fixture
                                  
                                  
                                  76
                                  
                                  
                                  
                                  132Leasehold
      improvements
                                  
                                  
                                  156
                                  
                                  
                                  
                                  440Motor
      vehicles
                                  
                                  
                                  456
                                  
                                  
                                  
                                  5422,807
                                  
                                  
                                  
                                  4,059Less:
      accumulated depreciation and amortization
                                  
                                  
                                  (1,428
                                  )
                                  
                                  
                                  (2,179
                                  )$
                                  1,379
                                  
                                  
                                  $
                                  1,880





For the
years ended December 31, 2006, 2007 and 2008, depreciation expense was $287,
$384 and $761 respectively.




F-31




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





10.
            INTANGIBLE
      ASSETS, NET





Intangible
assets, net consist of the following:





December
      31,2007
                            
                            
                            2008Core
      technology
                            
                            $
                            384
                            
                            
                            $
                            384Complete
      technology
                            
                            
                            62
                            
                            
                            
                            62Contract
      backlogs
                            
                            
                            284
                            
                            
                            
                            284Customer
      relationship
                            
                            
                            1,004
                            
                            
                            
                            1,004Digital
      watermarking technology
                            
                            
                            -
                            
                            
                            
                            889Image
      tracing technology
                            
                            
                            -
                            
                            
                            
                            4101,734
                            
                            
                            
                            3,033Less:
      accumulated amortization
                            
                            
                            (811
                            )
                            
                            
                            (1,304
                            )foreign exchange difference
                            
                            
                            79
                            
                            
                            
                            125$
                            1,002
                            
                            
                            $
                            1,854





Digital
watermarking technology and image tracing technology were recorded as a result
of the acquisition of intellectual rights from N-T Information Engineering (see
Note1).The purchase price of these two technologies was allocated based on the
relative fair value of each technology, which was estimated by management using
the discounted cash flow method.





The Group
recorded amortization expense of $269, $542 and $493 for the years ended
December 31, 2006, 2007 and 2008, respectively.  Estimated
amortization expenses of the existing intangible assets for the next five years
are $646, $343, $315, $315 and $235, respectively.





11.
            LONG-TERM
      INVESTMENTS





Long-term
investments consist of the following equity method investments:





December
      31,Notes
                                          
                                          
                                          2007
                                          
                                          
                                          2008Nanjing
      Qingda Yongxin CultureMedia
      Co., Ltd. ("Qingda Yongxin")
                                          (a)
                                          
                                          
                                          $
                                          105
                                          
                                          
                                          $
                                          107Foshan
      Nanhai Guokai Digital TVTechnology
      Co., Ltd. ("Nanhai Guokai")
                                          (b)
                                          
                                          
                                          
                                          291
                                          
                                          
                                          
                                          330$
                                          396
                                          
                                          
                                          $
                                          437




F-32




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





11.
            LONG-TERM
      INVESTMENTS - continued





(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 (the "JV").  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 additional interest will be
determined based on 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.





(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.





The
combined financial information for the equity method investments as of and for
the years ended December 31, 2007 and 2008 is as follows




December
      31,2007
                      
                      
                      2008Total
      current assets
                      
                      $
                      899
                      
                      
                      $
                      914Total
      assets
                      
                      
                      924
                      
                      
                      
                      934Total
      current liabilities
                      
                      
                      52
                      
                      
                      
                      12Total
      liabilities
                      
                      
                      52
                      
                      
                      
                      12Total
      net revenue
                      
                      
                      1
                      
                      
                      
                      420Loss
      from operations
                      
                      $
                      (8
                      )
                      
                      $
                      (12
                      )




F-33




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





12.
            ACCRUED
      EXPENSES AND OTHER CURRENT
LIABILITIES





Accrued
expenses and other current liabilities consist of the following:





December
      31,2007
                              
                              
                              2008Accrued
      payroll and bonus
                              
                              $
                              1,657
                              
                              
                              $
                              1,380Other
      taxes payable
                              
                              
                              1,300
                              
                              
                              
                              2,474Other
      accrued expenses
                              
                              
                              1,049
                              
                              
                              
                              1,834Accrued
      initial public offering expenses
                              
                              
                              681
                              
                              
                              
                              -Social
      insurance withholding
                              
                              
                              38
                              
                              
                              
                              246Accrued
      warranty
                              
                              
                              32
                              
                              
                              
                              71Amount
      due to employeesfor
      stock option exercise proceeds
                              
                              
                              -
                              
                              
                              
