---

As filed with the U.S. Securities and Exchange Commission on
June 30, 2005

---

---

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
       OF THE SECURITIES EXCHANGE ACT OF 1934 
       FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

Commission file number [                
]

SUNDAY Communications Limited

Cayman Islands (Jurisdiction of incorporation or
organization)

13/F Warwick House 
TaiKoo Place 
979 King's Road, Quarry Bay 
Special Administrative Region of Hong Kong 
The People's Republic of China (Address of principal executive offices)

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

None.

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

Ordinary Shares, par value of HK$0.10 per share.

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

None.

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:

Number outstanding as ofClass
      
      December 31, 2004Ordinary Shares, par value HK$0.10 per share
      
      2,990,000,000


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

Indicate by check mark which
financial statement item the registrant has elected to follow:

Item 17

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|TABLE OF CONTENTS                                                
|-----------------------------------------------------------------
|                                                                 
|GENERAL INFORMATION                                              
|FORWARD-LOOKING STATEMENTS                                       
|PART I                                                           
|ITEM 1. IDENTITY OF DIRECTORS,
    SENIOR MANAGEMENT AND ADVISERS
|ITEM 2. OFFER STATISTICS AND
    EXPECTED TIMETABLE              
|ITEM 3. KEY INFORMATION                                          
|3.A                                                              
|3.B                                                              
|3.C                                                              
|3.D                                                              
|ITEM 4. INFORMATION ON THE
    COMPANY                           
|4.A                                                              
|4.B                                                              
|4.C                                                              
|4.D                                                              
|ITEM 5. OPERATING AND FINANCIAL
    REVIEW AND PROSPECTS         
|5.A                                                              
|5.B                                                              
|5.C                                                              
|5.D                                                              
|5.E.                                                             
|5.F                                                              
|ITEM 6. DIRECTORS, SENIOR
    MANAGEMENT AND EMPLOYEES           
|6.A                                                              
|6.B                                                              
|6.C                                                              
|6.D                                                              
|6.E                                                              
|ITEM 7. MAJOR SHAREHOLDERS AND
    RELATED PARTY TRANSACTIONS    
|7.A                                                              
|7.B                                                              
|7.C                                                              
|ITEM 8. FINANCIAL INFORMATION                                    
|8.A                                                              
|8.B                                                              
|ITEM 9. THE OFFER AND LISTING                                    
|ITEM 10.
    ADDITIONAL
    INFORMATION                          
|10.A                                                             
|10.B                                                             
|10.C                                                             
|10.D                                                             
|10.E                                                             
|10.F                                                             
|10.G                                                             
|10.H                                                             
|ITEM 11.                                                         
|ITEM 12.                                                         
|PART II                                                          
|ITEM 13.                                                         
|ITEM 14.                                                         
|ITEM 15.                                                         
|ITEM 16.                                                         

|ITEM 16A AUDIT
    COMMITTEE FINANCIAL EXPERT                                       | 73 
|----------------------------------------------------------------------------------- | ---
|ITEM 16B CODE OF
    ETHICS                                                         | 73 
|ITEM 16C
    PRINCIPAL ACCOUNTANT FEES AND SERVICES                                 | 74 
|ITEM 16D
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES             | 75 
|ITEM 16E
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 75 
|PART III                                                                            | 75 
|ITEM 17.
    FINANCIAL STATEMENTS                                                   | 75 
|ITEM 18.
    FINANCIAL STATEMENTS                                                   | 75 
|ITEM 19.
    EXHIBITS                                                               | 75 
|APPENDIX A -
    GLOSSARY OF TECHNICAL TERMS                                        | A-1
|EXHIBIT INDEX                                                                       | E-1

i

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GENERAL INFORMATION

Except as otherwise required by
the context, references in this Annual Report to "SUNDAY", "Company",
"registrant", "us" or "we" refer to SUNDAY Communications Limited. The term
"you" refers to holders of ordinary shares and American depositary shares, or
ADSs, representing the ordinary shares. The terms "Hong Kong" and the
"Government" refer to Hong Kong Special Administrative Region of The People's
Republic of China and its government, respectively. See "Appendix A  Glossary
of Technical Terms" for definitions of technical terms used in this Annual
Report.

We publish our financial
statements in Hong Kong dollars. In this Annual Report, references to "Hong Kong
dollars" or "HK$" are to the currency of Hong Kong, and references to "U.S.
dollars" or "US$" are to the currency of the United States of America. This
Annual Report contains translations of Hong Kong dollar amounts into U.S. dollar
amounts, solely for your convenience. Unless otherwise indicated, the
translations have been made at HK$7.7723 = US$1.00, which was the noon buying
rate in The City of New York for cable transfers in Hong Kong dollars as
certified for customs purposes by the Federal Reserve Bank of New York on
December 31, 2004. See "Item 3. Key Information  Selected Financial Data 
Exchange Rate Information" for historical information regarding this noon buying
rate. You should not construe these translations as representations that the
Hong Kong dollars actually represent such U.S. dollar amounts or could have been
or could be converted into U.S. dollars at the rate indicated or at any other
rates.

FORWARD-LOOKING STATEMENTS

Some statements made in this
Annual Report are forward-looking statements, which are subject to various risks
and uncertainties. These include statements with respect to us, our corporate
plans, strategies and beliefs and other statements that are not historical
facts. These statements can be identified by the use of forward-looking
terminology such as "may", "will", "expect", "anticipate", "intend", "estimate",
"continue", "plan" or other similar words. The statements are based on our
management's assumptions and beliefs in light of the information currently
available to us.

These assumptions involve risks
and uncertainties which may cause the actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Potential
risks and uncertainties include, without limitation:

- 

For a further discussion of such
risks and uncertainties, see "Item 3. Key Information  Risk Factors." You
should consider these factors carefully in evaluating any forward-looking
statements and should not place any undue reliance on any forward-looking
statements. You should keep in mind that any forward-looking statement made by
us in this Annual Report or elsewhere speaks only as of the date on which we
made it. New risks and uncertainties come up from time to time, and it is
impossible for us to predict these events or how they may affect us.

We are under no obligation to, and
do not intend, to update or revise our forward-looking statements made herein to
reflect actual results or changes in assumptions or other factors that could
affect those statements.

1

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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
3.A SELECTED FINANCIAL DATA

The selected
financial data as of December 31, 2003 and 2004 and for each of the three years
ended December 31, 2002, 2003 and 2004 are derived from and should be read with
our audited consolidated financial statements, including the notes to the
audited consolidated financial statements, included in this Annual Report
beginning on page F-1. We derived the selected financial data as of December 31,
2000, 2001 and 2002 and for each of the two years ended December 31, 2000 and
2001 from our audited consolidated financial statements, which are not included
in this Annual Report.

Our consolidated
financial statements are prepared and presented in accordance with generally
accepted accounting principles in Hong Kong, or HK GAAP, which differ in some
material respects from generally accepted accounting principles in the United
States of America, or US GAAP. For a discussion of relevant differences between
HK GAAP and US GAAP, see note 26 to our audited consolidated financial
statements.

|                                                                                | Year Ended
    December 31,                                                       
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|                                                                                | 2000                                                                              
|                                                                                | HK$                                                                               
|                                                                                | (in millions, except for number of shares and ADS, per
    share and per ADS data)
|Consolidated income statement data:                                             |                                                                                   
|HK GAAP:                                                                        |                                                                                   
|Operating
    revenues:                                                         |                                                                                   
|Mobile services                                                                 | 988.7                                                                             
|Sales of mobile phones and accessories                                          | 404.4                                                                             
|Other services(2)                                                               | 57.2                                                                              
|Total operating revenues                                                        | 1,450.3                                                                           
|Costs of
    sales and services:                                                |                                                                                   
|Cost of services(2)(3)                                                          | (235.5)                                                                           
|Cost of sales of mobile phones and accessories                                  | (424.5)                                                                           
|Gross profit                                                                    | 790.3                                                                             
|Other revenues                                                                  | 8.7                                                                               
|Operating
    expenses(4)                                                       | (1,179.7)                                                                         
|(Loss)/profit
    from operations                                               | (380.7)                                                                           
|Interest income                                                                 | 51.1                                                                              
|Finance costs                                                                   | (136.9)                                                                           
|Share of losses
    of joint ventures                                           |                                                                                  
|Net (loss)/profit                                                               | (466.5)                                                                           
|Number of shares
    used to calculate (loss)/earnings per share (in thousands) | 2,850,492                                                                         
|Basic
    (loss)/earnings per share (in cents)(5)                               | (16.4)                                                                            
|US GAAP:                                                                        |                                                                                   
|Operating
    revenues:                                                         |                                                                                   
|Mobile services                                                                 | 988.7                                                                             
|Sales of mobile phones and accessories                                          | 404.4                                                                             
|Other services(2)                                                               | 57.2                                                                              
|Total operating revenues                                                        | 1,450.3                                                                           
|Costs of
    sales and services:                                                |                                                                                   
|Cost of services(2)(3)                                                          | (577.7)                                                                           
|Cost of sales of mobile phones and accessories                                  | (424.5)                                                                           
|Gross profit                                                                    | 448.1                                                                             
|Other revenues                                                                  | 8.7                                                                               
|Operating
    expenses(4)                                                       | (841.3)                                                                           
|(Loss)/profit
    from operations                                               | (384.5)                                                                           
|Interest income                                                                 | 51.1                                                                              
|Finance costs                                                                   | (136.9)                                                                           
|Share of losses
    of joint ventures                                           |                                                                                  

|Net (loss)/profit                                                               | (470.3)   | (225.9)   | (119.0)   | 38.5      | 7.6       | 1.0      
|------------------------------------------------------------------------------- | --------- | --------- | --------- | --------- | --------- | ---------
|Number of shares
    used to calculate (loss)/earnings per share (in thousands) | 2,850,492 | 2,990,000 | 2,990,000 | 2,990,000 | 2,990,000 | 2,990,000
|Number of ADSs
    used to calculate (loss)/earnings per ADS (in thousands)(5)  | 28,505    | 29,900    | 29,900    | 29,900    | 29,900    | 29,900   
|Basic
    (loss)/earnings per share (in cents)(5)                               | (16.5)    | (7.6)     | (4.0)     | 1.3       | 0.3       | 0.03     
|Basic
    (loss)/earnings per ADS (in dollars)(5)                               | (16.5)    | (7.6)     | (4.0)     | 1.3       | 0.3       | 0.03     

2

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|                                                       | As of December
    31,     
|------------------------------------------------------ | ---------------------------
|                                                       | 2000                       
|                                                       | HK$                        
|                                                       |                            
|Consolidated balance sheet data:                       |                            
|HK GAAP:                                               |                            
|Total assets                                           | 2,375.2                    
|Long-term debt                                         | 753.7                      
|Total liabilities                                      | 1,375.5                    
|Shareholders' equity                                   | 999.7                      
|US GAAP:                                               |                            
|Total assets                                           | 2,512.8                    
|Shareholders' equity                                   | 999.7                      
|                                                       |                            
|                                                       | Year Ended
    December 31,
|                                                       | 2000                       
|                                                       | HK$                        
|                                                       |                            
|Cash flows data:                                       |                            
|HK GAAP:                                               |                            
|Net
    cash (outflow)/inflow from:                    |                            
|Operating activities                                   | (324.4)                    
|Investing activities                                   | (203.4)                    
|Financing activities                                   | 1,065.0                    
|Other financial data:                                  |                            
|EBITDA (HK GAAP)(6)                                    | (119.4)                    
|Operating data for mobile communications
    business: |                            
|Number of
    subscribers                              | 410,000                    
|Average
    monthly ARPU (HK$)(7)                      | 272                        
|Average
    monthly minutes of usage per subscriber    | 353                        
|Average
    monthly churn rate(8)                      | 6.1%                       

_______________

> (1) Our financial statements are maintained in
>   Hong Kong dollars. For convenience, the U.S. dollar information as of and for
>   the year ended December 31, 2004 has been translated into U.S. dollars at the
>   exchange rate of HK$7.7723 = US$1.00, the noon buying rate on December 31,
>   2004. You should not construe these translations as representations that the
>   Hong Kong dollars actually represent such U.S. dollar amounts or could have
>   been converted into U.S. dollars at the rate indicated or at any other rates.
>   (2) Other services include our "SUNDAY 1622"
>   retail international long distance calling service business, which was
>   launched in September 1999 and for which we outsourced the sales, service and
>   billing functions in August 2000. The outsourcing arrangement was terminated
>   in September 2001.
>   (3) Cost of services consists of cost of mobile
>   services and cost of other services, including the SUNDAY 1622 services.
>   (4) Operating expenses consist of network costs,
>   depreciation, rent and related costs, salaries and related costs, advertising,
>   promotion and other selling costs, and other operating expenses.
>   (5) Basic (loss)/earnings per share amount for the
>   year ended December 31, 2000 has been calculated as if the 2,300,000,000
>   ordinary shares were in issue on January 1, 2000 and on the basis that the
>   690,000,000 ordinary shares were issued on March 15, 2000 pursuant to the
>   global offering. Basic (loss)/earnings per share amounts for each of the three
>   years ended December 31, 2001, 2002 and 2003 have been calculated based on the
>   2,990,000,000 ordinary shares in issue during the year. The ADS to share ratio
>   was changed from 1:30 to 1:100 in July 2002. The comparative basic loss per
>   ADS amounts for each of the two years ended December 31, 2000 and 2001 had
>   been restated based on the new ADS to share ratio to conform with the 2002
>   presentation.
>   (6) EBITDA represents (loss)/profit before
>   interest income and finance costs, income tax expense/(benefit), depreciation,
>   amortization and share of losses from joint ventures. EBITDA is presented
>   because we believe it is an accepted financial indicator of a company's
>   ability to meet its future debt service, capital expenditure and working
>   capital requirements. Since the telecommunications business is capital
>   intensive, capital expenditure and level of debt and interest expenses may
>   have a significant impact on net profit for companies with similar operating
>   results. Therefore, for a telecommunications company such as ourselves, we
>   believe that EBITDA provides a useful reflection of our operating results.
>   However, EBITDA should not be considered in isolation or as an alternative to
>   net profit/(loss) as determined under HK GAAP or US GAAP as an indicator of
>   operating performance or as an alternative to cash flow as determined under HK
>   GAAP or US GAAP as a measure of liquidity. In addition, our EBITDA, which is
>   not a measure under HK GAAP or US GAAP, is not comparable to that of other
>   companies, which may determine EBITDA differently.

3

---



> As a measure of our operating performance, we believe that the most
>   directly comparable HK GAAP and US GAAP measure to EBITDA is net profit. The
>   following table reconciles our net (loss)/profit under HK GAAP to our
>   definition of EBITDA on a consolidated basis for each of the five years ended
>   December 31, 2000, 2001, 2002, 2003 and 2004.
> Year Ended December 31,2000
>     2001
>     2002
>     2003
>     2004
>     2004(1)HK$
>     HK$
>     HK$
>     HK$
>     HK$
>     US$(in millions)EBITDA
>     (119.4)
>     101.9
>     213.7
>     315.2
>     260.5
>     33.5Add/(less):Depreciation
>     (261.3)
>     (265.1)
>     (256.4)
>     (233.3)
>     (228.6)
>     (29.4)Interest income
>     51.1
>     21.6
>     3.5
>     2.5
>     0.2
>     -Finance costs
>     (136.9)
>     (70.1)
>     (59.5)
>     (52.8)
>     (26.3)
>     (3.4)Share of losses from joint ventures
>     
>     
>     (18.6)
>     (4.4)
>     (0.3)
>     -Net (loss)/profit
>     (466.5)
>     (211.7)
>     (117.3)
>     27.2
>     5.5
>     0.7The following table reconciles our net (loss)/profit under US GAAP to our
>   definition of EBITDA on a consolidated basis for each of the five years ended
>   December 31, 2000, 2001, 2002, 2003 and 2004.
> Year Ended December 31,2000
>     2001
>     2002
>     2003
>     2004
>     2004(1)HK$
>     HK$
>     HK$
>     HK$
>     HK$
>     US$(in millions)EBITDA
>     (123.2)
>     87.7
>     212.0
>     326.5
>     262.6
>     33.8Add/(less):Depreciation
>     (261.3)
>     (265.1)
>     (256.4)
>     (233.3)
>     (228.6)
>     (29.4)Interest income
>     51.1
>     21.6
>     3.5
>     2.5
>     0.2
>     -Finance costs
>     (136.9)
>     (70.1)
>     (59.5)
>     (52.8)
>     (26.3)
>     (3.4)Share of losses
>     from joint ventures
>     
>     
>     (18.6)
>     (4.4)
>     (0.3)
>     -Net (loss)/profit
>     (470.3)
>     (225.9)
>     (119.0)
>     38.5
>     7.6
>     1.0(7) Monthly average revenue per user, or ARPU, or
>   the monthly average revenue from mobile services per post-paid subscriber, is
>   computed by dividing total revenues from mobile services for the month
>   (including airtime revenues, value-added and enhanced services revenues,
>   revenues from airtime for roaming and international long distance calls that
>   terminate at our subscribers' mobile phone numbers, as well as from airtime
>   revenues arising from foreign subscribers roaming on our mobile network, but
>   excluding subscription fees paid in advance, deposit payments and revenues
>   from sales of mobile phones and accessories and prepaid SIM cards) by the
>   daily weighted average number of mobile services subscribers for the month.
>   Average monthly ARPU is the sum of ARPU for each month in the period divided
>   by the number of months in the period.
>   (8) The monthly churn rate is
>   calculated by expressing the net number of post-paid subscriber deactivations
>   or disconnections for the month as a percentage of the number of post-paid
>   subscribers at the beginning of such month. The average monthly churn rate is
>   the sum of the monthly churn rates in the period divided by the number of
>   months in the period.

Exchange Rate Information

The Hong Kong dollar is freely
convertible into other currencies (including the U.S. dollar). Since 1983, the
Hong Kong dollar has effectively been officially linked to the U.S. dollar at
the rate of approximately HK$7.80 = US$1.00. On May 18, 2005, the Hong Kong
Monetary Authority announced that it would introduce an upper ceiling to the
currency peg at HK$7.75 to US$1.00, and a lower limit of HK$7.85 to US$1.00
(which was introduced over a period of five weeks), effectively putting the Hong
Kong dollar into a fixed trading band of HK$7.75 to HK$7.85 to US$1.00. However,
the market exchange rate of the Hong Kong dollar against the U.S. dollar
continues to be influenced by the forces of supply and demand in the foreign
exchange market. Exchange rates between the Hong Kong dollar and other
currencies are influenced by the rate between the U.S. dollar and the Hong Kong
dollar.

4

---



The Basic Law of Hong Kong
provides that the Hong Kong dollar is to remain the legal tender in Hong Kong
after July 1, 1997 when Hong Kong became a Special Administrative Region of The
People's Republic of China, or the PRC. The Basic Law also provides that no
foreign exchange control policies will be applied in Hong Kong and that the Hong
Kong dollar is to be freely convertible. During the Asian regional economic
crisis in 1998, however, the Hong Kong government intervened on several
occasions in the foreign exchange market by purchasing the Hong Kong dollar and
selling the U.S. dollar to support the value of the Hong Kong dollar.

The following table sets forth the
average, high, low and period-end noon buying rate between the Hong Kong dollar
and the U.S. dollar (in Hong Kong dollars per U.S. dollar) for the periods
indicated.

On June 24, 2005, the noon buying
rate for the Hong Kong dollar was HK$7.7719 = US$1.00.

|                       | Hong Kong
    dollar/U.S. dollar
|---------------------- | --------------------------------
|                       | Noon Buying
    Rate            
|                       | Average(1)                      
|                       | HK$                             
|1999                   | 7.7599(1)                       
|2000                   | 7.7936(1)                       
|2001                   | 7.7996(1)                       
|2002                   | 7.7996(1)                       
|2003                   | 7.7875(1)                       
|2004                   | 7.7887(1)                       
|December               | 7.7763                          
|2005                   |                                 
|January                | 7.7938                          
|February               | 7.7993                          
|March                  | 7.7994                          
|April                  | 7.7982                          
|May                    | 7.7906                          
|June (through June 24) | 7.7769(1)                       

______________
Source: Bloomberg

(1) The average of the noon buying rates on the last business day of each
month during the relevant period.

3.B      CAPITALIZATION AND INDEBTEDNESS

> Not applicable.

3.C     REASONS FOR THE OFFER AND USE OF PROCEEDS

> Not applicable.

3.D     RISK FACTORS

Risks Relating to Our Businesses and Operations

As we are the subject of a tender offer by PCCW Limited for all of our issued
shares that it does not currently own, such acquisition by PCCW Limited may
result in the delisting of our shares from the Hong Kong Stock Exchange and
Nasdaq, or a substantially decreased liquidity in any shares which are not
purchased by PCCW Limited pursuant to such tender offer.

On June 13, 2005, our former
shareholder, Distacom Communications Limited, or Distacom, and their wholly
owned subsidiary, Distacom Hong Kong Limited, or Distacom HK, entered into a
conditional sale and purchase agreement with PCCW Limited, or PCCW, or the First Agreement,
whereby PCCW agreed to purchase (or procure the purchase by one of its
wholly-owned subsidiaries) and Distacom HK agreed to sell an aggregate of
1,380,000,000 shares in SUNDAY, representing approximately 46.15% of our issued
share capital, for the consideration of HK$897,000,000 in cash, being a price of
HK$0.65 per share. On the same date, our former shareholder, USI Holdings
Limited, or USI, and their wholly owned subsidiary, Townhill Enterprises
Limited, or Townhill, entered into a separate conditional sale and purchase agreement with PCCW, or the Second Agreement, whereby PCCW agreed to purchase (or procure the
purchase by one of its wholly-owned subsidiaries) and Townhill agreed to sell an
aggregate of 410,134,000 shares, representing approximately 13.72% of our issued
share capital, for the consideration of HK$266,587,100 in cash, being a price of
HK$0.65 per share. Completion of the First Agreement and the Second Agreement took place
on June 22, 2005.

5

---



Upon the completion of  the
First Agreement, PCCW is required under the Hong Kong Code on Takovers and Mergers, or the Hong
Kong Takeovers Code, to make a mandatory cash tender offer for all of our issued
shares other than those already owned or agreed to be acquired by PCCW. The
offer price will be HK$0.65 per share, which is the same as the price paid by PCCW to Distacom HK and Townhill for each share purchased under the First
Agreement and Second Agreement.

We cannot assure you that PCCW
will be successful in purchasing all our issued shares.

- In the event that PCCW is unable to purchase all our issued shares and as
  a result, our shares as held by the public represent less than 25% of our
  issued shares, trading in our shares may be suspended until a sufficient level
  of public float is attained, and if you are still a shareholder, you will lose
  liquidity in your shares.
- If PCCW is able to acquire more than 90% of our outstanding disinterested
  shares, PCCW intends to avail itself of the compulsory purchase provisions of
  the Companies Law (2004 Revision) of the Cayman Islands, which would permit
  PCCW to compulsorily acquire the balance of our shares. In such event, and
  subject to the applicable provisions of the Hong Kong Takeovers Code and the
  Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong
  Limited, or the Listing Rules, our shares will
  be withdrawn from the Hong Kong Stock Exchange and Nasdaq.
- If PCCW is unable to acquire more than 90% of our outstanding shares, PCCW
  may either seek a withdrawal of listing of our shares from the Hong Kong Stock
  Exchange, or take such steps as necessary to ensure or procure that we
  maintain an adequate public float so as to comply with the applicable
  requirements of the Listing Rules. Any withdrawal of listing of our shares
  from the Hong Kong Stock Exchange as contemplated in this paragraph will
  require a resolution passed by a majority of at least 75% of the votes cast at
  a shareholders' meeting of our independent shareholders (being shareholders
  other than any controlling shareholder, director or chief executive of SUNDAY)
  and not voted against by more than 10% of the votes cast at such meeting. As
  of June 22, 2005, PCCW has not made a determination whether to maintain the
  listing of SUNDAY on the Hong Kong Stock Exchange or to privatize SUNDAY in
  such event.

Any failure by PCCW to purchase
all of our shares may result in significantly decreased liquidity for any of our
remaining shareholders.

The tender offer by PCCW for the remainder of our shares may be subject to
delays and regulatory approvals, which may prevent completion of the offer or
may affect the integration of our business with PCCW.

Subsequent to the acquisition of
our shares, PCCW has indicated that it intends that we will continue with our
existing core business of development and provision of wireless communications
and data services in Hong Kong. Under Section 7P of the Hong Kong
Telecommunications Ordinance, or the Ordinance, the Hong Kong Telecommunications
Authority, or the HKTA, has jurisdiction over certain mergers and acquisitions
involving telecommunications carrier license and proposed shareholder changes in
relation to such licenses. Where the HKTA can demonstrate on the balance of
probabilities that a particular transaction has or is likely to have the effect
of substantially lessening competition in a telecommunications market, the HKTA
may refuse to give consent or otherwise give consent subject to conditions.
Prior to the acquisition, the HKTA provided a "no-objection letter" that it did
not consider likely that the acquisition of our shares from Distacom HK and
Townhill by PCCW would result in a significant lessening of competition in any
relevant market for telecommunication services, and that it did not intend to
object to the acquisition of shares from Distacom HK and Townhill or launch a
formal investigation. However, there remains a legal possibility under the terms
of the Ordinance that the HKTA could, if it were to consider that the
acquisition has, or is likely to have, the effect of substantially lessening
competition in the telecommunications market, the HKTA is empowered under the
terms of the Ordinance to direct us to take such action as the HKTA considers
necessary to eliminate or avoid the effect of any substantial lessening of
competition in the telecommunications market resulting from the acquisition. In
such event, this could result in a delay to the offer timetable.

6

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We are currently controlled by PCCW, who may take actions that are not in, or
may conflict with, your interests.As of June 22, 2005, PCCW owns approximately 59.87% of our shares. Subsequent to
the completion of its tender offer for the remainder of our shares, PCCW may own
between 59.87% to 100% of our shares. As of June 22, 2005, PCCW is able to
influence our business through its ability to control actions that require
majority shareholders' approval, including the appointment of directors and the
approval of significant corporate transactions. PCCW is not obliged to provide
us with financial support or to exercise its rights as a shareholder in our best
interests or the interests of minority shareholders. Further, while PCCW has
indicated that it views SUNDAY's existing core business of development and
provision of wireless communications and data services in Hong Kong as
complementary to its own service offerings in Hong Kong, no assurances can be
made that PCCW will not pursue strategies that might bring it in conflict with
SUNDAY or that PCCW will not engage in activities that conflict with SUNDAY's
interests. Further, we cannot assure you that PCCW will not take steps to change
our business direction, replace our management, dispose of our assets and
equipment or take any other steps that may have a material adverse impact on our
business operations.

Current profitability is a recent development.

We generated positive cash flow
from our operating activities since 2002, and in January 2003 we started earning
net profit on a month-to-month basis. The year 2003 was the first year since we
commenced commercial operations in September 1997 that we have been profitable
and have had positive operating cash flow. However, in 2004, we experienced a
substantial decrease in net profit, from HK$27.2 million in 2003 to HK$5.5
million in 2004.

We cannot be certain as to whether
our profitability is sustainable. We may incur net losses and negative operating
cash flows again as we expand our business, such as by enhancing our wireless
network to accommodate increased usage and new technologies, developing our
wireless data services, and incurring increased sales and marketing costs
associated with our new businesses and services. To achieve sustained
profitability, we will need in particular to continue to expand our mobile
subscriber base, attract users and subscribers to our new services and increase
the average revenue per user of our services. Whether we will continue to be
profitable will also depend on our ability to develop new services successfully.
The level of our operating expenses is based largely on anticipated
organizational growth and revenue trends and a high percentage of these
operational expenses are, and will continue to be, fixed. As a result, any
delays in generating revenue could result in substantial operating losses. If we
do not stay profitable and cash flow positive, our business and financial
condition would be materially adversely affected. Our ability to service our
debt could be also materially adversely affected. In the initial stages of our
launch of 3G
services, we anticipate to incur substantial operating costs with minimal revenue
contribution from the 3G business operations.

We cannot assure you that our third generation, or 3G, wireless services will
be successful, or that we will be successful in developing the 3G services as
currently required by our 3G license or the quality and levels of 3G services
currently planned.

We were awarded one of Hong Kong's
four 3G licenses in October 2001. Our 3G license currently requires that our 3G
network and services will cover at least 50% of the population of Hong Kong by
the end of 2006. As of June 2005, we have only launched our 3G data card
service.

Other wireless operators worldwide
are facing critical issues in 3G, such as the availability of mobile phones and
international roaming capabilities. As is common with undertakings of this scale
and complexity, we may experience various difficulties, including software,
network, mobile phones and other technical problems, and we cannot be certain
that we will be able to fully resolve the 3G related problems currently
experienced by other wireless operators or that we will not encounter new
problems. For example, we cannot be certain that:

- when completed, our 3G network and services will deliver the quality and
  levels of services as that our customers demand or prefer;
- we will be able to provide all planned 3G services, or that we will be
  able to provide such services on schedule, or that developing and providing
  such services will not be more costly than expected;
- manufacturers and content providers will create and offer products,
  including mobile phones for our 3G system and contents for our 3G services, on
  a timely basis;
- there will be sufficient demand for 3G services to offer these services
  profitably;
- our competitors will not offer
  similar services at lower prices; or
- changes in the Hong Kong government's policies, rules, regulations or
  practices will not affect our network rollout or our business operations.

7

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If we experience substantial
problems with the rollout of our 3G network or our 3G services in the future, it
may adversely affect the range of our wireless voice and data services offered
to our subscribers and may hinder our business growth.

Our wireless data services present us with unique risks and challenges and we
can give no assurance that we will succeed.

Our dominant source of revenues
from mobile services is still voice communications. While we have observed a
trend of increased usage in wireless data services, such as short messaging
services, or SMS, during the past three years, the revenue from wireless data
devices still has not accounted for a significant share of our total service
revenue. There is no current proven business model for the provision of wireless
data services in Hong Kong. The success of our data services will depend on the
application of new technologies, the development of new and innovative service
plans and products as well as the successful introduction of mobile devices
which can provide fast and easy access to the internet. We cannot be certain
that our strategy in this area will succeed or that we will be able to compete
and achieve market acceptance for our products and services.

We may require additional funds.

Our business requires significant
capital expenditure, as well as marketing, development and other operating
expenditures. We will need to continually expend capital to maintain and upgrade
our network, develop new business lines, and market existing and new services.
On October 22, 2001, we were awarded a 3G license from the Hong Kong
Telecommunications Authority, or the HKTA, of which the minimum annual fees
aggregate to approximately HK$1,306.8 million, payable over its 15-year license
period. We are also required to provide a rolling performance bond to the HKTA
covering the next five years' minimum annual fees. Details of such requirements
are set out in "Item 4. Information on the Company  Business Overview 
Regulation". We expect that the impact of capital expenditure and other
operating expenses relating to the rollout of the 3G network, which was started
in 2004, will be significant.

In May 2004, our main operating
subsidiary, Mandarin Communications Limited, or Mandarin, signed a facility
agreement for the provision of long-term financing in connection with the
establishment and supply of the 3G mobile communications network, or the
Facility Agreement, with Huawei Tech. Investment Co., Limited, or HTIC. In
November 2004, Mandarin signed an amendment and restatement agreement, or the
Amendment and Restatement Agreement, with HTIC to increase the amount of the
equipment supply facility from HK$859 million to HK$1,208 million. See the
summary of the Facility Agreement and the Amendment and Restatement Agreement in
"Item 10. Additional Information - Material Contracts." However, certain capital
expenditure requirements may not be covered by the Amendment and Restatement
Agreement. Also, our expenditure plans and financing needs may grow faster than
expected. If we are unable to maintain adequate financing, we will be unable to
fund our capital expenditure, expand our business lines or meet our debt service
obligations.  As discussed below in "We are subject to covenants in our
financing agreements that restrict our financial and operating flexibility.",
the outstanding amounts due under the Facility Agreement could be subject to
acceleration upon the resignation of certain of our directors in connection with
the completion of the First Agreement and the Second Agreement.

We have pledged substantially all of our assets to secure financing.

Under the Facility Agreement (as
amended by the Amendment and Restatement Agreement) and the related share
charge, subordination deed and other security documents, or collectively the
Security Arrangements, substantially all our assets, including the 3G license,
were pledged to HTIC to secure the facilities. Such Security Arrangements,
together with certain restrictive covenants in the Facility Agreement (as
amended by the Amendment and Restatement Agreement), will limit our ability to
obtain new financing. See "Item 5. - Operating and Financial Review and
Prospects - Liquidity and Capital Resources - Certain Indebtedness." If we
default on the repayment of such debts, HTIC could enforce its security
interests by seizing our assets or forcing us to sell our assets to repay the
debt. In the event of a liquidation of our company, HTIC will have priority over
our unsecured creditors and our ordinary share and ADS holders.

We have, and expect to continue to have, substantial debt, which will require
us to improve our cash flow to satisfy the related debt service obligations,
increases our vulnerability to adverse developments and creates other risks.

We signed the Facility Agreement
with HTIC in May 2004, comprising of HK$859 million equipment supply facility, a
HK$500 million general facility and a 3G performance bond facility. We signed an
Amendment and Restatement Agreement with HTIC in November 2004 to increase the
amount of the equipment supply facility to HK$1,208 million. See "Item 5. -
Operating and Financial Review and Prospects - Liquidity and Capital Resources -
Certain Indebtedness." The equipment supply facility is drawn down against
invoices issued under the turn key contract signed between Mandarin and HTIC in
May 2004 for the supply and installation of a mobile communications network and
associated services, or the Supply Contract, which was amended by a supplemental
agreement in November 2004 to increase the supply contract value to HK$1,208
million. Under the Facility Agreement (as amended by the Amendment and
Restatement Agreement), the equipment supply facility is repayable in eight
semi-annual installments commencing four years from May 2004. The next
repayment installment under the general facility is due in July 2006, and other
installments are spread over the period from January 2007 to July 2011.

8

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Therefore, our debt repayment
obligations are, and will continue to be, substantial and will require us to
dedicate a substantial portion of our cash flow to pay interest and principal.
Our cash flow is, in large part, generated from operations. We cannot give you
any assurance that our operating cash flow will improve sufficiently.
Furthermore, if our operating cash flow does not grow as expected, we will need
to raise additional financing, which may not be available on attractive terms or
at all.

Our debt service requirements will
consume cash that might otherwise be available to maintain and expand our
business. Furthermore, our leverage and the covenants imposed under the Facility
Agreement increase our vulnerability to adverse developments in our company, the
industry, market interest rates and the general economy, limit our ability to
take advantage of or react to new trends and challenges in our business, and
place us at a competitive disadvantage relative to competitors with less debt.

We are subject to covenants in our financing agreements that restrict our
financial and operating flexibility.

Our financing arrangements with
HTIC under the Facility Agreement (as amended by the Amendment and Restatement
Agreement) subject us to a number of covenants that restrict our financial and
operating flexibility and include certain financial and operating targets that
we must satisfy to avoid default, which include:

- operation of Mandarin's business in accordance with the approved business
  plans except for variations that would not have a material adverse effect on
  Mandarin's financial condition, its operations or its ability to repay the
  debt;
- certain financial and performance targets which Mandarin is required to
  comply with;
- a minimum level of cash for debt service in a reserve account;
- application of all or part of its excess cash flow to the repayment of
  debt; and
- without the consent from our lenders, no new debt except for certain
  permitted indebtedness.

Under the terms of the Facility Agreement, the resignation of
any two or more of Richard John Siemens, William Bruce Hicks, Kuldeep Saran and
Edward Wai Sun Cheng as a director would constitute an event of default and
entitle HTIC to accelerate the maturity of the outstanding amounts under the
Facility Agreement.  Pursuant to the First Agreement and the Second
Agreement, all of these persons will resign as directors of SUNDAY on or about
July 29, 2005.  We are currently in discussions with HTIC to seek a waiver
of this potential default.  If we are unable to obtain a waiver, the upon
resignation of the directors above, HTIC may elect to accelerate the maturity of
the outstanding amounts under the Facility Agreement.  We do not have
sufficient cash to repay the outstanding amounts.

---

Our limited resources may cause delays in implementing our plan of aggressive
growth and expansion.

The launch of our new products and
services is critical to the success of our business plan. The implementation of
this plan will impose a greater burden on our systems and may strain our
administrative, operational and financial resources. We will have to cope with
managing the simultaneous implementation of our infrastructure development and
marketing plans, while expanding our internal management, technical, information
and accounting systems. We face the risk of unforeseen complications in the
deployment of new technologies, such as 3G. Failure to achieve these objectives
in a timely manner and on a cost effective basis could delay the implementation
of new services, reduce the quality and functionality of the services, increase
our operational costs, reduce our actual and potential market share, hinder us
from realizing our revenue streams and otherwise materially adversely affect our
results of operations, prospects and financial condition.

We may not be able to deliver our services if we experience system failures
or shutdown in communications networks.

Our mobile communications,
international long distance calling, and data and internet services are
currently carried through our mobile network, the circuits of local fixed-line
network operators, international private lease circuits, our own switching
systems, other fixed international long distance operators and the switching
systems of international long distance operators and other network-related
infrastructure. The provision of our services and products depends on the
stability of this integrated network. This network may be vulnerable to damage
or interruptions in operation due to earthquake, fire, power loss,
telecommunications failures, network software flaws, transmission cable cuts, or
similar events. Any failure of this integrated network, our servers, or any link
in the delivery chain that results in an interruption in our operations or our
provision of any service, whether from operational disruption, natural disaster
or otherwise, could lead to significant negative publicity, reduce our ability
to attract and retain subscribers and adversely affect our results of operations
and financial condition.

We rely on third-party vendors and delays in lead times or problems with
supply may adversely affect our operations.

We rely on third-party vendors
with respect to many aspects of the supply, development and operation of our
mobile network. The principal suppliers of our 2G and 3G radio and switching
infrastructure and equipment are Nortel and Huawei Technologies Co., Ltd., or
Huawei, respectively. The principal suppliers of our mobile phones and
accessories are Nokia, Sony Ericsson, Samsung, Mitsubishi and Motorola, which
collectively accounted for 82% of the mobile phones supplied to us in 2004. We
expect that this trend will continue in 2005. Failure by any of these or other
suppliers to provide equipment, software and services in accordance with
specifications and in a timely manner could materially adversely affect our
operations and business prospects and increase our costs.

We rely on sophisticated billing and credit control systems.

Sophisticated billing and credit
control systems are critical to our ability to increase revenue streams, avoid
revenue loss, monitor costs and potential credit problems, and bill customers
properly and in a timely manner. We expect new technologies and applications
arising in particular from the convergence of our communications and data
businesses to create increasing demands on our billing and credit control
systems. We may decide to launch certain services and products even though we do
not have the ability to capture revenue in full at the time of launch. If
adequate billing and credit control systems and software programs are
unavailable or if upgrades are delayed or not introduced in a timely manner or
if we are unable to integrate such systems and software programs into our
billing and credit systems, we may be unable to offer services to certain
customers. In addition, we may experience delayed billing which may negatively
affect our cash flow and other aspects of our operations.

We may need to expand and adapt
our billing and credit control systems to capture revenue streams as our
businesses continue to grow. We recently implemented a new billing system to support
the launch of our 3G services and customer activation. Failure to successfully
implement our new billing system, or expand and adapt our billing and credit
systems in the future could adversely affect our business, prospects, financial
condition and results of operations.

10

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Our shareholders may face difficulties in protecting their interests under
the laws of the Cayman Islands or Hong Kong.

Our corporate affairs are governed
by our Memorandum and Articles of Association and by the Companies Law (Revised)
of the Cayman Islands. The laws of the Cayman Islands relating to the protection
of the interests of minority shareholders and to the fiduciary responsibilities
of directors may differ from the laws in certain jurisdictions in the United
States and the corresponding remedies available to such shareholders may differ
accordingly. A summary of the laws of the Cayman Islands relating to protection
of minority shareholders is set out in "Item 10. Additional Information 
Memorandum and Articles of Association." The rights of our shareholders and the
fiduciary responsibilities of our directors under Cayman Islands and Hong Kong
law may not be as clearly established as under statutes or judicial precedent in
existence in certain jurisdictions in the United States. Therefore, our public
shareholders may have more difficulty in protecting their interests in the face
of actions by our directors, management or controlling shareholders than would
shareholders of a corporation incorporated in certain jurisdictions in the
United States.

All of our directors and senior
officers and our major shareholders live outside the United States. Also, all or
most of our assets are located outside the United States. As a result, you may
not be able to:

- effect service of process upon us or these persons within the United
  States; or
- enforce against us or these persons, judgments obtained in the United
  States courts. These judgments include judgments relating to the federal
  securities laws of the United States.

There is doubt as to whether Hong
Kong courts or Cayman Islands courts will enforce judgments of United States
courts, based only upon the civil liability provisions of the federal securities
laws of the United States or the securities laws of any state of the United
States.

Industry Risks

If we are unable to stay ahead of technology trends and evolving industry
standards, our services and products may become obsolete.

Our mobile communications and
wireless data businesses are characterized by rapidly changing technology and
industry standards, subscriber needs and new products and services. The emerging
nature of these products and services, their rapid evolution and increasingly
shorter life cycles require us to continually improve our performance, products,
services, network and our ability to respond to offerings by competitors.

We cannot be certain that we can
continue to be successful in responding in a timely and cost-effective way to
keep up with these developments. Furthermore, changing our services in response
to market demand may require the adoption of new technologies that could render
many of the technologies that we are currently implementing less competitive or
obsolete. To respond successfully to technological advances and emerging
industry standards, we may require substantial capital expenditure and access to
related or enabling technologies in order to integrate the new technology with
our existing technology. For example, our existing 2G network may need to be
modified or updated in the near future, due to the technological advancements in
recent years which may replace the existing 2G hardware/software in the near
future, rendering it technologically obsolete.We may not be successful in updating or modifying our network
infrastructure in a timely and cost-effective manner to facilitate such
integration of new technology, which could adversely affect our quality of
services, our results of operations and our business and prospects.

Our success depends on increased wireless data usage.

Our future success depends on more
people and businesses in Hong Kong using wireless data services, such as 3G.
Commercial use of wireless data services is still developing and subject to many
uncertainties. The data transmission speed for accessing to the internet through
mobile telephones or other wireless devices is still low. Critical issues such
as cost, security, reliability, ease of deployment, administration, availability
of access devices, data transmission speed and quality of service may affect the
adoption of wireless data applications and the internet to solve business needs
in such markets. Our profitability could depend greatly on a sustained growth of
wireless data applications in such markets.