                              1,883$
                              4,757
                              
                              
                              $
                              7,888





Movement
of warranty accrual is as follows:





Balance
      at
                    
                    
                    
                    
                    
                    
                    
                    
                    Balance
      atBeginning
                    
                    
                    Charge
      to
                    
                    
                    
                    
                    
                    end
      of theof
      the year
                    
                    
                    expenses
                    
                    
                    Deductions
                    
                    
                    year2007
                    
                    $
                    38
                    
                    
                    $
                    32
                    
                    
                    $
                    (38
                    )
                    
                    $
                    322008
                    
                    $
                    32
                    
                    
                    $
                    56
                    
                    
                    $
                    (17
                    )
                    
                    $
                    71





13.
            DEFERRED
      REVENUE





Deferred
revenue consists of the following:





December
      31,2007
                                  
                                  
                                  2008Current:Advance
      from customers
                                  
                                  $
                                  3,431
                                  
                                  
                                  $
                                  2,430Incentive
      offered to customers
                                  
                                  
                                  205
                                  
                                  
                                  
                                  287Deferred
      revenue for SI service contracts withfree
      PCS period greater than one year
                                  
                                  
                                  1,148
                                  
                                  
                                  
                                  987$
                                  4,784
                                  
                                  
                                  $
                                  3,704Non-current:Deferred
      revenue for SI service contractswith
      free PCS period greater than one year
                                  
                                  
                                  1,136
                                  
                                  
                                  
                                  957Total
                                  
                                  $
                                  5,920
                                  
                                  
                                  $
                                  4,661




F-34


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





13.
            DEFERRED
      REVENUE - continued





Incentive
offered to customers represents the incentive provided to customer when
cumulative purchase volume from the same customer reached a certain level as of
December 31, 2007, and 2008.  See Note 2(k) for a more detailed
description and related accounting treatment for deferred revenue.





14.
            INCOME
      TAXES





CDTV
Holdings and CDTV BVI are tax-exempted companies incorporated in the Cayman
Islands and the British Virgin Islands, respectively.





Golden
Benefit and CSM Holdings are 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 they both have no
assessable profits in 2007 and 2008.





Super TV,
N-S Digital TV, N-S Media Investment, Dongguan SuperTV and Guangdong SuperTV
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.





Both
Super TV and N-S Digital TV were qualified as New and High-Tech Enterprise"
("NHTE") under the Enterprise Income Tax Law effective from January 1, 2008 (the
"2008 EIT law") and therefore both of them were qualified for a preferential tax
rate of 15%.  Besides, since the two entities are both located in a
high tech zone in Beijing, they were entitled to a three year exemption from EIT
from 2004 to 2006 and a 50% further deduction of 15% from 2007 to
2009.





N-S Media
Investment, Dongguan Super TV and Guangdong Super TV were subject to the
statutory tax rate of 25% in 2008.





Deferred
income taxes result principally from differences in the recognition of certain
assets and liabilities for tax and financial reporting purposes and the tax
effect of tax loss carry forwards.





Income
tax expenses/(benefits) are as follows:





Years
      ended December 31,2006
                          
                          
                          2007
                          
                          
                          2008Income
      tax expenses/(benefits)Current
                          
                          $
                          -
                          
                          
                          $
                          2,554
                          
                          
                          $
                          3,271Deferred
                          
                          
                          (59
                          )
                          
                          
                          (212
                          )
                          
                          
                          (36
                          )Total
                          
                          $
                          (59
                          )
                          
                          $
                          2,342
                          
                          
                          $
                          3,235




F-35




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





14.
            INCOME
      TAXES - continued





The
principal components of the deferred income tax assets (liabilities) are as
follows:





December
      31,2007
                                  
                                  
                                  2008CurrentWrite-down
      of inventory value
                                  
                                  $
                                  21
                                  
                                  
                                  $
                                  23Deferred
      revenue-current
                                  
                                  
                                  212
                                  
                                  
                                  
                                  201Deferred
      cost-current
                                  
                                  
                                  (49
                                  )
                                  
                                  
                                  (23
                                  )Current
      deferred tax assets
                                  
                                  
                                  184
                                  
                                  
                                  
                                  201Non-currentProperty
      and equipment
                                  
                                  
                                  75
                                  
                                  
                                  
                                  77Deferred
      revenue-non-current
                                  
                                  
                                  212
                                  
                                  
                                  
                                  123Intangible
      assets
                                  
                                  
                                  (80
                                  )
                                  
                                  
                                  (63
                                  )Deferred
      cost-non-current
                                  
                                  
                                  (157
                                  )
                                  
                                  
                                  (51
                                  )Tax
      loss carry-forward deferred tax assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  711Valuation
      allowance oftax
      loss carry-forward deferred tax assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (711
                                  )Non
      current deferred tax assets
                                  
                                  $
                                  50
                                  
                                  
                                  $
                                  86





N-S Media
Investment and Dongguan SuperTV were loss making in 2008.  As of
December 31, 2008, deferred tax asset recognized for tax loss carried forwards
of these two entities amounted $711.  The tax loss carried forwards
would expire by 2013.  Since it is considered more likely than not
that the deferred tax assets recognized from tax loss carry forwards of these
two entities may not be realized, a valuation allowance has been provided to
reduce the amount of deferred tax assets.





Reconciliation
between the provision for income taxes computed by applying the PRC EIT rates of
33% in 2006 and 2007, and 25% in 2008 to income before income taxes and the
actual provision of income taxes is as follows:





Years
      ended December 31,2006
                            
                            
                            2007
                            
                            
                            2008Net
      income before provision for income taxes
                            
                            $
                            13,361
                            
                            
                            $
                            36,164
                            
                            
                            $
                            46,287PRC
      statutory tax rate
                            
                            
                            33
                            %
                            
                            
                            33
                            %
                            
                            
                            25
                            %Income
      tax at statutory tax rate
                            
                            
                            4,409
                            
                            
                            
                            11,934
                            
                            
                            
                            11,572Expenses
      not deductible for tax purposes:Salaries
      and employees' benefits
                            
                            
                            123
                            
                            
                            
                            439
                            
                            
                            
                            -Other
      expenses not deductable
                            
                            
                            43
                            
                            
                            
                            189
                            
                            
                            
                            197Effect
      of income tax exemptions
                            
                            
                            (2,709
                            )
                            
                            
                            (10,175
                            )
                            
                            
                            (8,752
                            )Effect
      of income tax rate difference in other jurisdictions
                            
                            
                            (1,925
                            )
                            
                            
                            (45
                            )
                            
                            
                            (493
                            )Change
      in valuation allowance
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            711Income
      tax expense/(benefit)
                            
                            $
                            (59
                            )
                            
                            $
                            2,342
                            
                            
                            $
                            3,235




F-36




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





14.
            INCOME
      TAXES - continued





If N-S
Digital TV and Super TV were not in a tax holiday period for the years ended
December 31, 2006, 2007 and 2008, earnings per share amounts would be as
follows:





Years
      ended December 31,2006
                            
                            
                            2007
                            
                            
                            2008Increase
      in income tax expense
                            
                            $
                            2,709
                            
                            
                            $
                            10,175
                            
                            
                            $
                            8,752Net
      income per share-
      basic ordinary shares
                            
                            
                            0.15
                            
                            
                            
                            0.52
                            
                            
                            
                            0.60Net
      income per share-
      basic preferred shares
                            
                            
                            0.54
                            
                            
                            
                            0.46
                            
                            
                            
                            -Net
      income per share-diluted
                            
                            $
                            0.13
                            
                            
                            $
                            0.48
                            
                            
                            $
                            0.57





China's
Enterprise Income Tax Law ("2008 EIT Law") became effective January 1, 2008 and
includes a provision specifying that legal entities organized outside of China
will be considered residents for Chinese income tax purposes if their place of
effective management or control is within China.  The Implementation
Rules to the 2008 EIT Law provide that non-resident legal entities will be
considered China residents if substantial and overall management and control
over the manufacturing and business operations, personnel, accounting,
properties, etc. occurs within China.  Pursuant to the additional
guidance released by the Chinese government in late April of 2009, management
believes that the legal entities organized outside of China should not be
characterized as China tax residents for 2008 EIT Law purposes.





Under
applicable accounting principles, a deferred tax liability should be recorded
for taxable temporary differences attributable to the excess of financial
reporting over tax basis, including those differences attributable to in a
subsidiary. However, recognition is not required in situations where the tax law
provides a means by which reported amount of that investment in subsidiary can
be recovered tax-free and the enterprise expects that it will ultimately use
that means.