11

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We operate in a competitive environment in Hong Kong in the mobile
communications industry.The Hong Kong mobile
communications industry is highly competitive, particularly since the March 1,
1999 introduction of mobile number portability, or MNP, which enables mobile
subscribers in Hong Kong to retain their telephone numbers when they switch to
different service providers. Also, the market is one of the most mature in the
world with mobile penetration rate of over 105% as of December 31, 2004. We
believe that currently the three largest operators collectively have a market
share of approximately 59% of the subscribers in the mobile communications
market in Hong Kong. Their pricing policies have affected and could in the
future significantly affect our tariff pricing and our ability to generate
sufficient revenue. There have been periods of extreme price competition or
"price wars" among Hong Kong wireless communications providers, which have
generally been initiated by our competitors. If our competitors adopt further
tariff lowering strategies, such as providing substantial handset subsidies and
free airtime, our subscriber churn rates may increase and our tariff revenue
will be adversely affected.
Many of our competitors have
longer operating histories, larger customer bases, more comprehensive usage
databases and significantly greater financial, technical, marketing, human and
other resources than us. These competitors may also offer products and services
that provide significant performance, price, creative, integrated or other
advantages over those that we offer or plan to offer. Accordingly, our
competitors may be better positioned than us to absorb operating losses and
launch competitive products and services.
Hutchison, which is one of the
four 3G licensees in Hong Kong, has launched its 3G services since January 2004
and has offered very substantial handset subsidies and attractive service tariff
plans to attract new customers and to migrate existing 2G customers to 3G
customers. The other two 3G licensees, Smartone and CSL, launched their 3G
services in December 2004. We launched our initial 3G service in June 2005. We
face severe market competition in the 3G marketplace, and we expect that
competition will continue to be intense as a result of the possible entry of new
competitors, consolidation of market leaders and the rapid development of new
technologies, products and services. Our ability to compete successfully will
depend on our ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced, changes
in consumer preferences, economic conditions and discount pricing strategies by
competitors. Future business combinations and alliances in the
telecommunications industry may create significant new competitors and could
harm our business and results of operations.Health risk concerns about mobile phones could adversely affect our business.Allegations that serious health
risks have resulted from the use of mobile phones have adversely affected share
prices of certain mobile communications companies in the United States in the
past. The actual or perceived risk of using mobile phones or any related
litigation could adversely affect us through reduced subscriber growth or a
reduction in the number of subscribers or usage per subscriber. In addition, we
could be subject to liability or incur significant costs defending lawsuits
brought by our subscribers or other parties who claim to have been harmed by or
as a result of our services.Data security concerns could limit our ability to generate revenues from our
wireless data businesses and subject us to legal liability.Our infrastructure is potentially
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by our subscribers. Computer viruses, break-ins or other problems could lead to
the following problems:
interruption, delay or cessation in service to our customers;
  compromised security of confidential information of our customers; and
  costly litigation.It is critical that our wireless
data services maintain secure, high quality data transmission with minimal
service disruptions or interference. Failure to maintain a consistent level of
secure, high quality service could harm our reputation and have a material
adverse effect on our ability to realize revenue from our wireless data
businesses and in turn adversely affect our operating results, financial
condition, business and prospects.
Until more comprehensive security
technologies are developed, the security and privacy concerns of existing and
potential customers may inhibit the growth of such businesses in general and our
subscriber base and revenues from wireless data services in particular. We also
may be required to spend substantial resources or discontinue certain services
or content offerings, which could adversely affect our operating results,
financial condition, business or prospects.
12
Exposure to such security concerns
is heightened as Hong Kong and PRC law relating to liability under such
circumstances is relatively new and untested. In addition, we do not carry
"errors and omissions" or other insurance covering losses or liability caused by
computer viruses or security breaches, which under certain circumstances could
mitigate damages that we may suffer. If we incur any such losses or liability,
our operating results, financial condition, business and prospects also may be
adversely affected.We may be held liable for information retrieved from or sent through our
internet web site.Because our mobile communications
and data services can be used to download and distribute information to others,
there is a risk that we may face claims for defamation, negligence, copyright or
trademark infringement or other claims based on the nature and content of such
material. Our insurance may not cover potential claims of this type, or may not
be adequate to indemnify us for all liability that may be imposed. Any
imposition of liability that is not covered by our insurance or is in excess of
our insurance coverage could have a material adverse effect on our business,
results of operations and financial condition.Regulatory, Economic and Political RisksWe are in a highly regulated business and we require licenses from the HKTA,
without which we would be unable to operate.We are subject to the rules and
regulations of the HKTA, which regulates the telecommunications industry in Hong
Kong and the Office of Telecommunications Authority, or OFTA, which assists the
HKTA in enforcing and administering the Telecommunications Ordinance. The HKTA's
authority includes regulating and licensing telecommunications facilities and
managing the radio frequency spectrum. If the HKTA determines that we have
violated Hong Kong's telecommunications laws or regulations or the conditions of
our licenses, the HKTA has the power to suspend or cancel our licenses or take
other action against us. We are also subject to various other rules, laws and
ordinances applicable to companies operating in Hong Kong, including, for
example, laws relating to obscenity and privacy. If we are found to be in
violation of these laws, we may face judgments or penalties. In addition, our
licenses have fixed duration, and we may not be granted renewals. The Chief
Executive in Executive Council may also cancel or suspend licenses if he
considers it in the public interest to do so. Furthermore, if the HKTA changes
its existing telecommunications regulations or policies such as those governing
interconnection or competition, our results of operations, our financial
condition, business and prospects could be adversely affected.
If we are found to be in violation
of our license conditions or any applicable laws or regulations enacted in the
future, our business may be severely affected. See "Item 4. Information on the
Company  Business Overview  Regulation."There may be political risks associated with doing business in Hong Kong.Our primary facilities and
operations are located in Hong Kong. Hong Kong is a Special Administrative
Region of the PRC with independent executive, judicial and legislative branches
of government. While Hong Kong should enjoy a high degree of autonomy from the
PRC under the principle of "one country, two systems," the erosion in Hong
Kong's autonomy and developments in the PRC have in the past adversely affected
and may in the future adversely affect the political and economic environment in
Hong Kong.The state of Hong Kong's economy may affect our performance and financial
condition.We generate substantially all of
our revenue from operations in Hong Kong. Our future performance will depend in
large part on Hong Kong's future economic growth. Adverse developments in Hong
Kong's economy or in political or social conditions in Hong Kong may have an
adverse effect on our number of subscribers, usage per subscriber and results of
operations. In addition, a deterioration of economic, political or social
conditions in Hong Kong could have an adverse effect on the prices of our
ordinary shares and the ADSs. The Hong Kong economy has experienced considerable
volatility since the second half of 1997.
The economy of Hong Kong is
significantly affected by developments in the PRC and elsewhere in the
Asia-Pacific region and the United States. The PRC economy may experience
adverse economic developments and other regional or local economies may
deteriorate further and this would have an adverse impact on Hong Kong's
economy.
In addition, as the economy in
Hong Kong continues to evolve, the Hong Kong government may increase the
currently prevailing tax rates or the types of taxes imposed or change the tax
structure. If any of these occur, they may adversely affect our sales and
revenue, as well as our results of operations, business and prospects, including
our ability to operate profitably.
13Fluctuations in currency exchange rates could increase our costs relative to
revenues.Substantially all of our operating
revenues, expenses and liabilities are denominated in Hong Kong dollars.
However, we may also incur significant expenses and liabilities in U.S. dollars,
mainly in connection with financing our capital expenditure and purchases of
mobile phones. As a result, we could be exposed to adverse effects of exchange
rate fluctuations, particularly against the U.S. dollar. Significant
fluctuations in the U.S. dollar to Hong Kong dollar exchange rate would likely
have an adverse effect on our operating results and financial condition.
The Basic Law of Hong Kong
provides that the Hong Kong dollar is to remain the legal tender in Hong Kong
after July 1, 1997. The Basic Law also provides that no foreign exchange control
policies will be applied in Hong Kong and that the Hong Kong dollar is to be
freely convertible. During the Asian regional economic crisis in 1998, however,
the Hong Kong government intervened on several occasions in the foreign exchange
market by purchasing Hong Kong dollars and selling U.S. dollars to support the
value of the Hong Kong dollar.
While the Hong Kong government has
continued to support a pegged value which was historically at approximately
HK$7.80 = US$1.00 and was recently revised to a trading band of HK$7.75 to
HK$7.85 = US$1.00. We cannot assure you that these policies will not
change. As of December 31, 2004, the exchange rate between Hong Kong dollars and Renminbi was approximately HK$1 = RMB1.06. 
While the PRC government has not appreciated the Renminbi, or the RMB, since
January 1, 1994, we cannot assure that these policies will not change. 
Appreciation of the Renminbi will increase our cost of operating our subsidiary
in Shenzhen, China.The unpredictability of our periodic results may adversely affect the trading
price of our securities.Our revenues and operating results
may vary significantly from period to period due to a number of factors, some of
which are outside of our control. Some of these factors include:
fluctuation in demand for our services;
  introduction of new technologies and services by our competitors;
  changes in our pricing policies, particularly in response to aggressive
  pricing by our competitors;
  our ability to introduce, develop and deliver our products and services
  that meet customer requirements in a timely manner; abnormally high marketing
  expenses associated with new services; and
  general economic conditions in Hong Kong and elsewhere in Asia.Due to the foregoing factors, we
believe that period-to-period comparisons of our operating results are not a
good indication of our future performance and should not be relied upon. It is
possible that our operating results in some periods will be below the
expectations of public market analysts and investors. In this event, the prices
of our ordinary shares and ADSs may decline, perhaps significantly more in
percentage terms than the decline in operating results.
14
Risks Relating to the Ordinary Shares and the ADSsOur Ordinary Shares and ADSs may be withdrawn from the Hong Kong Stock
Exchange and deregistered from Nasdaq.As a result of the acquisition by PCCW of a controlling stake in us, PCCW is
required to make a mandatory cash tender offer for our shares.
In the event that PCCW
  is unable to purchase all our issued shares and our shares as held by the
  public represent less than 25% of our issued shares, trading in our shares may
  be suspended until a sufficient level of public float is attained, and if you
  are still a shareholder, you will lose liquidity in your shares.
  If PCCW is able to acquire more than 90% of our outstanding disinterested
  shares, PCCW intends to avail itself of the compulsory purchase provisions of
  the Companies Law (2004 Revision) of the Cayman Islands, which would permit
  PCCW to compulsorily acquire the balance of our shares. In such event, and
  subject to the applicable provisions of the Hong Kong Takeovers Code and the
  Listing Rules, our shares will be withdrawn from the Hong Kong Stock Exchange
  and Nasdaq.
  If PCCW is unable to acquire more than 90% of our outstanding shares, PCCW
  may either seek a withdrawal of listing of our shares from the Hong Kong Stock
  Exchange, or take such steps as necessary to ensure, or procure that we
  maintain an adequate public float so as to comply with the applicable
  requirements of the Listing Rules. Any withdrawal of listing of our shares
  from the Hong Kong Stock Exchange as contemplated in this paragraph will
  require a resolution passed by a majority of at least 75% of the votes cast at
  a shareholders' meeting of our independent shareholders (being shareholders
  other than any controlling shareholder, director or chief executive of SUNDAY)
  and not voted against by more than 10% of the votes cast at such meeting. As
  of June 22, 2005, PCCW has not made a determination whether to maintain the
  listing of SUNDAY on the Hong Kong Stock Exchange or to privatize SUNDAY in
  such event.

If PCCW is unable to acquire all
of our shares, our remaining shareholders may experience a significant decrease
in the liquidity of our shares. We cannot assure you that PCCW will not take
steps to deregister our ADSs from Nasdaq, irrespective of the outcome of the
tender offer.
Like other companies in the telecommunications industries, our stock price
may be volatile.
The price of our ordinary shares
or ADSs may fluctuate as a result of variations in our operating results. If the
trading volume of our ordinary shares or the ADSs is low, the price fluctuations
may be exacerbated. Since our viability is intricately linked with technology
and our businesses are to a great extent driven by technology, the price of our
ordinary shares or ADSs may rise and fall in tandem with announcements of
technological or competitive developments, acquisitions or strategic alliances
by us, our competitors or our suppliers. The prices of our ordinary shares or
ADSs, as are typical of those of companies in the high technology and
telecommunications sectors, are also prone to news regarding the gain or loss of
a significant customer, key personnel or sales orders as well as changes in
securities analysts' estimates of our financial results or recommendations.
The sale or the possible sale of a substantial number of our ordinary shares
or ADSs in the public market could adversely affect the prices of our ordinary
shares and ADSs.
Currently, we have 2,990 million
ordinary shares outstanding (including those represented by ADSs). A substantial
amount of our ordinary shares are held by shareholders who may be considered to
be our affiliates pursuant to Rule 144 of the U.S. Securities Act of 1933, as
amended, or the Securities Act. The ordinary shares held by the shareholders
other than by the affiliates are freely tradable. The ordinary shares held by
our controlling shareholders may also be sold in the United States subject to
the restrictions of Rule 144 under the Securities Act or outside the United
States. If any shareholder sells or is perceived as intending to sell a
substantial amount of their ordinary shares, the market prices for our ordinary
shares and ADSs could be adversely affected.
15
All of our shareholders may sell
their ordinary shares on The Stock Exchange of Hong Kong Limited, or the Stock
Exchange of Hong Kong, without restriction.
We do not have any intention of paying dividends on the ordinary shares for
the foreseeable future.
Our loan agreements have covenants
that restrict the ability of Mandarin to pay dividends or make other
distributions, which may in turn restrict our ability to pay dividends or make
other distributions. In any event, we do not anticipate paying any cash
dividends in the near future.
Item 4. INFORMATION ON THE COMPANY
4.A HISTORY AND DEVELOPMENT
SUNDAY Communications Limited was
incorporated in the Cayman Islands on November 24, 1999 as a company with
limited liability under the Companies Laws (Revised) of the Cayman Islands. Our
principal executive office is located at 13/F Warwick House, TaiKoo Place, 979
King's Road, Quarry Bay, Special Administrative Region of Hong Kong, the PRC.
Pursuant to a group
reorganization, or the Reorganization, completed on February 24, 2000 to
rationalize the group structure in preparation for the dual listing of SUNDAY's
ordinary shares on the Stock Exchange of Hong Kong and The Nasdaq National
Market, SUNDAY became the holding company of the SUNDAY group.
On March 15, 2000, we successfully
completed a global offering of our shares, raising net proceeds of approximately
HK$2.1 billion, which were net of related expenses and the conversion of the
convertible notes. Our ADSs and ordinary shares were listed on The Nasdaq
National Market, or Nasdaq, in the U.S. on March 15, 2000, and the Stock
Exchange of Hong Kong on March 16, 2000, respectively.
Mandarin Communications Limited,
or Mandarin, was incorporated in Hong Kong as a company with limited liability
in November 1994. Mandarin holds a public radiocommunication service license for
personal communications service, or PCS, and is engaged in the provision of
wireless communications, data services and the sales of mobile phones and
accessories in Hong Kong. Mandarin is the main operating entity in the group.
Mandarin is wholly owned by SUNDAY
Holdings (Hong Kong) Corporation which itself is a wholly-owned subsidiary of
SUNDAY. SUNDAY Holdings (Hong Kong) was incorporated in the British Virgin
Islands in August 1997 and was formerly known as SUNDAY Holdings Corporation.
SUNDAY 3G (Hong Kong) Limited, or
SUNDAY 3G, is wholly owned by Mandarin and was incorporated in Hong Kong on July
16, 1997. SUNDAY 3G holds a 3G license in Hong Kong, which was issued by the
HKTA on October 22, 2001. SUNDAY 3G was formerly known as SUNDAY
Telecommunications (Hong Kong) Limited.
SUNDAY Investment Limited is a
wholly-owned subsidiary of Mandarin, which was incorporated as a limited
liability company in the Cayman Islands in November 1999 for the sole purpose of
the issuance of convertible notes of HK$700 million in December 1999. It became
a dormant company after all convertible notes had been either converted into our
ordinary shares upon the completion of the global offering or repaid in cash in
March 2000.
SUNDAY Communications Services
(Shenzhen) Limited, or SUNDAY Shenzhen, is wholly-owned by SUNDAY Holdings
(China) Corporation which itself is a wholly-owned subsidiary of SUNDAY
incorporated in the British Virgin Islands. SUNDAY Shenzhen was established in
Shenzhen, China in December 2001 for providing various support services to
SUNDAY group companies.
We are a developer and provider of
wireless communications and data services in Hong Kong. We were granted a
license in July 1996 to construct and operate a digital PCS network, and began
commercial operations in September 1997 when we introduced our GSM 1800 mobile
telephone services. We offer our services under the brand name "SUNDAY", a
highly recognized brand name in Hong Kong. Since early 2000, we have started
launching various wireless data services through which our subscribers could
enjoy ringtone or logo downloads, quiz games, message dedication or participate
in mobile community chat by the use of short messaging services or media
messaging services. We were also granted a mobile carrier license in Hong Kong
in October 2001 to construct and operate a 3G network. On June 12, 2005, we
launched our 3G data card service.
16
Acquisition by PCCWOn June 13, 2005, our former
shareholder, Distacom Communications Limited, or Distacom, and their wholly
owned subsidiary, Distacom Hong Kong Limited, or Distacom HK, entered into a
sale and purchase agreement with PCCW Limited, or PCCW, or the First Agreement,
whereby PCCW agreed to purchase (or procure the purchase by one of its
wholly-owned subsidiaries) and Distacom HK agreed to sell an aggregate of
1,380,000,000 shares in SUNDAY, representing approximately 46.15% of our issued
share capital, for the consideration of HK$897,000,000 in cash, being a price of
HK$0.65 per share. On the same date, our former shareholder, USI Holdings
Limited, or USI, and their wholly owned subsidiary, Townhill Enterprises
Limited, or Townhill, entered into a separate sale and purchase agreement with
PCCW, or the Second Agreement, whereby PCCW agreed to purchase (or procure the
purchase by one of its wholly-owned subsidiaries) and Townhill agreed to sell an
aggregate of 410,134,000 shares, representing approximately 13.72% of our issued
share capital, for the consideration of HK$266,587,100 in cash, being a price of
HK$0.65 per share. Completion of the First and Second Agreement took place
simultaneously on June 22, 2005.
As a result, as of June 22, 2005,
PCCW is interested in an aggregate of 1,790,134,000 shares, representing
approximately 59.87%. of our existing issued share capital. Under the Hong Kong
Takeovers Code, PCCW is required to make a mandatory cash tender offer for all
of our shares not already owned. Accordingly
PCCW has indicated that it will make a mandatory cash tender offer for all of
our issued shares with an offer price of HK$0.65 per share, which is the same as
the price paid by PCCW to Distacom HK and Townhill for each share  purchased under the First Agreement and the Second Agreement.
If, pursuant to PCCW's tender
offer for our shares, the shares that are not purchased by PCCW and remain as
held by the public should represent less than 25% of our issued shares, trading
in our shares on the Hong Kong Stock Exchange may be suspended until a
sufficient level of public float is attained. In the event that PCCW is able to
acquire more than 90% of our outstanding disinterested shares, PCCW has
indicated that it intends to avail itself of the compulsory purchase provisions
of the Companies Law (2004 Revision) of the Cayman Islands, which would permit
PCCW to compulsorily acquire the balance of our shares. In such event, and
subject to the applicable provisions of the Hong Kong Takeovers Code and the
Listing Rules, our shares will be withdrawn from the
Hong Kong Stock Exchange and will be delisted from Nasdaq and will be
deregistered under the Securities Exchange Act of 1934, as amended. If PCCW is
unable to acquire more than 90% of our outstanding disinterested shares, PCCW
has indicated that it may either seek a withdrawal of listing of our shares from
the Hong Kong Stock Exchange, or take such steps as necessary to ensure or
procure that we maintain an adequate public float so as to comply with the
applicable requirements of the Listing Rules. Any
withdrawal of listing of our shares from the Hong Kong Stock Exchange as
contemplated in this paragraph will require a resolution passed by a majority of
at least 75% of the votes cast at a shareholders' meeting of our independent
shareholders (being shareholders other than any controlling shareholder,
director or chief executive of SUNDAY) and not voted against by more than 10% of
the votes cast at such meeting. As of June 22, 2005, PCCW has not made a
determination whether to maintain the listing of SUNDAY on the Hong Kong Stock
Exchange or to privatize SUNDAY in such event.
PCCW has indicated that it intends
that the SUNDAY group will continue with its existing core business of
development and provision of wireless communications and data services in Hong
Kong.
On June 14, 2005, Huawei further
increased its interest from 212,488,000 shares, or approximately 8.0% to
296,416,000 shares or approximately 9.91% of our total shares in issue.
With effect from on or about July
8, 2005, new directors will be appointed to the SUNDAY board. In addition,
pursuant to the First Agreement and Second Agreement, with effect from on or
about July 29, 2005, certain of our existing directors and other individuals
related to Distacom and USI will resign as directors of SUNDAY and other
subsidiaries of SUNDAY on which they currently serve as directors.
PCCW
PCCW is a major
telecommunications service provider in Hong Kong and is one of Asia's leading
integrated communications companies. It is incorporated in Hong Kong and through
its group companies, provides local and international telecommunications
services, internet and interactive multimedia services, the sale and rental of
telecommunications equipment and the provision of computer, engineering and
other technical services, mainly in Hong Kong; investment in, and development
of, systems integration and technology-related businesses; and investment in,
and development of, infrastructure and properties in Hong Kong and elsewhere in
the People's Republic of China.
17
Procedures for Mandatory Cash Tender OfferOn or about July 8, 2005, PCCW
will, through Citigroup Global Markets Asia Limited, make a mandatory
unconditional cash
tender offer to acquire all our issued shares not already owned by or agreed to
be acquired by PCCW on the following basis. PCCW will also make an appropriate
offer or proposal to the holders of our outstanding share options. PCCW will,
together with us, prepare a composite offer document setting out,
inter alia, the terms and
conditions of the offer and the form of acceptance and transfer of the shares.
Such offer document will be sent to our shareholders on or about July 8, 2005.
The offer price to our
shareholders will be the same as the price payable by PCCW for each share
purchased under the First Agreement and the Second Agreement. The offer price
represents:-
(a)a premium of approximately 22.64% to the closing price of HK$0.53 per
  share as quoted on the Hong Kong Stock Exchange on June 10, 2005;
  (b)a premium of approximately 29.61% to the average closing price of
  HK$0.5015 per share for the ten trading days up to and including June 10,
  2005;
  (c)a premium of approximately 35.84% to the average closing price of
  HK$0.4785 per share for the last 30 trading days up to and including June 10,
  2005;
  (d)a premium of approximately 176.24% to the audited consolidated net
  asset value as of December 31, 2004 of SUNDAY of approximately HK$0.2353 per
  share as stated in the annual report of SUNDAY.
As at June 13, 2005,
there were 2,990,000,000 shares in issue. On the basis of the offer price of
HK$0.65 per share, the entire issued share capital of SUNDAY is valued at
approximately HK$1,943.5 million. On the basis of the 1,199,866,000 shares which
are subject to the offer and the offer price of HK$0.65 per share, in the event
that the offer is accepted in full, the aggregate amount payable by PCCW will be
approximately HK$779.9 million.
Shareholding Structure of SUNDAY before and after Completion
of the First Agreement and Second Agreement
Issued shares
    immediately
    Issued shares
    immediatelyIssued shares
    at June 22, 2005
    following
    completion of the
    following
    completion of theFirst Agreement
    Second Agreement(No. of shares)
    %
    (No. of shares)
    %
    (No. of shares)
    %Distacom HK
    1,380,000,000
    46.15
    -
    -
    -
    -Townhill
    410,134,000
    13.72
    410,134,000
    13.72
    -
    -Huawei Tech
    Investment Co., Limited
    296,416,000
    9.91
    296,416,000
    9.91
    296,416,000
    9.91PCCW
    -
    -
    1,380,000,000
    46.15
    1,790,134,000
    59.87Public
    903,450,000
    30.22
    903,450,000
    30.22
    903,450,000
    30.22Total
    2,990,000,000
    100
    2,990,000,000
    100
    2,990,000,000
    100Regulatory oversight by the Hong Kong Telecommunications Authority
Under Section 7P of the Hong Kong
Telecommunications Ordinance, or the Ordinance, the Hong Kong Telecommunications
Authority, or the HKTA, has jurisdiction over certain mergers and acquisitions
involving telecommunications carrier license and proposed shareholder changes in
relation to such licenses. Where the HKTA can demonstrate on the balance of
probabilities that a particular transaction has or is likely to have the effect
of substantially lessening competition in a telecommunications market, the HKTA
may refuse to give consent or otherwise give consent subject to conditions.
Prior to the acquisition by PCCW,
the HKTA provided a "no-objection letter" stating that it did not consider
likely that the acquisition of our shares from Distacom HK and Townhill by PCCW
would result in a significant lessening of competition in any relevant market
for telecommunication services, and that it did not intend to object to the
acquisition of shares from Distacom HK and Townhill or launch a formal
investigation. However, there remains a legal possibility under the terms of the
Ordinance that if it were to consider that the acquisition has, or is likely to
have, the effect of substantially lessening competition in the
telecommunications market, the HKTA is empowered under the terms of the
Ordinance to direct us to take such action as the HKTA considers necessary to
eliminate or avoid the effect of any substantial lessening of competition in the
telecommunications market resulting from the acquisition. The HKTA retains such
right for two weeks following the completion of the First and Second Agreement.
If the HKTA were to determine that the acquisition has, or is likely to have,
the effect of substantially lessening competitive, this could result in a delay
to the offer timetable.
18
Business DevelopmentThe wireless communications market
in Hong Kong remained highly competitive during 2004, with operators offering
extensive handset subsidies and discounted tariffs to attract consumers.
Recognizing the short-sightedness of competing aggressively on price for
customers in the mass market, we concentrated on preparing for the launch of our
3G services and the consequent migration of our subscriber base to our 3G
services.
We continue to make the provision
of high quality service our priority. We continued to upgrade our existing 2.5G
network in 2004 to improve the network coverage. We also continued with our
monthly surveys of quality of our service, using professional market research
firms. The data and analysis collected from such surveys was analyzed to
identify ways to improve our network quality and customer service. As a result,
in 2004, we garnered a number of customer service awards from a variety of
organizations. These included the "Best-in-Class" award from the Asia Pacific
Customer Service Consortium and a total of ten group and individual awards from
Hong Kong's Call Centre Association.
In developing our marketing
strategy, recognizing the potential of 3G technology, we moved away from the
commoditized product offerings applicable to the 2G voice market, towards more
targeted and content based services. Hence our operations are organized around
customer segments which centre on demographic attributes, such as age, ethnicity
and lifestyle as well as customer behavior patterns. We introduced a broad range
of new wireless data applications and services based on the general packet radio
service, or GPRS, technology in the fourth quarter of 2002. In 2003, we expanded
our proprietary "Location Based Services," or LBS. In the corporate segment, we
made good progress as the market leader in enterprise LBS applications for
logistics and field service dispatch. In the mass market, we launched "Family
Watch" and "SARS updates," applications which attracted considerable attention.
In the youth segment, we launched interactive LBS games. We also launched other
innovative services such as wireless LAN roaming services for business
customers, which allows customers to access the internet via GPRS or wireless
LAN. In May 2004, we introduced the "BOBO" mobile lifestyle service which is
designed specifically to appeal to the "urban elites" in Hong Kong.
The success of the strategy was
demonstrated in 2004 by a 32% increase in data services revenue, which accounted
for 8% of our mobile service revenues, and reduced churn. We also believe that
the introduction of these wireless data services is an important precursor to
our 3G services, as such services prepare the consumer market for the
specialized multimedia mobile services products to be delivered through 3G, thus
facilitating acceptance by consumers of our 3G product offerings.
We also have a highly efficient
operation. The measures we have taken over the past three years, notably the
establishment of SUNDAY Shenzhen, our service centre in Shenzhen, mainland
China, in 2002, continues to enable us to improve our efficiency each year, as
outlined in "Item 5. Operating and Financial Review and Prospects - Operating
Results - Results of Operations."
We have moved quickly to
capitalize on the rapid changes in the industry that have seen powerful new
entrants emerge in recent years. In May 2004, we entered into the Supply
Contract for the supply and installation of a mobile communications network and
associated services, and the
Facility Agreement with HTIC, a
subsidiary  of Huawei, to provide us with a
turnkey solution for our 3G business and the required financing. We entered into
a supplemental agreement to the Supply Contract, or the Supplemental Supply
Agreement, and the Amendment and Restatement Agreement in November 2004 to increase the
equipment supply value and the related credit facility for such supply from
HK$859 million to HK$1,208 million to further expand and improve our 3G network
coverage. Huawei is one of the leading telecommunications equipment
manufacturers, and is based in Shenzhen, China. Our partnership with Huawei has
given us strengths in areas that will be critical to our success in the 3G
arena, such as access to an IP core network platform, 3G service creation as
well as an end-to-end solution. The proximity of Huawei's base in Shenzhen to
Hong Kong gives us a significant advantage over our competitors in developing
tailor-made services and launching them quickly.
As a group operating in Hong Kong,
we believe SUNDAY will be in an advantageous position to exploit opportunities
in the China market, which is steadily liberalizing following the country's
accession to the World Trade Organization. We may also benefit from the
increasingly close economic links between Hong Kong and mainland China. For
example, the PRC government and the Hong Kong government have concluded a Closer
Economic Partnership Arrangement, or CEPA, in June 2003 with the aim of
fostering increased economic links between the two regions.
19
Capital ExpenditureOur digital GSM 1800 mobile
network is complete and is GPRS-enabled. While we will continue to allocate
capital expenditures to further develop and maintain our existing mobile
network, we expect total capital expenditure for such traditional mobile network
purposes to decline relative to the total amounts spent since our inception. We
incurred capital expenditure of approximately HK$339 million in 2000, HK$119
million in 2001, HK$168 million in 2002 and HK$122 million in 2003. Such capital
expenditure was mainly funded by cash flows generated from operating activities
and proceeds from the global offering in 2000.
Following the investments already
made to expand coverage and provide capacity for GPRS services, the increase in
capital expenditure incurred in 2004, which amounted to HK$356 million, mainly
related to the commencement of the 3G network rollout. Under the Supply
Contract, the 3G network was to be supplied and installed over a maximum period
of three years.
Such capital expenditure for the
3G network and services will be mainly funded by cash flows generated from
operating activities and the loan facilities provided by HTIC pursuant to the
Facility Agreement and the Amendment and Restatement Agreement. See "Item 5.
Operating and Financial Review and Prospects - Liquidity and Capital Resources -
Certain Indebtedness - Loan Facilities" for details.
We expect that capital expenditure
in 2005 will increase further as our 3G network will be substantially completed
in 2005. It is expected that the total capital expenditure for the construction
of the 3G network over the three-year period up to 2006 will amount to HK$1.2
billion.
4.B BUSINESS OVERVIEW
We operate mainly in the mobile
communications business (including the sales of mobile phones and wireless data
services) in Hong Kong.
Mobile Communications Business
We are a wireless service provider
in Hong Kong, having commenced commercial operations in mobile communications in
September 1997. We operate a GSM 1800 network which is also GPRS ready, and
offer a broad range of wireless communications and data services targeted to
specific market segments in Hong Kong. We have established a strong and unique
identity for our "SUNDAY" brand and received numerous awards for our marketing
and advertising efforts.
Subscribers
For the years
ended December 31, 2002, 2003 and 2004, our total subscribers grew at rates of
9%, 9% and 4%, respectively. Our subscriber growth has significantly slowed
since 2002 because the mobile communications market in Hong Kong during the past
two years has shifted from a high-growth mass market to one characterized by
saturation of penetration.
The following table sets out
selected information regarding our mobile subscriber base for the years ended
December 31, 2002, 2003 and 2004:
Year Ended December 31,2002
    2003
    2004Average monthly
    churn rate(%)(1)
    5.4%
    5.0%
    3.9%Total number of
    prepaid and post-paid subscribers
    603,000
    660,000
    684,000Year on year
    subscriber growth rate (%)
    9%
    9%
    4%Total number of
    mobile subscribers in Hong Kong(2)
    5,714,000
    6,532,000
    7,229,000Market
    share(%)(3)
    10.6%
    10.1%
    9.5%Hong Kong market
    penetration(%)(4)
    84.2%
    95.9%
    105%Average monthly
    ARPU (HK$)(5)
    209
    201
    180____________
20
(1) The monthly churn rate is
  calculated by expressing the net number of post-paid subscriber deactivations
  or disconnections for the month as a percentage of the number of post-paid
  subscribers at the beginning of such month. The average monthly churn rate is
  the sum of the monthly churn rates in the period divided by the number of
  months in the period.
  (2) Source: OFTA.
  (3) Total number of our mobile subscribers divided
  by the total number of mobile subscribers in Hong Kong.
  (4) Total number of mobile subscribers in Hong
  Kong divided by the estimated population of Hong Kong.
  (5) Monthly average revenue per user, or ARPU, or
  the monthly average revenue from mobile services per post-paid subscriber, is
  computed by dividing total revenue from mobile services for the month
  (including airtime revenue, value-added and enhanced services revenue, revenue
  from airtime for roaming and international long distance calls that terminate
  at our subscribers' mobile phone numbers, as well as from airtime revenue
  arising from foreign subscribers roaming on our mobile network, but excluding
  subscription fees paid in advance, deposit payments and revenue from sales of
  mobile phones and accessories and prepaid SIM cards) by the daily weighted
  average number of mobile services post-paid subscribers for the month. Average
  monthly ARPU is the sum of ARPU for each month in the period divided by the
  number of months in the period.
Services and Products
We offer our mobile subscribers
basic airtime services, value-added services, enhanced services, short messaging
services, wireless data services, roaming services and international long
distance calling services. We also sell mobile phones and accessories.
Basic Services
Our basic services include
connecting a subscriber's mobile phone to our network and providing airtime for
incoming and outgoing voice and data transmissions whenever the subscriber makes
or receives a call on the mobile phone. We charge customers for these basic
services and other services through our tariff plans and prepaid cards.
Tariff Plans
We bill our
subscribers on a monthly basis for the basic fee in advance and for any
additional airtime used in arrears. Subscribers pay for both incoming and
outgoing calls. We provide a number of tariff plans based on usage, which
provides our subscribers with a greater variety of choices to find one tailored
to their needs.
Since February 2001, we have
charged each post-paid subscriber a monthly fee of HK$10 to cover part of the
MTR/tunnels/mobile service license fees payable to the relevant third parties.
We launch promotional plans to new
subscribers at our retail shops and dealers from time to time to keep our rates
competitive and attractive. We also offer promotional plans to some of our
existing customers. Such promotional plans may offer additional airtime, free
value-added services for a specified period and/or waiver of certain charges. We
expect that we may adjust our tariffs more frequently and continue to launch
promotional plans from time to time based on market conditions and other
factors.
As of December 31, 2004, the basic
tariff plans offered to new subscribers (excluding the $10 monthly fee for MTR/tunnels/
mobile service license fees) are set out below:
Free AirtimePlan
    Normal Airtime
    Intra-network Airtime(minutes)
    (minutes)HK$50
    300
    -HK$68
    500
    -HK$88
    800 *
    200HK$108
    900 *
    800HK$138
    1,100 *
    1,000HK$188
    1,700 *
    1,100HK$258
    2,600 *
    1,100HK$388
    3,600 *
    1,300HK$488
    4,700 *
    1,700* extra 300 minutes of normal airtime for the first 12 months
21
Prepaid CardsIn April 2000, we launched
rechargeable prepaid SUNDAY SIM cards so that users are able to access our
wireless services, including international long distance calling services,
through any mobile phone. A SIM card, or subscriber identity module card, is a
smart card that carries subscriber identity and authentication information and
is used by inserting it into a mobile phone. Users are able to purchase prepaid
SUNDAY SIM cards and refill cards as and when they require them at our retail
shops and participating supermarkets and convenience stores.
Value-added Services
In addition to the
basic airtime tariff plans, subscribers may pay an additional monthly fee to
subscribe to certain value-added services, including voicemail, call forwarding,
call waiting, call holding, caller ID, call barring, conference calls, and
secretarial services. Certain value-added services may be free to new
subscribers during the first 12 months.
Roaming and International Long Distance Calling Services
We were the first GSM 1800
operator in Hong Kong to provide roaming facilities in China. We offer roaming
on over 180 networks in more than 130 countries and territories. Our roaming
services are automatic in all these regions except for Japan and South Korea. We
rent mobile phones to our subscribers for use in Japan and South Korea. We sell
tri-band mobile phones that provide automatic GSM 1900 roaming in Canada and the
United States in addition to GSM 900 and 1800 access. We may require a
refundable deposit for mobile international long distance calling services and
for roaming capabilities for China.
Wireless Data Services

With the advent of new
technologies, we believe that demand for wireless data services will continue to
grow as data transmission speed and ease of use improve. We have seen an
increase in both the awareness and the usage of data services since the launch
of inter-operator SMS among the wireless operators in Hong Kong in December
2001.

We launched a series of new
wireless data applications and services based on the GPRS technology, commonly
known as 2.5G technology, in the fourth quarter of 2002:

- My Albumis a one-stop shop for personalized MMS photos, with music, voice and text to
  MMS-enabled mobile phones, as well as e-mail and with made-to-order printouts
  available at over 450 Hong Kong locations.
- Location Based Services, or
  LBS,enable
  corporate customers to monitor effectively their fleets of vehicles, field
  staff or valuable parcels on a real time basis.
- SUNDAY Look!Hear!features MMS entertainment through popular content downloads of celebrity
  photos, cartoon and comic characters and e-cards.
- SUNDAY Gamesbring a real life "game store" experience to mobile phones through new
  collections of Java games.
- Handy Workstationis a complete mobile e-mail and personal information management solution
  enabling mobile users to access corporate e-mail accounts and up to 10
  POP3/IMAP4 internet e-mail accounts.
- ICQ for SMSallows users to stay in touch with ICQ friends 24 hours a day through the
  mobile phone with a short messaging function.
- MSN Mobile Messengerallows users to send, receive and reply to instant messages from their online
  contacts who are using MSN Messenger on a computer or a mobile phone.

To support our segmentation
strategy, we expanded the application of our propriety LBS. We made good
progress in the corporate segment as a market leader in enterprise LBS
applications for logistics and field services management. In the mass market, we
launched the "Family Watch" service that allows family users to locate each
other. We are also the first operator in Hong Kong to offer an unlimited GPRS
package and wireless LAN roaming services. Revenue of wireless data services
grew by 32% during 2004 and accounted for 8% of our mobile service revenues.

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We believe that
introducing a broad range of wireless data services is an important development
in providing specialized products and services to individual consumer segments,
and is a vital step in ensuring a successful launch of 3G services. We believe
that the data services we have introduced to date are an important precursor to
our 3G services, since 3G technology is expected to move more consumers away
from the mass market of mobile voice communications towards more tailored
multi-media mobile services.

We believe that our fundamentals
are in place for the launch of our 3G services, such as our strategy on timing,
technology and service delivery, which we believe will give us a competitive
advantage in the 3G marketplace. We believe that our decision to delay the
launch of our 3G services has proven to be prudent. While 3G technology remains
available, it has predictably been undermined by teething problems in the 3G
networks and in particular by a lack of good mobile phones. The situation is now
improving and by the second half of 2005, more advanced mobile phones will be
available to all 3G operators from a wide variety of manufacturers. Although
other 3G license holders have already launched their services in Hong Kong, our
decision to launch in 2005 will coincide with the availability of more advanced
mobile phones which we believe will be popular with customers because of their
improved functionality and cost.

On June 12, 2005 we launched our
first 3G service, a data card service which was the first in Hong Kong that can
provide symmetrical speeds of 384 kbs for both uplink and downlink transmission.

Services Offered Through Our Web Site

Since 2000, we
have provided services through the internet under the brand name "sunday.com" as
an extension of our strategy to serve consumers' lifestyle needs through
innovative commercial applications of wireless communications technology and to
capitalize on the convergence of mobile communications and data technologies.

In 2001, we launched the "SUNDAY
eShop" on our web site, through which customers could subscribe our mobile
services and/or purchase mobile phones or prepaid SIM cards online by credit
card payments. We also revised our web site and introduced a number of new
services for our subscribers to subscribe online. We have partnered with a
number of content providers to allow our subscribers to download various
ringtones, logos or games to their mobile phones or other mobile devices (such
as PDAs). We also launched a range of short messaging services that offer our
subscribers the latest news and information, such as weather and news, share
prices, flight schedules, horse racing, new movies and music releases. Each of
our subscribers can access his or her service subscription profile and make
changes at any time through the internet.

In anticipation of our launch of
3G services in 2005, we revamped our web site to improve its usability and
presentation. The new web site was launched in June 2005.

Sales of Mobile Phones

Through our direct sales force,
our retail shops and our independent dealers, we sell mobile phones equipped
with a SUNDAY GSM 1800 SIM card, a smart card with personalized subscriber
information. We also sell mobile phones (without service subscription) through
our retail shops and direct sales force, generally at a higher price. We buy
substantially all of our mobile phones from Nokia, Motorola, Sony Ericsson,
Mitsubishi and Samsung. We believe that we are not dependent on any single mobile
phone supplier. In 2004, in dollar terms, we purchased approximately 29% of our
mobile phones from our largest mobile phone supplier, and the top five mobile
phone suppliers in aggregate accounted for approximately 82% of our mobile phone
purchases.

Historically, we have resisted
offering routine handset subsidies but would offer subsidy programs from time to
time to respond to handset rebate programs introduced by our competitors for new
consumer acquisition and for retention. We have seen an increased use of handset
promotions in the market since 2004. For a discussion of our handset subsidies,
see "Item 5. Operating and Financial Review and Prospects  Operating Results 
Operating Revenues  Sales of mobile phones and accessories."

Network

We operate an intelligent mobile
network on the GSM 1800 MHz frequency with over 1,100 cell sites located
throughout Hong Kong. Nortel is our principal network infrastructure equipment
supplier for our 2G/2.5G network and to date has accounted for approximately 70%
of the total costs of our 2G/2.5G network infrastructure and equipment The
network is designed to provide ubiquitous network coverage in Hong Kong and
extensive roaming coverage worldwide. With the infrastructure provided by
Nortel, together with our applications, we are able to pinpoint the location of
a wireless communication device within a fairly precise geographic range. The
cell site is mainly connected via a leased fixed transmission link to a "base
station controller", which provides connection to a number of cell sites. We
currently have 22 base station controllers and five mobile switches located in
two switching centers.

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The Hong Kong government initially
granted us 2 x 5 MHz of frequency spectrum in the 1800 MHz waveband for our
network, and increased the spectrum by 2 x 2.5 MHz in February 1998. In March
1999, we were allocated a further 2 x 2.5 MHz, increasing the total spectrum
allocation to 2 x 10 MHz. The Hong Kong government granted us the additional
spectrum in recognition of our efficient use of previously allocated spectrum.
In March 2002, additional spectrum of 2 x 1.6 MHz was allocated to us.

Our network covers approximately
99% of the populated areas in Hong Kong, including Hong Kong Island, Kowloon and
the New Territories. The focus of our network rollout has been on providing
quality coverage of high usage areas. Our network also provides coverage in all
major vehicular tunnels in Hong Kong and in the KCRC, MTR and Airport Express
mass rail transport systems.

To improve our network coverage,
we established a dedicated task force to monitor enhancement of our network
performance. We increased the number of cell sites by over 21% during the past
three years. Although we have increased the number of cell sites, our network
operating costs over the past three years decreased mainly through continuous price negotiations with
our network service providers and
vendors.

Part of the strategy for our
mobile communications business involves our selective investment in and
incorporation of technologies. Technologies we have incorporated into our 2G and
2.5G businesses include:

- IN platform
   We believe we have been a leader in using intelligent network technology
  that permits us to offer a number of lifestyle services, including some
  real-time location-specific services.
- EFR  We
  were one of the first GSM 1800 operators in the world to adopt this Enhanced
  Full Rate technology to provide good and stable voice quality in our network
  in September 1997.
- SIM Toolkit
   We were one of the first operators in Hong Kong to adopt this 16 Kb SIM card
  technology in 1998.
- Java SIM Card
   We adopted the 32 Kb Java SIM Card technology in December 1999.
- WAP  We
  integrated Wireless Application Protocol-related software and WAP-related
  applications into our network and servers and started offering our "SO WAP"
  data services in January 2000.
- GPRS  Our
  network has been GPRS ready since 2000 and we launched commercial services in
  October 2002.

We started the construction of our
3G network in 2004. As of June 2005, we have rolled out our 3G data card
service, and our 3G network has been substantially installed with all supporting
service platforms and billing systems in place. We plan to make minor
enhancements to the 3G network at the end of 2005. Upon completion of such
enhancements, which is expected by the first quarter of 2006, our 3G network
will be ready to carry high speed downlink packet access technology, which can
offer faster download speeds and will open our mobile networks to a wider range
of multimedia services.

Our decision to select Huawei as
our technology partner has proven to be a discriminating choice. At the time, we
selected Huawei based on their technical skills and attractive commercial terms.
Since then, Huawei has exceeded our expectations in respect of technical
quality, vendor responsiveness and overall commercial support. In November 2004,
we signed expanded supply terms with HTIC for the supply of the 3G network.

Competition

We compete with five other digital
mobile operators who are licensed to provide 2G mobile communications services
in Hong Kong. Of these, the largest operators are Hutchison Telecommunications
(Hong Kong) Limited (which operates under the consolidated brand name of "3" for
all mobile services, including 2G and 3G services), Hong Kong CSL Limited (which
operates under the brands "1010" and "One2free") and SmarTone Telecommunications
Holdings Limited (which operates under the brand "SmarTone"). Both Hong Kong CSL
and SmarTone were unsuccessful in obtaining PCS licenses in 1996 but later
acquired two companies which were successful in doing so. We believe that
currently these three operators collectively have a market share of
approximately 59%. The eight networks of these three operators utilize different
technologies and frequency bands, namely GSM 900, GSM 1800, TDMA and CDMA, and
these companies have merged some of their networks to allow subscribers with
dual band and tri-band mobile phones to roam seamlessly between such networks.
As operators of the older GSM 900 networks, these three operators commenced
operating mobile services between four and 12 years earlier than us.

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The three remaining operators are
SUNDAY, Peoples and New World. These operators all operate the GSM 1800
networks, which were licensed by OFTA in 1996, and all commenced commercial
operations during 1997.

In October 2001, the HKTA granted
four 3G licenses to SUNDAY 3G, Hong Kong CSL Limited, Hutchison 3G HK Limited
and SmarTone 3G Limited for the construction of the 3G network and provision for
3G services and applications in Hong Kong. Hutchison launched its 3G services in
Hong Kong in January 2004, and the other two 3G licensees launched their 3G
services in December 2004.

The 3G tariff plans launched by
Hutchison currently include large bundles of data products like video, text
messages, multimedia video news and wireless data downloads. To attract
subscribers, Hutchison competitively priced its 3G data and voice service
packages on a comparable basis with 2G and 2.5G pricing. By May 2005, Hutchison
acquired around 325,000 3G subscribers while each of CSL and SmarTone had less
than 20,000 3G subscribers. 3G handsets were initially in short supply, however,
since Hutchison's launch, more models have been available since 2004 with longer
battery time and more features.