Aggregate
undistributed earnings of the Company’s subsidiaries located in the PRC that are
taxable upon distribution to the Company of approximately $73,280 at December
31, 2008 are considered to be indefinitely reinvested under APB opinion No. 23,
because the Group does not have any present plan to pay any cash dividends from
its earnings on its ordinary shares in the foreseeable future and intends to
retain all of its available and any future earnings for use in the operation and
expansion of its business. Accordingly, no deferred tax liability has been made
for the Chinese dividend withholding taxes that would be payable upon the
distribution of those amounts to the Company as of December 31,
2008.




F-37




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





15.
            NET
      INCOME PER SHARE





For
      the years ended December 31,2006
                                                                                                    
                                                                                                    
                                                                                                    2007
                                                                                                    
                                                                                                    
                                                                                                    2008Net
      income per share-basic:Net
      income
                                                                                                    
                                                                                                    $
                                                                                                    12,990
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    33,816
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    43,062Dividend
      to ordinary shares
                                                                                                    
                                                                                                    
                                                                                                    15,569
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Dividend
      to preferred shares
                                                                                                    
                                                                                                    
                                                                                                    5,731
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Total
      dividends
                                                                                                    
                                                                                                    
                                                                                                    21,300
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Undistributed
      income (loss)
                                                                                                    
                                                                                                    $
                                                                                                    (8,310
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    33,816
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    43,062Shares
      (denominator):Weighted
      average ordinary shares outstanding
                                                                                                    
                                                                                                    
                                                                                                    30,488,889
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    39,170,004
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    57,138,985Weighted
      average preferred sharesoutstanding
      on an as-if-converted basis
                                                                                                    
                                                                                                    
                                                                                                    10,519,120
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    7,389,394
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -41,008,009
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    46,559,398
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    57,138,985Allocation
      of undistributed income/(loss) (numerator):To
      ordinary shares
                                                                                                    
                                                                                                    $
                                                                                                    (8,310
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    28,907
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    43,062To
      preferred shares
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4,909
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -(8,310
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    33,816
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    43,062Undistributed
      income/(loss) per share to ordinary shares
                                                                                                    
                                                                                                    
                                                                                                    (0.27
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    0.74
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.75Undistributed
      income per share to preferred shares
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.66
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Distributed
      income per share to ordinary share
                                                                                                    
                                                                                                    
                                                                                                    0.51
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Distributed
      income per share to preferred share
                                                                                                    
                                                                                                    
                                                                                                    0.54
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Net
      income per share-basic ordinary shares
                                                                                                    
                                                                                                    
                                                                                                    0.24
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.74
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.75Net
      income per share-basic participatingpreferred
      shares
                                                                                                    
                                                                                                    $
                                                                                                    0.54
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    0.66
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -Net
      income per ordinary share-diluted:Income
      to ordinary shares (numerator):Distributed
      income allocated to ordinary shares
                                                                                                    
                                                                                                    $
                                                                                                    15,569
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -Undistributed
      income (loss) allocated to ordinary
                                                                                                    
                                                                                                    
                                                                                                    (8,310
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    33,816
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    43,062Distributed
      and undistributedincome
      allocated to ordinary shares
                                                                                                    
                                                                                                    
                                                                                                    7,259
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    28,907
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    43,062Undistributed
      income allocated to preferred shares
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4,909
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Less
      undistributed income reallocated to preferred sharestaking
      into account the dilutive effect to ordinary shares
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (4,554
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -$
                                                                                                    7,259
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    29,262
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    43,062Shares
      (denominator):Weighted
      average ordinary shares outstanding
                                                                                                    
                                                                                                    
                                                                                                    30,488,889
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    39,170,004
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    57,138,985Plus
      incremental weighted averageordinary
      shares from assumed conversionof
      warrant using the treasury stock method
                                                                                                    
                                                                                                    
                                                                                                    1,463,114
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Plus
      incremental weighted average ordinaryshares
      from assumed exercise of stockoptions
      using the treasury stock method
                                                                                                    
                                                                                                    
                                                                                                    2,273,318
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,603,586
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,919,739Weighted
      average ordinary shares outstanding used incomputing
      diluted net income per ordinary share
                                                                                                    
                                                                                                    
                                                                                                    34,225,321
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    42,773,590
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    60,058,724Net
      income per ordinary share-diluted
                                                                                                    
                                                                                                    $
                                                                                                    0.21
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    0.68
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    0.72




F-38


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





16.
            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-39


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





16.
            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.  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.