Retail International Long Distance Calling Services Business

Starting September 1999, we
provided retail international long distance calling services using the name
"SUNDAY 1622" Any wireline or non-SUNDAY mobile user who has registered for our
"SUNDAY 1622" service can access our international long distance calling
services by dialing "1622" followed by the number they wish to reach. In
addition, international calls from Hong Kong originating from our mobile
subscribers have been routed automatically through our international switching
facilities since July 1999. Since 1999, we have a prepaid card service that
enables purchasers of the card, denominated in stored values of HK$50 or HK$100,
to use our SUNDAY 1622 service on a prepaid basis without the need to register
as a subscriber.

Marketing, Sales and Distribution

Marketing

Since inception, we have pursued a
strategy of producing a single, strong and highly visible brand name. We have
marketed "SUNDAY" as a provider of wireless communications and data services
suitable for a highly active and mobile way of living. We use original, bright,
unconventional and humorous advertising by direct mailing and via various media,
including billboards, television, magazines and newspapers.

Since we launched our commercial
operations in late 1997, we believe that the "SUNDAY" brand name has become and
continues to be one of the most well-recognized in Hong Kong.

We received many awards from the
advertising industry in recognition of our brand. In 2001, we were awarded the
well recognized Kam Fan Award for our strategic brand building campaign by the
Association of Accredited Advertising Agents of Hong Kong. We were awarded the
Gold Prize and Citation for Outstanding TV Campaign in the Hong Kong Management
Association/TVB Awards for Marketing Excellence 2000. In an annual survey
reported in Media, we
also ranked second (after McDonald's) in Hong Kong in television advertisement
recall for 2000 and won Media's
Asian Advertising Campaign of the Year in 2000.

In 2004, we appointed a new
advertising agency to advise us on our launch of 3G services and to develop a
new brand positioning. We believe that the 3G technology promises a wide variety
of entertaining content, intriguing handsets and innovative services, combined
with ease of use. We believe that such promised characteristics of the 3G
technology aligns closely with perceptions of our brand, thus creating synergies
in our advertising strategy and giving us an advantage in the marketplace.

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Sales and Distribution

We sell our mobile services and
handsets and provide after-sales service to customers primarily through our
retail outlets and the customer service centre. In 2000, we began directing our
successful marketing and brand strategy to focus on expanding distribution and
sales channels. During 2000 and 2001 we aggressively expanded our distributions
network coverage and broadened the use of different distribution channels during
2000 and 2001. As of December 31, 2004, we had 23 retail shops located at
high-traffic locations as compared with 12 at the start of 2000. We also sell
mobile services and handsets to our corporate and individual customers through
our own direct sales force.

We have entered into agreements
with various independent dealers in Hong Kong to sell our mobile services and
handsets on a non-exclusive basis. Dealer commission rates are based on quality
and quantity targets. We defer commission payments and pay our dealers in
installments, provided that the relevant subscriber account is still active at
the time the commission payment is due.

As of December 31, 2004, our
rechargeable stored value SIM cards were carried in over 1,000 retail outlets,
including dealers' shops, convenience stores and chain stores.

Our retail shops generated
approximately 61% of our new mobile subscribers in 2004. For the same period,
our direct sales team generated approximately 24% of our new subscribers, and
independent dealers generated approximately 15% of our new subscribers.

We provide training, quality
assurance and incentive programs (including a commission scheme) for our sales
force. We also provide marketing support for our independent dealers through
advertising product demonstrations. Our monthly service surveys also help
monitor our customer service operations and sales services in our retail shops
and by our direct sales team.

Customer Service

We aim to provide good quality
customer service. We provide user-friendly and easy-to-access customer service
through our 24-hour hotline and our retail outlets. Inquiries regarding account
balances, billing and service information and usage are handled by an integrated
voice response system and customer service operators. We also provide limited
repair services of certain mobile telephones at our repairs center.

We established an operations
center in Shenzhen, China in 2002 to provide various support services, including
the customer service hotline and administration functions. This new center has
helped us reduce our operating costs by leveraging the lower labor costs in
mainland China as well as improve the productivity and service quality of our
customer service function.

Billing and Subscriber Management

We have a billing and customer
management system that handles our mobile and wireless data services from a
common, convergent, platform as well as an enterprise data warehouse and business
intelligence system that permits us to analyze the effect of tariff packages,
promotional and advertising campaigns and subscriber usage patterns thereby
assisting in the development of new services and marketing strategies.

We bill our mobile subscribers on
a monthly basis in arrears for excess airtime and enhanced services, and in
advance for fixed monthly charges, including value-added services. All of our
billings are in Hong Kong dollars and may be settled in cash, or by credit card,
auto payment, check, electronic payment system or payment by phone. In 2001, we
launched e-bills whereby instead of mailing the monthly statements of account to
our customers, we send short messages to our subscribers or e-mails to the
registered e-mail addresses of most of our customers informing them the
outstanding amounts payable. Our customers may also inquire their usage and
outstanding balances by calling our hotline, or accessing the "sunday.com" web
site through the internet, or by fax-on-demand.

In 2002, we further introduced new
billing tools, achieving greater efficiency and cost savings in billing
management and providing better response to billing related inquiries from
subscribers. As a result, we received "Outstanding Billing Implementation -
Telecoms" award in Tarifica's Billing Magazine Globe Awards 2002.

The user needs and requirements
for the billing system would be very different in respect of 3G services and
applications. As such, we have been implementing a new billing system in phases
since 2004 to replace the existing system. The existing billing system will
remain in operation until we have completed a full migration of our billing
operations to the new filing system. As of June 2005, the new billing
system is undergoing user testing, and we expect that it will be ready to
support the 3G service launch Similar to any new system rollout, we expect to
encounter minor teething
problems. To minimize the possibility of any adverse impacts to our business
operations the system vendor in the short-term period after the launch of the
new billing system, we have arranged for intensive follow-up monitoring and
instruction by.

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We generally
terminate services for subscribers who have accounts that are more than 45 days
overdue. Accounts are reinstated only if the subscriber pays all due amounts and
a reconnection fee. If a subscriber's account is terminated before its handset
subsidy balance is fully rebated, the balance of the amounts to be rebated will
be forfeited.

We have credit control procedures
to minimize bad debts. Such procedures include requiring up-front deposits for
roaming and international long distance calling services, requiring the
provision of credit card details upon registration of retail international long
distance services, and encouraging subscribers to use auto-deduct or direct
debit for paying their bills. When payments for an account are overdue, we send
short messages to the mobile phones of such delinquent customers and reminder
calls and invoices, accompanied by monitoring and service cut-off for customers
with unreliable payment track records. We also engage debt collection agencies
to pursue invoiced amounts after internal collection efforts are exhausted.

We have also established internal
controls to manage our cash sales. Sales receipts recorded in our cash register
systems are reconciled on a daily basis with actual bank receipts, and
discrepancies are investigated.

Our provision for bad debts
charged to the income statements for 2002, 2003 and 2004 were HK$31.0 million
(approximately 2.5% of service revenue), HK$30.2 million (approximately 2.6% of
service revenues), and HK$25.6 million (approximately 2.5% of service revenue),
respectively. The bad debt provision during the past three years had been fairly
stable. For a discussion of our bad debt experience and what measures we have
taken, see "Item 5. Operating and Financial Review and Prospects."

Intellectual Property

We rely on a combination of trade
marks, service marks and domain name registrations, copyright protection and
contractual restrictions to establish and protect our technologies, brand name
and logos, marketing designs and internet domain names. We have registered and
applied to register certain trade marks and service marks with the Hong Kong
Trade Marks Registry in connection with our mobile communications and
international long distance businesses. We also have registered and applied to
register certain trade marks and/or service marks with the relevant trade marks
registration bodies in Canada, China, Macau, Malaysia, Singapore, South Korea,
Taiwan and Thailand. Our registered trade marks and service marks include our
brand name, logos and certain advertising features. In relation to domain names,
we have registered the "sunday.com" domain name with Network Solutions, which is
a principal domain name registration operator for the internet. Our copyrights
are principally in the area of computer software for service applications
developed in connection with our wireless and wireline communications network
platform. We have copyrights to certain designs and materials used in marketing
and advertising our mobile communications and enhanced services in Hong Kong.

Regulation

HKTA is the telecommunications
regulator in Hong Kong and is responsible for administering the
Telecommunication Ordinance.

OFTA was established in 1993 under
the Telecommunication Ordinance to assist the HKTA in administering and
enforcing the provisions of the Telecommunication Ordinance. OFTA's
responsibility and functions also include regulating and licensing
telecommunication network services and regulating the telecommunications markets
in Hong Kong.

Our indirectly wholly-owned
subsidiary, Mandarin, was one of six successful applicants to which the Hong
Kong government awarded Public Radiocommunication Service, or PRS, licenses in
1996. This license permits us, among other things, to:

- provide a public mobile radiocommunication service using mobile
  communication technology in accordance with the GSM 1800 standard;
- establish and maintain a GSM 1800 network; and
- sell mobile telephone and other equipment to subscribers.

Each PRS license has a duration of
ten years and will expire in 2006, although it may be extended for an additional
period of up to three years under the Telecommunication Ordinance. A PRS license
is non-exclusive, and the licensee must operate in a manner satisfactory to the
HKTA in accordance with the specifications contained in the license. Under the
terms of the PRS license, we may only operate our PRS network on the radio
frequencies assigned to us.

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The Telecommunication (Amendment)
Ordinance 2000, or the TAO 2000, came into operation on June 16, 2000. The TAO
2000 brought significant amendments to the Telecommunications Ordinance in
certain areas. In particular, the TAO 2000 seeks to enhance competition
safeguards in the telecommunications sector, which will be administered and
enforced by the HKTA, and, unusually for Hong Kong legislation, embraces
antitrust law principles. The competitive safeguards include provisions dealing
with anti-competitive practices, abuse of a dominant position, misleading and
deceptive conduct and discrimination. The amendments made to the
Telecommunication Ordinance also significantly increases penalties for breach of
license conditions and legislation. The TAO 2000 also aims to improve
interconnection and access arrangements to telecommunications services,
streamline licensing procedures and provide the HKTA with powers over 3G
spectrum auction and certain telecommunications services and technical areas,
such as radio spectrum management. The TAO 2000 also makes amendments which are
important for mobile operators, strengthening existing rights to access suitable
sites for radio communications installations, provided that an operator fulfills
certain criteria, such as public interest requirements, and the HKTA grants
authorization. The HKTA will have increased powers to intervene in disputes
between operators and those having a legal interest in the potential
installation sites, in order to determine the interim fees payable for site
access.

The Hong Kong government announced
in February 2001 that the licensing framework for 3G mobile services consisting
of four mobile carrier licenses for building a 3G network and providing 3G
services, or 3G licenses, would be issued by auction. As there were only four
applicants, including SUNDAY 3G, no auction took place and each applicant was
granted a 3G license on October 22, 2001. Each licensee was allocated a block of
paired band spectrum of 2 x 14.8 MHz plus one 5 Hz block of unpaired band
spectrum. Pursuant to the Special Conditions of the 3G license, SUNDAY 3G is
required to install, maintain and use equipment for the purposes of the network
and the services to be provided under the 3G license such that by no later than
December 31, 2006 (and for all dates thereafter during the term of the 3G
license), the 3G network and services will cover at least 50% of the population
of Hong Kong. Further, all base stations to be installed must be capable of
supporting services at a minimum of 144 kbits per second. In addition, the
licensees must open up at least 30% of their 3G network capacity for use by
non-affiliated companies to operate as a mobile virtual network operator, or
MVNO, and/or content providers.

The 3G license is
valid for 15 years from the date of grant, expiring in 2016. Pursuant to the 3G
license, each licensee is required to pay the minimum guaranteed annual fees in
arrears. For each of the first five years, the minimum annual fee is HK$50
million. In each of the remaining 10 years, the annual fee would be the higher
of 5% of the licensee's turnover attributable to the provision of 3G services or
the minimum annual fee amounts indicated below:

|          | Commencing from  | (HK$'000)
|--------- | ---------------- | ---------
|6th year  | October 22, 2006 | 60,124   
|7th year  | October 22, 2007 | 70,249   
|8th year  | October 22, 2008 | 80,373   
|9th year  | October 22, 2009 | 90,497   
|10th year | October 22, 2010 | 100,622  
|11th year | October 22, 2011 | 110,746  
|12th year | October 22, 2012 | 120,870  
|13th year | October 22, 2013 | 130,995  
|14th year | October 22, 2014 | 141,119  
|15th year | October 22, 2015 | 151,243  

On the grant of the 3G license,
the licensee was required to provide the HKTA with a performance bond covering
the next five years' minimum annual fees or the minimum annual fees for the
remaining life of the 3G license, whichever is higher. SUNDAY 3G paid HK$250
million in cash upon the grant of the 3G license in lieu of the performance bond
for the first five years' minimum annual fees.

In accordance with the 3G license,
we were required to provide a performance bond, equivalent to the 6th year's
minimum annual fee, on October 22, 2002. On October 11, 2002, OFTA granted a
one-year waiver to us and the other three 3G licensees on the submission of such
performance bond. In August 2003, OFTA granted another one-year waiver to us and
the other three 3G licensees on the submission of the performance bond in an
amount equivalent to the 6th and 7th years' minimum annual fees as required by
the terms of the 3G license on October 22, 2003. On October 22, 2004, we
submitted the performance bond to OFTA by drawing down on a 3G performance bond
facility in an aggregate amount equivalent to the 6th, 7th and 8th years'
minimum annual fees.

In early May 2002, the Secretary
of the Information Technology and Broadcasting Bureau proposed the
Telecommunications (Amendment) Bill 2002, or the Bill, to provide a legislative
framework for the regulation of merger and acquisition activities in the Hong
Kong telecommunications industry. The Bill was subsequently passed in July 2003
becoming the Telecommunications (Amendment) Ordinance 2003, or the TAO 2003.
Under the TAO 2003, the HKTA may direct a telecom carrier licensee to take such
actions as the HKTA considers necessary to eliminate any anti-competitive effect
where the HKTA determines that a change in ownership or control over a telecom
carrier licensee has, or is likely to have, the effect of substantially
lessening the competition in the telecommunications market.

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The key features of the TAO 2003
are as follows:

- Where the HKTA is of the opinion that a change in ownership or control
  over a carrier licensee (which includes, among other things, a person becoming
  the beneficial owner of the voting shares in the carrier licensee in excess of
  the thresholds set out in the TAO 2003, or a person becoming a voting
  controller of the voting shares in the carrier licensee in excess of the
  thresholds set out in the TAO 2003) had, or is likely to have, the effect of
  substantially lessening the competition in the telecommunications market, the
  carrier licensee will take such actions as the HKTA considers necessary
  (including directing the carrier licensee to procure modifications to its
  ownership or control) to eliminate any such anti-competitive effect.
- Failure to take such action would constitute a breach of the relevant
  provisions of the Telecommunications Ordinance and sanctions available under
  the Telecommunication Ordinance could then be imposed upon the carrier
  licensee (including suspension or cancellation of the license).
- Alternatively, prior to a proposed change in ownership or control, a
  carrier licensee may on a voluntary basis seek the consent of the HKTA to the
  proposed change. The carrier licensees would have a choice as to whether it
  will seek prior consent or not, taking into account the risk of being
  penalized subsequently if the activity is found to be anti-competitive.

The relevant sections of the TAO
2003 dealing with mergers and acquisitions came into effect in July 2004. In May
2004, OFTA issued guidelines relating to the handling of mergers and
acquisitions by HKTA under the new legislation.

OFTA is currently in the process
of finalizing the telecommunications policies governing Internet Protocol
Telephony, or IP Telephony, and broadband wireless access. OFTA held the first
round of public consultations on the above topics in 2004. It is expected that
OFTA will conduct further public consultations with a view to resolving the
technical and implementation issues arising from the implementation of IP
Telephony and broadband wireless access in Hong Kong.

The Hong Kong government
liberalized the telecommunications market by introducing more competition to
various sectors of the communications industry including the public mobile radio
services in the 1980s, the provision and operation of local fixed wireline
network services in 1995 and more recently in the real time voice international
long distance services.

Our international long distance
business, operated under our "SUNDAY 1622" brand, is carried out under a PNETS (ETS)
license. OFTA does not restrict the number of PNETS (ETS) licenses that it will
issue. As of June 3, 2005, OFTA had issued around 220such licenses. A PNETS
license is issued for a term of 12 months upon submission of an application to
OFTA and the payment of the prescribed fee. It is renewable annually upon
payment of a small licensing fee. The HKTA may cancel a PNETS license, including
ours, at any time or suspend it for up to 12 months, if a licensee contravenes
any provision of the Telecommunication Ordinance or any condition of the
license.

Generally, companies using web
sites or the internet to sell products must comply with applicable Hong Kong
consumer protection laws (for example, the Sale of Goods Ordinance (Chapter 26
of the Laws of Hong Kong)).

The Electronic Transactions
Ordinance (Chapter 553 of the Laws of Hong Kong) came into effect in January
2000. This ordinance is intended to recognize the legal status and effect of
certain electronic records and signatures and to govern the certification
authorities established in Hong Kong.

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4.C ORGANIZATIONAL STRUCTURE

SUNDAY has the following principal
wholly-owned subsidiaries as of December 31, 2004:

|Name | Place of      | Issued and Fully |                     
|---- | ------------- | ---------------- | --------------------
|     | Incorporation | Paid Up Capital  | Principal Activities

|Shares held
    directly                       |                            |                                      |                              
|---------------------------------------------- | -------------------------- | ------------------------------------ | -----------------------------
|SUNDAY HOLDINGS
    (HONG KONG) CORPORATION    | British Virgin
    Islands | 100 ordinary
    shares of US$1 each | Investment
    holding       
|SUNDAY HOLDINGS
    (CHINA) CORPORATION        | British Virgin
    Islands | 1 ordinary share
    of US$1         | Investment
    holding       
|SUNDAY IP
    HOLDINGS CORPORATION             | British Virgin
    Islands | 1 ordinary share
    of US$1         | Investment
    holding       
|                                               |                            |                                      |                              
|Shares held
    indirectly                     |                            |                                      |                              
|MANDARIN
    COMMUNICATIONS LIMITED            | Hong Kong                  | 100 ordinary
    shares of HK$1 each | Provision of
    mobile and  
|                                               |                            | and 1,254,000,000
    non-voting     | other services,
    and sales
|                                               |                            | deferred shares
    of HK$1 each     | of mobile phones
    and     
|                                               |                            |                                      | accessories                  
|SUNDAY 3G
    HOLDINGS (HONG KONG) CORPORATION | British Virgin
    Islands | 1 ordinary share
    of US$1         | Investment
    holding       
|SUNDAY 3G (HONG
    KONG) LIMITED              | Hong Kong                  | 2 ordinary shares
    of             | Licensee of Hong
    Kong    
|                                               |                            | HK$1 each                            | 3G license                   
|SUNDAY IP LIMITED                              | British Virgin
    Islands | 1 ordinary share
    of US$1         | Holding our
    intellectual 
|                                               |                            |                                      | property rights
    and      
|                                               |                            |                                      | trade marks                  
|SUNDAY
    COMMUNICATIONS SERVICES (SHENZHEN)  | The PRC                    | US$1,500,000                         | Provision of back
    office 
|LIMITED, or
    SCSSL(1)                       |                            |                                      | support services
    to the  
|                                               |                            |                                      | SUNDAY group                 

__________

(1) SCSSL is registered as a wholly foreign-owned enterprise in the PRC and
the registered capital of SCSSL has been fully paid up.

Our principal activities, except
for SCSSL which operates in the PRC, are undertaken in one geographical area,
Hong Kong.

4.D PROPERTY, PLANT AND EQUIPMENT

We lease and occupy around 36 properties in Hong Kong and the PRC, which we
use as offices, retail shops, switching centers, customer service center and
warehouse. We also lease and operate over 1,100 cell sites in Hong Kong.

Our fixed assets have been pledged
to HTIC as security for the Facility Agreement since July 2004.

We started construction of the 3G
network in 2004 and as of June 2005, our 3G network has been substantially
completed.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following
discussion, together with our audited consolidated financial statements and the
related notes, beginning on page F-1. Our audited consolidated financial
statements have been prepared in accordance with HK GAAP, which differs in
certain significant respects from US GAAP. Note 26 to our audited consolidated
financial statements provides a description of the significant differences
between HK GAAP and US GAAP as they relate to us. Note 26 also provides a
reconciliation to US GAAP of consolidated net (loss)/profit and consolidated
shareholders' equity. You should also read the information under
"Forward-looking Statements" for special information about our forward-looking
information.

Introduction

We are a developer and provider of
wireless communications and wireless data services in Hong Kong. Since our
formation in 1994, we have pursued a vision that wireless communications would
become increasingly pervasive and integrated into consumers' lives. We were one
of the first mobile operators in Hong Kong to develop personalized
wireless-based services designed for a highly active and mobile way of living.
We have used these services to differentiate ourselves from our competitors and
attract new subscribers who tend to be responsive to lifestyle marketing and
quick to adopt technological innovation.

We began commercial operation in
September 1997 with the introduction of our digital GSM 1800 mobile telephone
services under the SUNDAY brand name. We have invested significant resources to
build our SUNDAY brand name and have succeeded in making it one of the most
well-known brand names in Hong Kong. Our marketing strategy assisted us in
building a mobile subscriber base of 684,000 subscribers as of December 31,
2004.

30

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The Hong Kong mobile
communications industry is highly competitive. We believe that currently the
three largest operators collectively have a market share of approximately 59%.
There have been periods of intense price competition or "price wars" among Hong
Kong's wireless communications and other telecommunications service providers.
These activities have generally been initiated by our competitors. Many of our
competitors have greater resources than we do and may be better positioned than
us to launch competitive products and services and to absorb operating losses.

We experienced net losses since we
commenced operations until January 2003, when we started earning net profit on a
month to month basis. Our accumulated losses decreased for the first time from
HK$3,006.7 million as of December 31, 2002 to HK$2,974.0 million as of December
31, 2004. To maintain profitability, we will need to continue to grow our
subscriber base, increase ARPU of our services, improve customer retention,
enhance productivity and control costs, successfully develop and introduce new
services, such as the rollout of our 3G data card service.

The successful dual listing of our
ADSs and ordinary shares on The Nasdaq National Market and the Stock Exchange of
Hong Kong, respectively, in March 2000 raised HK$2.6 billion new share capital
and helped to substantially strengthen our financial position to cater for our
network expansion and enhancement, and the development and introduction of new
services and applications based on new technologies.

We have completed installation of
the GPRS network infrastructure and we have dedicated resources to develop and
launch wireless data services and applications using the GPRS platform. We have
launched a broad range of new wireless data services since 2002 and expect to
continue to launch more data services in the future.

Winning a 3G license in Hong Kong
in October 2001 was another important milestone for us. Acquiring the 3G license
is an integral part of our long-term strategy to offer an enhanced range of
wireless services under the "SUNDAY" brand. In addition to the 3G license, we
were allocated 2 x 1.6 MHz of additional 2G spectrum in the 1800 MHz range in
March 2002. This has increased our network capacity and has allowed us to
further expand our subscriber base and enhance our service quality. We commenced
the rollout of our 3G data card service on June 12, 2005.

As a result of the acquisition by
PCCW of a controlling stake in us from our former shareholders, Distacom and USI,
PCCW is required under the Hong Kong Takeover Code to make a cash tender offer
to acquire the remaining shares that it does not currently own or has agreed to
acquire. As a result of the acquisition and such tender offer for our shares by
PCCW, we may be delisted from the Hong Kong Stock Exchange and deregistered from
Nasdaq. PCCW has stated that it intends for SUNDAY to continue with its existing
core business of development and provision of wireless communications and data
services in Hong Kong.

While revenues from wireless voice
services are still the dominant source of revenue, we expect that wireless data
services will play a more important role in the near future. Revenues from
wireless data services grew by 32% in 2004 as compared with 2003.

5.A OPERATING RESULTS

Recently issued accounting standards

The HKICPA has issued a number of
new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards, or the new HKFRSs, which are effective for accounting periods
beginning on or after January 1, 2005. We have not adopted these new HKFRSs in
our financial statements for the year ended December 31, 2004. We have already
commenced an assessment of the impact of these new HKFRSs but we are not yet in
a position to state whether these new HKFRSs would have a significant impact on
our results of operations and financial position.

Recent accounting pronouncements



The HKICPA has undertaken to
converge by January 1, 2005 all Hong Kong Financial Reporting Standards HKFRSs with International Financial Reporting Standards  IFRSs issued by
the International Accounting Standards Board. As a result, the HKICPA has issued
a number of new and revised HKFRSs, including Hong Kong Accounting Standards ("HKAS"),
HKAS Interpretations ("HKAS-INTs") and HKFRSs, which were aligned with the
requirements of IFRSs in effect as at December 31, 2004 in all material respects
and are effective for accounting periods beginning on or after January 1, 2005.
As a consequence, the corresponding Statements of Accounting Practices ("SSAP")
and Interpretations are superseded effective January 1, 2005. The applicable
HKFRSs required to be adopted by SUNDAY for the year ending December 31, 2005
are set out below.

31

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|HKFRSs issued | Standards superseded                                               
|------------- | -------------------------------------------------------------------
|              |                                                                    
|HKAS 1        | Presentation of
    Financial Statements                           
|HKAS 2        | Inventories                                                        
|HKAS 7        | Cash Flow
    Statements                                           
|HKAS 8        | Accounting
    Policies, Changes in Accounting Estimates and Errors
|HKAS 10       | Events After the
    Balance Sheet Date                            
|HKAS 12       | Income Taxes                                                       
|HKAS 14       | Segment Reporting                                                  
|HKAS 16       | Property, Plant
    and Equipment                                  
|HKAS 17       | Leases                                                             
|HKAS 18       | Revenue                                                            
|HKAS 19       | Employee Benefits                                                  
|HKAS 21       | The Effects of
    Changes in Foreign Exchange Rates               
|HKAS 23       | Borrowing Costs                                                    
|HKAS 24       | Related Party
    Disclosures                                      
|HKAS 27       | Consolidated and
    Separate Financial Statements                 
|HKAS 31       | Interests in
    Joint Ventures                                    
|HKAS 32       | Financial
    Instruments: Disclosure and Presentation             
|HKAS 33       | Earnings Per
    Share                                             
|HKAS 36       | Impairment of
    Assets                                           
|HKAS 37       | Provisions,
    Contingent Liabilities and Contingent Assets       
|HKAS 38       | Intangible Assets                                                  

|HKAS 39     | Financial
    Instruments: Recognition and Measurement         | SSAP 24           | Accounting for
    investments in securities
|----------- | -------------------------------------------------------------- | ----------------- | --------------------------------------------
|HKFRS 2     | Share-based
    Payment                                        | -                 |                                             
|HKFRS 3     | Business
    Combinations                                      | SSAP 30           | Business
    combination                    
|HKAS-INT 21 | Income Taxes -
    Recovery of Revalued Non-Depreciable Assets | Interpretation 20 | Income taxes -
    Recovery of              
|            |                                                                |                   | revalued
    non-depreciable                
|            |                                                                |                   | assets                                      

We are currently assessing the potential impact that the
adoption of the HKAS on January 1, 2005 may have on
our financial statements presented in accordance with Hong Kong GAAP but are not
yet in a position to state whether these new HKAS would have a significant
impact on its results.

32

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(ii)
US GAAP

In November 2004, the Financial
Accounting Standards Board, or the FASB, issued FASB Statement No. 151,
"Inventory Costsan amendment of ARB No. 43" or SFAS No. 151, which is the
result of its efforts to converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS No. 151 requires idle facility
expenses, freight, handling costs, and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We are
currently assessing the impact of this statement on our results of operations,
financial position and cash flows upon adoption and we have not yet completed that
assessment.

In December 2004, the FASB issued
SFAS No. 123 (revised 2004) or SFAS No. 123(R) Share-Based Payment. SFAS No.
123(R) replaces SFAS No. 123 "Accounting for Stock-Based Compensation",
supersedes APB Opinion No. 25 "Accounting for Stock Issued to Employees" and
amends SFAS No. 95 "Statement of Cash Flows". SFAS No. 123(R) requires all
share-based awards to employees, including grants of employee stock options, to
be recognized in the financial statements based on their grant-date fair values.
The related compensation costs are to be recognized over the period during which
an employee is required to provide service in exchange for the award. Excess tax
benefits are to be recognized as an addition to paid-in capital and reflected as
financing cash inflows in the statement of cash flows. For public entities that
do not file as small business issuers, SFAS No. 123(R) is effective for all
awards granted after June 15, 2005, and to awards modified, repurchased, or
cancelled after that date. The Group will adopt the modified prospective
application transition method under the transition provisions of SFAS No. 123(R)
to new and existing plans as at January 1, 2006. The grant-date fair values of
unvested awards that are outstanding on the date of adoption will be charged to
expense over their remaining vesting periods. We are currently assessing
the impact of this statement on our results of operations, financial position
and cash flows upon adoption and we have not yet completed that assessment.

In December 2004, the FASB issued
SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No.
29", or SFAS 153 effective for nonmonetary asset exchanges occurring in the
fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial substance. We are currently assessing the impact of this statement on
our results of
operations, financial position and cash flows upon adoption and we have not yet
completed that assessment.

33

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In March 2005, the FASB issued
SFAS No. 154, "Accounting Changes and Error Corrections" or SFAS 154 - a
replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes
made in fiscal years beginning after December 15, 2005. SFAS 154 requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. It also requires
that retrospective application of a change in accounting principle be limited to
the direct effects of the change. In direct effect of a change in accounting
principle should be recognized in the period of the accounting change. SFAS also
requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. We are currently
assessing the impact of this statement on our results of operations, financial
position and cash flows upon adoption and we have not yet completed that assessment.

The SEC issued SAB 107 in March
2005. SAB 107 summarizes the views of the SEC staff regarding the interaction
between SFAS No. 123R and certain Securities and Exchange Commission rules and
regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. We are currently
analysing the effects of this SAB and will adopt SAB 107 concurrently with SFAS
No. 123.

Critical Accounting Policies

The discussion and analysis of our
financial conditions and results of operations are based upon our audited
consolidated financial statements which have been prepared in accordance with HK
GAAP. Our principal accounting policies are set out in note 2 to our audited
consolidated financial statements. The preparation of the consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses as well as the disclosure of
contingent assets and liabilities.

We continually evaluate our
estimates and judgments including those related to revenue recognition,
provisions for doubtful debts, useful lives of plant and equipment and
intangible assets, deferred tax and contingencies. We base our estimates and
judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions and conditions. We believe that the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of the consolidated financial statements.

The plant and equipment used in
our network is long-lived but may be subject to technical obsolescence. The
annual depreciation charge is sensitive to the estimated economic useful lives
we allocate to each type of fixed assets. We perform annual reviews to assess
the appropriateness of their estimated economic useful lives. For the three
years ended December 31, 2002, 2003 and 2004, there was no change in the useful
lives of the fixed assets. Such reviews take into account the technological
changes, prospective economic utilization and physical condition of the assets
concerned. We also regularly review whether there are any indications of
impairment. We will recognize an impairment loss if the carrying amount of an
asset is lower than its recoverable amount which is the greater of its net
selling price or its value in use. In determining the value in use, we assess
the present value of the estimated future cash flows expected to arise from the
continuing use of the asset and from its disposal at the end of its useful life.
We use estimates and judgment in determining these future cash flows and the
discount rate. We estimate the future cash flows based on certain assumptions,
such as the market competition and development and the expected growth in
subscribers and ARPU.

We engage dealers for selling
mobile services to new subscribers and pay commissions to the dealers based on
the number of subscribers who remain active after a prescribed period of time.
Therefore, the amount of commission payable would depend on the churn rate of
such subscribers. We estimate the average churn rate of such subscribers
periodically based on past experience and market conditions and accrue dealer
commissions accordingly. If the actual churn rate is lower than our estimate,
additional accrual of the dealer commissions may be required. The Management
would reviews the estimate by comparing against actual.

We provide
services to our subscribers mainly on credit terms. We know that certain debts
due to us will not be paid through the default of a small number of our
customers. We perform regular reviews to estimate, based on our historical
write-off experience, the aging of our accounts receivable and the general
economic conditions and industry trends, and the level of debts that we believe
will not be collected.

We provided
for deferred taxation in full, using the liability method, on temporary differences
arising between the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements. Taxation rates enacted or
substantively enacted by the balance sheet date are used to determine deferred
taxation. Deferred tax assets are only recognized to the extent that it is
probable that future taxable profit will be available against which the
temporary differences can be utilized. Deferred taxation is provided on
temporary differences arising from depreciation on fixed assets except where the
timing of the reversal of the temporary difference can be controlled and it is
probable that the temporary difference will not reverse in the foreseeable
future.

34

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OverviewOperating Revenues

Our operating revenues in 2004
declined by 8% as compared with 2003, mainly due to the lowering of our tariff
rates under certain price promotions
by lowering tariff rates in response to our competitors' price promotions.
Revenues from mobile services and the sales of mobile phones and accessories
accounted for 89% and 11%, respectively, of the operating revenues in 2004.

We have achieved sustained
subscriber growth although revenues from mobile services decreased by 10% in
2004 as compared with 2003. We experienced subscriber growth rates of 9%, 9% and
4% for the years ended December 31, 2002, 2003 and 2004, respectively. The
number of subscribers grew from approximately 660,000 subscribers as of December
31, 2003 to 684,000 subscribers as of December 31, 2004.

Market competition has remained
intense through aggressive price promotions and heavy handset subsidies since
the introduction of mobile number portability, or MNP, in March 1999, which
allows mobile telephone subscribers in Hong Kong to change their mobile
telephone operator and still keep their mobile telephone number. As a result,
the ARPU of the industry, including ours, continued to decrease while the churn
rate increased during the past few years.

Mobile Services

We recognize revenues from mobile
services when the services are rendered. A substantial majority of the revenues
from mobile services has consisted of revenues from local airtime. Subscribers
pay local airtime charges for both incoming and outgoing calls. Revenues from
mobile services also include revenues from international long distance calls
made over our subscribers' mobile telephones, inbound and outbound roaming,
value-added services, enhanced services and data services.

We calculate ARPU by dividing
revenues from post-paid mobile services for the month by the daily weighted
average number of post-paid mobile service subscribers for the month. The ARPU
for the years ended December 31, 2002, 2003 and 2004 were HK$209, HK$201 and
HK$180, respectively. This decrease in ARPU was in line with the industry as a
whole.

The rechargeable stored value
prepaid SIM cards continued to record significant growth since its launch in
April 2000. The number of subscribers using such prepaid SIM cards grew from
189,000 in 2002 to 243,000 by December 31, 2003, and further to 256,000 by
December 31, 2004. The ARPU of these prepaid subscribers, however, decreased to
HK$37 as compared with HK$60 in 2003 due to aggressive price promotions
initiated by some competitors.

Our mobile communications business
can be significantly affected by churn, which represents net subscriber
deactivation or disconnection, whether voluntary or not, during a period. Our
average monthly churn rate for our mobile subscribers is the total of the
monthly churn rates for the period, which is calculated as a percentage of
opening subscribers, divided by the number of months in such period. Along with
other mobile telephone operators in Hong Kong, we have experienced relatively
high churn rates since MNP became available, which increased subscribers'
willingness to switch among operators. Our average monthly churn rates of
post-paid subscribers for the years ended December 31, 2002, 2003 and 2004 were
5.4%, 5.0% and 3.9%, respectively, reflecting an improvement in churn rate
between 2003 and 2004. Since 2002, we have made churn a priority and
considerable efforts were put into retention programs based on market research
which allowed us to gain greater insight into the reasons behind customers
changing service. The churn rate has further improved since the fourth quarter
of 2004, and the churn rate in December 2004 was 3.7%.

Sales of Mobile Phones and Accessories

We recognize
revenues from the sales of mobile phones and accessories at the time of sale. In
response to subsidies offered by our competitors that in some cases effectively
give away the handsets for free, we also offer subsidies on our mobile phones
for subscriber acquisition and retention. Typically, our subsidy arrangements
involved selling mobile phones at discounts of up to the full cost of the
handsets in exchange for subscribers making an upfront prepayment for credit
against future monthly airtime charges. We rebate the upfront prepayment in
equal installments over an agreed period. The upfront prepayment amount is not
transferable and any amount outstanding is forfeited by the subscriber if the
account is closed. We currently only offer heavy discounts for retention
programs and sales of older models of mobile phones or mobile phones in the low
to medium price range.

35

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We account for
subsidized handset sales by recognizing the purchase price paid by the
subscriber, excluding any upfront prepayment amount. We simultaneously recognize
our full cost of the mobile phone, which sometimes substantially exceeds our
sales revenue. The upfront prepayment amount is recorded as deferred revenue and
included in the balance sheet as a liability. The monthly rebate is recognized
as revenue from mobile services in the month when access to our network and
facilities is provided to the subscriber and is deducted from subscriptions
received in advance. The amount of our total deferred revenue in connection with
handset sales was HK$13.4 million as of December 31, 2004, which was included in
the balance sheet as part of the subscriptions received in advance which
amounted to HK$70.0 million. The amount of our deferred revenue in connection
with handset sales was HK$16.2 million as of December 31, 2003 and was included
as part of the subscriptions received in advance which amounted to HK$89
million. The decrease in deferred revenue in 2004 as compared with 2003 was due
to less handset subsidies offered to our subscribers.

Other Services

Revenues of other services mainly
consisted of revenues from our retail international long distance calling
services. The retail international telecommunications services revenues consist
of revenues from international calls by non-SUNDAY mobile service users and
revenues from international calls by registered fixed line subscribers using our
SUNDAY 1622 services. Revenues from our mobile service subscribers making
international long distance calls from their mobile phones are excluded from the
retail international telecommunications services revenues but are included in
revenues from mobile services as described above.

Revenues of other services of
HK$0.7 million in 2003 were mainly generated through the provision of certain
consultancy services, which were not of a recurring nature. Revenues of other
services further decreased to HK$0.3 million in 2004.

Cost of Sales and Services

Our cost of sales and services
consists of costs directly associated with generating revenues. Cost of sales
consists almost entirely of mobile phones and accessories costs and related
collection charges. Cost of services relates to the cost of mobile services and
the costs of other services, which consists primarily of a variety of
interconnection charges, including PNETS charges (interconnection charges for
local calls payable to an FTNS operator); dipping charges (payable to a FTNS
operator under certain MNP arrangements); outbound roaming charges;
revenue-sharing payments made to Mass Transit Railway Corporation, or MTR, for
calls made by our mobile subscribers in MTR's facilities; billing related costs;
collection charges; provision for bad debts; and cost of prepaid cards. Cost of
mobile services accounted for 18%, 17% and 21% of revenue from mobile services
in 2002, 2003 and 2004, respectively.

Our provision for bad debts is
mainly based on the aging of the receivables from the billing cutoff date. Our
provision for bad debts was 2.5%, 2.6% and 2.5% of service revenue in 2002, 2003
and 2004, respectively.

Operating Expenses

Our operating expenses consist
primarily of network costs which include rentals for leased lines (between cell
sites and our two switching centers, between our switching centers, and for
interconnection to FTNS operators and to international carriers), cell sites
acquisition and rental and maintenance costs, depreciation, advertising,
promotion and other selling costs, salaries and related costs, and other
operating costs. Advertising, promotion and other selling costs consist
primarily of advertising costs and dealer and salesperson commissions.

Total operating expenses for the
three years ended December 31, 2002, 2003 and 2004 amounted to HK$1,052.8
million, HK$852.7 million and HK$773.3 million, respectively. The operating
expenses in 2002 included a one-time restructuring cost of HK$26.6 million in
relation to an operations restructuring implemented in December 2002. Since
2002, we have moved certain back office support functions to our Shenzhen office
which operates with a lower cost base and provides better quality service. The
total operating expenses showed a decreasing trend during the three years from
2002 to 2004 due to our continued focus on cost control.

Income Taxes

We have not paid Hong Kong profits
tax since inception because we have sufficient tax losses brought forward to set
off against the net profit for 2004. See note 5 to our audited consolidated
financial statements for more detailed calculations.

36

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Foreign Exchange Exposure

Substantially all our income,
expenses, assets and liabilities are denominated in Hong Kong dollars except for
the vendor loan facility provided by Nortel, which was fully repaid in January
2004. The international roaming payables and receivables are netted and settled
on a monthly basis in Special Drawing Rights, or SDRs. As of December 31, 2004,
the net SDR-denominated payables were insignificant. We have not experienced
significant foreign exchange movements and do not anticipate significant foreign
exchange losses as long as the Hong Kong government's policy to link the Hong
Kong dollar to the U.S. dollar remains in effect. To date, we have not hedged
our foreign exchange exposure and will continue to monitor the foreign exchange
exposure and market conditions to determine if any hedging is required.

Results of Operations

The following table summarizes our
results of operations for the three years ended December 31, 2002, 2003 and
2004.

|                                               | Year Ended December 31,
|---------------------------------------------- | -----------------------
|HK GAAP                                        | 2002                   
|                                               | HK$
    million        
|Operating
    revenues:                        |                        
|Mobile services                                | 1,217.7                
|Sales of mobile
    phones and accessories     | 115.3                  
|Other services                                 | 9.7                    
|Total operating revenues                       | 1,342.7                
|Total operating
    revenues growth            | (5.6)%                 
|Costs of sales
    and services:               |                        
|Mobile services                                | (220.5)                
|Sales of mobile
    phones and accessories     | (113.4)                
|Other services                                 | (0.6)                  
|Total costs of sales and services              | (334.5)                
|Total costs of
    sales and services growth   | (28.7)%                
|Gross profit                                   | 1,008.2                
|Gross profit
    growth                        | 5.8%                   
|Other revenues                                 | 1.9                    
|Operating
    expenses:                        |                        
|Network
    costs                              | (303.6)                
|Depreciation                                   | (256.4)                
|Rent and
    related costs                     | (61.1)                 
|Salaries
    and related costs                 | (243.9)                
|Advertising, promotion and other selling costs | (127.8)                
|Other
    operating costs                      | (60.0)                 
|Total operating expenses                       | (1,052.8)              
|Total operating
    expenses growth            | (5.9)%                 
|(Loss)/profit
    from operations              | (42.7)                 
|Interest income                                | 3.5                    
|Finance costs                                  | (59.5)                 
|Share of losses
    of joint ventures          | (18.6)                 
|Net (loss)/profit                              | (117.3)                

___________

(1) Percentage of total operating revenues for the year.

2004 Compared with 2003

We recorded a net profit of HK$5.5
million as compared with a net profit of HK$27.2 million in 2003. The decrease
in net profit was mainly attributable to the decrease in service revenues and
3G-related operating costs.

The year 2004 was challenging.
Some of our competitors launched aggressive price promotions and heavy handset
subsidies to secure short-term gains. As a result, our operating revenues in
2004 declined by 8% as compared with 2003. Revenues from mobile services and the
sales of mobile phones and accessories accounted for 89% and 11%, respectively,
of the operating revenues in 2004.

37

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Revenue from the mobile services
business for 2004 declined by 10% to HK$1,031.4 million from HK$1,149.9 million
in 2003 as ARPU fell from HK$201 in 2003 to HK$180 in 2004, in line with an
industry-wide decline.

Revenue from sales of mobile
phones and accessories increased by 16% to HK$126.9 million. The business made a
gross loss of HK$17 million as compared with a gross loss of HK$23.9 million in
2003, despite an increased use of handset promotions in the market for ongoing
retention programmes and to acquire new customers. The improvement was mainly
attributable to the adoption of the future-focused strategy  namely, offering
handset subsidy promotions for products which are most likely to encourage an
increase in data usage, and the introduction of premium handsets.

Despite difficult market
conditions, our focus on service and network quality and our segmentation
strategy enabled us to grow our mobile subscriber base, which increased by 4% to
684,000, and to reduce churn. We continued to make customer retention a
priority. As a result, the average monthly gross churn rate for 2004, calculated
as a percentage of opening subscribers, improved by 22% to 3.9%, as compared
with 5.0% in 2003. The churn rate has further improved since the fourth quarter
of 2004, and the churn rate in December 2004 was 3.7%.

The data services that we
introduced was an important precursor to our 3G services, since the 3G
technology is expected to move consumers further away from the mass market of
mobile voice communications towards more tailored multimedia mobile services.
Our efforts enabled us to post a strong increase in data service revenues, which
rose by 32% to HK$81.3 million in 2004, while data services as a share of total
mobile service revenues also increased to 9% by December 2004.

The use of prepaid SIM cards has
continued to grow. Prepaid subscriber numbers increased by 13,000, or 5%, to
256,000 in 2004 over 2003. However, ARPU for such prepaid subscribers decreased
to HK$37 in 2004 from HK$60 in 2003 due to aggressive price promotions initiated
by some of our competitors.