17.
            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-40




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





17.
            WARRANT
      - continued





The fair
value of the warrant was $6,324 on November 16, 2006, the exercise
date.  The fair value was estimated on the basis of the Black-Scholes
option pricing model with the following assumptions:


November
      16,2006Expected
      price volatility
                    
                    
                    34.9
                    %Risk-free
      interest rate
                    
                    
                    5.5
                    %Expected
      life of the warrant (in years)
                    
                    
                    0.62Expected
      dividends
                    
                    
                    -Fair
      value of preferred share
                    
                    $
                    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.





18.
            SHARE-BASED
      COMPENSATION





Option
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 4,444,440 ordinary
shares of the Group, to its employees, directors, and consultants, subject to
vesting requirements.  Under Share Incentive Plans in 2005, there are
four schemes of the options granted: Scheme I, Scheme II, Scheme III and Scheme
IV, which were granted on February 3, 2005, September 22, 2006, December 5, 2006
and October 5, 2008, respectively.





On
September 13, 2007, the directors of CDTV Holding approved the 2008 Stock
Incentive Plan, pursuant to which the Group may grant options to purchase up
1,200,000 ordinary shares to its employees and other eligible
people.  Scheme V was granted on October 5, 2008 under the 2008 Stock
Incentive Plan.





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-41




CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            SHARE-BASED
      COMPENSATION - continued





Option 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-42


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            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 to 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, 2008, the financial target has not been
met.  However management believes the financial target is still
probable being met in 2009.  As a result, a compensation expense of
$16 in connection with these 32,000 shares was recognized in 2008.




F-43




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            SHARE-BASED
      COMPENSATION - continued





Options granted
to employees - continued





Scheme
IV





Grant
date: October 5, 2008


Exercise
price per share: $0.543


Expiration
date: October 4, 2018


Number of
options granted: 53,280





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
V





Grant
date: October 5, 2008


Exercise
price per share: $7.89


Expiration
date: October 4, 2018


Number of
options granted: 406,776





Vesting
schedule: (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.





Options
granted to non-employees





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-44


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            SHARE-BASED
      COMPENSATION - continued





Options granted
to non-employees - continued





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 to estimate the fair value of the
options on their respective grant date with the following
assumptions:





Scheme I/Options granted
                        
                        
                        
                        
                        
                        
                        
                        
                        Options grantedto Tech Power
                        
                        
                        
                        
                        
                        
                        
                        
                        to an independentEnterprise
                        
                        
                        Scheme II
                        
                        
                        Scheme III
                        
                        
                        director
                        
                        
                        Scheme IV
                        
                        
                        Scheme VExpected
      price volatility range
                        
                        
                        56.3%-58.1
                        %
                        
                        
                        50.5%-50.6
                        %
                        
                        
                        49.8%-52.4
                        %
                        
                        
                        45.4%-48.1
                        %
                        
                        
                        56.20
                        %
                        
                        
                        56.20
                        %Risk-free
      interest rate range
                        
                        
                        4.17%-4.36
                        %
                        
                        
                        5.77%-5.81
                        %
                        
                        
                        5.77%-5.83
                        %
                        
                        
                        4.99%-5.03
                        %
                        
                        
                        2.92
                        %
                        
                        
                        2.92
                        %Expected
      life range
                        
                        
                        5.25-6.33
                        
                        
                        
                        5.50-6.26
                        
                        
                        
                        5.28-6.54
                        
                        
                        
                        5.19-5.94
                        
                        
                        
                        6.25
                        
                        
                        
                        6.25Expected
      dividends
                        
                        
                        -
                        
                        
                        
                        1.00
                        %
                        
                        
                        1.00
                        %
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Fair
      value of ordinaryshare
      at grant date
                        
                        $
                        0.27
                        
                        
                        $
                        3.56
                        
                        
                        $
                        3.56
                        
                        
                        $
                        9.15
                        
                        
                        $
                        7.66
                        
                        
                        $
                        7.66




F-45


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            SHARE-BASED
      COMPENSATION - continued





Option
exercise - continued





The fair
value of the option at the grant date was $0.11, $2.38, $1.67, $6.48, $7.22 and
$4.24 for each option for Scheme I, Scheme II, and Scheme III option plans,
options granted to the independent director, Scheme IV and Scheme V,
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 or the
Company's own historical stock price volatility.  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





The
Company 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-46


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            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, which were
granted before the Company's IPO in October 2007, 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.For the share options
granted after the Company's IPO, the fair value of ADSs representing its
ordinary shares on the grant date is determined by the closing trade price of
ordinary shares on the grant date.