Revenues from the sales of mobile
phones and accessories increased by 16% as compared with 2003. This business
made a gross loss of HK$17 million as compared with HK$23.9 million in 2003. The
improvement was mainly attributable to the adoption of the future-focused
strategy  namely, offering handset subsidy promotions for products which are
most likely to encourage an increase in data usage, and the introduction of
premium handsets.

Total operating revenue decreased
by 8%, but cost of sales and services increased by 8% from HK$330.0 million in
2003 to HK$356.5 million in 2004.

Due to the factors listed above,
gross profit decreased by HK$127.9 million, or 14%, from HK$930.0 million in
2003 to HK$802.1 million in 2004. Gross profit as a percentage of total
operating revenues also decreased from 74% in 2003 to 69% in 2004, mainly due to
lower tariff rates and lower mobile services revenue. Our gross profit margin of
mobile services decreased slightly from 83% in 2003 to 79% in 2004,

Operating expenses in 2004 reduced
by HK$79.4 million or 9% from HK$852.7 million in 2003 to HK$773.3 million in
2004. This was achieved despite additional operating costs resulting from the 3G
network roll-out, largely by efficiency gains and lower labor costs resulting
from the setup of our operations centre in Shenzhen in 2002, which enabled us to
improve our service and network quality. Significant savings were made in all
cost components. In particular, both salary and related costs and other
operating costs decreased by 15% and 13%, respectively, in 2004 despite an
increase in headcount and the 3G roll-out.

Share of losses from a joint
venture reduced by HK$4.1 million to HK$0.3 million in 2004 as we have fully
written down the carrying value of our investment in and advances to a joint
venture in Hong Kong in respect of development of applications for wireless
communication in 2003.

Finance costs for 2004 amounted to
HK$26.3 million, HK$26.5 million less than 2003. The decrease was mainly due to
lower average debt levels and lower average borrowing rates in 2004 as a result
of the full repayment of bank and vendor loans in January 2004 as well as the
capitalization of interest and other borrowing costs into fixed assets, which
amounted to HK$5.5 million.

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2003 Compared with 2002

We recorded a net profit of
HK$27.2 million in 2003 as compared with a net loss of HK$117.3 million in 2002.

Total operating revenues for 2003
declined 6% to HK$1,260.0 million as compared with HK$1,342.7 million in 2002,
mainly attributable to the generally weak economy, the outbreak of SARS and
aggressive price promotions. Revenues from mobile services and sales of mobile
phones and accessories accounted for 91% and 9%, respectively, of total
operating revenues in 2003, compared to 91% and 8% in 2002.

Revenue from mobile services
decreased by 6% from HK$1,217.7 million to HK$1,149.9 million in 2003 although
our subscriber base continued to grow by 9% to 660,000 in 2003 as compared with
603,000 in 2002. The year 2003 was full of challenges, such as the adverse
effect of the outbreak of SARS and the weak economy in general. Also, some
competitors launched aggressive price promotions to secure short-term gains. To
respond such challenges, we invested in the quality of our service delivery and
continued our focused approach on market segmentation and service innovation.
This strategy coincided with a shift in consumer attitudes as customers began to
increasingly value innovation and service quality, which enabled us to maintain
our consumer growth.

We continued to make customer
retention a priority and maintain tight control over churn rate. The average
monthly churn rate, calculated as a percentage of opening subscribers, improved
to 5.0% in 2003 as compared with 5.4% in 2002. The relatively high churn rate
was mainly attributable to adverse market conditions in Hong Kong in the first
three quarters in 2003, but the churn rate has significantly decreased since the
fourth quarter of 2003. The churn rate in December 2003 was 3.6%.

Despite the difficult market
conditions, our high service quality and segmentation strategy enabled us to
grow our subscriber base by 9% in 2003. Monthly ARPU for postpaid subscribers
for 2003 fell a modest 4% to HK$201 from HK$209 in 2002.

We remain a leader in the
introduction of innovative data services and was the first operator in Hong Kong
to offer wireless LAN roaming services and unlimited GPRS package. Such
initiatives helped our data service revenue grew by 55% in 2003.

The use of prepaid SIM cards has
continued to grow. Prepaid subscriber number increased by 54,000, or 29%, to
243,000 in 2003 over 2002. However, ARPU for such prepaid subscribers decreased
to HK$60 in 2003 from HK$92 in 2002 due to aggressive price promotions initiated
by some competitors.

Revenues from the sales of mobile
phones and accessories decreased by 5% as compared with 2002. The business made
a gross loss of HK$23.9 million as compared with a gross profit of HK$1.9
million in 2002. The gross loss was mainly attributable to an extremely
competitive market environment in 2003 where more handsets were sold at
subsidized prices to help upgrade existing customers for ongoing retention
programs and to acquire new customers.

Because of the increase in handset
subsidies, while total operating revenue decreased by 6%, cost of sales and
services decreased by only 1% from HK$334.5 million in 2002 to HK$330.0 million
in 2003.

Due to the factors mentioned
above, gross profit decreased by HK$78.2 million, or 7.8%, from HK$1,008.2
million in 2002 to HK$930.0 million in 2003. Gross profit as a percentage of
total operating revenues also decreased from 75% in 2002 to 74% in 2003 due to
the increase in handset subsidies. The gross profit margin of mobile services
increased slightly from 82% in 2002 to 83% in 2003.

Operating expenses decreased by
HK$200.1 million, or 19%, from HK$1,052.8 million in 2002 to HK$852.7 million in
2003. The decrease was primarily due to a reduction in salaries and related
costs and a general decrease in all other operating costs. The reduction in
salaries and related costs in 2003 largely reflected the full year effect of the
restructuring of our organization and the setting up of an operations center in
Shenzhen, China in 2002. Also, as a result of the organizational restructuring,
we incurred onetime restructuring costs in 2002, comprised mainly of severance
pay and payments in lieu of notice to redundant or terminated employees, of
HK$26.6 million.

The decrease in other operating
expenses was a direct result of stringent cost controls and continued
improvements in operating efficiencies that came with an expanded subscriber
base and lowering marginal costs. As a percentage of operating revenues,
operating expenses declined from 78% in 2002 to 68% in 2003.

Share of losses from a joint
venture of HK$4.4 million in 2003 was mainly attributable to the full provision
of our investment in and advances to a joint venture in Hong Kong in respect of
development of applications for wireless communication. We write down the
carrying value of these assets as we regularly assess the expected
recoverability of such investment.

39

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Interest income and finance costs
decreased by HK$1.0 million and HK$6.7 million, respectively, in 2003. The
decrease in interest income was mainly attributable to a decrease in average
cash balance and the drop in average interest rate. The decrease in finance
costs was mainly attributable to a reduction in interest expenses due to a drop
in market interest rate in general.

5.B LIQUIDITY AND CAPITAL RESOURCES

The wireless communications and
data businesses are capital intensive. Development of mobile, international long
distance calling and data networks and service applications requires significant
capital expenditures as well as considerable marketing, administrative and other
expenditures that give rise to negative operating cash flow in the initial years
of operation. We started generating positive cash flows from operations since
2002.

Cash Flow from Operating Activities

We recorded positive cash flow
from operating activities of HK$184.9 million in 2004 as compared with cash
inflows of  HK$241.9 million in 2003 and HK$129.3 million in 2002. The
decrease in cash flow from operating activities primarily resulted from lower
service revenues.

The decrease in net cash inflow of
HK$57.0 million in 2004 over 2003 was mainly attributable to an decrease in
operating profit before working capital changes of HK$54.7 million.

The increase in net cash inflow of
HK$112.6 million in 2003 over 2002 was mainly attributable to an increase in
operating profit before working capital changes of HK$101.2 million.

Cash Flow from Investing Activities

We recorded a net cash inflow from
investing activities of HK$62.1 million in 2004 as compared with net cash
outflows of HK$127.2 million in 2003 and HK$109.5 million in 2002. The decrease
in cash outflow of HK$189.3 million in 2004 over 2003 was mainly due to decrease
in restricted cash deposits as a result of full repayment of bank and vendor
loans in January 2004. The decrease was offset by a HK$70 million increase in
cash invested in the construction of our 3G network.

The increase in cash outflow of
HK$17.7 million in 2003 over 2002 was mainly due to an increase in restricted
cash deposits to cover loan and interest repayable within six months.

Cash Flow from Financing Activities

The amount of bank loans, vendor
loans and financing costs incidental to new vendor loans repaid in 2004 amounted
to HK$807.8 million. During the year, HK$572.9 million was drawn down from the
general and equipment supply facilities from HTIC. As a result, the net cash
used in financing activities in 2004 was HK$234.9 million, an increase over the
2003 amount of HK$173 million which was used to repay the bank loans, vendor
loans and the financing costs.

The amount of bank
loans, vendor loans and the capital element of finance leases repaid in 2003
amounted to HK$314.7 million. During the year, HK$252.8 million was drawn down
from the revolving loan facilities from Nortel. As a result, the net cash used
in financing activities in 2003 was HK$61.9 million, an increase over the 2002
amount of HK$17.6 million which was used to repay the bank loans, vendor loans
and the capital element of finance leases.

Funding Arrangements

Starting from 2002, we recorded
positive cash flow from operating activities, which partly covered our capital
expenditure and loan repayments.

The loan facilities from UOB and
Nortel had both been fully utilized in 2000. On July 30, 2002, we entered into
various documents to amend the bank loans and vendor loans facilities in order
to accommodate changes to our group structure, as well as to vary certain
financial covenants. The maturity date of the loans, amounts lent and interest
provisions were not altered. As of December 31, 2003, the outstanding balances
for the bank loan from UOB and vendor loan from Nortel amounted to HK$481.4
million and HK$240 million, respectively. Such bank and vendor loans were
repayable in three quarterly installments and were secured by a charge over all
the assets, revenues and shares of Mandarin, our main operating subsidiary. The
revolving facility from Nortel had been fully drawn down during 2003.

40

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As of December 31, 2003, we had
total bank and vendor loans of HK$721 million and a cash reserve of HK$314
million. Our net debt (total bank loans and vendor loans less cash reserves)
amounted to HK$407 million and the net debt to equity ratio was 58% as of
December 31, 2003.

Thereafter, the bank loan from UOB
and vendor loan from Nortel were fully repaid in January 2004 through our
operating cash flows and a term loan of HK$500 million, or the New Loan
Facility, extended by HTIC in January 2004. The New Loan Facility was refinanced
by the general facility tranche under Facility Agreement signed on May 13, 2004,
and the indebtedness owed under the New Loan Facility was deemed to have been
fully repaid by the deemed disbursement under the general facility tranche.

In November 2004, the Supplemental Supply Agreement and the
Amendment and Restatement Agreement were signed between Mandarin and HTIC. The
Facility Agreement (as amended by the Amendment and Restatement Agreement)
comprises the following loan and credit facilities:

- 

In 2004, HK$178
million was drawn from the equipment supply facility to pay for invoices issued
under the Supply Contract (as amended by the Supplemental Supply Agreement), of which HK$105 million was non-cash drawdown. The
equipment supply facility has a term of 7.5 years and the outstanding loans are
repayable by eight semi-annual installments commencing four years after the date
of the facility agreement.

The general facility of HK$500
million had been fully drawn, of which HK$75 million was repaid during the year.
As at December 31, 2004, the outstanding balance was HK$425 million. The next
installment amounts to HK$75 million, which will be paid in July 2006, and the
remaining balance will be repayable by installments until July 2011.

As at December 31, 2004, we had
total long-term loans (before deferred charges) of HK$603 million, and cash
reserves of HK$116 million. Net debt (total bank and vendor loans less cash
reserves) amounted to HK$487 million, and the net debt-to-equity ratio was 69%
as at December 31, 2004.

See "Item 5. Operating and
Financial Review and Prospects - Liquidity and Capital Resources - Certain
Indebtedness - Loan Facilities" for details.

Certain Indebtedness

Loan Facilities

Our long-term debt (other than our
obligations under finance leases) was secured by charges on most of our assets,
which included our bank accounts, revenues and receivables, plant and equipment,
intellectual property rights, rights under our telecommunications licenses
(including our 3G license) and goodwill.

In December 2003, our main
operating subsidiary, Mandarin, signed heads of agreement with Huawei, a company
incorporated in Shenzhen, People's Republic of China, in respect of the supply
and installation, on a turnkey basis, of our 3G network and the provisioning of
the related long-term financing, including the provision of a New Loan Facility,
or the Supply Heads of Agreement and Facility Heads of Agreement, respectively.
On December 30, 2003, we gave notice to the lenders of the UOB and Nortel
facilities of our intention to make full repayment of all the outstanding loan
principal and accrued interest of the bank loans and vendor loans of HK$721.4
million. On January 12, 2004, all the outstanding bank and vendor loans under
the Nortel and UOB facilities were fully repaid through our operating cash flows
and the New Loan Facility of HK$500.0 million extended by HTIC, pursuant to the
Facility Heads of Agreement and Supply Heads of Agreement. The New Loan Facility
from HTIC was unsecured and repayable in five progressively increasing
semi-annual installments after drawdown and carried a floating interest rate
tied to HIBOR.

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In July 2004, HTIC, Mandarin and
SUNDAY entered into a facility agreement, or the Facility Agreement, comprising:

- a HK$859 million equipment supply facility, which is a term loan facility
  with a term of 7.5 years from the date the Facility Agreement comes into
  effect following satisfaction of all conditions precedent, for an aggregate
  amount equal to the amounts payable by Mandarin under the Supply Contract. The
  equipment supply facility was drawn down against invoices issued under the
  Supply Contract and repayable by eight semi-annual installments commencing
  four years from the date of the Facility Agreement;
- a HK$500 million general facility, which is a term loan facility in an
  amount of HK$500 million that replaced the New Loan Facility provided by HTIC
  in January 2004. The term of the general facility is 2.5 years from the date
  of original drawdown of the New Loan Facility; and
- a 3G performance bond facility, which is a facility for the issuance of
  the performance bonds required by OFTA (under the terms of the 3G license) to
  be issued to OFTA in the years 2004 to 2010 inclusive in an amount equal to
  the following five years' spectrum utilization fees (as defined in the 3G
  license) payable to OFTA under the 3G license after deducting payments already
  made by us.

On October 22, 2004, we submitted
a performance bond of HK $210.7 million to OFTA by drawing down on the 3G performance bond facility.
The amount of the performance bond was the aggregate amount of the 6th, 7th and
8th years' minimum annual fees.

As security for the provision of
loans and issuance of performance bonds under the Facility Agreement, HTIC was
granted a security package with terms that are standard for similar project
financing arrangements, the principal elements of which include:

- a charge over all the assets, revenues and shares of eight principal
  wholly-owned subsidiaries of SUNDAY, including Mandarin;
- to the extent permitted by OFTA, a charge over the 2G license and 3G
  license issued by OFTA to Mandarin and SUNDAY 3G;
- assignment of Mandarin's rights under the Supply Contract; and
- a guarantee by SUNDAY of the performance by Mandarin of its obligations
  under the Facility Agreement.

We are subject to certain
financial covenants and general covenants, which are customary to transactions
of this nature. HTIC may require repayment of the facilities at any time on the
occurrence of events of default which are standard for similar project financing
arrangements, and which include as an event of default a change in executive
management at any time during the term of the facility resulting from two or
more of Richard John Siemens, Kuldeep Saran, Bruce Hicks and Edward Cheng
ceasing to be directors and involved in the management other than in certain
agreed circumstances.

Pursuant to the First Agreement
and the Second Agreement, all of those persons will resign as directors of
SUNDAY on or about July 29, 2005, which may constitute an event of default
unless a waiver to such term is granted by HTIC.  Failure to comply with
this covenant may entitle HTIC to accelerate the maturity of the outstanding
amounts under the Facility Agreement and if not repaid, to exercise their
security rights over substantially all of our assets.  SUNDAY and PCCW are
considering various alternatives available to them to prevent such event of
default occurring.

In November 2004, Mandarin entered
into  the Supplemental
Supply Agreement, the supplemental agreement to the Subcontract Agreement, or
the Supplemental Subcontract Agreement, and the Amendment and Restatement
Agreement, with HTIC in respect of amendments to the above Supply Contract and
Facility Agreement.

The Amendment and Restatement
Agreement provided for:

> (a)the
>   equipment supply facility under the Facility Agreement to be increased by
>   HK$349,000,000 from HK$859,000,000 to HK$1,208,000,000;
>   (b)the
>   repayment schedule for the general facility within the Facility Agreement to
>   be amended to provide for the next payment to be extended to July 2006 and for
>   the remaining balance to be paid by installments until July 2011; and
>   (c)
>   amendment of certain of the covenants given by Mandarin to the lenders to take
>   account of the changes to the Facility Agreement.

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The table below sets out the
outstanding long-term debts and interest rates of respective facilities as of
December 31, 2004:

|                              | HK$ millions | Interest rate
|----------------------------- | ------------ | -------------
|General Facility              | 425.0        | HIBOR + 3.5% 
|Equipment Supply
    Facility | 178.1        | HIBOR + 3%   

The table below sets out the
repayment schedule for our borrowings as of December 31, 2004:

|                             | HK$ millions
|---------------------------- | ------------
|Balance due in:              |             
|Year 2006                    | 75.0        
|Year 2007                    | 75.0        
|Year 2008
    and thereafter | 453.1       
|                             | 603.1       

Guarantees and Pledges

As of December 31, 2004, Mandarin
has pledged a fixed deposit to UOB to obtain a guarantee of HK$1.1 million to
the Hong Kong Airport Authority in relation to our network facilities installed
at the Chek Lap Kok airport. The guarantee will expire in March 2007.

Future Funding Requirements

Our ability to meet our future
debt service obligations will in large part depend on our improving cash from
operations and utilizing existing financing facilities. We cannot give any
assurance that we can generate sufficient operating cash flow, or that we will
be able to satisfy the required conditions in order to obtain funds or comply
with the covenants to avoid acceleration of the amounts outstanding under our
existing financing facilities.

The actual amount of our financing
requirements will depend on our future performance, market conditions and other
factors, many of which are beyond our control and cannot be predicted with
certainty. We may need to raise additional funds, however, to finance more rapid
expansion, unanticipated operating losses, and new investments for the
development of new or enhanced services and technologies. We would expect to
seek such additional funds, if necessary, through new issuance of shares and
debt financing from banks, vendors or private placements. If we do not have
access to adequate capital on terms favorable to us or at all in a timely
manner, our ability to service our debt, our business, financial condition and
prospects could be severely adversely affected.

Our high debt level could also
have important adverse consequences, including reducing our ability to obtain
additional financing for working capital, capital expenditures, debt service and
other purposes, requiring us to divert a substantial portion of our operating
cash flow to debt service, limiting our flexibility in reacting and taking
advantage of developments and opportunities in the industry and our business,
and placing us at a competitive disadvantage to our competitors that have less
debt.

Inflation

We have not experienced any
significant inflationary pressure in Hong Kong during the three years ended
December 31, 2004. We expect that inflation would not have a material impact on
our business, financial condition or results of operations in 2005. However, if
Hong Kong experiences significant inflation in the future, we may not be able to
fully offset the related higher costs through tariff increases. Our inability or
failure to do so could adversely affect our business, financial condition and
results of operations.

US GAAP Reconciliation

We prepare our consolidated
financial statements in accordance with HK GAAP which differs in certain
material respects from US GAAP. Note 26 to our audited consolidated financial
statements provides a description of the significant differences between HK GAAP
and US GAAP.

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The differences between HK GAAP
and US GAAP include significant differences in the presentation of our results
of operations. Under HK GAAP, consolidated statements of operations are reported
by nature whereby network costs are presented separately under operating
expenses and bad debt expenses are presented under cost of services. Under US
GAAP, however, statements of operations are reported by function and the network
costs and salaries and related costs, excluding depreciation, which are directly
related to the generation of revenue are included in cost of services. Rental,
salaries and related costs and bad debt expenses are presented under selling,
general and administrative expenses.

Other differences between HK GAAP
and US GAAP include accounting for and disclosure of deferred taxation and
compensation costs in respect of grant of share options to employees, the
accounting treatment of connection fee of mobile services and the 3G license.

A reconciliation of net
loss/profit and total shareholders' equity as of and for the years ended
December 31, 2002, 2003 and 2004 under HK GAAP to the comparable amounts
determined under US GAAP is also provided in note 26 to our audited consolidated
financial statements.

5.C RESEARCH AND DEVELOPMENT

We believe that our success
depends on our ability to improve applications in anticipation of emerging
technologies. We will introduce new services and products through:

- internal R&D efforts;
- market research; and
- incorporation of new technologies and applications from third parties.

Since our
inception, we have envisaged the convergence of mobile communications and data
technologies and in anticipation of such convergence, we have, in conjunction
with Nortel, improved and installed onto our 2G mobile network a number of
enhanced and location based services and products, such as Mobile Cupid, Jetso
and Mobile Concierge, which were not previously available elsewhere in Southeast
Asia when we launched our services.

Our product development,
principally relating to improvement of commercially available service
applications, is undertaken primarily by a dedicated team which worked closely
with both devices and software vendors to develop innovative and user friendly
wireless data and applications and services to our subscribers based on existing
and the GPRS technologies to our subscribers.

We rolled out our 3G
data card service on June 12, 2005. Our 3G network was constructed by Huawei, and covers
the whole of Hong Kong. It incorporates Huawei's network solutions, including an
R4-based softswitch core networks, a packet domain core network, more than 1,000
base stations, service platforms and terminals. We have established a close
working relationship with Huawei on technology development and production
innovation regarding 3G applications and services. We believe the proximity of
Huawei's base in Shenzhen to Hong Kong gives us a significant advantage over our
competitors in developing tailor-made services and bringing them to market
quickly. Huawei has one of the largest research and development establishments
of any network equipment manufacturer in the world, including 3,500 engineers
working specifically on 3G. It has strengths in areas that will be critical to
our success in 3G applications and services, such as its IP platform and 3G
service creation, as well as the formulation of an end-to-end solution.

5.D TREND INFORMATION

The wireless communications
industry in Hong Kong is highly volatile and intensely competitive, and has
shifted from being a high-growth mass market to one characterized by saturation
of penetration. We expect that we will continue to encounter aggressive pricing
practices by competitors, fast changing customer demand patterns and rapid
technological developments in the mobile communications industry.

We had substantially completed our
3G network by June 2005. We launched our 3G data card service in June 2005 and
we are ready to launch other 3G services. The other 3G licensees in Hong Kong
launched their 3G services in 2004. Previously, the slower than expected 3G
take-up rates in other markets such as Europe had mainly been attributed to the
lack of handsets; however there are now more 3G handsets available with longer
battery life and more features, and we expect that this trend will continue in
the second half year of 2005 with a broader range of advanced handsets available
from a wider variety of manufacturers. In order to attract new 3G customers and
to migrate existing 2G customers to use 3G services, our 3G competitors provided
substantial handset subsidies and offered attractive pricing plans for 3G that
includes large bundles of data services, and these pricing plans are also
comparable with tariff plans for 2G and 2.5G services.

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Given the importance and size of
the mainland Chinese market, we expect that the future of Hong Kong's mobile
communications industry will be closely linked to that of mainland China. CEPA
may provide an early entry to the Chinese mobile communications market for Hong
Kong mobile operators such as ourselves. We will continue to use our Shenzhen
operations center to drive cost efficiencies and create the foundation to
capitalize upon opportunities that will develop as mainland China
telecommunications industry opens.

5.E. OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2004, we did
not have any off-balance sheet arrangements or any written options on
non-financial assets.

5.F CONTRACTUAL OBLIGATIONS

The following table sets forth
certain information regarding our contractual obligations to make future
payments as of December 31, 2004:

|                                       | Payment Due by Period (HK$ million)
|-------------------------------------- | -----------------------------------
|                                       |                                    
|Contractual Obligations                | Total                              
|Trade payables                         | 60.2                               
|Other payables
    and accrued charges | 205.8                              
|Long-term debts                        | 603.1                              
|Total                                  | 869.1                              

The following table sets forth certain information regarding our other
commercial commitments as of December 31, 2004:

Under the terms of the Facility Agreement (as amended by the
Amendment and Restatement Agreement) with HTIC., the cessation of any two
or more of Richard John Siemens, William Bruce Hicks, Kuldeep Saran and Edward
Wai Sun Cheng as directors involved in the management of the Company other than
by reason of death, disability, removal by shareholders or dismissal for cause
may constitute an event of default unless a waiver to such term is granted by
HTIC Failure to comply with this covenant may entitle HTIC to
accelerate the maturity of the outstanding amounts under the Facility Agreement
and if not repaid, to exercise their security rights over substantially all of
the Group's assets. The Company and PCCW are considering various alternatives
available to them to prevent such event of default occurring.

If we are unable to obtain a waiver
from compliance with such term, then upon resignation of the directors above,
HTIC may elect to accelerate the maturity of the outstanding amounts under the
Facility Agreement and the long term debts will become due within one year, or
enforce its security rights against substantially all of our assets.

|                                | Amount of Commitment expiration
    by Period (HK$ million)
|------------------------------- | -----------------------------------------------------------
|                                |                                                            
|Commercial
    Commitments      | Total                                                      
|Operating lease
    commitments | 352.4                                                      
|Capital
    commitments         | 1,130.0                                                    
|Total                           | 1,482.4                                                    

The actual schedule of payments in
respect of our capital commitments will be dependent on the rate of rollout of
the remainder of our 3G network, which will depend on the demand for such 3G
services in the telecommunications market in Hong Kong over the upcoming months.

45

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Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A DIRECTORS AND SENIOR MANAGEMENT
Directors

In accordance with
the agreement between Distacom, USI and PCCW as set out in the First and Second
Agreements, on or about July 8, 2005, Alexander Anthony Arena, Wing Wa Chan,
Marisa Yuen Man Kwok, Gary Ding Man Chow, Tom Kee Sun Chan and Susanna Hon Hing
Hui will be appointed as additional directors to our board. Subsequent to around
July 29, 2005, Richard John Siemens, William Bruce Hicks, Kuldeep Saran, Kenneth
Michael Katz, Edward Wai Sun Cheng and Andrew Chun Keung Leung will resign as
directors.
As of June 22, 2005, our directors are as follows:
Name
    Age(2)
    Position
    Position Held SinceRichard John Siemens(1)
    60
    Co-Chairman and
    November 24, 1999Executive DirectorEdward Wai Sun Cheng(1)
    49
    Co-Chairman and
    November 24, 1999Executive DirectorWilliam Bruce Hicks(1)
    43
    Group Managing
    Director
    January 1, 2002(3)Kuldeep Saran(1)
    54
    Executive Director
    November 24, 1999Andrew Chun Keung
    Leung(1)
    48
    Executive Director
    November 24, 1999John William Crawford
    63
    Non-executive Director
    November 10, 2003Kenneth Michael Katz(1)
    36
    Non-executive Director
    January 16, 2004Henry Michael Pearson
    Miles
    69
    Non-executive Director
    January 27, 2000Robert John Richard
    Owen
    65
    Non-executive Director
    January 27, 2000Hongqing Zheng
    57
    Non-executive Director
    November 24, 1999Alexander Anthony
    Arena(4)
    54
    Executive Director
    Wing Wa Chan(4)
    54
    Executive Director
    Marisa Yuen Man Kwok
    (4)
    50
    Executive Director
    Gary Ding Man Chow
    (4)
    44
    Executive Director
    Tom Kee Sun Chan (4)
    47
    Executive Director
    Susanna Hon Hing Hui
    (4)
    40
    Executive Director
    ____________________
(1) Will resign as director with effect on or about July 29, 2005.(2) Ages as of June 22, 2005. 
(3) William Bruce Hicks has been an Executive Director since November 24, 1999
and was appointed as the Group Managing Director on January 1, 2002. 
(4) Will be appointed as director on or about July 8, 2005.
Mr. Richard John
Siemens, Co-Chairman and Executive Director, has been with the SUNDAY
group since 1995. Mr. Siemens is chairman and a founding member of Distacom
Communications Limited and co- chairman and a founding member of Mandarin
Communications Limited. He is also the chairman of e-Kong Group Limited. Born
and raised in Canada, Mr. Siemens was trained as a Chartered Accountant and came
to Hong Kong in 1979. In 1984, he formed Hutchison Telephone Company Limited in
partnership with Hutchison Whampoa and Motorola. Mr. Siemens, as group managing
director of Hutchison Telecommunications Limited, was instrumental in the
establishment of other well-known companies including AsiaSat, STAR TV and Metro
Radio and Hutchison's move into the European wireless business with "Orange".
Mr. Edward Wai Sun
Cheng, Co-Chairman and Executive Director, is a founding member of
Mandarin Communications Limited and has been with the SUNDAY group since 1995.
Mr. Cheng is also currently the chief executive of USI Holdings Limited. USI, a
publicly listed company on the Stock Exchange, is a member of the Wing Tai Asia
group. Active in public and community services, Mr. Cheng is the chairman of the
Urban Renewal Authority, a member of the Hong Kong SAR Government's Steering
Committee on Innovation and Technology, the Advisory Committee on Corruption of
the Independent Commission Against Corruption, the Council of the Hong Kong
Institute of Certified Public Accountants and the Council of City University of
Hong Kong.
Mr. William Bruce Hicks,
Group Managing Director, has been with SUNDAY since the Company's inception in
1995 when he led the team which successfully acquired SUNDAY's PCS licence. He
has been a partner and director of Distacom Communications Limited of Hong Kong
since 1994. Prior to joining Distacom, Mr. Hicks was at Hutchison Telecom, where
he was responsible for technical operations in Hong Kong and actively involved
in new business development in Asia and Europe. Mr. Hicks, a Canadian, began his
career with Motorola Inc. in the United States. He received his BSEE degree from
Michigan Technological University in 1983 and an MBA from the International
Management Institute in Geneva, Switzerland in 1987.
46

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Mr. Kuldeep Saran,
Executive Director, has been a director of Mandarin Communications Limited since
1998. He is an executive director of Distacom Communications Limited and deputy
chairman of e-Kong Group Limited. Mr. Saran has extensive experience in
developing, building and managing global telecommunications and other
businesses. He spent several years with a major international bank. He holds a
Bachelors degree in engineering and an MBA.
Mr. Andrew Chun
Keung Leung, Executive Director, has been a director of Mandarin
Communications Limited since 1997. He graduated from the University of Hong Kong
with an Honours Bachelors degree in Laws and a Post Graduate Certificate in
Laws. Between 1980 and 1987, Mr. Leung practiced corporate finance law in Hong
Kong and Sydney, Australia. Thereafter, until 1990, Mr. Leung served as a banker
in the Asian investment banking divisions of two major international investment
banks. Between 1990 and 1993, Mr. Leung initiated and structured a number of key
infrastructure projects in Thailand's communications and mass transit sectors.
From 1993 to 1997, he was the executive director of World-Wide (Holdings)
Limited, a company specializing in direct investment activities for the
Worldwide Investment Group, which was founded by Sir Y.K. Pao. Mr. Leung is
responsible for overseeing USI's communications and technology investments,
including its interests in the SUNDAY group.
Mr. John William
Crawford JP, Independent Non-executive Director, joined the Board of the
Company in November 2003. He was a founding partner of Ernst & Young, Hong Kong
and vice chairman of the firm until he retired in 1997. During his 25 years in
public accounting, he was also the chairman of the audit division of Ernst &
Young and was active in a number of large private and public company takeover
and/or restructuring exercises. He has continued such consultancy/advisory work
in a private capacity since his retirement and is also the chairman of
International Quality Education Limited. Mr. Crawford has been active in various
community service areas such as being a founding member of UNICEF Hong Kong
Committee and the Hong Kong Institute of Directors. In 1997, he was appointed a
Justice of the Peace in Hong Kong. He is a member and was a governor for many
years of the Canadian International School of Hong Kong. Mr. Crawford is an
independent director and is a member of the Company's audit committee, where he
acts as the designated financial expert.
Mr. Kenneth
Michael Katz, Non-executive Director, joined the Board of the Company in
January 2004. Mr. Katz has 13 years experience in project finance, direct
investment and private equity fund management. Since early 2003, Mr. Katz has
formed his own private equity advisory business Westlank Advisors Pte. Ltd. and
is currently managing director of the firm. Prior to that, he was a director of
Emerging Markets Partnership, a private equity fund management company,
responsible for managing an emerging markets Asia investment fund. Previously,
Mr. Katz was the head of Edison Capital in Asia Pacific overseeing the firm's
direct investment efforts. Mr. Katz graduated with a Bachelor of Arts degree in
economics from the University of California, Santa Barbara and also holds an MBA
from the University of Michigan.
Mr. Henry Michael
Pearson Miles OBE, Independent Non-executive Director, has been with the
Company since January 2000. He is currently chairman of Johnson Matthey plc and
Schroders plc, and a non-executive director of BP; all companies registered in
the United Kingdom. Between 1984 and 1988, he was chairman of Swire Pacific
Limited and Cathay Pacific Airways Ltd. He was also a non-executive director of
Hongkong Bank 1984/88. Between 1976 and 1999, he was a director of John Swire
and Sons (Hong Kong) Limited. Between 1988 and 1999, he was an executive
director of John Swire & Sons Limited, to which he is now an advisor. Mr. Miles
was a vice president of the China-British Trade Group from 1990 to 1999 and is a
committee member of the Hong Kong Association. Mr. Miles is an independent
director and is a member of the Company's audit committee.
Mr. Robert John
Richard Owen, Independent Non-executive Director, has been with the
Company since January 2000. From 1979 to 1987, Mr. Owen held various positions
with Lloyds Bank, including chairman of Lloyds Merchant Bank and director of
Investment Banking of the Lloyds Bank group. In 1988, Mr. Owen was recruited by
the Hong Kong Government as advisor on securities markets to lead the
implementation of extensive reforms to the regulation and operation of Hong
Kong's securities and futures markets. From 1989 to 1992, he served as the first
chairman of the Securities and Futures Commission. Since 1992, Mr. Owen has held
a number of concurrent positions which include chairman of Crosby Capital
Partners Ltd. (from 2001), director of Nomura International (Hong Kong) Limited
(from 1994), member of the Regulatory Council of the Dubai International
Financial Centre (since 2002), council member, Lloyds of London (1993-1996),
chairman of Techpacific Capital Ltd. (from 1999 to early 2004), chairman of the
International Securities Consultancy Ltd. (from 2000), director of Singapore
Exchange Limited (from 2004) and director of Citibank (Hong Kong) Ltd. (from
2005), as well as director of various other companies and investment funds. Mr.
Owen is an independent director and is a member of the Company's audit
committee.
47

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Mr. Hongqing Zheng,
Non-executive Director, has been with the SUNDAY group since 1996 when he was
appointed a director of Mandarin Communications Limited. He graduated from the
planning and statistics department of the People's University of China and holds
a Master's degree in economics. Mr. Zheng has over 25 years experience in
economic development work and is a qualified senior economist. Prior to joining
the SUNDAY group, Mr. Zheng was a committee member of the State Commission for
Restructuring Economic System and director of the Comprehensive Planning
Department and general manager of the China Container Corporation. Mr. Zheng is
also a director of China Travel Service (Holdings) Hong Kong Limited and holds
chairmanships and directorships in various subsidiaries of China Travel Service
(Holdings) Hong Kong Limited.
Mr. Alexander
Anthony Arena,is an executive director of PCCW, deputy chairman
of PCCW's Executive Committee, group chief financial officer of PCCW, a director
of Pacific Century Regional Developments Limited, a director of Pacific Century
Insurance Holdings Limited and an executive director and Executive Committee
member of Pacific Century Premium Developments Limited. He joined the Pacific
Century Group in 1998. Prior to joining the Pacific Century Group, Mr Arena was
a Special Policy Adviser to the Hong Kong Government from 1997 to 1998. From
1993 to 1997, he was director-general of telecommunications at the Office of the
Telecommunications Authority of Hong Kong, as well as a member of the
Broadcasting Authority. Before his appointment as director-general, Mr Arena was
recruited to plan a reform program for the liberalization of Hong Kong's
telecommunications sector. Prior to his appointment to the Hong Kong Government,
he was an inaugural member of the Australian Telecommunications Authority, which
he served for four years. Mr Arena has had an extensive career in public
administration, specializing in high technology and infrastructure industries.
From a practising radio/communications engineer to a public policy maker, his
experience spans such diverse areas as the commercialization of government-owned
business enterprises and deregulation in the aviation, transport,
telecommunications and postal industries. Mr Arena graduated from the University
of New South Wales, Australia, with a bachelor's degree in electrical
engineering. He completed a MBA at Melbourne University, Australia, and is a
Fellow of the Hong Kong Institution of Engineers.
Mr. Chan Wing Wa,
managing director of Cascade Limited, joined Hong Kong Telephone Company, or
HKTC, in 1977 and has spent more than 28 years in senior positions in the
network engineering departments of Hong Kong Telecom, Cable & Wireless and PCCW.
Mr Chan served as director of network operations since January 1998, responsible
for the planning and operation of the local fixed network which supports a full
range of telecom services including voice, narrowband and broadband data,
interactive multimedia service and carrier services serving 3.7 million
customers in Hong Kong. He took up the position of director of chief executive
office in November 1999. Then in August 2000, he became the president of service
operations in the telecommunications services sector looking after network
operations and customer services. Before joining HKTC, Mr Chan worked in the UK
for one and a half years as a software design engineer with Standard Telephones
and Cables Ltd. Mr Chan gained a Polytechnic Diploma in Electrical and
Electronic Engineering in 1975 from the Plymouth Polytechnic in the UK and a
Diploma in Management for Executive Development in 1986 from the Chinese
University of Hong Kong. Mr Chan is a Chartered Engineer and a member of the
Institution of Electrical Engineers and the Hong Kong Institution of Engineers.
Ms. Kwok Yuen Man,
Marisa, joined PCCW as managing director, commercial group in 2004.
Recently, she is assigned as the executive coordinator of the integration
committee on the acquisition of SUNDAY. She began her extensive experience in
telecommunications with Bell Canada. During her appointment with Hong Kong
Telecom, she held senior management positions in telecom systems and products,
personal, business and corporate markets. In 2001, she joined Hong Kong CSL
Limited as director, marketing & operations. Ms Kwok is the president of fixed
network and VAS Group and the Executive Committee of the Internet and Telecom
Association of Hong Kong. She holds an Honours B.A. in Business Administration
from the University of Western Ontario.
Mr. Chow Ding Man,
Gary, joined the PCCW Group in February 1986 as a sales executive. He
worked in various management positions within the PCCW Group and is currently
the acting head of commercial group. Mr Chow graduated from the University of
Hong Kong with a bachelor's degree in biology. He has 19 years of experience in
business operation and management and an in-depth knowledge of the
communications business in Hong Kong.
Mr. Chan Kee Sun,
Tom, is the president of consumer sales and channel of PCCW, responsible
for all PCCW's consumer sales teams covering telesales, shops, direct sales,
partnership sales and consumer roadshow. He joined the PCCW Group in September
1988. Mr Chan has over 16 years of experience with PCCW in different managerial
and executive roles, covering finance, regulatory, carrier business, marketing
and sales. He is a Certified Public Accountant and a Fellow of both Association
of Chartered Certified Accountants and Chartered Institute of Marketing.
Ms. Hui Hon Hing, Susanna,
joined the PCCW Group in 1999 and is now director of finance responsible for the
telecommunications services sector and regulatory accounting. She is a qualified
accountant and is a member of both the Hong Kong and the American Institute of
Certified Public Accountants. Ms. Hui graduated from the University of Hong Kong
with first class honors and has held various senior positions with banks and
listed companies prior to joining the PCCW Group.
48

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The following person
resigned/retired as director during the year ended December 31, 2004:

|Name         | Position               | Resignation/Retirement Date
|------------ | ---------------------- | ---------------------------
|Simon Murray | Non-executive Director | September 24, 2004         

Senior Management

Our senior management as of June
22, 2005 is as follows:

|Name                        | Position                                     | With
    SUNDAY Since
|--------------------------- | -------------------------------------------- | ---------------------
|Janet Ching Man Fung        | Group Director -
    Operations              | 1997                 
|Agnes Pik Yee Tang Mak      | Group Director -
    Information Technology  | 2003                 
|Frankie Chun Keung
    Wong | Group Director -
    Network Operations      | 1996                 
|Henry Kam Heng Wong         | Group Director - New
    Technologies        | 1996                 
|Karen Ka Wun Cheng          | Director - Customer
    Care                 | 2005                 
|Wai Lok Cheung              | Director - Legal &
    Regulatory            | 2000                 
|Alex Kei Tung Kun           | Director - New
    Technologies              | 1999                 
|Jady Yuk Ming Leung         | Director - Sales                             | 2004                 
|Raymond Wai Man Mak         | Director - Finance and
    Company Secretary | 1999                 
|Pauline Poh Gaik Ooi        | Director - Internal
    Audit                | 2001                 

Ms. Janet Ching
Man Fung, Group Director  Operations, overseeing Sales, Marketing &
Communications, and Customer Care departments of the SUNDAY group. Ms. Fung
joined the SUNDAY group in 1997 as Group Director  Finance and Company
Secretary. She has extensive experience in public accounting, financial
consultancy and management in Hong Kong and the PRC. Prior to joining the SUNDAY
group, she was the finance director of the Far East operations of Liz Claiborne
Group. She holds a first class honours degree in management studies from the
University of Hong Kong and is a fellow member of the Association of Chartered
Certified Accountants (UK), the Hong Kong Institute of Certified Public
Accountants, and a member of CPA Australia.

Mrs. Agnes Pik Yee
Tang Mak, JP, Group Director  Information Technology, joined the SUNDAY
group in February 2003. Mrs. Mak has over 20 solid years of experience in
information technology, with a proven track record of using IT as a tool for
business growth and performance improvement, operations, and cost control in
alignment with business objectives, policies and priorities. Prior to joining
the SUNDAY group, Mrs. Mak was Head of IT of Mandatory Provident Fund Schemes
Authority, Head IT  Asia Pacific North of British American Tobacco China and
the director of MIS of The Gap (Far East) Ltd. Mrs. Mak is a distinguished
fellow and past president of Hong Kong Computer Society. She is also a council
member of Hong Kong Productivity Council, member of the Finance Committee of
Hong Kong Housing Authority, and the IT Projects Vetting Committee and General
Support Program Vetting Committee of the Innovation and Technology Fund.

Mr. Frankie Chun
Keung Wong, Group Director  Network Operations, joined the SUNDAY group
in 1996. He has over 16 years experience in planning, development, engineering
and operation in mobile and fixed networks. Prior to joining the SUNDAY group,
Mr. Wong worked for Hutchison Telecom (Hong Kong) and was responsible for
building the GSM and CDMA networks. Earlier, he was involved in a number of
projects with Cable & Wireless HKT in switching, Intelligent Network,
transmission and network management areas. He holds a first class honours degree
in electrical & electronic engineering from the City University (London), and he
is a chartered engineer, member of Institute of Electrical Engineers (UK) and
The Hong Kong Institution of Engineers.

Dr. Henry Kam Heng
Wong, Group Director  New Technologies, joined the SUNDAY group in 1996
following seven years at Hutchison Telecom (Hong Kong) Ltd, where he was senior
manager in the Radio Systems Engineering Department of Hutchison Telephone
Company Ltd. He was involved in the building of network, the first CDMA
commercial system in the world. His academic qualifications include a BSc (Hons)
in computer engineering from University of Manchester, a PhD in mobile radio
telecommunications from University of Southampton and an MBA from the University
of Hull.

Ms. Karen Ka Wun Cheng,
Director  Customer Care, Customer Service Department. Ms. Cheng has 18 years
experience in the customer service and marketing fields. Prior to joining
SUNDAY, she worked for Manulife International Limited as Senior Manager of
Customer Relationship Management. Previously, Ms. Cheng was the General Manager
of CRM Project Management and the General Manager of Mobile Commerce and
Value-added Service Marketing at CSL. She also served as Head of Direct Banking
of Citic Ka Wah Bank and Assistant General Manager of Customer Service at
Pacific Link Communications. She holds an MSc. in Electronic Commerce from The
Chinese University of Hong Kong, an MBA from The Hong Kong Polytechnic
University, and a BBA from Ottawa University, Kansas.

49

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Mr. Wai Lok
Cheung, Director  Legal & Regulatory, joined the SUNDAY group in 2000.
Mr. Cheung brings with him a wealth of experience in the legal and regulatory
side of the telecommunications industry. Prior to joining SUNDAY, he was the
general manager, legal, administration and procurement at Peoples Telephone
Company. His academic qualifications include an LLB and LLM from the University
of Wolverhampton, an MBA from Leicester University and Honours Diploma in
Company Secretaryship and Administration from Lingnan University. Mr. Cheung is
an associate of The Institute of Chartered Secretaries and Administrators UK and
the Hong Kong Institute of Company Secretaries.

Mr. Alex Kei Tung
Kun, Director  New Technologies, joined the SUNDAY group in 1999. Mr.
Kun is responsible for data products and services development and
implementation, including content aggregation, strategic product and service
planning, as well as project management and deployment. Prior to joining SUNDAY,
Mr. Kun was the business development director of Next Media Interactive, Next
Media Group. He holds a BSc in Computer Information Systems from Eastern
Washington University and is a council member of the Hong Kong Wireless
Technology Industry Association Limited.

Ms. Jady Yuk Ming Leung, Director 
Sales, joined the SUNDAY group in 2004. She has over 20 years of working
experience in marketing, sales, customer services and business management
profession with over 12 years specifically in the telecommunications industry.
Before joining the SUNDAY group, Ms. Leung was the chief operating officer of
Star Telecom Limited, and has extensive experience gained from various network
operators such as Peoples and New World. Her wide range of experience includes
the launching and operations of various telecommunications services ranging from
paging, fixed network, cable TV and mobility services to the wholesaling and
distribution of telecom products. She holds a Bachelor degree of Business
Administration from the Chinese University of Hong Kong.

Mr. Raymond Wai
Man Mak, Director  Finance and Company Secretary, joined the SUNDAY
group in 1999. Mr. Mak has extensive financial management, auditing and business
consulting experience in Hong Kong and China. Prior to joining the SUNDAY group,
he was an audit manager at the Hong Kong Jockey Club and an experienced manager
at an international audit firm. He holds an MBA from the University of Warwick,
and is an associate member of the Hong Kong Institute of Certified Public
Accountants and a fellow member of the Association of Chartered Certified
Accountants (UK).

Ms. Pauline Poh
Gaik Ooi, Director  Internal Audit, joined the SUNDAY group in 2001.
She has over 15 years of experience in audit and business development in the
Asia-Pacific region. Prior to joining SUNDAY, Ms. Ooi was a manager of the
internal audit team at PCCW responsible for a wide variety of audit related
assignments, fraud and ad hoc investigations and special review projects. Ms.
Ooi started her early career in the accounting firms in Deloitte Touche Tohmatsu
and PricewaterhouseCoopers. She holds a Bachelor degree, majoring in Accounting
& Information Systems, from the University of New South Wales in Australia and
is a member of CPA Australia and the Hong Kong Institute of Certified Public
Accountants.

6.B COMPENSATION

Remuneration of the Group Managing
Director and the Executive Directors is prudently designed to attract, motivate
and retain them to formulate strategies and to oversee operational matters and
to reward them for enhancing value to the shareholders. The Group Managing
Director is also entitled to a discretionary bonus which is assessed based on
both individual and group performance.

For the year ended December 31,
2004, the aggregate compensation paid to our directors was as follows:

50

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|                     |         | Salary, other     |               |        
|-------------------- | ------- | ----------------- | ------------- | -------
|                     |         | allowances        | Retirement    |        
|                     |         | and
    benefits- | scheme        |        
|Directors            | Fees    | in-kind           | contributions | Total  
|                     | HK$'000 | HK$'000           | HK$'000       | HK$'000
|                     |         |                   |               |        
|Richard John Siemens | -       | 1,500             | 30            | 1,530  

|Edward Wai Sun Cheng            | -   | 1,500 | 30  | 1,530 
|------------------------------- | --- | ----- | --- | ------
|William Bruce Hicks             | -   | 3,976 | 30  | 4,006 
|Kuldeep Saran                   | -   | 1,500 | 30  | 1,530 
|Andrew Chun Keung
    Leung     | -   | 1,500 | 30  | 1,530 
|John William Crawford
    (1)   | 200 | -     | -   | 200   
|Henry Michael Pearson
    Miles | 200 | -     | -   | 200   
|Simon Murray (2)                | 146 | -     | -   | 146   
|Robert John Richard
    Owen    | 200 | -     | -   | 200   
|Kenneth Michael Katz
    (3)    | -   | -     | -   | -     
|Hongqing Zheng                  | -   | -     | -   | -     
|                                | 746 | 9,976 | 150 | 10,872

___________ 
Notes:

(1) Appointed on November 10, 2003. 
(2) Resigned on September 24, 2004. 
(3) Appointed on January 16, 2004.

No options were granted to or
exercised by the directors in 2004.

The aggregate
amounts of compensation incurred for all our senior officers was approximately
HK$11.1 million in 2004. We have set up a defined contribution scheme to
provide retirement benefits for our employees in Hong Kong. In 2004, our
contribution to the defined contribution scheme was HK$6.5 million.

We paid each of our independent
non-executive Directors an annual director fee of HK$0.2 million, HK$0.2 million
and HK$0.2million for the years ended December 31, 2002, 2003 and 2004,
respectively, except Mr. Simon Murray who was paid HK$146,000 for the period
ended September 23, 2004, as compensation for acting in such capacity. We will
review the amount of compensation annually.

6.C BOARD PRACTICES

As of June 22, 2005, our board
consisted of ten members. There are five Non-executive Directors, three of whom
are independent Non-executive Directors. Pursuant to our Articles of
Association, at each general meeting one-third of our directors shall retire
from office by rotation, provided that every director is subject to retirement
by rotation at least once every three years. If the number of directors on the
board is not a multiple of three, the number of directors to retire shall be
decreased to the number nearest to but not greater than one-third. A retiring
director shall be eligible for re-election. None of the directors has entered
into or is proposing to enter into a service contract with the Company or its
subsidiaries, which is not determinable by the employer within one year without
payment of compensation (other than statutory compensation). There are no
provisions relating to retirement of directors upon reaching any age limit.

Our board has determined that our
independent Non-executive Directors do not have a relationship with the Company
that would impair their independence and that they satisfy the director
independence requirements under the Nasdaq corporate governance rules. The
independent Non-executive Directors and their immediate family receive no
payments from the Company or its subsidiaries (except for director fees). No
family member of any independent non-executive Directors is employed as an
executive officer of the Company or its subsidiaries, or has been so in the past
three years. The independent Non-executive Directors are subject to retirement
by rotation and re-election at the annual general meeting in accordance with our
Articles of Association.

Our board is scheduled to meet at
least four times a year to determine overall strategic direction and objectives
and approve interim and annual results, budgets and other significant matters.
All directors are able to take independent professional advice at the Company's
expense in furtherance of their duties if necessary. The roles of the
Co-Chairmen and the Group Managing Director are distinct and segregated with a
clear division of responsibility. The role of Non-executive Directors is to
enhance independence and objectivity of the Board's deliberations and decisions.
During the year ended December 31, 2004, five board meetings were held with an
average attendance rate of 77%.

The board appointed an executive
management committee which consists of our Executive Directors. The principal
functions of this committee include formulating strategies and overseeing our
operational matters under the direct authority of the board. The committee meets
regularly each month and on an ad hoc basis as required with senior management,
and engages in frequent informal discussions.

51

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Our board also appointed an audit
committee, with written terms of reference that set out the authorities and
duties of the committee, which consists of the three independent Non-executive
Directors. Its principal duties include selecting and engaging on our behalf
independent public accountants to audit our financial statements, reviewing and
approving the nature and scope of both the statutory and internal audits,
considering and approving our interim and annual financial statements, and
reviewing the adequacy and effectiveness of our accounting and financial
controls. The audit committee re-assesses the Audit Committee Charter on an
annual basis. The audit committee meets at least twice a year and also meets
regularly with the external auditors and our internal audit personnel and
follows up with management regularly regarding management actions arising from
the audits.

The members of the audit committee
are Mr. Robert Owen, Mr. John William Crawford and Mr. Michael Miles. During the
year ended December 31, 2004, three committee meetings were held and the
attendance by the members is set out as follows:

|Audit Committee Members                           | Meetings Attended/Held
|------------------------------------------------- | ----------------------
|John William Crawford                             | 3/3                   
|Henry Michael Pearson
    Miles                   | 2/3                   
|Robert John Richard
    Owen                      | 3/3                   
|Simon Murray (resigned
    on September 24, 2004) | 1/2                   

The board has also appointed a
remuneration committee which consisted of three members, namely Mr. Richard
Siemens, Mr. Edward Cheng and Mr. Michael Miles, to review matters relating to
compensation of the directors and officers and such other matters relating to
remuneration as directed by the board from time to time. None of the members of
the remuneration committee has any personal financial interests (other than as
shareholders) or conflicts of interest arising from the day-to-day involvement
in the running of the business. No director plays a part in any discussion
regarding his own remuneration. The remuneration committee was restructured in
2005 to comply with the new requirements of the Listing
Rules, and currently comprises of Mr. Richard Siemens and the three independent
directors, Messrs. John Crawford, Michael Miles and Robert Owen.

In 2000, the board appointed a
share option scheme committee which currently comprises Mr. Richard Siemens and
Mr. Edward Cheng to deal with the granting of share options under the share
option scheme approved by the shareholders. Two independent nonexecutive
Directors, Mr. Michael Miles and Mr. Robert Owen, had been delegated with full
powers of the board to deal with granting of share options to our two
Co-Chairmen before the amendment of Chapter 17 the Listing
Rules in September 2001. In accordance with the amended Chapter 17 of the
Listing Rules, the granting of share options to our directors, the chief
executive, and substantial shareholders requires approval by the independent Non-executive Directors.

INTERNAL AUDIT

An internal audit function was
established in May 2001 with an Internal Audit Charter approved and adopted by
the audit committee. The internal audit function is an independent unit which
provides to the board of directors an independent appraisal of our system of
internal controls by means of conducting reviews to evaluate the adequacy and
effectiveness of the controls established to safeguard shareholders' investments
and our assets. The head of the internal audit function has a direct reporting
line to the Audit Committee.

6.D EMPLOYEES

We had a total of 773 employees as
of December 31, 2004, of which 502 employees were in Hong Kong and 271 employees
were in Shenzhen, China. We offer comprehensive remuneration and benefits
packages to all employees. Remuneration of employees is maintained at
competitive levels, and promotion and salary increments are assessed based on
individual and Group performance. Other staff benefits include Mandatory
Provident Fund schemes, subsidized medical care and subsidies for external
educational and training programs.

We adopted an employee share
option scheme on March 1, 2000, or the Old Scheme, and have since issued share
options to most of our permanent employees. On May 22, 2002, our shareholders
approved the adoption of a new share option scheme, or the New Scheme, and the
termination of the operation of the Old Scheme. Upon termination of the Old
Scheme, no further options will be offered under the Old Scheme but the
provisions of the Old Scheme will remain in full force and effect in respect of
the existing options granted.

52

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6.E SHARE OWNERSHIP

The following table shows the
number and class of voting securities of the Company owned by the directors and
senior management who had interests as of June 22, 2005.

|Name                        | Position                                | Shares Outstanding | Special Voting Rights
|--------------------------- | --------------------------------------- | ------------------ | ---------------------
|Janet Ching Man Fung        | Group Director -
    Operations         | Less
    than 1%   | None                 
|Frankie Chun Keung
    Wong | Group Director -
    Network Operations | Less
    than 1%   | None                 
|Henry Kam Heng Wong         | Group Director - New
    Technologies   | Less
    than 1%   | None                 
|Alex Kei Tung Kun           | Director - New
    Technologies         | Less
    than 1%   | None                 
|Raymond Wai Man Mak         | Director - Finance                      | Less
    than 1%   | None                 

Statements as to
securities beneficially owned by directors and senior management, or as to
securities over which they exercise control or direction, are based upon
information obtained from such directors and senior management and from records
available to us.

Share Option Scheme

Share Option Scheme Adopted on March 1, 2000

We adopted an employee share
option scheme on March 1, 2000. Under the terms of the scheme, our board of
directors may, in its discretion from time to time, and subject to such
conditions as it may determine, within 10 years beginning on the adoption date,
offer to grant qualifying employees and directors of our company or our
subsidiaries options to subscribe for our ordinary shares. Upon accepting an
option, a grantee must pay HK$1.00 token of acceptance to us as consideration
for the grant.

The maximum number of ordinary
shares over which options may be granted under this scheme may not, when
aggregated with any shares subject to any other executive and employee share
option scheme involving the issue or grant of options over our shares and other
securities, exceed 10% of our issued share capital from time to time (excluding
for this purpose from the issued share capital any shares which have been issued
on the exercise of any option granted under this scheme). The number of shares
over which an option may be granted to any one person at any time is limited
such that no person may be granted an option, which, if exercised in full, would
result in such person becoming entitled to subscribe for shares which, when
aggregated with the total number of shares subscribed under options previously
granted to that employee, would exceed 25% of the aggregate number of shares
over which all options may be granted under the scheme.

Our board of directors may
determine, in its discretion, the consideration for a share payable by a
participant upon the exercise of any option granted under the share option
scheme, save such price will not be less than the higher of: (1) the nominal
value of a share; or (2) 80% of the average of the closing prices of our shares
on the Stock Exchange of Hong Kong on the five trading days immediately
preceding the date of grant of the option on which there were dealings in our
shares on the Stock Exchange of Hong Kong.

Our board of directors has
absolute discretion to determine the exercise period of any option, except that
no option may be exercised more than 10 years after its grant.

Where there is any change in our
capital structure, such corresponding alterations shall be made in the number of
shares subject to any option, the subscription price, the method of exercise of
any option and/or the maximum number of shares available for subscription under
the scheme as independent auditors shall certify in their opinion to be fair and
reasonable. No change in our capital structure is permitted where it will cause
shares to be issued below their nominal value.

Our board of directors may in
certain circumstances alter our share option scheme by resolution, except that
any material alterations to the terms are subject to prior approval by the Stock
Exchange of Hong Kong. No alteration is permitted to certain provisions to the
extent such alteration adversely affects any options granted or agreed to be
granted before the date of such alteration, save with the consent of the holders
of not less than two-thirds of the shares to be issued on exercise of the
relevant options.

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On March 23, 2000, we granted 39,586,616 share options to all employees hired
on or before March 22, 2000 for a total consideration of HK$630. The share
options are exercisable at HK$3.05 per share. On May 31, 2000, we granted
146,483,120 share options to all employees and Executive Directors for a total
consideration of HK$682, exercisable at HK$1.01 per share, and 3,108,961 share
options to employees hired after March 22, 2000 for a total consideration of
HK$93, exercisable at HK$3.05 per share. On January 19, 2001, we granted
4,213,147 share options to employees hired after May 30, 2000 for a total
consideration of HK$178, exercisable at HK$1.01 per share. Of the options
granted, generally, 40% become exercisable after one year from the grant date
and 30% per annum during the following two years.

During the year ended December 31,
2002, no options were exercised and options over 35.4 million shares were
forfeited upon termination of employment of certain employees. No compensation
cost to employees is required to be recognized in 2002 in respect of the grant
of the share options under HK GAAP. Under US GAAP, there was a write-back of
compensation cost of HK$111,000. The US GAAP accounting treatment and the basis
of amortization are set out in note 27(a)(iii) to our audited consolidated
financial statements.

In March 2003, options over 75
million shares of the five Executive Directors were cancelled at a total
consideration of HK$5. As of May 31, 2005, no options were held by our
directors. The table below sets out the share options granted to senior
management to purchase our ordinary shares, which are outstanding as of May 31,
2005.

|                | Securities      | Number of Securities |                |                 
|--------------- | --------------- | -------------------- | -------------- | ----------------
|                | Called for      | Underlying Options   | Exercise Price | Expiration Date 
|Senior officers | Ordinary Shares | 8,365,750            | $3.05          | March 23, 2010  
|                | Ordinary Shares | -                    | $3.05          | May 31, 2010    
|                | Ordinary Shares | 8,365,750            | $1.01          | May 31, 2010    
|                | Ordinary Shares | 362,919              | $1.01          | January 19, 2011

Share Option Scheme Adopted on May 22, 2002

Chapter 17 of the Listing Rules,
which governs the operation of share option schemes of companies listed in Hong
Kong, was amended in September 2001. In response to such changes, on May 22,
2002, our shareholders at an extraordinary general meeting approved the adoption
of the New Scheme which complies with the amended Chapter 17 and termination of
the operation of the share option scheme adopted on March 1, 2000, or the Old
Scheme. Upon the termination of the Old Scheme, no further options will be
offered under the Old Scheme but the provisions of the Old Scheme will remain in
full force and effect in respect of existing options granted.

Under the New Scheme, our board of
directors may, at its discretion, within ten years commencing on the date of
adoption of the New Scheme, grant options to the eligible participants that
include (i) any director, employee, consultant, customer, supplier, agent,
partner or adviser of or contractor to the SUNDAY group or a company in which
the SUNDAY group holds an interest or a subsidiary of such company, or an
affiliate; or (ii) the trustee of any trust the beneficiary of which or any
discretionary trust the discretionary objects of which include any director,
employee, consultant, customer, supplier, agent, partner or adviser of or
contractor to the SUNDAY group or an Affiliate; or (iii) a company beneficially
owned by any director, employee, consultant, customer, supplier, agent, partner,
adviser of or contractor to the SUNDAY group or an affiliate. Each grant of
options to a director, chief executive or substantial shareholder or any of
their respective associates must be approved in accordance with the requirements
of the Listing Rules. Upon accepting an option, a grantee must pay HK$1.00 token
of acceptance to us as consideration for the grant.

The maximum number of ordinary
shares which may be issued upon exercise of all outstanding options granted and
yet to be exercised under the New Scheme and any other schemes must not, in
aggregate, exceed 30% of our ordinary shares in issue from time to time. No
options may be granted under any share option scheme (including the New Scheme)
if this will result in the said 30% limit being exceeded.

The total number of ordinary
shares available for issue pursuant to options which may be granted under the
New Scheme and any other share option schemes must not, in aggregate, exceed 10%
of our issued share capital as at the date of approval of the New Scheme by our
shareholders, or the Scheme Mandate Limit, unless shareholders' approval is
obtained to refresh the Scheme Mandate Limit, provided that the Scheme Mandate
Limit so refreshed must not exceed 10% of our issued share capital on the date
of the shareholders' approval. Upon any such refreshment, all options granted
under the New Scheme and any other share option schemes (including those
outstanding, cancelled, or lapsed in accordance with the New Scheme or any other
share option scheme and exercised options) prior to the approval of such
refreshment will not be counted for the purpose of calculating whether the
refreshed Scheme Mandate Limit has been exceeded. Our board may also seek
separate shareholders' approval in general meeting to grant options beyond the
Scheme Mandate Limit (whether or not refreshed) provided that the options in
excess of the Scheme Mandate Limit are granted only to the eligible participants
specified by us before such approval is sought.

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No option may be granted to any
eligible participant which, if exercised in full, would result in the total
number of ordinary shares issued and to be issued upon exercise of the share
options already granted or to be granted to such eligible participant under the
New Scheme (including exercised, cancelled and outstanding share options) in the
12-month period up to and including the new option grant date to exceed one per
cent. of our issued share capital as of the new option grant date. Any grant of
further share options above this limit shall be subject to certain requirements
provided under the Listing Rules.
The exercise price for any
ordinary share under the New Scheme will be determined by our board of directors
and notified to each grantee and will be not less than the highest of (i) the
closing price of our ordinary share as stated on the Stock Exchange of Hong
Kong's daily quotations sheet on the date of grant of the relevant option, which
must be a business day, (ii) an amount equivalent to the average closing price
of a share for the five business days immediately preceding the option grant
date and (iii) the nominal value of a share.
As of June 22, 2005, no options
had been granted under the New Scheme.

Pursuant to the mandatory cash offer
to be made by PCCW for the remaining of our shares on or about July 8, 2005,
PCCW has indicated that it will also make an appropriate offer or proposal to
the holders of our outstanding share options to acquire their outstanding share
options.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A MAJOR SHAREHOLDERS

The following table contains
information concerning the ownership of our ordinary shares by each person whom
we know beneficially owns 5% or more of our ordinary shares as of June 22, 2005.

|                                 | Number of Ordinary Shares | Percentage of Ordinary
    Shares
|-------------------------------- | ------------------------- | ---------------------------------
|Name of Beneficial Owner         | Beneficially Owned        | Beneficially Owned               
|PCCW Limited(1)                  | 1,790,134,000             | 59.87%                           
|Huawei Technologies Co., Ltd.(2) | 296,416,000               | 9.91%                            

|____________
|------------
|(1)         
|(2)         

As of June 14, 2005, there were
approximately 324,005ADSs (representing 32,400,500 ordinary shares) in
issue, which were held by approximately 666beneficial holders in the
U.S.

PCCW is incorporated in Hong Kong
and through its group companies, provides local and international
telecommunications services, internet and interactive multimedia services, the
sale and rental of telecommunications equipment and the provision of computer,
engineering and other technical services, mainly in Hong Kong; investment in,
and development of, systems integration and technology-related businesses; and
investment in, and development of, infrastructure and properties in Hong Kong
and elsewhere in the People's Republic of China.

Huawei started
acquiring our shares in the open market from January 2004. By February 5, 2004,
Huawei had acquired a total of 163,848,000 shares, or approximately 5.5% of our
total shares in issue. On March 18, 2004, Huawei's interest in SUNDAY increased
to 187,496,000 shares, or approximately 6.3% of total shares in issue; to
212,488,000 shares, or approximately 7.1%, on May 11, 2004; and to 239,784,000
shares, or approximately 8.0% of our total shares in issue on May 24, 2004. On
June 14, 2005, Huawei further increased its interest to 296,416,000 shares, or
approximately 9.91% of our total shares in issue.

For a description of these
agreements and arrangements between our major shareholders and us, see "Item 7.
Related Party Transactions - Transactions with Major Shareholders and Their
Affiliates."

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7.B RELATED PARTY TRANSACTIONS

We have entered
into a number of transactions with our major shareholders, beneficial
shareholders, and their respective affiliates. We believe that such transactions
have generally been as favorable to us as similar transactions with third
parties would have been. Set forth below is a summary of such transactions.

Transactions with Major Shareholders and Their Affiliates

Major Transactions
with PCCW and its Affiliates

With effect from June 22, 2005, PCCW
beneficially owns approximately 59.87% of our ordinary shares, and has become a
substantial shareholder.

Provision of
telecommunications services to the Group

Since 1997, PCCW and its subsidiaries has started providing
certain types of  leased circuits and interconnection capacity to us. The terms of the agreements entered into between PCCW, its subsidiaries and us are in accordance with usual commercial practices
and entered into in the ordinary course of business, and are currently stated to
expire on September 30, 2006.

Agreements with Huawei and its
Affiliates

Supplemental Supply Agreement

On November 15, 2004, Mandarin
entered into the Supplemental Supply Agreement with HTIC in respect of
amendments to the Supply Contract.

The Supplemental Supply Agreement
became effective on December 23, 2004. The Supplemental Supply Agreement set out
the terms for the purchase and installation of additional equipment under the
Supply Contract. The value of equipment purchased increased for HK$859 million
to HK$1,208 million. Payment for all equipment and services provided under the
Supplemental Supply Agreement will be satisfied by drawdown of the equipment
supply facility under the Facility Agreement, as increased by the Amendment and
Restatement Agreement.

Amendment and Restatement Agreement to the Facility Agreement

The Amendment and Restatement
Agreement provides for:

> (a) the equipment supply facility under the
>   Facility Agreement to be increased by HK$349,000,000 from HK$859,000,000 to
>   HK$1,208,000,000;
>   (b) the repayment schedule for the general
>   facility within the Facility Agreement to be amended to provide for the next
>   payment to be extended to July 2006 and for the remaining balance to be paid
>   by installments until July 2011; and
>   (c) amendment of certain of the covenants given by
>   Mandarin to the lenders to take account of the changes to the Facility
>   Agreement.

The Amendment and Restatement
Agreement became effective on December 23, 2004.

Supplemental Agreement to the Subcontract

On November 15, 2004, Mandarin
entered into the
Supplemental Subcontract Agreement, with HTIC for the amendment of certain work
and equipment schedules in the Subcontract Agreement.

Supply Contract

On May 13, 2004, Mandarin and HTIC
entered into the Supply Contract for the supply and installation of a mobile
communications network and associated services on a turnkey basis. HTIC, as the
contractor, is obligated to design, manufacture, install the 3G network, and
will be responsible for the integration and ensuring the full operability
between the existing network and the 3G network. HTIC is further obligated to
provide maintenance services for specified warranty periods, and ensuring that
the 3G network and associated systems will perform to certain agreed minimum
performance criteria. The contract price for the Supply Contract was HK$859
million.

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Facility Agreement

On May 13, 2004, HTIC, Mandarin
and SUNDAY Communications Limited entered into the Facility Agreement for the
provision of long-term financing in relation to the 3G mobile communications
network. The Facility Agreement comprised a HK$859 million equipment supply
facility, a HK$500 million general facility and a 3G performance bond facility.
We paid HK$17.7 million interest costs and repaid $75 million to HTIC in respect
of the loan facilities under the Facility Agreement during 2004.

Subcontract Agreement

On May 13, 2004, Mandarin and HTIC
entered into a Subcontract Agreement, pursuant to which Mandarin, as a
subcontractor to HTIC under the Supply Contract, agreed to perform certain civil
works and equipment installation on designated cell sites in respect of the
installation of certain equipment for the 3G mobile communications network.

Transactions with Related Companies

We lease various
premises for our warehouses, switching centers and repair center and have
obtained property license rights for certain cell sites from affiliates of our
shareholders and companies controlled by the father of Peter Kin Ngok Lam who
was one of our directors up to May 22, 2003. For the years ended December 31,
2002, 2003 and 2004, we made lease payments to such affiliates amounting to
HK$4.3 million, HK$1.3 million and HK$126,000, respectively. During the period
from January 1, 2005 to May 31, 2005, we made lease payments to such affiliates
of our shareholders amounting to approximately HK$53,000.

We entered into certain agreements
based on normal commercial terms with Lifetree Convergence Limited, or Lifetree,
during the years ended December 31, 2001 and 2002. Lifetree provided various
software development and consulting services to us, for which we paid
approximately HK$0.8 million and HK$1.6 million to Lifetree in 2001 and 2002,
respectively. Messrs. Richard John Siemens, Edward Wai Sun Cheng, William Bruce
Hicks and Kuldeep Saran are directors of both SUNDAY and Lifetree.

7.C INTERESTS OF EXPERTS AND COUNSEL

Not applicable

Item 8. FINANCIAL INFORMATION

8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See "Item 18. Financial
Statements".

Legal Proceedings

We are not a party to, nor are we
aware of, any threatened or pending litigation, legal or arbitration proceedings
which we believe would, individually or taken as a whole, have a material
adverse effect on our business, financial condition or results of operation.

8.B SIGNIFICANT CHANGES

As a result of the acquisition by
PCCW of a controlling stake in us from our major shareholders, Distacom and USI,
PCCW is required under the Hong Kong Takeover Code to make a cash tender offer
to acquire the remaining shares that it does not currently own or has agreed to
acquire. Such tender offer is expected to commence on or about July 8, 2005. As
a result of such acquisition and tender offer for our shares by PCCW, we may be
delisted from the Hong Kong Stock Exchange and deregistered from Nasdaq. PCCW
has stated that it intends for SUNDAY to continue with its existing core
business of development and provision of wireless communications and data
services in Hong Kong.

Item 9. THE OFFER AND LISTING

MARKETS

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Market Price Information  Ordinary Shares

Our ordinary shares have been listed and traded on the main board of the
Stock Exchange of Hong Kong under the stock code "866" since March 16, 2000. The
following table shows, for the periods indicated, the high and low closing
prices for the ordinary shares as quoted on the main board of the Stock Exchange
of Hong Kong for the fiscal year ended December 31 of each year indicated below,
as at the end of each fiscal quarter indicated below, and for each month of the
five-month period ended May 31, 2005.

|               | High  |       | Low  
|-------------- | ----- | ----- | -----
|               |       | (HK$) |      
|Year 2001      | 0.700 |       | 0.275
|Year 2002      | 0.330 |       | 0.084
|Year 2003      | 0,405 |       | 0.122
|Year 2004      | 0.740 |       | 0.310
|Year 2003      | 0.405 |       | 0.122
|First quarter  | 0.196 |       | 0.131
|Second quarter | 0.180 |       | 0.122
|Third quarter  | 0.405 |       | 0.163
|Fourth quarter | 0.380 |       | 0.295
|Year 2004      |       |       |      
|First quarter  | 0.740 |       | 0.310
|Second quarter | 0.560 |       | 0.370
|Third quarter  | 0.520 |       | 0.450
|Fourth quarter | 0.475 |       | 0.425
|December       | 0.740 |       | 0.370
|Year 2005      |       |       |      
|First quarter  | 0.580 |       | 0.400
|Months 2004    |       |       |      
|December       | 0.740 |       | 0.370
|Months 2005    |       |       |      
|January        | 0.540 |       | 0.400
|February       | 0.580 |       | 0.400
|March          | 0.560 |       | 0.450
|April          | 0.465 |       | 0.430
|May            | 0.510 |       | 0.445

Market Price Information  American Depositary Shares (ADSs)

Our ADSs have been listed and traded on The Nasdaq National Market under the
symbol "SDAY" since March 15, 2000. The Bank of New York acts as the depositary
of our ADSs. Prior to July 25, 2002, each ADS represents ownership interests in
30 ordinary shares (or the right to receive 30 ordinary shares). On July 25,
2002, our ADS to share ratio was changed from 1:30 to 1:100.

The following table shows, for the periods indicated, the high and low
closing prices for the ADSs for the fiscal year ended December 31 of each year
indicated below, as at the end of each fiscal quarter indicated below, and for
each month of the six-month period ended May 31, 2005.

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|               | High  |       | Low  
|-------------- | ----- | ----- | -----
|               |       | (US$) |      
|Year 2001(1)   | 8.958 |       | 3.333
|Year 2002(1)   | 4.200 |       | 1.000
|Year 2003      | 4.900 |       | 1.250
|Year 2004      | 9.420 |       | 4.700
|Year 2003      | 0.405 |       | 0.122
|First quarter  | 0.196 |       | 0.131
|Second quarter | 0.180 |       | 0.122
|Third quarter  | 0.405 |       | 0.163
|Fourth quarter | 0.380 |       | 0.295
|Year 2004      |       |       |      
|First quarter  | 9.420 |       | 3.880
|Second quarter | 7.110 |       | 4.700

|Third quarter  | 6.550 |  | 5.240
|-------------- | ----- |  | -----
|Fourth quarter | 6.040 |  | 5.330
|2005           |       |  |      
|First quarter  | 7.250 |  | 5.090
|Months 2004    |       |  |      
|December       | 9.420 |  | 4.700
|Months 2005    |       |  |      
|January        | 6.500 |  | 5.090
|February       | 7.250 |  | 5.090
|March          | 7.110 |  | 6.070
|April          | 6.160 |  | 5.670
|May            | 6.500 |  | 5.660

(1) The prices quoted on The Nasdaq National Market prior to July 25, 2002,
had been adjusted based on the new ADS to share ratio of 1:100.

Item 10. ADDITIONAL INFORMATION

10.A SHARE CAPITAL

Not applicable.

10.B MEMORANDUM AND ARTICLES OF ASSOCIATION

We amended certain sections of our
Articles of Association relating to procedural matters in general meetings and
meetings of our board of directors. Such amendments were approved by the
shareholders at our 2005 annual general meeting held in May 2005. See Exhibit
1.1 for the revised Articles of Association.

Set forth below is the purpose of
the Company, a summary of the material provisions of our Memorandum and Articles
of Association and of the material applicable laws of the Cayman Islands.

Purpose

We are an investment holding
company with limited liability incorporated in the Cayman Islands.

Summary of Memorandum and Articles of Association and Material Applicable
Laws of the Cayman Islands

Meetings

An annual general meeting and any
extraordinary general meeting called for the passing of a special resolution
shall be called by not less than 21 clear days' notice and any other
extraordinary general meeting shall be called by not less than 14 clear days'
notice. Notice of every general meeting shall be given to all our members other
than such as, under the provisions of the Articles of Association or the terms
of issue of the shares they hold, are not entitled to receive such notices from
us, and also to our auditors for the time being.

Notwithstanding that a meeting is
called by shorter notice than that mentioned above, it shall be deemed to have
been duly called, if it is so agreed (i) in the case of a meeting called as an
annual general meeting by all our members entitled to attend and vote at the
meeting; and (ii) in the case of any other meeting, by a majority in number of
the members having a right to attend and vote at the meeting, being a majority
together holding not less than 95% in nominal value of the issued shares giving
that right.

No business other than the
appointment of a chairman shall be transacted at any general meeting unless a
quorum is present at the commencement of business.

Two of our members present in
person or by proxy or (in case of a member being a corporation) by its duly
authorized corporate representative representing not less than one third in
nominal value of the total issued voting shares throughout the meeting shall be
a quorum.

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A corporation being a member shall
be deemed for the purpose of the Articles of Association to be present in person
if represented by its duly authorized representative being the person appointed
by resolution of the directors or other governing body of such corporation to
act as its representative at the relevant general meeting or at any relevant
general meeting of any class of our members. Such duly authorized representative
shall be entitled to exercise the same powers on behalf of the corporation which
he represents as that corporation could exercise if it were our individual
member.
The quorum for a separate general
meeting of the holders of a separate class of our ordinary shares is described
in "Modification of Rights" below.
Voting Rights Attaching to the Ordinary Shares

Subject to any special rights or
restrictions as to voting for the time being attached to any shares, at any
general meeting every member who is present in person or by proxy (or, in the
case of a member being a corporation, by its duly authorized representative)
shall have one vote, and on a poll every member present in person or by proxy
(or, in the case of a member being a corporation, by its duly appointed
representative) shall have one vote for each share which such member is the
holder. Notwithstanding anything contained in the Articles of Association, where
more than one proxy is appointed by a member which is a recognized clearing
house or its nominee, each such proxy shall have one vote on a show of hands.
No member shall be entitled to
vote or be reckoned in a quorum, in respect of any share unless such member is
registered as our shareholder at the applicable record date for that meeting and
all calls or other sums due by such member to us have been paid.
Where any member
is, under the rules of the designated stock exchange, required to abstain from
voting on any particular resolution or restricted to voting only for or only
against any particular resolution, any votes cast by or on behalf of such member
in contravention of such requirement or restriction shall not be counted.
If a recognized clearing house or
its nominee is our member, it may authorize such person or persons as it thinks
fit to act as its representative or representatives at any meeting or at any
meeting of any class of our members provided that the authorization shall
specify the number and class of shares in respect of which each such person is
so authorized. A person authorized pursuant to this provision shall be entitled
to exercise the same powers on behalf of the recognized clearing house (or its
nominee) which he represents as that clearing house (or its nominee) could
exercise if it were our individual shareholder.
Protection of Minorities

The Grand Court of the Cayman
Islands may, on the application of members holding not less than one fifth of
our shares in issue, appoint an inspector to examine into our affairs and to
report thereon in a manner as the Grand Court shall direct.
Any shareholder may petition the
Grand Court of the Cayman Islands which may make a winding up order, if the
court is of the opinion that it is just and equitable that we should be wound
up.
Claims against us by our
shareholders must, as a general rule, be based on the general laws of contract
or tort applicable in the Cayman Islands or their individual rights as
shareholders as established by our memorandum and articles of association.
The Cayman Islands courts
ordinarily would be expected to follow English case law precedents including the
exceptions to the rule in Foss
v. Harbottlewhich permit a minority shareholder to commence a class action
against, or derivative actions in our name to challenge (i) an act which is ultra viresor illegal, (ii)
an act which constitutes a fraud against the minority and the wrongdoers are
themselves in control of us, and (iii) an irregularity in the passing of a
resolution which requires a qualified (or special) majority.
Pre-emption Rights

There are no pre-emption rights
applicable to the issue of new shares under either Cayman Islands law or our
Memorandum and Articles of Association.
Liquidation Rights

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Subject to any special rights,
privileges or restrictions as to the distribution of available surplus assets on
liquidation for the time being attached to any class or classes of shares (i) if
we are wound up and the assets available for distribution among our members
shall be more than sufficient to repay the whole of the capital paid up at the
commencement of the winding up, the excess shall be distributed pari passuamongst those members in proportion to the amount paid up at the
commencement of the winding up on the shares held by them, respectively and (ii)
if we are wound up and the assets available for distribution among the members
as such shall be insufficient to repay the whole of the paid-up capital, these
assets shall be distributed so that, as nearly as may be, the losses shall be
borne by the members in proportion to the capital paid up at the commencement of
the winding up on the shares held by them, respectively.
If we are wound up, the liquidator
may with the sanction of our special resolution and any other sanction required
by the Companies Law, divide among our members in specie or kind the whole or
any part of our assets (whether they shall consist of property of the same kind
or not) and may, for such purpose, set such value as he deems fair upon any
property to be divided as aforesaid and may determine how such division shall be
carried out as between the members or different classes of members. The
liquidator may, with the like sanction, vest the whole or any part of such
assets in trustees upon such trusts for the benefit of the members as the
liquidator, with the like sanction, shall think fit, but so that no member shall
be compelled to accept any assets, shares or other securities upon which there
is a liability.
Modification of Rights

Except with respect to share
capital (as described below) and the location of the registered office,
alterations to our Memorandum and Articles of Association may only be made by
special resolution.
Subject to the Companies Law of
the Cayman Islands, all or any of the special rights attached to shares or any
class (unless otherwise provided for by the terms of issue of the shares of that
class) may, be varied, modified or abrogated either with the consent in writing
of the holders of not less than three-fourths in nominal value of the issued
shares of that class or with the sanction of a special resolution passed at a
separate general meeting of the holders of the shares of that class. The
provisions of the Articles of Association relating to general meetings shall
apply mutatis mutandisto every such separate general meeting, but so
that the quorum for the purposes of any such separate general meeting other than
an adjourned meeting shall be a person or persons together holding (or
represented by proxy) on the date of the relevant meeting not less than
one-third in nominal value of the issued shares of that class, every holder of
shares of the class shall be entitled on a poll to one vote for every such share
held by such holder and that any holder of shares of that class present in
person or by proxy may demand a poll. At an adjourned meeting of such holders,
two holders present in person or by proxy (whatever the number of shares held by
them) shall be a quorum.
The special rights conferred upon
the holders of any class of shares shall not, unless otherwise expressly
provided in the rights attaching to or the terms of issue of such shares, be
deemed to be varied by the creation or issue of further shares ranking pari
passutherewith.Alteration of CapitalWe may from time to time by
ordinary resolution:
increase our capital by such sum, to be divided into shares of such
  amounts, as the resolution shall prescribe;
  consolidate and divide all or any of our share capital into shares of
  larger amount than our existing shares;
  divide shares into several classes and without prejudice to any special
  rights previously conferred on the holders of existing shares, attach to the
  shares respectively as preferential, deferred, qualified or special rights,
  privileges, conditions or such restrictions which in the absence of any such
  determination in general meeting may be determined by the directors;
  sub-divide our shares or any of them into shares of smaller amount than is
  fixed by the Memorandum of Association, subject nevertheless to the Companies
  Law, and so that the resolution whereby any share is sub-divided may determine
  that, as between the holders of the share resulting from such sub-division,
  one or more of the shares may have any such preferred or other special rights,
  over, or may have such deferred rights or be subject to any such restrictions
  as compared with the others as we have power to attach to unissued or new
  shares; and
  cancel any shares which at the date of the passing of the resolution have
  not been taken or agreed to be taken by any person,
  and diminish the amount of its share
  capital by the amount of the shares so canceled subject to the provisions of
  the Companies Law.61
We may, by special resolution,
subject to any confirmation or consent required by the Companies Law, reduce our
share capital, share premium account or any capital redemption reserve in any
manner authorized by law.
Transfer of Shares

Subject to such of the
restrictions of the Articles of Association as may be applicable, any of our
members may transfer all or any of his or her shares by an instrument of
transfer in the usual or common form or in any other form which the directors
may approve.
Our directors may decline to
register any transfer of any share which is not paid up or any share issued
under any share incentive scheme for employees upon which there is a restriction
and they may also refuse to register any transfer of any share to more than four
joint holders or on which we have a lien. Our directors may also decline to
register any transfer of any share unless:
(a) the instrument of transfer is lodged with us
  accompanied by the certificate for the shares to which it relates and such
  other evidence as the directors may reasonably require to show the right of
  the transferor to make the transfer;
  (b) the instrument of transfer is in respect of
  only one class of share;
  (c) the instrument of transfer is properly stamped
  (in circumstances where stamping is required);
  (d) a fee of such maximum sum as the Stock
  Exchange of Hong Kong may determine to be payable or such lesser sum as the
  directors may from time to time require is paid to us in respect thereof.
If the directors refuse to
register a transfer they shall, within two months after the date on which the
instrument of transfer was lodged, send to each of the transferor and the
transferee notice of such refusal.
The registration of transfers may,
on notice being given by advertisement in one or more newspapers designated by
the Stock Exchange of Hong Kong, be suspended and the register closed at such
times and for such periods as the directors may from time to time determine,
provided, however, that the registration of transfers shall not be suspended nor
the register closed for more than 30 days in any year as our directors may
determine.
Share Repurchase

We are empowered by the Companies
Law and the Articles of Association to purchase our own shares subject to
certain restrictions. Our directors may only exercise this power on our behalf,
subject to the Companies Law, our Memorandum and Articles of Association and to
any applicable requirements imposed from time to time by the Stock Exchange of
Hong Kong, the Securities and Futures Commission of Hong Kong, the United States
Securities and Exchange Commission, or the U.S. SEC, or by any other recognized
stock exchange.
Dividends

Subject to the Companies Law, in a
general meeting we may declare dividends in any currency but no dividends shall
exceed the amount recommended by our directors. Dividends may be declared and
paid out of our profits, realized or unrealized, or from any reserve set aside
from profits which our directors determine is no longer needed. With the
sanction of an ordinary resolution, dividends may also be declared out of the
share premium account or any other fund or account which can be authorized for
this purpose in accordance with the Companies Law.
Except in so far as the rights
attaching to or the terms of issue of, any share otherwise provide (i) all
dividends shall be declared and paid according to the amounts paid up on the
shares in respect of which the dividend is paid, but no amount paid up on a
share in advance of calls shall be treated for this purpose as paid up on that
share; and (ii) all dividends shall be apportioned and paid pro rata according
to the amounts paid upon the shares during any portion or portions of the period
in respect of which the dividend is paid.
Our directors may also pay interim
dividends, whenever our position, in the opinion of the directors, justifies
such payment.
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Our directors may deduct from any
dividend or bonus payable to any member all sums of money (if any) presently
payable by him to us on account of calls, installments or otherwise.
No dividend or other monies
payable by us on or in respect of any share shall bear interest against us.
In respect of any dividend
proposed to be paid or declared on our share capital, our directors may resolve
and direct that; (i) such dividend be satisfied wholly or in part in the form of
an allotment of shares credited as fully paid up, provided that our members
entitled thereto will be entitled to elect to receive such dividend (or part
thereof if our directors so determine) in cash in lieu of such allotment; or
(ii) that the members entitled to such dividend will be entitled to elect to
receive an allotment of shares credited as fully paid up in lieu of the whole or
such part of the dividend as the directors may think fit. The directors may
also, with the sanction or by an ordinary resolution of our members in general
meeting, resolve in respect of any particular dividend that, notwithstanding the
foregoing, it may be satisfied wholly in the form of an allotment of shares
credited as fully paid up without offering any right of members to elect to
receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other
sum payable in cash to the holder of shares may be paid by check or warrant sent
by mail addressed to the holder or, in the case of joint holders, addressed to
the holder whose name stands first in the register, at such holder's registered
address, or addressed to such person and at such addresses as the holder may
direct. Every such check or warrant shall, unless the holder or joint holders
otherwise direct, be made payable to the order of the holder or, in the case of
joint holders, to the order of the holder whose name stands first on the
register in respect of such shares, and shall be sent at his or their risk and
payment of the check or warrant by the bank on which it is drawn shall
constitute a good discharge to us.
Any dividend unclaimed after a
period of six years from the date of declaration of such dividend may be
forfeited by our board of directors and, if so forfeited, shall revert to us.
Whenever our directors or the
members in general meeting have resolved that a dividend be paid or declared,
the directors may further resolve that such dividend be satisfied by direct
payment or satisfaction wholly or in part by the distribution of specific assets
of any kind, and in particular of paid up shares, debentures or warrants to
subscribe for our securities or securities of any other company, and where any
difficulty arises with regard to such distribution, the directors may settle it
as they think expedient, and in particular may issue fractional certificates,
disregard fractional entitlements or round the same up or down, and may fix the
value for distribution purposes of any such specific assets and may determine
that cash payments shall be made to any of our members upon the footing of the
value so fixed in order to adjust the rights of the parties and may vest any
such specific assets in trustees as may seem expedient to the directors.
Untraceable Shareholders

We are entitled to sell any share
of a member who is untraceable, provided that:
(i) all checks or warrants, not being less than
  three in number, for any sums payable in cash to the holder of such shares
  have remained uncashed for a period of 12 years and the three-month period
  referred to in paragraph (iv) below has expired;
  (ii) we have not during that time
  or before the expiry of the three-month period referred to in paragraph (iv)
  below received any indication of the whereabouts or existence of the member or
  person entitled to such shares by death, bankruptcy or operation of law;
  (iii) upon expiry of the 12-year period and
  three-month period referred to in paragraph (iv) at least three dividends in
  respect of the shares in question have become payable and no dividend during
  that period has been claimed by the member; and
  (iv) upon expiry of the 12-year period, we have
  caused an advertisement to be published in newspapers in the manner stipulated
  by our Articles of Association, giving notice of its intention to sell these
  shares, and a period of three months has elapsed since such advertisement and
  the Stock Exchange of Hong Kong has been notified of such intention.
The net proceeds of any such sale
shall belong to us and when we receive these net proceeds we shall become
indebted to the former member for an amount equal to such net proceeds.
Board of Directors