A summary
of stock option activity is as follows:





Weighted averageNumber of options
                                              
                                              
                                              exercise priceOptions
      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
                                              
                                              
                                              
                                              1.29Granted
                                              
                                              
                                              460,056
                                              
                                              
                                              
                                              7.04Exercised
                                              
                                              
                                              (2,220,182
                                              )
                                              
                                              
                                              1.03Forfeited
                                              
                                              
                                              (2,915
                                              )
                                              
                                              
                                              4.17Options
      outstanding as at December 31, 2008
                                              
                                              
                                              2,297,862
                                              
                                              
                                              $
                                              2.69




F-47




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





18.
            SHARE-BASED
      COMPENSATION - continued





Option
exercise - continued





The
following table summarizes information with respect to share options outstanding
at December 31, 2008:





Weighted-averageWeighted-average
                                    
                                    
                                    Number
                                    
                                    
                                    Number
                                    
                                    remaining
                                    
                                    Intrinsicexercise price
                                    
                                    
                                    outstanding
                                    
                                    
                                    exercisable
                                    
                                    contractual life
                                    
                                    valueScheme
      I and Options granted toTech
      Power Enterprise
                                    
                                    $
                                    0.54
                                    
                                    
                                    
                                    969,723
                                    
                                    
                                    
                                    656,633
                                    
                                    6.09
      years
                                    
                                    $
                                    7.84Scheme
      II
                                    
                                    
                                    1.77
                                    
                                    
                                    
                                    511,316
                                    
                                    
                                    
                                    185,044
                                    
                                    7.72
      years
                                    
                                    
                                    6.61Scheme
      III
                                    
                                    
                                    4.17
                                    
                                    
                                    
                                    316,767
                                    
                                    
                                    
                                    72,513
                                    
                                    7.93
      years
                                    
                                    
                                    4.21Options
      granted to an independent director
                                    
                                    
                                    4.17
                                    
                                    
                                    
                                    40,000
                                    
                                    
                                    
                                    27,778
                                    
                                    8.37
      years
                                    
                                    
                                    4.21Scheme
      IV
                                    
                                    
                                    0.54
                                    
                                    
                                    
                                    53,280
                                    
                                    
                                    
                                    -
                                    
                                    9.76
      years
                                    
                                    
                                    7.84Scheme
      V
                                    
                                    $
                                    7.89
                                    
                                    
                                    
                                    406,776
                                    
                                    
                                    
                                    -
                                    
                                    9.76
      years
                                    
                                    $
                                    0.492,297,862
                                    
                                    
                                    
                                    941,968




The
weighted-average grant-date fair value of options granted during the years 2006,
2007 and 2008 was $1.97, $6.48 and $4.59, respectively.
  The
aggregate intrinsic value of options outstanding and vested as of December 31,
2008 was $13,101 and $9,271, respectively.





A summary
of unvested stock option activity as of December 31, 2008, and changes during
the year ended December 31, 2008 is presented below:





Weighted averageUnvested
      Stock Option
                            
                            Number
      of Shares
                            
                            
                            Grant-date
      Fair ValueUnvested
      at January 1, 2008
                            
                            
                            1,329,516
                            
                            
                            $
                            1,704Granted
                            
                            
                            460,056
                            
                            
                            
                            2,111Vested
                            
                            
                            (766,924
                            )
                            
                            
                            (663
                            )Forfeited
                            
                            
                            (2,915
                            )
                            
                            
                            (5
                            )Unvested
      at December 31, 2008
                            
                            
                            1,019,733
                            
                            
                            $
                            3,147





The Group
recorded a related compensation expense of $338, $1,261 and $1,044 for the years
ended December 31, 2006, 2007 and 2008, respectively.





As of
December 31, 2008, total unrecognized compensation expense related to the
unvested share options was $1,939, which is expected to be recognized over a
weighted-average period of 1.89 years according to the graded vesting
schedule.




F-48




CHINA
DIGITAL TV HOLDING CO., LTD.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





19.
            SHARE
      REPURCHASE PROGRAM





On
September 17, 2008, the Company announced the authorization of a share
repurchase program pursuant to which the Company was entitled, in the period
from September 15, 2008 to November 21, 2008, to purchase up to $40,000 worth of
its issued and outstanding ADSs.  Under this program 2,307,566 ADSs
were repurchased at a total consideration of $16,255 (including transaction
costs).  These ADSs were cancelled immediately after the
repurchase.