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We are managed by
a board of directors which, unless otherwise determined by us in general
meeting, must consist of not less than two members. As of May 31, 2005, our
board of directors consisted of 10 members. At each annual general meeting,
one-third of our directors are subject to retirement from office by rotation,
provided that every director is subject to retirement by rotation at least once
every three years. Retiring directors are eligible for re-election.
Meetings of the board of directors
may be convened at any time deemed necessary by any members of the board of
directors. Advance notice of a meeting is not required if all the directors are
present or represented at the meeting concerned and consent to the holding of
such meeting.
A meeting of the
board of directors shall be competent to make lawful and binding decisions if
any two members of the board of directors are present or represented. At any
meeting of the directors, each director, be it by his presence or by his
alternate, is entitled to one vote.
Questions arising at a meeting of
the board of directors are required to be decided by simple majority votes of
the members of the board of directors present or represented at the meeting. In
the case of a tie vote, the chairman of the meeting shall have a second or
deciding vote. Our board of directors may also pass resolutions without a
meeting by unanimous written consent.
Directors' Interests

Any of our directors may hold any
other office or place of profit with us (except that of the auditor of) in
conjunction with his or her office of director for such period and, subject to
the Articles of Association, upon such terms as the board may determine, and may
be paid such extra remuneration therefor (whether by way of salary, commission,
participation in profits or otherwise) in addition to any remuneration provided
for by or pursuant to any other Articles of Association. A director may be or
become a director or other officer of, or otherwise interested in, any company
promoted by us or any other company in which we may be interested, and shall not
be liable to account to us or the members for any remuneration, profits or other
benefits received by him or her as a director, officer or member of, or from his
or her interest in, such other company. Subject as otherwise provided by the
Articles of Association, the board may also cause the voting power conferred by
the shares in any other company held or owned by us to be exercised in such
manner in all respects as it thinks fit, including the exercise thereof in favor
of any resolution appointing our board or any of them to be directors or
officers of such other company, or voting or providing for the payment of
remuneration to the directors or officers of such other company.
Subject to the Companies Law and
our Articles of Association, no director or proposed or intended director shall
be disqualified by his or her office from contracting with us, either with
regard to his or her tenure of any office or place of profit or as vendor,
purchaser or in any other manner whatsoever, nor shall any such contract or any
other contract or arrangement in which any director is in any way interested be
liable to be avoided, nor shall any director so contracting or being so
interested be liable to account to us or the members for any remuneration,
profit or other benefits realized by any such contract or arrangement by reason
of such director holding that office or the fiduciary relationship thereby
established. A director who to his or her knowledge is in any way, whether
directly or indirectly, interested in a contract or arrangement or proposed
contract or arrangement with us shall declare the nature of his or her interest
at the meeting of the board at which the question of entering into the contract
or arrangement is first taken into consideration, if such director knows his or
her interest then exists, or in any other case, at the first meeting of the
board after such director knows that he or she is or has become so interested.
A director shall
not vote (nor be counted in the quorum) on any resolution of the board approving
any contract or arrangement or any other proposal in which he or any of his
associates is materially interested, but this prohibition shall not apply to any
of the following matters namely:
(a) any contract or arrangement
  for the giving to such director or his associate(s) any security or indemnity
  in respect of money lent by him or any of his associates or obligations
  incurred or undertaken by him or any of his associates at the request of or
  for the benefit of the Company or any of its subsidiaries;
  (b) any contract or arrangement for the giving of
  any security or indemnity to a third party in respect of a debt or obligation
  of the Company or any of its subsidiaries for which the director or his
  associate(s) has himself/themselves assumed responsibility in whole or in part
  whether alone or jointly under a guarantee or indemnity or by the giving of
  security;

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(c) any contract or arrangement
  concerning an offer of shares or debentures or other securities of or by the
  Company or any other company which the Company may promote or be interested in
  for subscription or purchase, where the director or his associate(s) is/are,
  or is/are to be interested as a participant in, the underwriting or
  sub-underwriting of the offer;
  (d) any contract or arrangement in
  which the director or his associate(s) is/are interested in the same manner as
  other holders of shares or debentures or other securities of the Company or
  any of its subsidiaries by virtue only of his/their interest in shares or
  debentures or other securities of the Company;
  (e) any contract or arrangement concerning any
  other company in which the director or his associate(s) is/are interested
  only, whether directly or indirectly, as an officer or executive or a
  shareholder other than a company in which the director and/or his associate(s)
  is/are beneficially interested in five (5) per cent or more of the issued
  shares or of the voting rights of any class of shares of such company (or any
  third company through which his interest or that of any of his associates is
  derived); or
  (f) any proposal concerning the
  adoption, modification or operation of a share option scheme, a pension fund
  or retirement, death or disability benefits scheme or other arrangement which
  relates both to directors, his associates and employees of the Company or of
  any of its subsidiaries and does not provide in respect of any director, or
  his associate(s), as such any privilege or advantage not accorded to the
  employees to which such scheme or fund relates.
Directors' Fees and Expenses

The ordinary remuneration of our
directors shall from time to time be determined by our shareholders in general
meeting, such sum (unless otherwise directed by the resolution on which it is
voted) to be divided amongst our board in such proportions and in such manner as
the board may agree or, failing agreement, equally, except that any director
holding office for part only of the period in respect of which the remuneration
is payable shall only rank in such division in proportion to the time during
such period for which such director held office. Our board members shall also be
entitled to be prepaid or repaid all travelling, hotel and incidental expenses
reasonably expected to be incurred or incurred by them in attending any board
meetings, committee meetings or general meetings or separate meetings of any
class of shares or of debentures of our company or otherwise in connection with
the discharge of their duties as directors. Any director who, by request, goes
or resides abroad for any purpose of our company or who performs services which
in the opinion of the board go beyond the ordinary duties of a director may be
paid such extra remuneration (whether by way of salary, commission,
participation in profits or otherwise) as the board may determine and such extra
remuneration shall be in addition to or in substitution for any ordinary
remuneration as a director. An executive director appointed to be a managing
director, joint managing director, deputy managing director or other executive
officer shall receive such remuneration (whether by way of salary, commission or
participation in profits or otherwise or by all or any of those modes) and such
other benefits (including pension and/or gratuity and/or other benefits on
retirement) and allowances as the board may from time to time decide. Such
remuneration may be either in addition to or in lieu of his or her remuneration
as a director.
General Powers of the Directors

Our board may establish or concur
or join with other companies (being subsidiary companies of our company or
companies with which it is associated in business) in establishing and making
contributions out of our company's monies to any schemes or funds for providing
pensions, sickness or compassionate allowances, life assurance or other benefits
for employees (which expression as used in this and the following paragraph
shall include any director or ex-director who may hold or have held any
executive office or any office of profit with our company or any of our
subsidiaries) and ex-employees of our company and their dependents or any class
or classes of such persons.
The board may pay, enter into
agreements to pay or make grants which may be revocable or irrevocable, and
either subject or not subject to any terms or conditions, pensions or other
benefits to employees and ex-employees and their dependents, or to any of such
persons, including pensions or benefits additional to those, if any, to which
such employees or ex-employees or their dependents are or may become entitled
under any such scheme or fund as is mentioned in the previous paragraph. Any
such pension or benefit may, as the board considers desirable, be granted to an
employee either before and in anticipation of, or upon or at any time after, his
actual retirement.
The board may exercise all the
powers of our company to raise or borrow money, to mortgage or charge all or any
part of the undertaking, property and assets (present and future) and uncalled
capital of our company and, subject to the Companies Law, to issue debentures,
bonds and other securities of our company, whether outright or as collateral
security for any debt, liability or obligation of our company or of any third
party.
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Exemption from Nasdaq Proxy Solicitation Rules
Pursuant to Nasdaq Marketplace
Rule 4350(a), we have been granted an exemption by Nasdaq from Nasdaq
Marketplace Rule 4350(g) which requires an issuer to solicit proxies and provide
proxy statements for all shareholder meetings and furnish copies of such proxy
solicitation to Nasdaq. As a Cayman Islands company, we are only required to
send notices of general meetings of shareholders in the manner prescribed by our
Articles of Association. Under our Articles of Association, our board of
directors may, if they think fit, send out with the notice of any general
meeting forms of instrument of proxy for use at the meeting. Also, under Hong
Kong law and the rules of The Stock Exchange of Hong Kong, issuers are not
required to solicit proxies or provide proxy statements to their shareholders.
We publish notices of our shareholder meetings in a local newspaper of general
circulation and distribute such notices to shareholders together with proxy
cards. Proxy cards provide that shareholders may appoint anyone they choose to
vote on their behalf at the shareholder meeting.
10.C MATERIAL CONTRACTS

Supplemental Supply Agreement
between HTIC and Mandarin dated November 15, 2004 for the amendment of the terms
and conditions of the Supply Contract dated May 13, 2004, and the Supplemental
Subcontract Agreement between HTIC and Mandarin dated November 15, 2004 for the
amendment of the terms and conditions of the sub-contract under the Supply
Contract dated May 13, 2004.
Amendment and Restatement
Agreement between HTIC, Mandarin, SUNDAY and JPMorgan Chase Bank, N.A. dated
November 15, 2004 for the amendment of the terms and conditions of the Facility
Agreement dated May 13, 2004.
Supply Contract between Mandarin
and HTIC dated May 13, 2004 for the supply and installation of a 3G mobile
communications network and associated services on a turnkey basis, and a
sub-contract under such Supply Contract for Mandarin to undertake certain civil
works and equipment installation on designated cell sites.
Facility Agreement between HTIC,
Mandarin and SUNDAY dated May 13, 2004 for the provision of long term financing
in connection with the 3G mobile communications network.
10.D EXCHANGE CONTROLS AND OTHER LIMITATIONS

The laws of the Cayman Islands
where the Company is incorporated and those of Hong Kong where the Company
operates its businesses and the Memorandum and Articles of Association of the
Company do not impose exchange control or restrictions on the remittance of
dividends or other payments to nonresident holders of the ordinary shares and
American depositary shares.
For a discussion on exchange rate
information relating to Hong Kong dollars, see "Item 3. Key Information 
Selected Financial Data  Exchange Rate Information" in this Annual Report.
10.E TAXATION
The following summary of the
material United States federal income, Hong Kong and the Cayman Islands tax
consequences of beneficial ownership of the ordinary shares or ADSs is based
upon laws, regulations, rulings, income tax conventions (treaties),
administrative practice and judicial decisions in effect on the date of this
Annual Report. Subsequent legislative, judicial or administrative changes or
interpretations may be retroactive and could affect these tax consequences.
Your tax treatment as a holder of
ordinary shares or ADSs may vary depending upon your particular situation, and
you may be subject to special rules not discussed below. State, local and
foreign (other than Hong Kong and the Cayman Islands) tax consequences of
ownership and disposition of the ordinary shares or ADSs are not discussed.
You should consult your own tax
advisors about the particular tax consequences of the ownership and disposition
of ordinary shares or ADSs, including the applicability and effect of any state,
local or foreign tax laws.
United States Federal Income Taxation

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The following is a discussion
under present law of the material United States federal income tax consequences
of the purchase, ownership and disposition of ADSs or ordinary shares by a U.S.
Holder (as defined below). The discussion deals only with ADSs or ordinary
shares held by a U.S. Holder as capital assets as defined in the Internal
Revenue Code of 1986, as amended, and does not address all of the tax
consequences that may be relevant to prospective purchasers of ADSs or ordinary
shares in light of their particular circumstances or to persons subject to
special tax rules, such as insurance companies, financial institutions, dealers
in securities or foreign currencies, tax-exempt investors, foreign persons,
persons holding ADSs or ordinary shares as a position in a "straddle", as a part
of a short-sale, or as part of a hedging or conversion transaction, persons
owning, directly, indirectly or constructively, 10% or more of our voting stock
or persons whose functional currency is not the United States dollar.
Prospective purchasers of ADSs or ordinary shares should consult with their tax
advisors regarding the application of the United States federal income tax laws
to their particular situations as well as to any additional tax consequences of
purchasing, holding or disposing of ADSs or ordinary shares, including the
applicability and effect of the tax laws of any state, local or foreign
jurisdiction.
For purposes of this summary, a
"U.S. Holder" is any beneficial owner of ADSs or ordinary shares that is:
a citizen or resident of the United States,
  a corporation, partnership or other entity organized under the laws of the
  United States or any state thereof,
  an estate the income of which is subject to United States federal income
  tax without regard to its source, or
  a trust (a) subject to the primary supervision of a United States court
  and the control of one or more United States persons or (b) that has elected
  to be treated as a United States person under applicable Treasury regulations.In general, for United States
federal income tax purposes, U.S. Holders of ADSs will be treated as the owners
of the ordinary shares represented by the ADSs. Accordingly, no gain or loss
will be recognized upon the exchange of ADSs for the holder's proportionate
interest in the ordinary shares represented by such ADSs. A U.S. Holder's tax
basis in the withdrawn shares will be the same as its tax basis in the ADSs
surrendered therefor, and the holding period in the withdrawn shares will
include the period during which the holder held the ADSs.
Distributions on ADSs or Ordinary Shares

Subject to a holder's satisfaction
of certain holding period requirements, dividends included in income by a
noncorporate U.S. Holder for taxable years ending after December 31, 2002 and
before January 1, 2009 are subject to tax at a maximum rate of 15% if the
dividends are paid by a domestic corporation or "qualified foreign corporation."
A qualified foreign corporation generally includes a foreign corporation if (i)
its shares (or ADSs) are readily tradable on an established securities market in
the U.S. or (ii) it is eligible for benefits under a comprehensive U.S. income
tax treaty, provided that (a) the corporation was not, in the year prior to the
year in which the dividend was paid and is not the year in which the dividend
is paid a passive foreign investment
company, or (b) for dividends paid prior to the 2005 tax year, a foreign person holding company or foreign investment company. We
believe that we should be treated as a qualified foreign corporation with
respect to dividend payments to our ADSs holders and, therefore, dividends paid
to an individual U.S. Holder of ADSs should be taxed at a maximum rate of 15%.
However, you should be aware that the requirements to be treated as a qualified
foreign corporation are not entirely clear and further guidance from the
Internal Revenue Service may be forthcoming that could affect this conclusion.
U.S. Holders of ordinary shares directly, rather than through ADSs, should
consult their own tax advisor about whether the 15% maximum rate applies to
dividends they receive.
To the extent that
the amount of any distribution on ADSs or ordinary shares exceeds our current
and accumulated earnings and profits, as determined for United States federal
income tax purposes, a U.S. Holder's pro rata share of such excess amount would
be treated:
as a non-taxable return of capital that would be applied against and would
  reduce the U.S. Holder's tax basis in its ADSs or ordinary shares until this
  basis is equal to zero; and
  to the extent excess distributions remain, as capital gain.Subject to certain conditions and
limitations, including certain minimum holding period requirements, the United
States dollar value of the foreign income taxes, if any, withheld from a
distribution to a U.S. Holder on ADSs or ordinary shares may be claimed as a
credit against the U.S. Holder's United States federal income tax liability.
Alternatively, a U.S. Holder may claim a deduction for such amount of foreign
income taxes withheld in a taxable year, but only if such U.S. Holder does not
elect to claim a foreign tax credit in respect of any foreign taxes paid by it
in the taxable year. Dividends on ADSs or ordinary shares generally will
constitute "passive income" or, in the case of certain U.S. Holders, "financial
services income" for United States foreign tax credit purposes.
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A U.S. Holder will be entitled to
a foreign tax credit for withholding taxes that are imposed, subject to
generally applicable limitations and restrictions. In the case of U.S.
individuals for whom the reduced rate of U.S. tax on dividends applies,
limitations and restrictions on claiming foreign tax credits will appropriately
take into account the rate differential under rules similar to section
904(b)(2)(B) of the Internal Revenue Code. The rules governing foreign tax
credits are complex and U.S. Holders should consult their tax advisors regarding
their application to the particular circumstances of such holder.
The amount of any distribution
paid in Hong Kong dollars will be the United States dollar value of the payment
made, determined at the spot Hong Kong dollar/United States dollar rate on the
date such payment is includible in the income of the U.S. Holder, regardless of
whether the payment is in fact converted into United States dollars. Any gain or
loss resulting from currency exchange fluctuations during the period from the
date the dividend payment is includible in income to the date such payment is
converted into United States dollars will be treated as United States source
ordinary income or loss.
A corporate U.S. Holder will not
be entitled to a dividends received deduction with respect to distributions on
ADSs or ordinary shares.
Sale, Exchange of Other Disposition

A U.S. Holder generally will
recognize gain or loss upon a sale or other taxable disposition of ADSs or
ordinary shares in an amount equal to the difference between the United States
dollar value of the amount realized on the sale or other taxable disposition and
the U.S. Holder's adjusted tax basis in the ADSs or ordinary shares, as
applicable. Subject to the passive foreign investment company discussion below,
such gain or loss will generally be capital gain or loss and, in the case of
certain non-corporate U.S. Holders, may be subject to United States federal
income tax at a preferential rate where the U.S. Holder's holding period exceeds
one year. With respect to sales occurring on or after May 6, 2003, but before
January 1, 2009, the long-term capital gain tax rate for an individual U.S.
Holder is 15%. For sales occurring before May 6, 2003, or after December 31,
2008, under current law the long-term capital gain rate for an individual U.S.
Holder is 20%. Any gain or loss recognized by a U.S. Holder on a sale or other
taxable disposition of ADSs or ordinary shares will generally be treated as
United States source gain or loss for foreign tax credit purposes. A U.S.
Holder's ability to deduct capital losses in respect of ADSs or ordinary shares
is subject to limitations.
Passive Foreign Investment Company

In general, a foreign corporation
is a passive foreign investment company for any taxable year in which (i) 75% or
more of its gross income consists of passive income (such as dividends,
interest, rents and royalties) or (ii) 50% or more of the average quarterly
value of its assets consists of assets that produce, or are held for the
production of, passive income. We believe that we will not be treated as a
passive foreign investment company under either of these tests in the current or
subsequent taxable years. In reaching this conclusion, we have assumed that our
available cash will be expended in accordance with a projected capital
expenditure budget. However, the actual expenditure of these amounts will depend
on business exigencies and may differ from the projected expenditures. If we
were to retain more cash than we have projected, this could cause us to be a
passive foreign investment company. Because the passive foreign investment
company determination is made annually on the basis of facts and circumstances
that may be beyond our control, we cannot assure you that we will not become a
passive foreign investment company.
If we were a passive foreign
investment company for any taxable year, a U.S. Holder that held ADSs or
ordinary shares in that taxable year would generally be subject to special rules
with respect to certain distributions made by us on the ADSs or ordinary shares
and with respect to gains from dispositions of ADSs or ordinary shares. In
general, such a U.S. Holder would be required to allocate such distributions or
gains, as the case may be, ratably over its holding period for such ADSs or
ordinary shares. That portion of any such distributions or gains allocated to a
prior taxable year, other than a year prior to the first year in which we were a
passive foreign investment company, would effectively be taxed at the highest
United States federal income tax rate in effect for such year with respect to
ordinary income. In addition, the U.S. Holder would be subject to an interest
charge on the resulting tax liability determined as if such tax liability had
been due with respect to the particular taxable year. The portion, if any, of
such distributions or gains not so allocated to a prior taxable year of the U.S.
Holder in which we were a passive foreign investment company would be included
in the U.S. Holder's income for the taxable year of the particular distribution
or disposition and taxed as ordinary income.
The foregoing rules with respect
to distributions and dispositions may be avoided if a U.S. Holder is eligible
for and timely makes either a valid "qualifying electing fund" election, in
which case the U.S. Holder generally would be required to include in income on a
current basis its pro rata share of our ordinary income and net capital gains,
or a valid "mark-to-market" election. We do not currently intend to complete the
actions necessary for U.S. Holders to make a qualifying electing fund election
in the event that we were to be considered a passive foreign investment company
for any taxable year. If a mark-to-market election is made, the U.S. Holder will
include in ordinary income each year the excess, if any, of the fair market
value over the adjusted tax basis of its ADSs or ordinary shares. The U.S.
Holder also will be allowed an ordinary loss each year of the excess, if any, of
the adjusted tax basis over the fair market value of its ADSs or ordinary
shares, but only to the extent of the net amount of previously included income
as a result of the mark-to-market election. The U.S. Holder's tax basis in the
ADSs or ordinary shares will be adjusted to reflect any such income or loss
amounts. Assuming the ordinary shares are regularly traded on a qualified
exchange or other market for purposes of the passive foreign investment company
rules, the mark-to-market election would be available with respect to the ADSs
and the ordinary shares. Prospective purchasers are urged to consult their tax
advisors regarding the consequences of an investment in a passive foreign
investment company.
68

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Backup Withholding and Information Reporting

"Backup" withholding and information reporting requirements may apply to
payments made within the United States of dividends on ADSs or ordinary shares
and to certain payments of proceeds of a sale or redemption of ADSs or ordinary
shares paid to a U.S. Holder. We, our agent, a broker or any paying agent, as
the case may be, may be required to withhold tax from any payment that is
subject to backup withholding at a rate of 28% of such payment if the U.S.
Holder fails to furnish the U.S. Holder's taxpayer identification number, to
certify that such U.S. Holder is not subject to backup withholding, or to
otherwise comply with the applicable requirements of the backup withholding
rules. Certain U.S. Holders, including, among others, corporations, are not
subject to the backup withholding and information reporting requirements. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
Holder may generally be claimed as a credit against such U.S. Holder's United
States federal income tax liability provided that the required information is
furnished to the United States Internal Revenue Service.
Hong Kong Taxation

The following provides a general
outline of the material tax considerations that may be relevant to a decision to
purchase, own or dispose of the ADSs or ordinary shares but does not purport to
deal with the tax consequences applicable to all categories of investors.
Prospective investors should consult their own professional advisers on the Hong
Kong and overall tax implications of investing, holding or disposing the ADSs or
ordinary shares under the laws of the countries in which they are liable to
taxation. The discussion below is applicable to both U.S. and non-U.S. citizens
as an investor.
Tax on Dividends

Under the Hong Kong Inland Revenue
Ordinance, no tax is payable in Hong Kong by withholding or otherwise in respect
of dividends paid by us.
Profits Tax

No tax is imposed in Hong Kong in
respect of gains from the sale of property, including shares and ADSs, unless
all the following three factors are present:
(i) such gain is derived from or arises in Hong
  Kong;
  (ii) such gain is attributable to a trade,
  profession or business carried on in Hong Kong; and
  (iii) the property in question such as shares and
  ADSs is not a capital asset of that trade, profession or business.
Taxable gains will be subject to
Hong Kong profits tax which is currently imposed on corporations at the
prevailing rate of 17.5% and on individuals or unincorporated business at the
prevailing rate of 16%.
Gains from sales of shares listed
on the Stock Exchange of Hong Kong will be considered to be derived from or to
arise in Hong Kong. Liability to Hong Kong profits tax in respect of such gains
would arise if the shares were not held as capital assets and the gains are
attributable to a business, trade or profession carried out in Hong Kong.
69

---

Gains from sales of ADSs will be
considered to be derived from or to arise in Hong Kong if the relevant purchase
or sales contracts are negotiated and concluded in Hong Kong, and such gains
will be subject to Hong Kong profits tax in the case of those persons dealing or
trading in the ADSs as part of their business being carried out in Hong Kong.
Stamp Duty

A sale or purchase of shares is
subject to Hong Kong stamp duty if the transfer of such shares is required to be
registered in Hong Kong. The ordinary shares will be registered in our Hong Kong
branch register of members and, therefore, will constitute "Hong Kong stock" for
the purposes of Hong Kong stamp duty. For such purposes any person who effects a
sale or purchase of Hong Kong stock such as the ordinary shares registered on
our Hong Kong register of members, whether as principal or agent, is required to
execute a contract note evidencing such sale or purchase and to have that note
stamped. Contract notes attract stamp duty, payable by the seller and the
purchaser in equal shares, at the aggregate rate of HK$2.00 per HK$1,000 by
reference to the value of the consideration paid or the market value of the
shares on the Stock Exchange of Hong Kong, whichever is greater, on the date the
contract note is executed. If, in the case of a sale or purchase of the shares
by a person who is not resident in Hong Kong, the stamp duty on either or both
of the contract notes is not paid, the transferee will be liable to pay stamp
duty on the instrument of transfer in an amount equal to the unpaid duty. If the
stamp duty is not paid on or before the due date, a penalty of up to ten times
the duty payable may be imposed. In addition, a fixed duty of HK$5.00 is
currently payable on any instrument of transfer of shares.
Upon the exchange of any ADRs
evidencing ADSs for certificates representing shares, or exchange of shares for
ADRs evidencing ADSs, stamp duty aggregating HK$2.00 per HK$1,000 or part
thereof is payable in addition to the depositary's charges, if any, unless the
exchange does not result in any change in the beneficial ownership of the shares
under Hong Kong law. Investors are not liable for stamp duty on the issuance of
the ADSs upon the initial deposit of shares issued directly to the depositary or
for the account of the depositary. No Hong Kong stamp duty is payable upon the
transfer of ADRs evidencing ADSs if such ADRs are not maintained on a register
in Hong Kong.
Estate Duty

The ordinary shares, being
registered on our branch register of members in Hong Kong, are property in
relation to which Hong Kong estate duty will be chargeable on the death of the
owner of such shares regardless of the place of the owner's residence,
citizenship or domicile, unless there is an applicable exemption under the
Estate Duty Ordinance (Ch. 111 of the Laws of Hong Kong). We cannot assure you
that the Hong Kong Inland Revenue Department will not treat the ADSs as Hong
Kong property that may be subject to estate duty on the death of the beneficial
owner of the ADSs even if the ADSs are located outside Hong Kong at the date of
such death. Hong Kong estate duty is imposed on a progressive scale from 5% to
15%. The rate of and the threshold for estate duty has, in the past, been
adjusted on a fairly regular basis. No estate duty is payable when the aggregate
value of the dutiable estate does not exceed HK$7.5 million, and the maximum
rate of duty of 15% applies when the aggregate value of the dutiable estate
exceeds HK$10.5 million.
Where shares registered on the
Hong Kong branch register, and possibly ADSs, are owned by a controlled company
which is defined under the Estate Duty Ordinance as a company under the control
of not more than five persons (certain classes of persons being treated as a
single person for this purpose), the death of a person who made at any time a
transfer of property to such company and who received or could have received
benefits from that company in the three years ending with that person's death
may expose the company to an estate duty liability.
The above statements are based on
prevailing laws. The Hong Kong Financial Secretary announced in the 2005/06 Hong
Kong Budget that estate duty would be abolished. Under the proposed law, estates
of persons that pass away after the commencement date of Revenue (Abolition of
Estate Duty) Ordinance 2005, will not subject to estate duty.
Cayman Islands Taxation

Pursuant to section 6 of the Tax
Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an
undertaking from the Governor-in-Council:
that no law enacted in the Cayman Islands imposing any tax to be levied on
  profits or income or gains or appreciation shall apply to us or our
  operations; and
  that such tax or any tax in the nature of estate duty or inheritance tax
  shall not be payable on our shares, debentures or other obligations.70

---

Our undertaking is effective for a
period of 20 years from December 7, 1999.
The Cayman Islands currently
levies no taxes applicable to us or our nominees based upon profits, income,
gains or appreciation and there is no taxation in the nature of inheritance tax
or estate duty payable by us or our members with respect to the ordinary shares.
There are no other taxes likely to be material to us levied by the Cayman
Islands government except for stamp duties which may be applicable on
instruments executed in, or after execution brought within the jurisdiction of,
the Cayman Islands. The Cayman Islands are not party to any double tax treaties.
There are no exchange control regulations or currency restrictions in the Cayman
Islands applicable to us.
10.F DIVIDENDS AND PAYING AGENTS

Not applicable.
10.G STATEMENT BY EXPERTS

Not applicable.
10.H DOCUMENTS ON DISPLAY

We are subject to the
informational requirements of the Securities Exchange Act of 1934, as amended.
Accordingly, we will file reports and other information with the U.S. SEC. You
may inspect and copy the reports and other information we file at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, DC 20549, and at the regional offices of the
Commission located in Chicago and New York. You may also obtain copies of such
material by mail from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates. The Commission also
maintains a web site at http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission. Our annual reports and some of the other information
submitted by us to the Commission may be accessed through this web site.Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSOur market risk is related to
changes in foreign exchange rates and interest rates.
The foreign exchange risk results
primarily from movements of the Hong Kong dollar against the U.S. dollar. Our
revenues are generated in Hong Kong dollars while a significant proportion of
all our network equipment costs are denominated in U.S. dollars. As of December
31, 2004, substantially all the assets and liabilities are denominated in Hong
Kong dollars. We have not experienced significant foreign exchange movements
primarily because the Hong Kong dollar has remained stable against the U.S.
dollar, which until May 18, 2005, was officially linked at HK$7.80 = US$1.00 by
the Hong Kong government, and subsequently trades between a fixed trading band
of HK$7.75 to HK$7.85 to US$1.00. We will continue to monitor our foreign
exchange exposure and market conditions and determine if any hedging is
required.
Substantially all of our
outstanding debts bore interest at floating rates based on the Hong Kong
interbank offer rate, or HIBOR, 
in 2004 and were subject to interest rate exposure resulting from changes in
interest rates in the Hong Kong dollar. Depending on
the outlook on interest rates, we may hedge our interest rate-related
transactions to manage such exposure.
The table below
provides information about our debt obligations as of December 31, 2004 under
the Facility Agreement (as amended by the Amendment and Restatement Agreement) that are sensitive to changes in
interest rates. The table represents principal cash flows and related weighted
average interest rates by expected maturity dates. The information is presented
in Hong Kong dollar, which is our reporting currency. The debts
actual cash flows are denominated in  Hong Kong dollars as
indicated in parentheses.
71
As of December 31, 20042005
    2006
    2007
    2008
    2009
    2010
    2011
    Total
    Fair ValueHK$
    HK$
    HK$
    HK$
    HK$
    HK$
    HK$
    HK$
    HK$Liabilities
    (in thousands)Long-term debtVariable rate (HK$)
    -
    75,000
    75,000
    -
    75,000
    100,000
    100,000
    425,000
    420,586Not
    HIBOR
    HIBOR
    Not
    HIBOR
    HIBOR
    HIBORAverage interest rate
    Applicable
    +3.5%
    +3.5%
    Applicable
    +3.5%
    +3.5%
    +3.5%Variable rate (HK$)
    -
    -
    -
    44,537
    44,537
    44,537
    44,537
    178,148
    176,613Not
    Not
    Not
    HIBOR
    HIBOR
    HIBOR
    HIBORAverage interest rate
    Applicable
    Applicable
    Applicable
    +3%
    +3%
    +3%
    +3%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

None.
Item 15. CONTROLS AND PROCEDURES
As of December 31,2004, we carried out an evaluation under the supervision of
and with the participation of our management, including our Group Managing
Director and Director - Finance, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on our evaluation, our Group Managing Director and Director -Finance
concluded that the design and operation of our disclosure controls and
procedures were effective as of December 31, 2004 at the reasonable assurance
level for gathering, analyzing and disclosing the information SUNDAY is required
to disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. In connection with the foregoing evaluation,
we identified deficiencies in the internal controls, and we have taken
corrective actions and allocated additional resources to improve the disclosure
controls and procedures. We do not believe the deficiencies in the disclosure
controls and procedures had any significant impact on our consolidated financial
statements for the year ended December 31, 2004.

72

---



Internal Control

The senior
management is responsible for internal control at the Group and for reviewing
its effectiveness. Procedures have been designed for safeguarding assets against
unauthorized use or disposition, for maintaining proper accounting records and
for ensuring the reliability of financial information used within the business
or for publication. Such procedures are designed to manage rather than eliminate
the risk of failure to achieve business objectives and can only provide
reasonable and not absolute assurance against material errors, losses or fraud.

The key internal controls established within the Group include
the following:

- 

Policies
  and proceduresare
  established to set policies, procedures and standards in the areas of finance,
  treasury, legal and regulatory affairs, company secretarial, human resources,
  corporate communications, purchasing and supply, and property management.

Internal Audit

Internal Audit was
established to provide independent assurance to the Board and executive
management on the adequacy and effectiveness of internal controls for the Group.
The Director of Internal Audit reports directly to the Chairman of the Audit
Committee and the Group Managing Director.

Internal Audit
adopts a risk management approach.  The annual work plan of Internal Audit
covers major activities and processes of the Groups business. All audit reports
are communicated to the relevant senior management, the Group Managing Director
the Executive Directors. Audit issues are tracked and followed up for proper
implementation, with progress reported to the the Executive Directors and Audit Committee on a
quarterly basis.

Our Group Managing Director and
our Director - Finance have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
United States Securities Exchange Act of 1934, as amended) as of December 31,
2004. Based on the evaluation, they have concluded that these disclosure
controls and procedures and internal control over financial reporting are
effective. There were no significant changes in our internal control over
financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) of the
United States Securities Exchange Act of 1934 as amended) that occurred during
the fiscal year ended December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

Item 16. [Reserved]

Item 16A AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has
determined that Mr. John William Crawford, being a former vice chairman of Ernst
& Young Hong Kong and the chairman of the audit division of Ernst & Young Hong
Kong, has appropriate professional qualifications and is sufficiently
experienced and skilled in the area of financial management, application of
accounting principles and internal control procedures to qualify as a financial
expert as defined under the applicable rules of the U.S. SEC issued pursuant to
Section 407 of the Sarbanes-Oxley Act of 2002.

Item 16B CODE OF ETHICS

Code of Ethics

In September 2003, we adopted a Code of Ethics that applies to our principal
executive officer and senior financial officers. The code emphasizes the role of
the principal executive officer and senior financial officers in the conduct and
practice of financial management and lays down the key principles that they
shall follow and advocate, which include:

- 

73

---



Our Code of Ethics has been posted on the Company's web site.

Related Party Transaction Policy

We have formulated a policy on the
review and approval of the related party transactions since March 2003. Related
party transactions are periodically reviewed and approved by the Audit
Committee. Significant related party transactions undertaken by us during the
year are set out in note 21 to our audited consolidated financial statements.
All such related party transactions were undertaken in our ordinary course of
business, on normal commercial terms, and complied with this policy.

Whistleblower Policy

In September 2003, a Whistleblower
Policy was established to facilitate the reporting of improper activities
relating to fraud against shareholders, or questionable accounting, internal
accounting controls or auditing matters. Any whistleblower complaints can be
reported to the head of the Internal Audit function or the Audit Committee
Chairman on a confidential and anonymous basis via the means set out in the
policy. The Audit Committee will investigate each matter so reported and take
corrective and disciplinary actions, if appropriate.

Securities Dealing Code

In March 2004, we
revised our existing Securities Dealing Code to align with the amendments of the
Model Code for Securities Transactions by Directors of Listed Issuers of The
Stock Exchange of Hong Kong Limited. The revised code sets out the principles
applying to dealings in our shares and other securities. It applies to all
directors and to all employees to whom the code is given and who are informed
that they are subject to its provisions. The directors and all the relevant
employees must comply strictly with the terms of the code. Any breach of the
code will be regarded as a very serious disciplinary matter.

Item 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

The fees for the professional
services rendered by our auditors, PricewaterhouseCoopers, in 2003 and 2004 are
depicted in the table below.

|                                | Fees for 2003      | Fees for 2004     
|------------------------------- | ------------------ | ------------------
|                                | (HK$)              | (HK$)             
|                                | (in
    thousands) | (in
    thousands)
|Audit services(1)               | 1,100              | 1,288             
|Audit-related
    services(2)   | 251                | 248               
|Tax services(3)                 | 128                | 80                
|Other permitted
    services(4) | 70                 | 288               
|Total                           | 1,549              | 1,904             

_______________

> (1) Audit fees for the years ended
>   December 31, 2003 and 2004 were for professional services rendered for the
>   audits of our audited consolidated financial statements, statutory audits and
>   assistance with review of documents filed with the Stock Exchange of Hong Kong
>   and the U.S. SEC.
>   (2) Audit-related fees for the years
>   ended December 31, 2003 and 2004 were for professional services rendered for
>   an employee benefit plans audit, issuance of certifications required by the OFTA,
>   a revenue sharing review required by one of our vendors and a system audit
>   required by the OFTA.
>   (3) Tax fees for the years ended
>   December 31, 2003 and 2004 were for services related to the preparation of
>   Hong Kong income tax returns. Tax fees for the year ended December 31, 2003
>   also included advisory services related to queries raised by the Inland
>   Revenue Department of Hong Kong.
>   (4) Fees for other permitted services
>   for the year ended December 31, 2003 related to systems consultation
>   services. Fees for other permitted services for the year ended December 31,
>   2004  related to major transactions in respect of execution of a
>   conditional Supply Contract and of the conditional Facility Agreement in May
>   2004, and execution of the conditional Supplemental Supply Agreement and of
>   the conditional Amendment and Restatement Agreement in November 2004.

74

---





The engagement of PricewaterhouseCoopers and the services provided pursuant
to such engagement were approved by our audit committee in accordance with
paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees for all such
services have been preapproved by our audit committee.

Our audit committee has satisfied itself that the provision of the
above-stated non-audit services has not impaired the independence of
PricewaterhouseCoopers.

Item 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

Item 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS

None.

PART III

Item 17. FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this item.

Item 18. FINANCIAL STATEMENTS

See pages F-1 through F-47 incorporated herein by reference.

Item 19. EXHIBITS

|EXHIBIT INDEX                                                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                            
|1.1****                                                                                                                                                     
|1.2*                                                                                                                                                        
|2.1*                                                                                                                                                        
|2.2*                                                                                                                                                        
|2.3*                                                                                                                                                        
|4.1*                                                                                                                                                        
|4.2**                                                                                                                                                       
|4.3**                                                                                                                                                       
|4.4***                                                                                                                                                     
|4.5***                                                                                                                                                     
|4.6***                                                                                                                                                     
|4.7****                                                                                                                                                    
|4.8****                                                                                                                                                    
|4.9****                                                                                                                                                    
|8.1****                                                                                                                                                     
|12.1****                                                                                                                                                    
|12.2****                                                                                                                                                    
|13.1****                                                                                                                                                    
|13.2****                                                                                                                                                    
|                                                                                                                                                            
|                                                                                                                                                            
|                                                                                                                                                            
|*
    Incorporated by reference to the registrant's Registration Statement on Form
    F-1, filed on March 9, 2000 (Registration No. 333-11470).            
|                                                                                                                                                            
|**
    Incorporated by reference to the registrant's Form 20-F for the year ended
    December 31, 2001.                                                    
|                                                                                                                                                            
|***
    Incorporated by reference to the registrant's Form 20-F for the year ended
    December 31, 2003.                                                   
|                                                                                                                                                            
|****
    Filed herewith.                                                                                                                                    
|                                                                                                                                                            
|
    Portions of the exhibit have been omitted pursuant to application for
    confidential treatment, which has been filed separately with the Commission.
|                                                                                                                                                            

75

---



SIGNATURE

Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, as amended, the registrant hereby certifies that it meets
all of the requirements for filing on Form 20-F and has duly caused and
authorized the undersigned to sign this Annual Report on its behalf.

SUNDAY Communications LimitedBy: /s/ WILLIAM BRUCE HICKS___________________________Name: William Bruce HicksTitle: Group Managing DirectorDate: June 30, 2005


---

APPENDIX A
GLOSSARY OF TECHNICAL TERMS

This glossary contains certain definitions and other terms as they relate to
our businesses and as they are used in this Annual Report. As such, these
definitions may not correspond to standard industry definitions.

|2G                                   | "Second Generation", a
    type of wireless communications technology based on the digital technology,
    including GSM, CDMA and D-AMPS technology, and which was developed primarily
    for voice applications.                       
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     |                                                                                                                                                                                                                                           
|3G                                   | "Third Generation",
    the next wave of wireless communications technology based on the UMTS
    standard that has broadband transmission capability to support multimedia
    services, such as real time interactive video.            
|                                     |                                                                                                                                                                                                                                           
|base
    station                     | fixed transceiver
    (transmitter and receiver) equipment, containing base transceiver stations,
    used for communicating between mobile phones within a certain area in a
    mobile network and a fixed link base station controller.
|                                     |                                                                                                                                                                                                                                           
|base
    station controller (BSC)... | a switch controlling a
    number of base stations.                                                                                                                                                                                       
|                                     |                                                                                                                                                                                                                                           
|base
    transceiver station (BTS).  | radio equipment,
    contained in a base station, used for transmitting and receiving signals to
    and from mobile phones within a single cell.                                                                                         
|                                     |                                                                                                                                                                                                                                           
|broadband                            | a service or
    connection allowing a considerable amount of information to be conveyed.
    Broadband is generally defined as bandwidth of at least 1.5 Mbps.                                                                           
|                                     |                                                                                                                                                                                                                                           
|browser                              | a software program
    that retrieves, displays, and prints information from the World Wide Web.                                                                                                                                          
|                                     |                                                                                                                                                                                                                                           
|CDMA                                 | code division multiple
    access, a digital cellular technology developed in the United States which
    is a way of multiplying a variety of signals onto a single communications
    channel.                                          
|                                     |                                                                                                                                                                                                                                           
|cell                                 | coverage area for a
    single base transceiver station.                                                                                                                                                                                  
|                                     |                                                                                                                                                                                                                                           
|cell
    site                        | the location of a base
    station.                                                                                                                                                                                                       
|                                     |                                                                                                                                                                                                                                           
|digital                              | in recording or
    computing, the use of binary code to represent information.                                                                                                                                                           
|                                     |                                                                                                                                                                                                                                           
|e-mail                               | electronic messages
    sent via the internet.                                                                                                                                                                                            
|                                     |                                                                                                                                                                                                                                           
|EFR                                  | enhanced full rate, a
    technology which enables voice transmission quality over digital mobile
    systems, which is equivalent to voice transmission quality over a landline,
    by filtering background noise.                      
|                                     |                                                                                                                                                                                                                                           
|ETS                                  | external
    telecommunication services, which are regulated and licensed in Hong Kong by
    the Hong Kong Telecommunications Authority for external telecommunications
    services over IPLCs.                                         
|                                     |                                                                                                                                                                                                                                           
|FTNS                                 | fixed
    telecommunication network services, which are regulated and licensed in Hong
    Kong by the Hong Kong Telecommunications Authority for telecommunications
    services between fixed points.                                   

A - 1

---



|GPRS                  | general packet radio
    services, an evolved version of 2G GSM technology which transmits and
    receives packets of data in bursts instead of using a continuous open radio
    channel. GPRS bandwidth is 115.2 Kbps.                                                                                                      
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |                                                                                                                                                                                                                                                                                                                                
|GSM
    1800          | global system for
    mobile communications standard, which uses the 1800 MHz frequency band. This
    standard was previously known as DCS 1800 and is the standard for PCS
    networks in Hong Kong.                                                                                                                        
|                      |                                                                                                                                                                                                                                                                                                                                
|GSM
    900           | global system for
    mobile communications standard, which uses the 900 MHz frequency band.                                                                                                                                                                                                                                   
|                      |                                                                                                                                                                                                                                                                                                                                
|IN                    | intelligent network.                                                                                                                                                                                                                                                                                                           
|                      |                                                                                                                                                                                                                                                                                                                                
|international roaming | a service which
    permits subscribers to use their existing mobile phone and telephone number
    when travelling in other countries outside their local network.                                                                                                                                                            
|                      |                                                                                                                                                                                                                                                                                                                                
|internet              | international computer
    network, a worldwide electronic communication network.                                                                                                                                                                                                                                              
|                      |                                                                                                                                                                                                                                                                                                                                
|IPLC                  | international private
    leased circuit.                                                                                                                                                                                                                                                                                      
|                      |                                                                                                                                                                                                                                                                                                                                
|ISR                   | International Simple
    Resale, a mechanism enabling operators who are licensed to provide external
    telecommunications services which enable international long distance calls
    using external telecommunications facilities of fixed telecommunication
    network service operators who are licensed to provide them.
|                      |                                                                                                                                                                                                                                                                                                                                
|Java                  | object-oriented
    programming language for creating software applications which are
    independent of operating systems and can be uploaded from servers to
    subscribers allowing, for example, the functionality of browsers to be
    increased.                                                                       
|                      |                                                                                                                                                                                                                                                                                                                                
|Java
    SIM card     | a rewriteable SIM Card
    with 32K memory.                                                                                                                                                                                                                                                                                    
|                      |                                                                                                                                                                                                                                                                                                                                
|Kbps                  | kilobits per second,
    which is a measurement of speed for digital signal transmission expressed in
    thousands of bits per second.                                                                                                                                                                                        
|                      |                                                                                                                                                                                                                                                                                                                                
|LAN                   | local area network.                                                                                                                                                                                                                                                                                                            
|                      |                                                                                                                                                                                                                                                                                                                                
|Mbps                  | megabits per second,
    which is a measurement of speed for digital signal transmission expressed in
    millions of bits per second.                                                                                                                                                                                         
|                      |                                                                                                                                                                                                                                                                                                                                
|MHz                   | megahertz, million
    hertz.                                                                                                                                                                                                                                                                                                  
|                      |                                                                                                                                                                                                                                                                                                                                
|MNP                   | mobile number
    portability, which was introduced by OFTA in March 1999. This allows mobile
    telephone users in Hong Kong to switch service providers and keep their
    existing mobile telephone numbers without penalty.                                                                                               
|                      |                                                                                                                                                                                                                                                                                                                                
|mobile
    switch     | a switch in a GSM
    network responsible for telephony switching functions.                                                                                                                                                                                                                                                   
|                      |                                                                                                                                                                                                                                                                                                                                
|PCS                   | personal communication
    service or system, the generic term for the type of digital cellular network
    constructed in Hong Kong using frequency bands at 1800 MHz.                                                                                                                                                        
|                      |                                                                                                                                                                                                                                                                                                                                
|PDA                   | personal digital
    assistant, a hand-held device that functions as a personal organizer,
    containing calendar, address and perhaps e-mail or fax capabilities.                                                                                                                                                            

A - 2

---



|PNETS                   | public non-exclusive
    telecommunications services, which are regulated and licensed by the Hong
    Kong Telecommunications Authority for services such as international
    value-added network services (which also covers the licensing of ISPs),
    virtual private network services (or VPNs) and external telecommunications
    services (or ETS).                                                                 
|----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|PNETS
    (ETS) license | a public non-exclusive
    telecommunications services (external telecommunications service) license,
    which is required to be obtained by an international long distance service
    provider in order to provide customers short code access to that service
    provider's international long distance services, and permits such a service
    provider to use ISR to provide the international long distance services.
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|PRS
    license         | a public
    radio communication service license, which permits the provision by a mobile
    operator of PCS public mobile communication services.                                                                                                                                                                                                                                                                           
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|server                  | a computer that allows
    other computers to connect to it. Servers store information and allow client
    computers to retrieve information for users.                                                                                                                                                                                                                                                                      
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|SIM
    card            | subscriber identity
    module card, a smart card which stores the subscriber identity information
    and authentication key and which needs to be inserted into a GSM mobile
    phone to make it operable.                                                                                                                                                                                                                 
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|switch                  | a node in a telephony
    network in which circuits are connected automatically in response to signals
    generated by subscribers' mobile phones.                                                                                                                                                                                                                                                                           
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|switching center        | the physical location
    of one or several switching systems.                                                                                                                                                                                                                                                                                                                                                                
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|TDMA                    | time division multiple
    access, a digital cellular technology, which is deployed on the 800 MHz and
    1900 MHz frequencies.                                                                                                                                                                                                                                                                                              
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|UMTS                    | universal mobile
    telephony system or service, a standard for 3G networks.                                                                                                                                                                                                                                                                                                                                                 
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                               
|WAP                     | wireless application
    protocol, an open, global specification that allows internet access and
    other broadband services on mobile wireless devices.                                                                                                                                                                                                                                                                     

A - 3

---



---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|CONSOLIDATED
    FINANCIAL STATEMENTS                                                                                   |     
|----------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                        |     
|                                                                                                                        |     
|                                                                                                                        |     
|Report of Independent
    Registered Public Accounting Firm                                                             | F-2 
|                                                                                                                        |     
|                                                                                                                        |     
|Consolidated
    Statements of Profits and Losses for the years ended December 31, 2002, 2003 and 2004                  | F-3 
|                                                                                                                        |     
|                                                                                                                        |     
|Consolidated Balance
    Sheets as at December 31, 2003 and 2004                                                        | F-4 
|                                                                                                                        |     
|                                                                                                                        |     
|Consolidated
    Statements of Changes in Shareholders' Equity for the years ended December 31,
    2002, 2003 and 2004 | F-5 
|                                                                                                                        |     
|                                                                                                                        |     
|Consolidated
    Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004                          | F-6 
|                                                                                                                        |     
|                                                                                                                        |     
|Notes to the
    Consolidated Financial Statements                                                                      | F-10

F-1

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SUNDAY COMMUNICATIONS LIMITED

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of profits and losses, of changes in shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of SUNDAY Communications Limited (the "Company") and its subsidiaries
(hereafter collectively referred to as the "Group") at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in Hong Kong. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the United
States of America. Information relating to the nature and effect of such
differences is presented in Note 26 to the consolidated financial statements.
PricewaterhouseCoopers

Hong Kong, June 30, 2005
F-2

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF PROFITS AND LOSSES 
(Amounts in thousands except per share data)

|                                         |      | Year ended December, 31
|---------------------------------------- | ---- | -----------------------
|                                         | Note | 2002                   
|                                         |      | HK$                    
|                                         |      |                        
|Revenues from                            |      |                        
|Mobile services                          |      | 1,217,677              
|Sales of mobile phones and accessories   |      | 115,291                
|Other services                           |      | 9,722                  
|                                         |      |                        
|Total operating revenues                 | 22   | 1,342,690              
|                                         |      |                        
|Cost of services                         | 3    | (221,071)              
|Cost of sales of mobile phones and       |      |                        
|accessories                              |      | (113,414)              
|                                         |      |                        
|Gross profit                             |      | 1,008,205              
|                                         |      |                        
|Other revenues                           |      | 1,917                  
|                                         |      |                        
|Operating expenses                       |      |                        
|Network costs                            |      | (303,577)              
|Depreciation                             | 11   | (256,393)              
|Rent and related costs                   |      | (61,074)               
|Salaries and related costs               | 4    | (243,890)              
|Advertising, promotion and other         |      |                        
|selling costs                            |      | (127,798)              
|Other operating costs                    |      | (60,078)               
|                                         |      |                        
|(Loss)/profit from operations            | 22   | (42,688)               
|                                         |      |                        
|Interest income                          |      | 3,553                  
|Finance costs                            | 4    | (59,520)               
|Share of losses from joint ventures      |      | (18,609)               
|                                         |      |                        
|Net (loss)/profit                        | 4    | (117,264)              
|                                         |      |                        
|                                         |      |                        
|Basic and diluted (loss)/earnings per    |      |                        
|share (in cents)                         | 6    | (3.9)                  
|                                         |      |                        
|Shares outstanding for basic and diluted |      |                        
|loss/earnings per share (thousands)      | 6    | 2,990,000              

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

F-3

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 
(Amounts in thousands)

|                                                       |      | December 31,
|------------------------------------------------------ | ---- | ------------
|                                                       | Note | 2003        
|                                                       |      | HK$         
|                                                       |      |             
|ASSETS                                                 |      |             
|Current assets                                         |      |             
|Cash and cash equivalents                              | 19   | 102,413     
|Restricted cash deposits                               | 7    | 209,643     
|Trade receivables, net of provision for doubtful debts | 8    | 81,069      
|Prepayment of 3G licence fees                          | 13   | 50,000      
|Inventories                                            | 9    | 11,621      
|Deposits, prepayments and other receivables            | 10   | 82,677      
|                                                       |      |             
|Total current assets                                   |      | 537,423     
|                                                       |      |             
|Non-current assets                                     |      |             
|Fixed assets, net of accumulated depreciation          | 11   | 1,101,899   
|Investment in a joint venture                          | 12   | -           
|Prepayment of 3G licence fees                          | 13   | 91,667      
|Restricted cash deposits                               | 7    | 1,699       
|                                                       |      |             
|Total assets                                           |      | 1,732,688   
|                                                       |      |             
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |      |             
|Current liabilities                                    |      |             
|Trade payables                                         |      | 71,600      
|Other payables and accrued charges                     | 14   | 152,791     
|Subscriptions received in advance                      |      | 87,567      
|Current portion of bank and vendor loans               | 15   | 296,368     
|                                                       |      |             
|Total current liabilities                              |      | 608,326     
|                                                       |      |             
|Long-term liabilities                                  |      |             
|Subscriptions received in advance                      |      | 1,458       
|Bank and vendor loans                                  | 15   | 425,000     
|                                                       |      |             
|Total liabilities                                      |      | 1,034,784   
|                                                       |      |             
|                                                       |      |             
|Commitments and contingencies                          | 16   |             
|                                                       |      |             
|Shareholders' equity                                   |      |             
|Share capital                                          | 17   | 299,000     
|Reserve arising from the Reorganization                | 17   | 1,254,000   
|Share premium                                          | 17   | 2,124,424   
|Accumulated losses                                     |      | (2,979,520) 
|                                                       |      |             
|Total shareholders' equity                             |      | 697,904     
|                                                       |      |             
|                                                       |      |             
|Total liabilities and shareholders' equity             |      | 1,732,688   

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

F-4

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
(Amounts in thousands, except share data)

|                        |               |          | Reserve        |             |               |          
|----------------------- | ------------- | -------- | -------------- | ----------- | ------------- | ---------
|                        |               |          | arising        |             |               | Total    
|                        | Share capital | from the | Share          | Accumulated | shareholders'
|                        | Shares        | Amount   | Reorganization | premium     | losses        | equity   
|                        |               | HK$      | HK$            | HK$         | HK$           | HK$      
|                        |               |          |                |             |               |          
|                        |               |          |                |             |               |          
|As at January 1, 2002   | 299,000,000   | 299,000  | 1,254,000      | 2,124,424   | (2,889,428)   | 787,996  
|Net loss for the year   | -             | -        | -              | -           | (117,264)     | (117,264)
|                        |               |         
|As at December 31, 2002 | 299,000,000   | 299,000  | 1,254,000      | 2,124,424   | (3,006,692)   | 670,732  
|                        |               |          |                |             |               |          
|                        |               |          |                |             |               |          
|Net profit for the year | -             | -        | -              | -           | 27,172        | 27,172   
|                        |               |         
|As at December 31, 2003 | 299,000,000   | 299,000  | 1,254,000      | 2,124,424   | (2,979,520)   | 697,904  
|                        |               |          |                |             |               |          
|                        |               |          |                |             |               |          
|Net profit for the year | -             | -        | -              | -           | 5,544         | 5,544    
|                        |               |         
|As at December 31, 2004 | 299,000,000   | 299,000  | 1,254,000      | 2,124,424   | (2,973,976)   | 703,448  
|                        |               |         
|                        |               |          |                |             |               |          
|                        |               | US$      | US$            | US$         | US$           | US$      
|                        |               |          |                |             |               |          
|As at December 31, 2004 |               |          |                |             |               |          
|(Note 2(t))             |               | 38,470   | 161,342        | 273,333     | (382,638)     | 90,507   

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

F-5

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Amounts in thousands)

|                                                           | Year ended December 31,
|---------------------------------------------------------- | -----------------------
|                                                           | 2002                   
|                                                           | HK$                    
|                                                           |                        
|                                                           |                        
|Net cash provided by
    operating activities (note a)     | 129,343                
|                                                           |                        
|Investing activities                                       |                        
|Advances to
    joint ventures                             | (16,991)               
|Purchases of
    fixed assets                              | (68,995)               
|Proceeds from
    disposals of fixed assets                | 42                     
|(Increase)/decrease in restricted cash deposits            | (23,530)               
|Payment of
    financing costs                             | -                      
|                                                           |                        
|Net cash (used
    in)/provided by investing activities    | (109,474)              
|                                                           |                        
|                                                           |                        
|Financing activities
    (note b)                          |                        
|Repayment of
    long-term bank loans                      | (156,000)              
|Repayment of
    long-term vendor loan - Nortel            | (39,000)               
|Repayment of
    long-term vendor loans - Huawei           | -                      
|Increase in
    long-term vendor loan - Nortel             | 179,400                
|Increase in
    long-term vendor loans - Huawei            | -                      
|Payment of
    deferred charges                            | -                      
|Capital element
    of finance lease payments              | (2,020)                
|                                                           |                        
|Net cash used in
    financing activities                  | (17,620)               
|                                                           |                        
|                                                           |                        
|Increase in cash and
    cash equivalents                  | 2,249                  
|Cash and cash
    equivalents at the beginning of the year | 47,328                 
|                                                           |                        
|Cash and cash
    equivalents at the end of the year       | 49,577                 

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

F-6

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) 
(Amounts in thousands)

(a) Reconciliation of (loss)/profit from operations to net cash provided by
operating activities:

|                                                | Year ended December 31,
|----------------------------------------------- | -----------------------
|                                                | 2002                   
|                                                | HK$                    
|                                                |                        
|                                                |                        
|(Loss)/profit from operations                   | (42,688)               
|Depreciation                                    | 256,393                
|Loss on disposals of fixed assets               | 377                    
|                                                |                        
|Operating profit before working capital changes | 214,082                
|                                                |                        
|Decrease/(increase) in inventories              | 10,453                 
|Decrease in trade receivables, deposits,        |                        
|prepayments and other receivables               | 666                    
|(Decrease)/increase in trade payables,          |                        
|other payables and accrued charges              | (13,852)               
|Decrease in subscriptions received in advance   | (26,329)               
|                                                |                        
|Cash provided by operations                     | 185,020                
|                                                |                        
|Interest received                               | 3,422                  
|Interest paid                                   | (58,307)               
|Interest element of finance lease payments      | (129)                  
|Other incidental borrowing costs paid           | (663)                  
|Exchange differences                            | -                      
|                                                |                        
|Net cash provided by operating activities       | 129,343                

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

F-7

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) 
(Amounts in thousands)

(b) Analysis of changes in financing during the years:

|                                                                   | Long-term loans | Obligations under
    finance leases
|------------------------------------------------------------------ | --------------- | ------------------------------------
|                                                                   | HK$             | US$                                 
|                                                                   |                 | (Note 2(t))                         
|As at January 1, 2002                                              | 751,455         |                                     
|Net cash used in financing                                         | (15,600)        |                                     
|Purchases of fixed assets by directly
    assuming long-term loans | 49,461          |                                     
|                                                                   |                 |                                     
|As at December 31, 2002                                            | 785,316         |                                     
|                                                                   |                 |                                     
|Net cash used in financing                                         | (61,772)        |                                     
|Exchange differences                                               | (2,176)         |                                     
|                                                                   |                 |                                     
|As at December 31, 2003                                            | 721,368         | 92,813                              
|                                                                   |                 |                                     
|Net cash used in financing                                         | (223,407)       | (28,744)                            
|Purchases of fixed assets by directly
    assuming long-term loans | 105,231         | 13,539                              
|Exchange differences                                               | (44)            | (6)                                 
|Payment of deferred charges                                        | (11,467)        | (1,475)                             
|Amortization of deferred charges                                   | 1,059           | 136                                 
|                                                                   |                 |                                     
|As at December 31, 2004                                            | 592,740         | 76,263                              

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

F-8

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) 
(Amounts in thousands)

(c) Supplemental cash flow information:

|                                       | Year ended December 31,
|-------------------------------------- | -----------------------
|                                       | 2002                   
|                                       | HK$                    
|                                       |                        
|                                       |                        
|Major non-cash transactions:           |                        
|Purchases of fixed assets by directly  |                        
|assuming long-term vendor
    loans    | 49,464                 
|Interest expenses capitalized in fixed |                        
|assets in the course of
    network    |                        
|construction (Note 4)                  | -                      

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

F-9

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1          Description of business and basis of
  presentation
(a) Description of businessSUNDAY Communications Limited (the "Company") and its wholly-owned
  subsidiaries are engaged in the provision of mobile and other services in Hong
  Kong. The Company and its subsidiaries (together the "Group") commenced
  operations in November 1996 and commercial operations on September 21, 1997.(b) Basis of presentationThe consolidated financial statements have been prepared in accordance with
  applicable Statements of Standard Accounting Practice issued by the Hong Kong
  Institute of Certified Public Accountants ("HKICPA") and accounting principles
  generally accepted in Hong Kong ("HK GAAP"). These principles differ in
  certain significant respects from accounting principles generally accepted in
  the United States of America ("US GAAP"). Details of these differences are set
  out in note 26.
  The consolidated financial statements do not represent the Hong Kong
  statutory financial statements of the Group as certain reclassifications and
  changes in presentation have been in order to conform more closely to
  presentations customary in filings with the Securities and Exchange Commission
  of the United States of America.
  Unless indicated otherwise, all amounts are expressed in Hong Kong dollars.
  Refer to Note 2(t) for the policy on convenience translation.
  2 Principal accounting policies

> The principal accounting policies adopted in the preparation of the
>   consolidated financial statements are as set out below:(a) Group accounting(i) Consolidation
>     The consolidated financial statements of the Group incorporate the
>     financial statements of the Company and its subsidiaries made up to 31st
>     December. Subsidiaries are those entities in which the Company, directly or
>     indirectly, controls more than one half of the voting power; has the power
>     to govern the financial and operating policies; to appoint or remove the
>     majority of the members of the board of directors; or to cast majority of
>     votes at the meetings of the board of directors. The results of subsidiaries
>     acquired or disposed of during the year are included in the statements of
>     profits and losses from the effective date of acquisition or up to the
>     effective date of disposal as appropriate.
>     All significant intercompany transactions and balances within the Group
>     are eliminated on consolidation.
>     (ii) Joint venture
>     A joint venture is a contractual arrangement whereby the
>     Group and other parties undertake an economic activity which is subject to
>     joint control and none of the participating parties has unilateral control
>     over the economic activity.

F-10

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(a) Group accounting (Continued)(ii) Joint venture (Continued)
    The consolidated statements of profits and losses includes the Group's
    share of the results of joint ventures for the year, and the consolidated
    balance sheets includes the Group's share of the net assets of a joint
    venture.
    When an indication of impairment exists, the carrying amount of the
    investment in joint venture is assessed and written down immediately to its
    recoverable amount.(b) Revenue recognitionThe Group recognizes revenues on the following basis:
  (i) Mobile services
    Revenue from mobile services comprises connection fees and fees for usage
    of the Group's network and facilities by SUNDAY subscribers and
    international calls by such subscribers from mobile phones. Connection fee
    revenue is recognized when received upon completion of activation services.
    Subscribers pay monthly fees for usage of the Group's network and facilities
    which include an agreed minimum amount of free airtime available for local
    and international calls. Fees for airtime in excess of the agreed minimum
    and international calls are charged based on usage. Revenue for usage of the
    Group's network and facilities is recognized in the period in which usage of
    such network and facilities is provided and collectibility can be reasonably
    assured. Revenue in respect of international calls and mobile airtime in
    excess of the minimum agreed amount is recognized when the respective calls
    are made and collectibility can be reasonably assured.
    Subscriptions received in advance comprises prepaid subscription fees
    received from subscribers and the up-front subscription fees received from
    subscribers upon purchase of mobile phones. They are for provision of mobile
    airtime and access to the Group's network for an agreed period of time in
    accordance with the terms of the sales and services agreements and are
    deferred and amortized on a straight-line basis over the agreed period,
    except for prepaid subscription fees from prepaid mobile services which are
    recognized as revenue based on usage of the Group's network and facilities.
    (ii) Sales of mobile phones and accessories
    Revenue from sales of mobile phones and accessories is recognized when
    the mobile phones and accessories are delivered to customers and
    collectibility can be reasonably assured. Where a customer signs a sales and
    services agreement in connection with the purchase of a mobile phone and
    accessories from the Group and the provision of mobile services, revenue in
    respect of the service element of the agreement is recognized based on the
    fair value of the service element, which is the price the Group charges to
    customers who subscribe for mobile services only, without purchase of a
    mobile phone and accessories. The remainder of the total revenues from the
    agreement is allocated to revenue from the sale of the mobile phone and
    accessories.
    (iii) Interest income
    Interest income is recognized on a time proportion basis,
    taking into account the principal amounts outstanding and the interest rates
    applicable.

F-11SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(c) Subscriber acquisition costsThe direct costs of acquisition of subscribers, which comprise the loss on
  sales of mobile phones and accessories to the Group and commission expenses,
  are expensed as incurred. Revenue and cost of sales in respect of sales of
  mobile phones and accessories are included in revenue from sales and cost of
  sales of mobile phones and accessories, respectively. Commission expenses are
  included in advertising, promotion and other selling costs.(d) Advertising and promotion costsAdvertising and promotion costs are charged to the consolidated statements
  of profits and losses as incurred.(e) Warranty costsThe Group is provided with warranty from certain manufacturers in respect
  of such manufacturer defects of mobile phones and accessories. The Group
  provides warranties to customers upon sales of such mobile phones and
  accessories with similar terms and conditions to the warranties offered by the
  manufacturers.(f) Borrowing costsBorrowing costs that are directly attributable to the acquisition,
  construction or production of an asset that necessarily takes a substantial
  period of time to get ready for its intended use are capitalized as part of
  the cost of that asset.
  All other borrowing costs are charged to the consolidated statements of
  profits and losses in the year in which they are incurred.(g) Employee benefits(i) Employee leave entitlements
    Employee entitlements to annual leave are recognized when they accrue to
    employees. A provision is made for the estimated liability for annual leave
    as a result of services rendered by employees up to the balance sheet date.
    (ii) Bonus plans
    The expected bonus payments are recognized as a liability when the Group
    has a present legal or constructive obligation as a result of services
    rendered by employees and a reliable estimate of the obligation can be made.
    Liabilities for bonus plans are expected to be settled within 12 months
    and are measured at the amounts expected to be paid when they are settled.
    (iii) Retirement benefit costs
    The Group's contributions to defined contribution retirement schemes are
    expensed as incurred and are reduced by contributions forfeited by those
    employees who leave the schemes prior to vesting fully in the contributions.
    The assets of the schemes are held separately from those of the Group in
    independently administered funds of the respective schemes.

F-12SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(h) Deferred taxationDeferred taxation is provided in full, using the liability method, on
  temporary differences arising between the tax bases of assets and liabilities
  and their carrying amounts in the consolidated financial statements. Taxation
  rates enacted or substantively enacted by the balance sheet date are used to
  determine deferred taxation.
  Deferred tax assets are only recognized to the extent that it is probable
  that future taxable profit will be available against which the temporary
  differences can be utilized.
  Deferred taxation is provided on temporary differences arising from
  depreciation on fixed assets except where the timing of the reversal of the
  temporary difference can be controlled and it is probable that the temporary
  difference will not reverse in the foreseeable future.(i) Assets under leases(i) Finance leases
    Leases that substantially transfer to the Group all the risks and rewards
    of ownership of assets are accounted for as finance leases. At the inception
    of a finance lease, the fair value of the asset is recorded together with
    the obligation, excluding the interest element, to pay future rentals.
    Payments to the lessor consist of both the capital and interest elements.
    Finance charges are charged to the consolidated statements of profits and
    losses in proportion to the capital balances outstanding.
    Assets held under finance leases are depreciated over the shorter of
    their estimated useful lives or lease periods.
    (ii) Operating leases
    Leases where substantially all the risks and rewards of ownership of
    assets remain with the leasing company are accounted for as operating
    leases. Rentals applicable to such operating leases are charged to the
    consolidated statements of profits and losses on the straight line basis
    over the lease terms.

F-13SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(j) Fixed assets(i) Fixed assets are stated at cost less
    accumulated depreciation and accumulated impairment losses, if any.
    Depreciation of fixed assets is calculated to write off their cost over
    their estimated useful lives, using the straight-line basis. Estimated
    useful lives are summarized as follows:

|Network equipment              | Shorter of 10
        years or lease period of 1 to 3 years
|------------------------------ | -----------------------------------------------------------
|Computer equipment             | Shorter of 5 years
        or lease period of 1 to 3 years 
|Leasehold
        improvements | Lease period of 2
        to 10 years                      
|Furniture and
        fixtures | 5 years                                                    
|Office equipment               | 5 years                                                    
|Motor vehicles                 | 5 years                                                    

The cost of the network equipment comprises (i) the purchase cost of
    network assets and equipment and direct expenses in respect of the
    development of the network; and (ii) the minimum annual fees payable prior
    to the launch of 3G commercial services, and are depreciated over the
    remaining 3G Licence period or their estimated useful lives.

Major costs incurred in restoring fixed assets to their normal working
    condition are charged to the consolidated statements of profits and losses.
    Improvements are capitalized and depreciated over their expected useful
    lives to the Group.

At each balance sheet date, both internal and external sources of
    information are considered to assess whether there is any indication that
    fixed assets are impaired. If any such indication exists, the recoverable
    amount of the fixed assets is estimated and, where relevant, an impairment
    loss is recognized to reduce the fixed assets to the recoverable amount.
    Such impairment losses are recognized in the consolidated statements of
    profits and losses.

(ii) The gain or loss on disposal of a fixed
    asset is the difference between the net sale proceeds and the carrying
    amount of the relevant asset, and is recognized in the consolidated
    statements of profits and losses.

F-14

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(k) Impairment of long-lived assetsLong-lived assets are comprised of intangible assets and fixed assets. At
  each balance sheet date, both internal and external sources of information are
  considered to assess whether there is any indication that long-lived assets
  are impaired. If any such indication exists, the recoverable amount of the
  long-lived assets is estimated and where relevant, an impairment loss is
  recognized to reduce the long-lived asset to its recoverable amount. Such
  impairment losses are recognized in the consolidated statements of profits and
  losses. In determining the recoverable amount, expected future cash flows
  generated by the long-lived assets are discounted to their present values.(l) Trade receivablesProvision is made against trade receivables to the extent which they are
  considered to be doubtful. Trade receivables in the consolidated balance
  sheets are stated net of such provision.(m) InventoriesInventories are stated at the lower of cost and net
  realizable value. Cost is calculated on the weighted-average basis. Net
  realizable value is determined on the basis of anticipated sales proceeds less
  estimated selling expenses.(n) Refundable depositsRefundable deposits are received from customers who require mobile
  international calls and roaming services. The refundable deposits are retained
  by the Group and are included in other payables and accrued charges for as
  long as the customers require these services.(o) Cash and cash equivalentsCash and cash equivalents are short-term highly liquid investments, which
  are readily convertible into cash and have original maturities of three months
  or less at the date of acquisition.(p) Translation of foreign currenciesTransactions in foreign currencies during the year are translated into Hong
  Kong dollars at the rates of exchange ruling at the transaction dates.
  Monetary assets and liabilities denominated in foreign currencies are
  incorporated into the accounts by translating foreign currencies into Hong
  Kong dollars at rates of exchange ruling at the balance sheet date. All
  exchange differences arising are included in the consolidated statements of
  profits and losses.
  The balance sheets of subsidiaries and joint venture expressed in foreign
  currencies are translated at the rates of exchange ruling at the balance sheet
  date whilst the consolidated statements of profits and losses are translated
  at an average rate. Exchange differences are dealt with as a movement in
  reserves.(q) Use of estimatesThe preparation of financial statements in conformity with generally
  accepted accounting principles requires management to make estimates and
  assumptions that affect the reported amounts of assets and liabilities and
  disclosure of contingent assets and liabilities at the date of the financial
  statements and the reported amounts of revenues and expenses reported during
  the year. Actual results could differ from these estimates.

F-15

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(r) Risks and uncertaintiesThe Group participates in a volatile industry with a concentration of
  customers in one geographic area that are characterized by industry-wide
  competition for market share resulting in aggressive pricing practices,
  continually changing customers demand patterns, growing competition and rapid
  technological development. The Group's operating results could be adversely
  affected should the Group be unable to anticipate customer demand accurately,
  to maintain short design cycles while meeting evolving industry performance
  standards, to manage its product or services transitions and inventory levels,
  to distribute its products and services quickly in response to customer
  demand, to differentiate its products and services from those of its
  competitors, or to compete successfully in the market for its new products and
  services.

(s) Facility transaction costs and
  deferred charges

Facility transaction costs are incremental costs that are
  directly attributable to the borrowing of long-term loans.

Facility transaction costs include fees and
  commissions paid to agents, advisers, brokers, and dealers; levies by
  regulatory agencies and securities exchanges; and transfer taxes and duties,
  if applicable. Facility transaction costs do not include debt premiums or
  discounts, financing costs, or allocations of internal administrative or
  holding costs.

Long-term loans are recognized initially at their cost which
  is the fair value of the consideration received in respect thereof. Facility
  transaction costs are included in the initial measurement of loans, and are
  presented as deferred charges which are offset against loans and amortized
  using the straight-line method over the expected loan periods.

(t) Convenience translations

The consolidated statements of profits and losses, and of cash flows for
  the year ended December 31, 2004 and the consolidated balance sheets as at
  December 31, 2004 contain certain translations of Hong Kong dollars at the
  rate of HK$7.7723 to U.S. dollars. Such translations should not be construed
  as representations that the Hong Kong dollar amounts represent or have been or
  could have been converted into U.S. dollars at that or any other rate.

F-16

---

SUNDAY COMMUNICATIONS LIMITED
AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

3Cost of services

> Cost of services represents interconnection charges, cost of out-bound
>   roaming services, provision for doubtful debts, billing materials charges,
>   bill collection charges, cost of prepaid cards and revenue sharing expenses.

4 Net (loss)/profit

| |                                                          | Year ended December 31,     
| | -------------------------------------------------------- | ----------------------------
| |                                                          | 2002                        
| |                                                          | HK$                         
| |                                                          | (Amounts in
      thousands)
| |                                                          |                             
| | Net (loss)/profit is stated after charging:              |                             
| | Advertising and promotion costs                          | 41,551                      
| | Auditors' remuneration:                                  |                             
| | Audit services                                           | 1,146                       
| | Audit-related services                                   | 136                         
| | Other permitted services                                 | 73                          
| |                                                          |                             
| |                                                          | 1,355                       
| |                                                          |                             
| | Write-down of inventories to net realizable
      values | -                           
| | Cost of inventories sold                                 | 113,414                     
| | Loss on disposal of fixed assets                         | 377                         
| | Provision for doubtful debts                             | 31,016                      
| | Depreciation of owned fixed assets                       | 253,668                     
| | Depreciation of fixed assets under finance
      leases  | 2,725                       
| | Operating lease charges on land and
      buildings,     |                             
| | including transmission sites                             | 220,207                     
| | Operating lease charges on leased lines                  | 87,130                      
| | Net exchange losses                                      | 313                         
| |                                                          |                             
| |                                                          |                             
| | Salaries and related costs comprise:                     |                             
| | Salaries, bonuses and
      allowances                   | 212,338                     
| | Retirement scheme
      contributions                    | 6,653                       
| | Termination benefits                                     | 24,899                      
| |                                                          |                             
| |                                                          | 243,890                     

F-17

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4 Net (loss)/profit (Continued)

| |                                                                          | Year ended December 31,
| | ------------------------------------------------------------------------ | -----------------------
| |                                                                          | 2002                   
| |                                                                          | HK$                    
| |                                                                          | (Amounts in thousands) 
| | Finance costs
      comprise:                                            |                        
| | Interest on bank
      loans                                             | 37,923                 
| | Interest on vendor
      loans:                                          |                        
| | Wholly repayable within five years                                       | 20,816                 
| | Not wholly repayable within five years                                   | -                      
| | Interest element of
      finance lease payments                         | 129                    
| | Other incidental
      borrowing costs                                   | 652                    
| |                                                                          |                        
| | Total financing
      costs incurred                                     | 59,520                 
| | Amounts capitalized
      in fixed assets in the course of construction: |                        
| | Interest expenses                                                        | -                      
| | Other incidental borrowing costs                                         | -                      
| |                                                                          |                        
| | Total financing
      costs capitalized                                  | -                      
| |                                                                          |                        
| |                                                                          | 59,520                 
| |                                                                          |                        
| |                                                                          |                        
| | After crediting:                                                         |                        
| | Reversal of write
      down of inventories to net                       |                        
| | realizable value                                                         | 2,045                  
| | Net exchange gains                                                       | -                      

5

> 

The Group is subject to tax on an entity basis on income arising in or
  derived from Hong Kong. The rate of taxation of the companies within the Group
  operating in Hong Kong is 16% for the year ended December 31, 2002, and is
  17.5% for the years ended December 31, 2003 and 2004. No provision for Hong
  Kong and overseas profits tax has been made during the year ended December 31,
  2002 as the Group had no assessable profits for that year. No provision for
  Hong Kong and overseas profits tax has been made during the years ended
  December 31, 2003 and 2004 as the Group had sufficient tax losses brought
  forward to set off against the assessable profits for those years.

The income tax credit/charge attributable to the loss/profit for each of
  the years ended December 31, 2002, 2003 and 2004 differed from the amounts
  computed by applying the Hong Kong statutory rate to the pre-tax loss as a
  result of the following differences:

F-18

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5

| |                                                        | Year ended December 31,     
| | ------------------------------------------------------ | ----------------------------
| |                                                        | 2002                        
| |                                                        | HK$                         
| |                                                        | (Amounts in
      thousands)
| |                                                        |                             
| | Hong Kong statutory tax rate:                          | 16%                         
| |                                                        |                             
| | Income tax (credit)/charge at the Hong Kong            |                             
| | statutory tax rate                                     | (18,762)                    
| | Effect of temporary differences                        | 21,758                      
| | Effect of non-deductible expenses                      | 8,295                       
| | Effect of non-taxable income                           | (431)                       
| | Effect of utilization of previously
      unrecognized |                             
| | tax losses                                             | (10,860)                    
| |                                                        |                             
| | Provision for income taxes                             | -                           

> The potential deferred tax assets/(liabilities) not provided for as at
>   December 31, 2003 and 2004 amounted to:

| |                                     | December 31,          
| | ----------------------------------- | ----------------------
| |                                     | 2003                  
| |                                     | HK$                   
| |                                     | (Amounts in thousands)
| |                                     |                       
| | Accelerated depreciation allowances | (90,410)              
| | Tax losses                          | 491,024               
| |                                     |                       
| |                                     | 400,614               

> The Group has not recorded any deferred tax effect in its consolidated
>   statements of profits and losses for the years ended December 31, 2002, 2003
>   and 2004 in respect of tax losses due to the uncertainty that the resultant
>   deferred tax asset will be recovered in the foreseeable future. The Group has
>   net unrecognized tax losses of HK$3,217,454,000 (2003: HK$3,382,281,000) to
>   offset against future taxable income. These tax losses have no expiry date.

6 Earnings/(loss) per share

> Basic (loss)/earnings per share for the years ended
>   December 31, 2002, 2003 and 2004 has been calculated based on the weighted
>   average number of 2,990,000,000 shares in issue during those years.
>   There is no dilutive effect upon exercise of the share options on the
>   (loss)/earnings per share for the years ended December 31, 2002, 2003 and
>   2004.

F-19

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7 Restricted cash deposits

> As at December 31, 2004, a bank deposit of HK$1,130,000 (2003:
>   HK$1,699,000) has been pledged to a bank in return for a bank guarantee issued
>   in respect of the use of facilities at the Hong Kong International Airport for
>   the provision of mobile services. The guarantee will expire in March 2007.
>   No restricted cash deposit was required as at December 31, 2004 under the
>   terms of the long-term loans (2003: HK$209,643,000).

8 Trade receivables, net

> December 31,2003
>       2004HK$
>       HK$(Amounts in thousands)Trade receivables
>       88,581
>       81,297Less: Provision for doubtful debts
>       (7,512)
>       (7,632)81,069
>       73,665Changes in the provision for doubtful debts consist of:
>   Year ended December 31,2002
>       2003
>       2004HK$
>       HK$
>       HK$(Amounts in thousands)Balance at the beginning of the year
>       5,266
>       7,842
>       7,512Additions charged to expense
>       30,883
>       30,228
>       25,634Write-off
>       (28,307)
>       (30,558)
>       (25,514)Balance at the end of the year
>       7,842
>       7,512
>       7,632All trade receivables were pledged as security for the vendor loan
>   facilities of the Group (Note 15).

F-20

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

9 Inventories

| |                                | December 31,          
| | ------------------------------ | ----------------------
| |                                | 2003                  
| |                                | HK$                   
| |                                | (Amounts in thousands)
| | Mobile phones and accessories: |                       
| | Cost                           | 15,940                
| | Provisions                     | (4,319)               
| |                                |                       
| |                                | 11,621                

> As at December 31, 2004, the carrying amount of inventories that were
>   stated at net realizable values amounted to HK$8,173,000 (2003: HK$8,281,000).
>   All inventories were pledged as security for the vendor loan facilities of
>   the Group (Note 15).

10Deposits,
  prepayments and other receivables

| |                                          | December 31,          
| | ---------------------------------------- | ----------------------
| |                                          | 2003                  
| |                                          | HK$                   
| |                                          | (Amounts in thousands)
| |                                          |                       
| | Rental deposits for transmission sites   | 30,778                
| | Deposits for acquisition of fixed assets | 6,971                 
| | Other deposits                           | 16,776                
| | Prepayments                              | 21,002                
| | Discounts from vendors                   | 182                   
| | Other                                    | 6,968                 
| |                                          |                       
| |                                          | 82,677                

F-21

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11 Fixed assets, net of
accumulated depreciation

|                              |                        | Furniture |           |           |          |              |          
|----------------------------- | ---------------------- | --------- | --------- | --------- | -------- | ------------ | ---------
|                              | Network                | and       | Office    | Computer  | Motor    | Leasehold    |          
|                              | equipment              | fixtures  | equipment | equipment | vehicles | improvements | Total    
|                              | HK$                    | HK$       | HK$       | HK$       | HK$      | HK$          | HK$      
|                              | (Amounts in thousands)
|Cost:                         |                        |           |           |           |          |              |          
|As at January 1, 2003         | 1,835,136              | 7,449     | 17,948    | 221,740   | 3,080    | 324,264      | 2,409,617
|Additions                     | 105,581                | 181       | 691       | 3,022     | 4        | 12,296       | 121,775  
|Disposals                     | (39)                   | (981)     | (609)     | (1,828)   | (647)    | (16,594)     | (20,698) 
|Reclassifications             | -                      | -         | (58)      | 58        | -        | -            | -        
|                              |                        |           |           |           |          |              |          
|As at December 31,
    2003   | 1,940,678              | 6,649     | 17,972    | 222,992   | 2,437    | 319,966      | 2,510,694
|                              |                        |           |           |           |          |              |          
|                              |                        |           |           |           |          |              |          
|As at January 1, 2004         | 1,940,678              | 6,649     | 17,972    | 222,992   | 2,437    | 319,966      | 2,510,694
|Additions                     | 298,398                | 375       | 605       | 12,921    | 287      | 42,977       | 355,563  
|Disposals                     | (505)                  | (14)      | (1,092)   | (189)     | -        | (6,871)      | (8,671)  
|                              |                        |           |           |           |          |              |          
|As at December 31,
    2004   | 2,238,571              | 7,010     | 17,485    | 235,724   | 2,724    | 356,072      | 2,857,586
|                              |                        |           |           |           |          |              |          
|Accumulated
    depreciation: |                        |           |           |           |          |              |          
|As at January 1, 2003         | 727,513                | 5,154     | 10,129    | 187,151   | 2,212    | 263,561      | 1,195,720
|Charge for the year           | 185,419                | 940       | 2,440     | 14,878    | 228      | 29,388       | 233,293  
|Disposals                     | (26)                   | (894)     | (574)     | (1,824)   | (530)    | (16,370)     | (20,218) 
|Reclassifications             | -                      | -         | (7)       | 7         | -        | -            | -        
|                              |                        |           |           |           |          |              |          
|As at December 31,
    2003   | 912,906                | 5,200     | 11,988    | 200,212   | 1,910    | 276,579      | 1,408,795
|                              |                        |           |           |           |          |              |          
|                              |                        |           |           |           |          |              |          
|As at January 1, 2004         | 912,906                | 5,200     | 11,988    | 200,212   | 1,910    | 276,579      | 1,408,795
|Charge for the year           | 191,180                | 810       | 2,120     | 11,544    | 236      | 22,755       | 228,645  
|Disposals                     | (282)                  | (13)      | (912)     | (187)     | -        | (6,776)      | (8,170)  
|                              |                        |           |           |           |          |              |          
|As at December 31,
    2004   | 1,103,804              | 5,997     | 13,196    | 211,569   | 2,146    | 292,558      | 1,629,270
|                              |                        |           |           |           |          |              |          
|Net book value                |                        |           |           |           |          |              |          
|As at December 31,
    2003   | 1,027,772              | 1,449     | 5,984     | 22,780    | 527      | 43,387       | 1,101,899
|                              |                        |           |           |           |          |              |          
|                              |                        |           |           |           |          |              |          
|As at December 31,
    2004   | 1,134,767              | 1,013     | 4,289     | 24,155    | 578      | 63,514       | 1,228,316

As at December 31, 2004, all fixed assets were pledged as security for the
vendor loan facilities of the Group (Note 15).

Expenditures of HK$29,965,000 and borrowing costs of HK$5,543,000 were
capitalized as fixed assets in the course of constructing the 3G network (2003:
Nil).

F-22

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  12 Investment in a joint venture

| |                                     | December 31,          
| | ----------------------------------- | ----------------------
| |                                     | 2003                  
| |                                     | HK$                   
| |                                     | (Amounts in thousands)
| |                                     |                       
| | Share of net
      liabilities      | (4,000)               
| | Advance                             | 6,331                 
| | Provision for
      impairment loss | (2,331)               
| |                                     |                       
| |                                     | -                     

> Details of the joint venture as at December 31, 2004 are as follows:

| |               |           | Place of      |              | Principal activities
      and
| | ------------- | --------- | ------------- | ------------ | ------------------------------
| | Name          | Nature    | incorporation | Voting power | place of
      operation      
| |               |           |               |              |                               
| | Atria Limited | Corporate | Hong Kong     | 50%          | Inactive/Hong Kong            

> The advance to Atria Limited is unsecured, interest-free and has no fixed
>   repayment terms.
>   For the year ended December 31, 2004, the Group recognized the share of
>   losses from a joint venture of HK$258,000 (2003: HK$4,426,000) in the
>   consolidated statements of profits and losses. The amounts included share of
>   net liabilities of HK$192,000 (2003: HK$2,095,000) and additional provision
>   for impairment of HK$66,000 (2003: HK$2,331,000).
>   The Group regularly performs assessments on its investment in and advances
>   to the joint venture with reference to the expected recoverability. As at
>   December 31, 2004, a provision of HK$2,397,000 (2003: HK$2,331,000) was
>   considered necessary to write down the carrying value of these assets.

F-23

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  13 Prepayment of 3G licence fees

| |                                          | December 31,          
| | ---------------------------------------- | ----------------------
| |                                          | 2003                  
| |                                          | HK$                   
| |                                          | (Amounts in thousands)
| |                                          |                       
| | At January 1                             | 191,667               
| | Amount capitalized
      as fixed assets | (50,000)              
| |                                          |                       
| | At December 31                           | 141,667               
| |                                          |                       
| |                                          |                       
| | Classified as:                           |                       
| | Current assets                           | 50,000                
| | Non-current assets                       | 91,667                

> In 2001, the Group paid an amount of HK$250,000,000, equivalent to the
>   aggregate of the first five years' annual fees for its 3G licence, to the
>   Office of Telecommunications Authority ("OFTA"). For the remaining 10 years of
>   the 3G licence, the fees payable shall be the higher of 5% of the turnover
>   attributable to the provision of 3G services and the Minimum Annual Fees (as
>   defined in the 3G licence) for each year of the 3G licence. The total Minimum
>   Annual Fees over the remaining term of the 3G licence is HK$1,056,838,000. As
>   at December 31, 2004, the net present value of which, at an assumed cost of
>   capital to the Group at 9%, is HK$532,460,000.
>   In accordance with the 3G licence terms, on October 22 each year, the Group
>   is required to provide additional performance bond coverage during the licence
>   period such that the total amount of such performance bond(s) and the Minimum
>   Annual Fees prepaid is equivalent to the next five years' Minimum Annual Fees
>   due (or the remaining Minimum Annual Fees due where less than five years
>   remains). On October 22, 2004, the Group provided a performance bond through
>   drawdown of a 3G performance bond facility in the aggregate amount of the 6th,
>   7th and 8th years' Minimum Annual Fees.