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 $392, $784 and $1,522 for the years ended December 31, 2006, 2007
and 2008, respectively.





21.
            COMMITMENT





Lease
commitment





The Group
has operating lease agreements principally for its office spaces in the
PRC.  These leases expire through 2011 and are renewable upon
negotiation.  Rental expense under operating leases for the years
ended December 31, 2006 and 2007 and 2008 was $306, $535, and $914,
respectively.





Future
minimum lease payments under non-cancelable operating lease agreements are as
follows:





2009
                        
                        $
                        3672010
                        
                        
                        152011
                        
                        
                        11$
                        393




F-49


CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





22.
            RELATED
      PARTY BALANCES AND TRANSACTIONS





a.
            Amounts
      due from related parties





December
      31,2007
                                  
                                  
                                  2008Amount
      due from N-TInformation Engineering
                                  
                                  $
                                  1,277
                                  
                                  
                                  $
                                  -





l
            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.





l
            In
      December 2008, the loan of $1,635 was repaid in full by N-T Information
      Engineering, with the same RMB equivalent amount as the loan
      provided.





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 $3, $41, $9 of share-based compensation
      expense in 2006, 2007 and 2008,
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.





f.
            In
      August 2008, the Group entered into agreement with N-T Information
      Engineering to acquire two intangible assets, digital watermarking and
      image tracing technologies with a cost of
  $1,299.





g.
            In
      December 2008, the Group acquired for free the licensed graphic logo from
      N-T Information Engineering.




F-50




CHINA
DIGITAL TV HOLDING CO., LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(In
U.S. dollars in thousands, except share data)





23.
            DIVIDENDS





Dividends
before IPO





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.





Cash
distribution to shareholders





In
December 2008, the Group decided to pay $1.00 per ordinary share to shareholders
of record as of the close of business on January 8, 2009.  As of
December 31, 2008, the number of ordinary shares outstanding was 57,209,548 and
the payable to shareholders amounted to $57,210, accordingly.  The
cash payment was made in February 2009 to shareholders based on the number of
shares outstanding on the record date.





24.
            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
$1,965 and $3,335 and $4,496 for 2006, 2007 and 2008 respectively.


F-51
  EXHIBIT
INDEX
  Number
                
                Description of Exhibit1.1*
                
                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.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.
  
 
 Number
                
                Description of Exhibit4.12
                
                Letter
      of Consent, dated April 30, 2009, issued by Beijing Super TV Co., Ltd. to
      Beijing Novel-Super Digital TV Technology Co., Ltd.4.13
                
                Equity
      Transfer Agreement, dated June 20, 2008 between Ms. Wei Gao and Mr.
      Junming Wu for Beijing Novel-Super Digital TV Technology Co.,
      Ltd.4.14
                
                Equity
      Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
      Information Engineering Co., Ltd. and Mr. Shizhou Shen for Beijing
      Novel-Super Digital TV Technology Co., Ltd.4.15
                
                Equity
      Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
      Information Engineering Co., Ltd. and Mr. Lei Zhang for Beijing
      Novel-Super Digital TV Technology Co., Ltd.4.16
                
                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. *; 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*; the
      No. 3 Supplemental Agreement thereto, dated June 20, 2008, among Beijing
      Super TV Co., Ltd., Beijing Novel-Super Digital TV Technology Co., Ltd.,
      Novel-Tongfang Information Engineering Co., Ltd., Ms. Wei Gao and Mr.
      Junming Wu; and the No. 4 Supplemental Agreement thereto, dated November
      24, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super Digital TV
      Technology Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
      Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen.4.17*
                
                Share
      Pledge Agreement, dated September 1, 2005, between Novel-Tongfang
      Information Engineering Co., Ltd. and Beijing Super TV Co.,
      Ltd.4.18
                
                Termination
      Agreement of Share Pledge, dated November 24, 2008, between Beijing Super
      TV Co., Ltd. and Novel-Tongfang Information Engineering Co.,
      Ltd.4.19
                
                Share
      Pledge Agreement, dated September 1, 2005, between Ms. Li Yang and
      Beijing Super TV Co., Ltd.*; the Supplemental Agreement thereto, dated
      August 18, 2007, among Ms. Li Yang, Beijing Super TV Co., Ltd. and
      Ms. Wei Gao*; and the No.2 Supplemental Agreement thereto, dated June
      20, 2008, among Beijing Super TV Co., Ltd., Ms. Wei Gao and Mr. Junming
      Wu.4.20
                
                Share
      Pledge Agreement, dated November 24, 2008, between Mr. Shizhou Shen and
      Beijing Super TV Co., Ltd.4.21
                
                Share
      Pledge Agreement, dated November 24, 2008, between Mr. Lei Zhang and
      Beijing Super TV Co.,
Ltd.
  
 
 Number
                
                Description of Exhibit4.22
                
                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. *; 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*; the No.2 Supplemental Agreement thereto, dated June
      20, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super Digital TV
      Technology Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
      Ms. Wei Gao and Mr. Junming Wu; and the No. 3 Supplemental Agreement
      thereto, dated November 24, 2008, among Beijing Super TV Co., Ltd.,
      Beijing Novel-Super Digital TV Technology Co., Ltd., Novel-Tongfang
      Information Engineering Co., Ltd., Mr. Junming Wu, Mr. Lei Zhang and Mr.
      Shizhou Shen.4.23*
                
                Power
      of Attorney, dated September 1, 2005, of Novel-Tongfang Information
      Engineering Co., Ltd.4.24*
                
                Power
      of Attorney, dated August 18, 2007, of Ms. Wei
Gao.4.25
                
                Power
      of Attorney, dated June 20, 2008, of Mr. Junming Wu.4.26
                
                Power
      of Attorney, dated November 24, 2008, of Mr. Shizhou
  Shen.4.27
                
                Power
      of Attorney, dated November 24, 2008, of Mr. Lei Zhang.4.28*
                
                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.4.29*
                
                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.4.30*
                
                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.4.31*
                
                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.4.32
                
                Loan
      Agreement, dated November 24, 2008, between Mr. Shizhou Shen and Beijing
      Super TV Co., Ltd.4.33
                
                Loan
      Agreement, dated November 24, 2008, between Mr. Lei Zhang and Beijing
      Super TV Co., Ltd.4.34*
                
                Service
      Agreement, dated April 2, 2007, between Novel-Tongfang Information
      Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV Technology
      Co., Ltd.4.35*
                
                Interest
      Payment Agreement, dated November 30, 2006, between Beijing Novel-Tongfang
      Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
    Ltd.4.36*
                
                Form of
      Property Lease Agreement.4.37*
                
                Fixed
      Assets Transfer Agreement, dated March 28, 2007, between Beijing
      Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
      Ltd.
  
 
 Number
                
                Description of Exhibit4.38*
                
                Form of
      Employment Agreement and related Form of Agreement on Confidentiality
      and Intellectual Property.4.39*
                
                Form of
      Non-Disclosure, Non-Competition, Commitment and Proprietary Information
      Agreement.4.40*
                
                Form of
      Indemnification Agreement for Directors.4.41*
                
                Amended
      and Restated 2005 Stock Incentive Plan of China Digital TV Holding Co.,
      Ltd. and form of stock option agreement.4.42††*
                
                Cooperation
      Agreement, dated January 5, 2007, between Beijing Novel-Tongfang Digital
      TV Technology Co., Ltd. and Jiangsu Qingda Science and Technology
      Industries Co., Ltd.4.43*
                
                Cooperation
      Agreement, dated July 18, 2007, between Beijing Novel-Tongfang Digital TV
      Technology Co., Ltd. and China Electronics Smart Card Co.,
      Ltd.4.44*
                
                2008
      Stock Incentive Plan of China Digital TV Holding Co.,
  Ltd.4.45#
                
                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.4.46
                
                Intellectual
      Property Transfer Agreement, dated August 13, 2008, between Novel-Tongfang
      Information Engineering Co., Ltd. and Beijing Super TV Co.,
      Ltd.4.47
                
                Equity
      Transfer Agreement, dated October 5, 2008, between Beijing Super TV Co.,
      Ltd. and Beijing Novel-Super Digital TV Technology Co.,
    Ltd.4.48
                
                Framework
      Agreement for Purchase of Computer Chips, dated December 12, 2008, between
      Beijing Super TV Co., Ltd. and Beijing Novel-Super Digital TV 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 King & Wood, PRC
Lawyers.
 
 
 ††
              Portions
      of the agreement have been omitted pursuant to a confidential treatment
      request and have been filed with the SEC 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.
  #
              Previously
      filed as an exhibit to the annual report on Form 20-F (File No. 001-33692)
      of China Digital TV Holding Co., Ltd. filed with the SEC on June 18, 2008
      and incorporated herein by reference
thereto.