14 Other payables and accrued charges

| |                                             | December 31,          
| | ------------------------------------------- | ----------------------
| |                                             | 2003                  
| |                                             | HK$                   
| |                                             | (Amounts in thousands)
| |                                             |                       
| | Provision for commission                    | 11,974                
| | Deposits received                           | 33,818                
| | Accrual for network costs                   | 36,513                
| | Accrual for purchases of fixed assets       | 9,350                 
| | Accrual for purchases of inventory          | 7,746                 
| | Accrual for advertising and promotion costs | 13,743                
| | Interest payable                            | 644                   
| | Others                                      | 39,003                
| |                                             |                       
| |                                             | 152,791               

F-24

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> 15 Banking and other borrowing facilities
>   
>   The Group's banking and other borrowing facilities as at December 31, 2003
>   and 2004 are analyzed as follows:

|                                           |      | Amount available       | Amount utilized        | Terms as at December 31, 2004
|------------------------------------------ | ---- | ---------------------- | ---------------------- | -----------------------------
|                                           |      | December 31,           | December 31,           | Interest rate                
|                                           | Note | 2003                   | 2004                   | 2003                         
|                                           |      | HK$                    | HK$                    | HK$                          
|                                           |      | (Amounts in thousands) | (Amounts in thousands) |                              
|Banking facilities:                        |      |                        |                        |                              
|Bank loans                                 | (a)  | 240,000                | -                      | 240,000                      
|                                           |      |                        |                        |                              
|Other borrowing
    facilities:            |      |                        |                        |                              
|Vendor loans                               |      |                        |                        |                              
|-
    Nortel                               | (a)  | 481,368                | -                      | 481,368                      
|-
    Huawei Tech. Investment Co., Limited |      |                        |                        |                              
|General facility                           |      |                        | 425,000                |                              
|                                           |      |                        |                        |                              
|Equipment supply facility                  |      |                        | 1,208,000              |                              
|                                           |      |                        |                        |                              
|                                           |      |                        |                        |                              
|                                           |      | 721,368                | 1,633,000              | 721,368                      
|                                           |      |                        |                        |                              
|Less: Deferred charges                     |      |                        |                        | -                            
|                                           |      |                        |                        |                              
|                                           |      |                        |                        | 721,368                      
|Less: Current portion
    included under   |      |                        |                        |                              
|current liabilities:                       |      |                        |                        |                              
|- Bank loans                               |      |                        |                        | (240,000)                    
|- Vendor loans                             |      |                        |                        | (56,368)                     
|                                           |      |                        |                        |                              
|                                           |      |                        |                        | (296,368)                    
|                                           |      |                        |                        |                              
|                                           |      |                        |                        |                              
|Long-term portion                          |      |                        |                        | 425,000                      

F-25

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

15

> Apart from the vendor loans from Nortel which were U.S.
>   dollar denominated debts, all other facilities are denominated in Hong Kong
>   dollars.
>   The HIBOR rate was 0.97% as at December 31, 2004.
>   At December 31, 2003 and 2004, the Group's bank and vendor
>   loans were repayable as follows:

| |                             | Bank loans                 | Vendor loans
| | --------------------------- | -------------------------- | ------------
| |                             | 2003                       | 2004        
| |                             | HK$                        | HK$         
| |                             | (Amounts in
    thousands)
| |                             |                            |             
| | Within one year             | 240,000                    | -           
| | In the second year          | -                          | -           
| | In the third to fifth years | -                          | -           
| | After the fifth year        | -                          | -           
| |                             |                            |             
| |                             | 240,000                    | -           

> The weighted-average interest rate of the long-term vendor
>   loans of the Group was 4.72% as at December 31, 2004 (2003: 6.87%).
>   Pursuant to the Heads of Agreement of Facility Agreement
>   executed in December 2003 with Mandarin Communications Limited ("Mandarin"),
>   the principal operating subsidiary of the Group, Huawei Tech. Investment Co.,
>   Limited ("Huawei Tech.") extended a term loan of HK$500,000,000 (the "New
>   Loan") to Mandarin in January 2004.
>   On January 12, 2004, Mandarin repaid the outstanding loan
>   principal of HK$721,368,000 and accrued interest of the bank and vendor loans
>   using its operating cash flows and the New Loan from Huawei Tech.
>   On May 13, 2004, Mandarin, the Company and Huawei Tech.
>   entered into a conditional supply contract for HK$859,000,000 (the "Supply
>   Contract") and a conditional facility agreement for the provision of long-term
>   financing requirements (the "Facility Agreement"), subject to the satisfaction
>   of certain conditions precedent. The Facility Agreement comprises the
>   following facilities:
>   a HK$859,000,000 equipment supply facility with a term of
>     7.5 years. This facility is to be drawndown against invoices issued under
>     the Supply Contract. The loan carries a floating interest rate tied to HIBOR,
>     and is repayable by eight semi-annual installments commencing four years
>     from the date of the Facility Agreement;
>     a HK$500,000,000 general facility to replace the New
>     Loan, with a term of 2.5 years from the date of the original drawdown of the
>     New Loan. The loan carries a floating interest rate tied to HIBOR, and is
>     repayable by five semi-annual installments; and
>     a 3G performance bond facility for the issuance of the
>     performance bonds required by the OFTA in the years 2004 to 2010 (inclusive)
>     under the terms of the 3G licence.As security for the provision of the loan and credit
>   facilities under the Facility Agreement, Huawei Tech. has been granted a
>   security package with terms that are standard for similar project financing
>   arrangements and includes a charge over all the assets, revenues and shares of
>   certain wholly-owned subsidiaries of the Company and a corporate guarantee by
>   the Company.

F-26

---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15Banking and other borrowing
facilities (Continued)

> Both the Supply Contract and the Facility Agreement, as
>   well as the security arrangements, became effective on July 2, 2004.
>   On November 15, 2004, Mandarin entered into a supplemental
>   agreement to the Supply Contract ("the Supplemental Agreement") and an
>   amendment and restatement agreement relating to the Facility Agreement (the
>   "Amendment and Restatement Agreement") with Huawei Tech. in respect of
>   amendments to the above Supply Contract and Facility Agreement.
>   The Supplemental Agreement seeks to give Mandarin
>   flexibility to purchase and install the technologically advanced equipment
>   available. Payment for all equipment and services provided under the
>   Supplemental Agreement will be satisfied by drawdown of the equipment supply
>   facility under the Facility Agreement as increased by the Amendment and
>   Restatement Agreement.
>   The Amendment and Restatement Agreement provides for:
>   (a) the equipment supply
>     facility under the Facility Agreement to be increased by HK$349,000,000 from
>     HK$859,000,000 to HK$1,208,000,000;
>     (b) the repayment schedule for
>     the general facility within the Facility Agreement to be amended to provide
>     for the next payment to be extended to July 2006 and for the remaining
>     balance to be paid by installments until July 2011; and
>     (c) amendment of certain of the
>     covenants given by Mandarin to the lenders to take account of the changes to
>     the Facility Agreement.
>   Both the Supplemental Agreement and the Amendment and
>   Restatement Agreement became effective on December 23, 2004.

16 Commitments and contingencies

> (a) Capital commitments

| |                                              | December 31,          
| | -------------------------------------------- | ----------------------
| |                                              | 2003                  
| |                                              | HK$                   
| |                                              | (Amounts in thousands)
| |                                              |                       
| | In respect of
    purchases of fixed assets: |                       
| | - Contracted but
    not provided for        | 38,509                
| | - Authorized but
    not contracted for      | -                     
| |                                              |                       
| |                                              | 38,509                

> The outstanding commitments are mainly to be financed by
>   the unutilized balance of the equipment supply facility of the Amendment and
>   Restatement Agreement entered with Huawei Tech. as set out in Note 15.
>   As at December 31, 2004, the Group provided a performance
>   bond of HK$210,746,000 to the OFTA, representing the aggregate amount of the
>   6th, 7th and 8th years' Minimum Annual Fees.

F-27

---

16 Commitments and contingencies (Continued)

> (b) Commitments under operating leases
>   As at December 31, 2003 and 2004, the Group had future
>   aggregate minimum lease payments under non-cancelable operating leases as
>   follows:

| |                                                                     | December 31,              
| | ------------------------------------------------------------------- | --------------------------
| |                                                                     | 2003                      
| |                                                                     | HK$                       
| |                                                                     | (Amounts in
    thousands)
| |                                                                     |                           
| | In respect of land and buildings, including
    transmission sites: |                           
| | - within one year                                                   | 127,719                   
| | - in the second year                                                | 54,709                    
| | - in the third year                                                 | 11,640                    
| | - in the fourth year                                                | 1,196                     
| | - in the fifth year                                                 | 228                       
| |                                                                     |                           
| |                                                                     | 195,492                   
| |                                                                     |                           
| | In respect of leased lines:                                         |                           
| | - within one year                                                   | 21,286                    
| | - in the second year                                                | 5,019                     
| |                                                                     |                           
| |                                                                     | 26,305                    
| |                                                                     |                           
| |                                                                     |                           
| |                                                                     | 221,797                   

17

| |                                          | December 31,              
| | ---------------------------------------- | --------------------------
| |                                          | 2002                      
| |                                          | HK$                       
| |                                          | (Amounts in
    thousands)
| |                                          |                           
| | Share capital                            |                           
| | - Authorized: 10,000,000 ordinary shares |                           
| | of HK$0.01 each                          | 1,000,000                 
| |                                          |                           
| |                                          |                           
| | - Issued and fully paid: 2,990,000,000   |                           
| | ordinary shares of HK$0.01 each          | 299,000                   
| |                                          |                           
| |                                          |                           
| | Reserve arising from Reorganization      | 1,254,000                 
| |                                          |                           
| |                                          |                           
| | Share premium                            | 2,124,424                 

> Reserve arising from Reorganization represents the
>   difference between the nominal value of the share capital of the subsidiaries
>   and the nominal value of the Company's shares issued pursuant to a
>   reorganization (the "Reorganization") completed on February 24, 2000 to
>   rationalize the group structure in preparation for the dual listing of the
>   Company's ordinary shares on The Stock Exchange of Hong Kong Limited in Hong
>   Kong and the NASDAQ National Market in the United States of America.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18 Share option scheme

> On March 1, 2000, the shareholders of the Company approved
>   and adopted a share option scheme (the "Share Option Scheme"). Subject to
>   earlier termination by the Company in a general meeting of shareholders, the
>   Share Option Scheme will remain in force for 10 years from its adoption date.
>   On May 22, 2002, the shareholders of the Company approved
>   the adoption of a new share option scheme (the "New Option Scheme") and the
>   termination of the operation of the Share Option Scheme. Upon the termination
>   of the Share Option Scheme, no further options will be granted thereunder but
>   the provisions of the Share Option Scheme will remain in full force and effect
>   in respect of the existing options granted.
>   Under the New Option Scheme, the board may, in its
>   discretion, grant options to any director, employee, consultant, customer,
>   supplier, agent, partner, shareholder or adviser of or contractor to the Group
>   or a company in which the Group holds an interest or a subsidiary of such
>   company. Each grant of options to a director, chief executive or substantial
>   shareholder or any of their respective associates must be approved in
>   accordance with the requirements of the Rules Governing the Listing of
>   Securities on The Stock Exchange of Hong Kong Limited.
>   The exercise price for any particular option under the New
>   Option Scheme will be determined by the board but will be not less than the
>   highest of: (i) the closing price of shares on the date of grant of the
>   option; (ii) an amount equivalent to the average closing price of a share for
>   the five business days immediately preceding the date of grant of the option;
>   and (iii) the nominal share value.
>   The maximum number of shares which may be issued upon
>   exercise of all outstanding options granted and yet to be exercised under both
>   the New Option Scheme and Share Option Scheme must not, in aggregate, exceed
>   30% of the shares of the Company in issue.
>   The total number of shares available for issue under
>   options which may be granted under the New Option Scheme (excluding those
>   options that have been granted by the Company prior to the date of approval of
>   the New Option Scheme) must not, in aggregate, exceed 10% of the issued share
>   capital of the Company as at the date of approval of the New Option Scheme
>   ("Scheme Mandate Limit"). The Scheme Mandate Limit may be refreshed by
>   shareholders of the Company in general meeting provided that the Scheme
>   Mandate Limit so refreshed must not exceed 10% of the issued share capital of
>   the Company at the date of approval of the refreshment by the shareholders.
>   The board may also seek separate shareholders' approval in general meeting to
>   grant option beyond the Scheme Mandate Limit (whether or not refreshed)
>   provided that the options in excess of the Scheme Mandate Limit are granted
>   only to the eligible participants specified by the Company before such
>   approval is sought.
>   No option may be granted under the New Option Scheme to any
>   eligible participant which, if exercised in full, would result in the total
>   number of shares issued and to be issued upon exercise of the options already
>   granted or to be granted to such eligible participant (including exercised,
>   cancelled and outstanding options) in the 12-month period up to and including
>   the date of such new grant exceeding 1% of the issued share capital of the
>   Company. As at the date of such new grant, any grant of further options above
>   this limit will be subject to certain requirements provided under the Listing
>   Rules, including the approval of shareholders at a general meeting.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18 Share option scheme (Continued)

> No share options were granted under the New Option Scheme
>   during the year ended December 31, 2004 (2003: Nil). Details of the share
>   options outstanding as at December 31, 2004 which have been granted under the
>   Share Option Scheme are as follows:

| |                     |                 | Options       | Options         | Options held at | Exercise |                |            
| | ------------------- | --------------- | ------------- | --------------- | --------------- | -------- | -------------- | -----------
| |                     | Options held at | lapsed during | cancelled       | December 31,    | price    |                | Exercisable
| |                     | January 1, 2004 | the year (2)  | during the year | 2004            | HK$      | Grant date (1) | until      
| |                     |                 |               |                 |                 |          |                |            
| |                     |                 |               |                 |                 |          |                |            
| | Continuous contract |                 |               |                 |                 |          |                |            
| | employees           | 13,682,357      | 488,281       | -               | 13,194,076      | 3.05     | 23/03/2000     | 22/03/2010 
| |                     | 14,308,252      | 570,281       | -               | 13,737,971      | 1.01     | 31/05/2000     | 30/05/2010 
| |                     | 296,844         | 41,000        | -               | 255,844         | 3.05     | 31/05/2000     | 30/05/2010 
| |                     | 1,785,050       | 342,852       | -               | 1,442,198       | 1.01     | 19/01/2001     | 18/01/2011 
| |                     |                 |               |                 |                 |          |                |            
| |                     | 30,072,503      | 1,442,414     | -               | 28,630,089      |          |                |            

> Notes: 
>   (1)

19

| |                            | December 31,          
| | -------------------------- | ----------------------
| |                            | 2003                  
| |                            | HK$                   
| |                            | (Amounts in thousands)
| |                            |                       
| | Cash and bank
    balances | 43,712                
| | Bank deposits              | 58,701                
| |                            |                       
| |                            | 102,413               

20

> The following is a summary of significant related party
>   transactions which were carried out in the normal course of the Group's
>   business:

| |                                                                | Year ended December 31,
| | -------------------------------------------------------------- | -----------------------
| |                                                                | 2002                   
| |                                                                | HK$                    
| |                                                                | (Amounts in thousands) 
| |                                                                |                        
| | Operating lease charges paid to related
    companies (note a) | 4,334                  
| | Consulting service fees paid to a related
    company (note b) | 1,580                  

> (a) The Group entered into various
>   operating lease agreements based on normal commercial terms with subsidiaries
>   of certain beneficial shareholders of the Company to lease a number of
>   premises for the Group's operating activities.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20 Related party transactions (Continued)

> (b) The Group entered into certain
>   agreements based on normal commercial terms with Lifetree Convergence Limited
>   ("Lifetree") during the year ended December 31, 2002, which provided various
>   software development and consulting services to the Group.
>   Richard John Siemens, Edward Wai Sun Cheng, William Bruce
>   Hicks and Kuldeep Saran are directors of both the Company and Lifetree.

21

> Pursuant to a trust deed entered into by the Group on April
>   1, 1998, the Group set up a defined contribution scheme to provide retirement
>   benefits for its employees in Hong Kong with retrospective effect from July 1,
>   1997 (the "Retirement Scheme").
>   All permanent full time employees in Hong Kong were
>   eligible to join the Retirement Scheme before the Mandatory Provident Fund ("MPF")
>   Scheme was set up on December 1, 2000. Under the Retirement Scheme, the
>   employees were required to choose to contribute either nil or 5% of their
>   monthly salaries. The Group's contributions were calculated at 5% of the
>   employee's monthly salaries.
>   With effect from December 1, 2000, the Group set up another
>   defined contribution scheme, the MPF Scheme, for all the eligible employees of
>   the Group in Hong Kong including the employees under the Retirement Scheme.
>   The contributions from the employees and employer are made to the MPF Scheme
>   only and are no longer made to the Retirement Scheme.
>   Under the MPF Scheme, employees are required to contribute
>   5% of their monthly salaries up to a maximum of HK$1,000 and can choose to
>   make additional contributions. The Group's monthly contributions are
>   calculated at 5% of employee's monthly salaries up to a maximum of HK$1,000
>   (the "mandatory contributions"). The Group makes certain additional
>   contributions if employee's monthly salaries exceed HK$20,000 (the "voluntary
>   contributions").
>   Under the MPF Scheme, employees are entitled to 100% of the
>   employer's mandatory contributions upon their retirement at the age of 65
>   years old, death or total incapacity. Employees are entitled to 100% of the
>   Group's voluntary contributions after seven years of completed service or at a
>   reduced scale of the Group's voluntary contributions after completion of two
>   to six years' service. Under the Retirement Scheme, employees are entitled to
>   100% of the employer's contributions after seven years of completed service,
>   or at a reduced scale after completion of two to six years' service. Forfeited
>   contributions are to be refunded to the Group.
>   The Group's contributions for the years ended December 31,
>   2002, 2003 and 2004 amounted to HK$6,653,000, HK$5,362,000 and HK$6,522,000
>   respectively. The scheme assets are held separately from those of the Group
>   under respective provident funds managed by independent administrators.
>   The pension scheme which covers employees in the People's
>   Republic of China ("PRC") is a defined contribution scheme at various
>   applicable rates of monthly salary that are in accordance with local practices
>   and regulations.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
22 Business segment information

> The following segment reporting information is prepared
>   based on the segmental operating results regularly reviewed by the Group's
>   chief operating decision-maker. The Group is principally engaged in three
>   business segments in Hong Kong: mobile services, sales of mobile phones and
>   accessories and other services.

| |                                         |                            | Sales of        |                |          
| | --------------------------------------- | -------------------------- | --------------- | -------------- | ---------
| |                                         | Mobile                     | mobile phones   |                |          
| |                                         | services                   | and accessories | Other services | Group    
| |                                         | HK$                        | HK$             | HK$            | HK$      
| | 2002                                    | (Amounts in
    thousands)
| |                                         |                            |                 |                |          
| | Turnover                                | 1,217,677                  | 115,291         | 9,722          | 1,342,690
| |                                         |                            |                 |                |          
| |                                         |                            |                 |                |          
| | Profit/(loss) from
    operations       | 815                        | (38,239)        | (5,264)        | (42,688) 
| |                                         |                            |                 |                |          
| | Interest income                         |                            |                 |                | 3,553    
| | Finance costs                           |                            |                 |                | (59,520) 
| | Share of losses from
    joint ventures |                            |                 |                | (18,609) 
| |                                         |                            |                 |                |          
| | Net loss                                |                            |                 |                | (117,264)
| |                                         |                            |                 |                |          
| |                                         |                            |                 |                |          
| | Segment assets                          | 1,557,242                  | 28,823          | 12,987         | 1,599,052
| | Investment in a joint
    venture       |                            |                 |                | 3,322    
| | Unallocated assets                      |                            |                 |                | 208,469  
| |                                         |                            |                 |                |          
| | Total assets                            |                            |                 |                | 1,810,843
| |                                         |                            |                 |                |          
| |                                         |                            |                 |                |          
| | Capital expenditure                     | 164,701                    | 3,375           | -              | 168,076  



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

22 Business segment information

| |                                        |                        | Sales of            |                |          
| | -------------------------------------- | ---------------------- | ------------------- | -------------- | ---------
| |                                        | Mobile                 | mobile phones       |                |          
| |                                        | services               | and
    accessories | Other services | Group    
| |                                        | HK$                    | HK$                 | HK$            | HK$      
| | 2003                                   | (Amounts in thousands)
| |                                        |                        |                     |                |          
| | Turnover                               | 1,149,875              | 109,471             | 695            | 1,260,041
| |                                        |                        |                     |                |          
| |                                        |                        |                     |                |          
| | Profit/(loss)
    from operations      | 145,685                | (61,076)            | (2,750)        | 81,859   
| |                                        |                        |                     |                |          
| | Interest income                        |                        |                     |                | 2,526    
| | Finance costs                          |                        |                     |                | (52,787) 
| | Share of loss
    from a joint venture |                        |                     |                | (4,426)  
| |                                        |                        |                     |                |          
| | Net profit                             |                        |                     |                | 27,172   
| |                                        |                        |                     |                |          
| |                                        |                        |                     |                |          
| | Segment assets                         | 1,378,228              | 29,757              | 10,824         | 1,418,809
| | Unallocated
    assets                 |                        |                     |                | 313,879  
| |                                        |                        |                     |                |          
| | Total assets                           |                        |                     |                | 1,732,688
| |                                        |                        |                     |                |          
| |                                        |                        |                     |                |          
| | Capital
    expenditure                | 119,934                | 1,841               | -              | 121,775  



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

22 Business segment information

| |                                    |                            | Sales of        |                |          
| | ---------------------------------- | -------------------------- | --------------- | -------------- | ---------
| |                                    | Mobile                     | mobile phones   |                |          
| |                                    | services                   | and accessories | Other services | Group    
| |                                    | HK$                        | HK$             | HK$            | HK$      
| | 2004                               | (Amounts in
    thousands)
| |                                    |                            |                 |                |          
| | Turnover                           | 1,031,361                  | 126,920         | 328            | 1,158,609
| |                                    |                            |                 |                |          
| |                                    |                            |                 |                |          
| | Profit/(loss) from operations      | 84,835                     | (50,197)        | (2,754)        | 31,884   
| |                                    |                            |                 |                |          
| | Interest income                    |                            |                 |                | 218      
| | Finance costs                      |                            |                 |                | (26,300) 
| | Share of loss from a joint venture |                            |                 |                | (258)    
| |                                    |                            |                 |                |          
| | Net profit                         |                            |                 |                | 5,544    
| |                                    |                            |                 |                |          
| |                                    |                            |                 |                |          
| | Segment assets                     | 1,473,547                  | 33,870          | 8,931          | 1,516,348
| | Unallocated assets                 |                            |                 |                | 115,694  
| |                                    |                            |                 |                |          
| | Total assets                       |                            |                 |                | 1,632,042
| |                                    |                            |                 |                |          
| |                                    |                            |                 |                |          
| | Capital expenditure                | 353,346                    | 2,217           | -              | 355,563  

> There are no sales or other transactions between the
>   business segments. Segment assets consist primarily of fixed assets,
>   inventories, trade receivables, deposits, prepayments and mainly exclude
>   unallocated cash. Segment liabilities comprise operating liabilities and
>   mainly exclude unallocated long-term loans. Capital expenditure comprises
>   additions to fixed assets (Note 11).
>   The Group's principal activities are all undertaken in Hong
>   Kong.

23 Particulars of subsidiaries

> The Company has the following principal wholly-owned
>   subsidiaries as at December 31, 2004:

| |                      | Place of       | Issued and fully    |                     
| | -------------------- | -------------- | ------------------- | --------------------
| | Name                 | incorporation  | paid up capital     | Principal activities
| |                      |                |                     |                     
| | Shares held directly |                |                     |                     
| |                      |                |                     |                     
| | SUNDAY HOLDINGS      | British Virgin | 100 ordinary shares | Investment holding  
| | (HONG KONG)          | Islands        | of US$1 each        |                     
| | CORPORATION          |                |                     |                     
| |                      |                |                     |                     
| | SUNDAY HOLDINGS      | British Virgin | 1 ordinary shares   | Investment holding  
| | (CHINA) CORPORATION  | Islands        | of US$1             |                     
| |                      |                |                     |                     
| | SUNDAY IP HOLDINGS   | British Virgin | 1 ordinary share of | Investment holding  
| | CORPORATION          | Islands        | US$1                |                     



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

23

| |                        | Place of       | Issued and fully     |                     
| | ---------------------- | -------------- | -------------------- | --------------------
| | Name                   | incorporation  | paid up capital      | Principal activities
| |                        |                |                      |                     
| | Shares held indirectly |                |                      |                     
| |                        |                |                      |                     
| | MANDARIN               | Hong Kong      | 100 ordinary shares  | Provision of mobile 
| | COMMUNICATIONS         |                | of HK$1 each and     | and other services, 
| | LIMITED                |                | 1,254,000,000 non-   | and sales of mobile 
| |                        |                | voting deferred      | phones and          
| |                        |                | shares of HK$1 each  | accessories         
| |                        |                |                      |                     
| | SUNDAY 3G HOLDINGS     | British Virgin | 1 ordinary share of  | Investment holding  
| | (HONG KONG)            | Islands        | US$1                 |                     
| | CORPORATION            |                |                      |                     
| |                        |                |                      |                     
| | SUNDAY 3G (HONG        | Hong Kong      | 2 ordinary shares of | Licensee of Hong    
| | KONG) LIMITED          |                | HK$1 each            | Kong 3G Licence     
| | SUNDAY IP LIMITED      | British Virgin | 1 ordinary share of  | Holding the         
| |                        | Islands        | US$1                 | Group's intellectual
| |                        |                |                      | property rights and 
| |                        |                |                      | trade marks         
| |                        |                |                      |                     
| | SUNDAY                 | Peoples'       | US$1,500,000         | Provision of back   
| | COMMUNICATIONS         | Republic of    |                      | office support      
| | SERVICES (SHENZHEN)    | China          |                      | services to the     
| | LIMITED ("SCSSL")      |                |                      | Group               

> The principal activities of the subsidiaries, except for
>   SCSSL which operates in the People's Republic of China ("PRC"), are undertaken
>   in Hong Kong.
>   SCSSL is registered as a wholly foreign-owned enterprise in
>   the PRC and its registered capital has been fully paid up.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

24 Financial instruments

> (a) Fair value
>   Financial assets of the Group include restricted cash
>   deposits, cash and cash equivalents, trade receivables, deposits, prepayments
>   and other receivables. The fair values of the financial assets approximate
>   their respective carrying amounts due to the short-term nature of these items.
>   Financial liabilities of the Group include bank loans, vendor loans, trade
>   payables, other payables and accrued charges, and subscriptions received in
>   advance.

The fair values of the Group's bank loans and vendor loans
  are estimated based on the discounted cash flow method using current market
  rates for similar financial instruments. The carrying amounts and fair values
  of the Group's bank loans and vendor loans are as follows:

| |              | Carrying amount        | Fair value            
| | ------------ | ---------------------- | ----------------------
| |              | December 31,           | December 31,          
| |              | 2003                   | 2004                  
| |              | HK$                    | HK$                   
| |              | (Amounts in thousands) | (Amounts in thousands)
| |              |                        |                       
| | Bank loans   | 240,000                | -                     
| | Vendor loans | 481,368                | 603,148               

> The carrying values of trade payables, other payables and
>   accrued charges, and subscriptions received in advance approximated their fair
>   values as at December 31, 2003 and 2004.
>   (b) Concentration of credit risk
>   Financial instruments which potentially subject the Group
>   to concentration of credit risk consist principally of cash and cash
>   equivalents, trade receivables, deposits, prepayments and other receivables.
>   Restricted cash deposits, cash and cash equivalents are
>   substantially the entire Group's cash and bank balances. They are placed with
>   a number of international banks in Hong Kong to which the Group believes its
>   exposure to risk is limited.
>   Trade receivables mainly represent service fee receivables
>   from the Group's subscribers in Hong Kong. No individual customers made up
>   more than 10% of the Group's trade receivables or revenue as at December 31,
>   2003 and 2004 or each of the three years ended December 31, 2004.
>   Deposits, prepayments and other receivables are spread
>   among numerous third parties.
>   (c) Interest rate risk
>   The interest rates and terms of repayment of loans of the
>   Group are set out in note 15.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

25 Subsequent events

> On June 13, 2005, Distacom Hong Kong Limited ("Distacom")
>   and Townhill Enterprises Limited ("Townhill"), the two major shareholders of
>   the Company, entered into conditional sale and purchase agreements with PCCW
>   Limited ("PCCW") (a company listed on the Hong Kong Stock Exchange under Stock
>   Code 008), in relation to the sale of their 1,380,000,000 and 410,134,000
>   shares respectively to PCCW for a consideration of HK$0.65 per share in cash.
>   On June 22, 2005, the sales were completed. Following the
>   consummation of the sale, PCCW Mobile Holding No.2 Limited ("PCCW Mobile"), a
>   wholly-owned subsidiary of PCCW, together with persons acting in concert
>   beneficially own an aggregate of 1,790,134,000 shares of the Company,
>   representing approximately 59.87% of the issued share capital. The Company
>   accordingly became a subsidiary of PCCW.
>   Under the Hong Kong Code of Takeovers and Mergers (the
>   "Takeovers Code"), PCCW Mobile is required to make a mandatory unconditional
>   cash offer of HK$0.65 per share (the "Offer") to the remaining existing
>   shareholders of the Company. PCCW Mobile will also make an offer or proposal
>   to the holders of the Company's outstanding share options.
>   (A) 
> A composite offer document will be issued jointly by or on behalf of PCCW Mobile
> and the Company to all shareholders of the Company, containing the terms and
> conditions of the Offer and the forms of acceptance and transfer on or around
> July 8, 2005. If PCCW Mobile acquires not less than 90% of the outstanding
> shares, PCCW Mobile intends to consider availing itself of the powers of
> compulsory acquisition of the remaining shares that PCCW Mobile and the persons
> acting in concert do not then own.
> (B) 
> As disclosed in note 15, Mandarin, the Company and Huawei Tech. entered into the
> Facility Agreement on May 13, 2004 and the Amendment and Restatement Agreement
> on November 15, 2004 for the provision of an equipment supply facility, a
> general facility and a 3G performance bond facility. As of May 31, 2005, the
> Group had total outstanding borrowings of HK$799,244,000, represented by
> HK$374,244,000 of equipment supply facility and HK$425,000,000 of general
> facility, and a performance bond of HK$210,746,000 provided to OFTA through
> drawdown of the 3G performance bond facility.
> Under the terms of the Facility Agreement (as amended by the
> Amendment and Restatement Agreement) with Huawei Tech., the cessation of any
> two or more of Richard John Siemens, William Bruce Hicks, Kuldeep Saran and
> Edward Wai Sun Cheng as directors involved in the management of the Company
> other than by reason of death, disability, removal by shareholders or dismissal
> for cause may constitute an event of default unless a waiver to such term is
> granted by Huawei Tech.. Failure to comply with this covenant may entitle Huawei
> Tech. to accelerate the maturity of the outstanding amounts under the Facility
> Agreement and if not repaid, to exercise their security rights over
> substantially all of the Group's assets. The Company and PCCW are considering
> various alternatives available to them to prevent such event of default
> occurring.
> 
>   With effect from the posting of the composite offer
>   document on or around July 8, 2005, six new directors, namely Alexander
>   Anthony Arena, Wing Wa Chan, Marisa Yuen Man Kwok, Ding Man Chow, Tom Kee Sun
>   Chan and Susanna Hon Hing Hui, will be appointed as additional directors of
>   the Company. Also, with effect from the first closing date of the Offer under
>   the Takeovers Code on or around July 29, 2005, each of Richard John Siemens,
>   William Bruce Hicks, Kuldeep Saran, Kenneth Michael Katz, Edward Wai Sun Cheng
>   and Andrew Chun Keung Leung will resign as directors of the Company.
>   Under the terms of the Amendment and Restatement Agreement
>   with HTIC, the cessation of any two or more of Richard John Siemens, William
>   Bruce Hicks, Kuldeep Saran and Edward Wai Sun Cheng as a director involved in
>   the management of the Company other than by reason of death, disability,
>   removal by shareholders or dismissal for cause would constitute an Event of
>   Default as defined under the Amendment and Restatement Agreement. The Company
>   and PCCW are looking at various alternatives available to them to prevent such
>   Event of Default occurring, and the Company understands that PCCW are in
>   discussions with Huawei generally in respect of this, and other issues.



---

SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

26

> 

The Group's consolidated financial statements are prepared
  in accordance with HK GAAP, which differ in certain significant respects from
  US GAAP. Differences between HK GAAP and US GAAP which have significant
  effects on the net (loss)/profit and total shareholders' equity of the Group
  are summarized as follows:

(a) Net (loss)/profit and total
  shareholders' equity

| |                                                      | Year ended December 31,
| | ---------------------------------------------------- | -----------------------
| |                                                      | 2002                   
| |                                                      | HK$                    
| |                                                      | (Amounts in thousands) 
| |                                                      |                        
| | Net (loss)/profit under HK GAAP                      | (117,264)              
| | US GAAP adjustments:                                 |                        
| | Deferred tax on accelerated depreciation             |                        
| | allowances (i)                                       | (10,169)               
| | Deferred tax assets on tax losses and others
    (i) | 10,169                 
| | Amortization of net connection fees (ii)             | (1,878)                
| | Write-back of compensation cost in respect of        |                        
| | amortization of deferred
    compensation for        |                        
| | share options (iii)                                  | 111                    
| |                                                      |                        
| | Net (loss)/profit under US GAAP                      | (119,031)              
| |                                                      |                        
| |                                                      |                        
| | Basic and diluted (loss)/earnings per share          |                        
| | under US GAAP (in cents)                             | (4.0)                  
| |                                                      |                        
| |                                                      |                        
| | Shares outstanding for basic and diluted             | 2,990,000              
| | (loss)/earnings per share
    (thousands)            |                        
| |                                                      |                        
| |                                                      | As at December 31,     
| |                                                      | 2002                   
| |                                                      | HK$                    
| |                                                      | (Amounts in thousands) 
| |                                                      |                        
| | Total shareholders' equity under HK GAAP             | 670,732                
| | US GAAP adjustments:                                 |                        
| | Deferred tax non-current assets (i)                  | 375,358                
| | Valuation allowance (i)                              | (375,358)              
| | Deferred net connection fees (ii)                    | (12,268)               
| | Share premium in respect of deferred                 |                        
| | compensation for share options
    (iii)             | 7,854                  
| | Deferred compensation not yet amortized for          |                        
| | share options (iii)                                  | (413)                  
| | Compensation cost in respect of amortization         |                        
| | of deferred compensation for
    share options (iii) | (7,441)                
| | Intangible assets - licence (iv)                     | -                      
| | Liability for licence (iv)                           | -                      
| | Fixed assets (iv)                                    | -                      
| |                                                      |                        
| | Total shareholders' equity under US GAAP             | 658,464                



---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (i)  Under both HK GAAP and
>   US GAAP, the Group is required to recognize deferred tax assets and
>   liabilities for the expected future tax consequences of all events that have
>   been included in the financial statements or tax returns. Under this method,
>   deferred tax assets and liabilities are recognized for future tax consequences
>   attributable to differences between the financial statement carrying amounts
>   of existing assets and liabilities, and their respective tax bases and tax
>   credit carryforwards using enacted tax rates in effect for the year in which
>   the differences are expected to be recovered or settled.
>   Under HK GAAP, a deferred tax asset is recognized to the
>   extent it is probable that future taxable profits will be available against
>   which the temporary differences can be utilized. The unrecognized deferred tax
>   asset is disclosed in the notes to the financial statements. Under US GAAP, a
>   valuation allowance is recorded to reduce the carrying amount of deferred tax
>   asset unless it is more likely than not that such asset will be realized.
>   No deferred tax assets are recognized under HK GAAP, while
>   a valuation allowance is set against the deferred tax assets under US GAAP,
>   the net effect of which causes no impact to the financial statements of the
>   Group presented under US GAAP.
>   Details of deferred income taxes provided under US GAAP are
>   disclosed in note 26(c).
>   (ii) Under HK GAAP, connection fee
>   revenue is recognized when received upon completion of activation services.
>   Under US GAAP, connection fees for mobile services, net of
>   the direct incremental costs incurred, are deferred and recognized over the
>   estimated customer service period, which are estimated based on the expected
>   stabilized churn rates. Connection fee revenue for 2002, 2003 and 2004
>   amounted to HK$16,254,000, HK$411,000 and HK$1,200, respectively, of which
>   HK$175,000 and HK$800 were deferred as at December 31, 2003 and 2004,
>   respectively. Connection fee revenue of HK$1,896,000 and HK$136,000 deferred
>   in 2002 and 2003, respectively, has been credited to the consolidated
>   statements of profits and losses during 2004.
>   (iii) Under HK GAAP, no
>   compensation cost to employees is required to be recognized in respect of the
>   grant of share options. Proceeds from the issue of shares upon the exercise of
>   share options are credited to the share capital and share premium accounts,
>   and there is no effect on the results of the Group in connection with the
>   Share Option Scheme.
>   Under US GAAP, the intrinsic value of stock options issued
>   to employees has been used in the computation of the compensation cost for
>   outstanding share options granted to the Group's employees. Accordingly,
>   deferred compensation of HK$10,254,000 was recognized on options granted with
>   an exercise price lower than the fair market value of the Company's shares at
>   the grant date. The deferred compensation is amortized over the three-year
>   vesting period. Up to December 31, 2004, deferred compensation of HK$4,041,000
>   for the options forfeited was reversed in shareholders' equity. No
>   compensation is recognized for options which are granted with an exercise
>   price equal to the fair market value of the Company's shares at the grant
>   date. For the years ended December 31, 2002, 2003 and 2004, compensation costs
>   of HK$111,000, HK$1,188,000 and HK$40,000, respectively, were written back to
>   the consolidated statements of profits and losses and debited to the deferred
>   compensation account.

F-39

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

| | A
    summary of the status of the Company's Share Option Scheme is as follows:
| | -------------------------------------------------------------------------------
| |                                                                                
| |                                                                                
| |                                                                                
| |                                                                                
| | Outstanding as at
    January 1, 2003                                          
| | Granted                                                                        
| | Exercised                                                                      
| | Lapsed                                                                         
| | Cancelled                                                                      
| |                                                                                
| | Outstanding as at
    December 31, 2003                                        
| |                                                                                
| |                                                                                
| | Outstanding as at
    January 1, 2004                                          
| | Granted                                                                        
| | Exercised                                                                      
| | Lapsed                                                                         
| |                                                                                
| | Outstanding as at
    December 31, 2004                                        

> The following table summarizes information about share options outstanding
>   as at December 31, 2004:

| |                |                   |                  |                  
| | -------------- | ----------------- | ---------------- | -----------------
| |                | Number            | Weighted-average | Number           
| |                | exercisable as at | remaining        | exercisable as at
| | Exercise price | December 31, 2004 | contractual life | December 31, 2004
| | HK$            |                   |                  |                  
| | 1.01           | 15,180,169        | 5.48             | 15,180,169       
| | 3.05           | 13,449,920        | 5.23             | 13,449,920       
| |                |                   |                 
| |                | 28,630,089        |                  | 28,630,089       

> There were no options granted during the year ended
>   December 31, 2004.
>   If the Company had accounted for the plan using the fair
>   value method, the Group's net profit would have charged as follows:

| |                                                      | Year ended December 31,
| | ---------------------------------------------------- | -----------------------
| |                                                      | 2003                   
| |                                                      | HK$                    
| |                                                      | (Amounts in thousands) 
| | Net profit:                                          |                        
| | As reported                                          | 38,505                 
| | Pro forma                                            | 34,450                 
| |                                                      |                        
| | Basic and diluted earnings per share (in
    cents): |                        
| | As reported                                          | 1.3                    
| | Pro forma                                            | 1.2                    

F-40

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (iv) GAAP difference for 3G
>   licence
>   Under HK GAAP, the payment of HK$250,000,000 made in 2001,
>   which represents the annual fees for the first five years of the 3G licence
>   term is recorded as a prepayment with the licence fees charge prior to the
>   launch of the 3G services being included in fixed assets. Depreciation of the
>   fixed assets will be provided from the commencement of 3G services over the
>   shorter of the remaining life of the 3G licence or the estimated useful lives
>   of the fixed assets. The 3G licence fees, together with the fixed assets, are
>   evaluated for impairments when events occur that might affect its value.
>   Under US GAAP, licence fee payments being the upfront
>   amount referred to above and the discounted value of the fixed annual fees to
>   be paid over the licence period, and along with certain other direct costs
>   incurred prior to the date the asset is ready for its intended use are
>   capitalized and classified as an intangible asset. Capitalized licence fees
>   will be amortized from the date of launch of the 3G services over the
>   remaining 3G licence period. The imputed interest on the same will be charged
>   to the consolidated statements of profits and losses. The impairment review
>   for the licences is based on a comparison of the future undiscounted cash
>   flows expected to be generated from continual use and ultimate disposition of
>   the licences with their book value. If these cash flows are not sufficient, an
>   impairment charge is recorded to reduce the excess of the licence carrying
>   cost over the estimated discounted future cash flows.
>   There is no impact of this difference under HK GAAP and US
>   GAAP to the consolidated statements of profits and losses for the years ended
>   December 31, 2002, 2003 and 2004 since depreciation/amortization will only
>   start when the 3G network is available/ready for use.
>   (v) Impairment of long-lived
>   assets
>   Long-lived assets are comprised of intangible assets and
>   fixed assets.
>   Under HK GAAP, at each balance sheet date, both internal
>   and external sources of information are considered to assess whether there is
>   any indication that long-lived assets are impaired. If any such indication
>   exists, the recoverable amount of the long-lived assets is estimated and where
>   relevant, an impairment loss is recognized to reduce the long-lived asset to
>   its recoverable amount. Such impairment losses are recognized in the
>   consolidated statements of profits and losses. In determining the recoverable
>   amount, expected future cash flows generated by the long-lived assets are
>   discounted to their present values.
>   Under US GAAP, long-lived assets, including certain
>   identifiable intangible assets related to those assets to be held and used,
>   are reviewed for impairment whenever events or changes in circumstances
>   indicate that the carrying amount may not be recoverable. If the total
>   expected future undiscounted cash flows are less than the carrying amount of
>   the asset, an impairment loss is recognized for the difference between the
>   quoted market price in active markets, if available, and the carrying value of
>   the asset. If quoted market prices are not available, the estimated fair value
>   is based on various valuation techniques, including a discounted value of
>   estimated future cash flows and fundamental analysis. No such impairment
>   losses were required for the years ended December 31, 2002, 2003 and 2004.

F-41

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (b) Consolidated statements of
>   profits and losses
>   Under HK GAAP, the consolidated statements of profits and
>   losses are reported by nature whereby network costs are presented separately
>   under operating expenses and bad debts expenses are presented under costs of
>   services.
>   Under US GAAP, however, the consolidated statements of
>   profits and losses are reported by function and the network costs and salaries
>   and related costs, excluding depreciation, which are directly related to the
>   generation of revenue are included in cost of services, is separately shown.
>   Rental, salaries and related costs and bad debts expenses are included in
>   selling, general and administration expenses. As a result, under US GAAP, the
>   consolidated statements of profits and losses, including the US GAAP
>   adjustments as set out in note 26(a), would be reported as follows:

| |                                                    | Year ended December 31,
| | -------------------------------------------------- | -----------------------
| |                                                    | 2002                   
| |                                                    | HK$                    
| |                                                    | (Amounts in thousands) 
| | Revenues from:                                     |                        
| | Mobile services                                    | 1,215,799              
| | Sales of mobile phones and accessories             | 115,291                
| | Other services                                     | 9,722                  
| |                                                    |                        
| | Total operating revenues                           | 1,340,812              
| |                                                    |                        
| | Cost of sales of mobile phones and
    accessories | (113,414)              
| | Cost of services                                   | (547,676)              
| |                                                    |                        
| | Gross profit                                       | 679,722                
| |                                                    |                        
| | Other revenues                                     | 1,917                  
| |                                                    |                        
| | Operating costs:                                   |                        
| | Depreciation                                       | (256,393)              
| | Selling, general and administrative costs          | (469,701)              
| |                                                    |                        
| | (Loss)/profit from operations                      | (44,455)               
| |                                                    |                        
| | Interest income                                    | 3,553                  
| | Finance costs                                      | (59,520)               
| | Share of losses of joint ventures                  | (18,609)               
| |                                                    |                        
| | Net (loss)/profit                                  | (119,031)              

F-42

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (c) Deferred tax
>   Under US GAAP, deferred tax (liabilities) / assets comprise the following:

| |                                     | Year ended December 31,
| | ----------------------------------- | -----------------------
| |                                     | 2003                   
| |                                     | HK$                    
| |                                     | (Amounts in thousands) 
| |                                     |                        
| | Deferred tax liabilities:           |                        
| | Accelerated depreciation allowances | (90,410)               
| |                                     |                        
| | Deferred tax assets:                |                        
| | Tax losses carried forward          | 490,231                
| | Valuation allowance                 | (399,821)              
| |                                     |                        
| | Deferred tax assets                 | 90,410                 
| |                                     |                        
| |                                     |                        
| | Net deferred tax liabilities        | -                      

> As at December 31, 2004, the Group has accumulated tax
>   losses, with no definite period of expiration, amounting to HK$3,217,454,000
>   (the tax effect thereon is HK$563,054,000) which may be carried forward and
>   applied to reduce future taxable income which is earned in or derived from
>   Hong Kong. Management believes it is not more likely than not that the results
>   of future operations will generate sufficient taxable income to realize
>   deferred tax assets and therefore, valuation allowances of HK$399,821,000 and
>   HK$396,991,000 at December 31, 2003 and 2004, respectively, has been
>   established.
>   Changes in the valuation allowance are as follows:

| |                                               | Year ended December 31,
| | --------------------------------------------- | -----------------------
| |                                               | 2003                   
| |                                               | HK$                    
| |                                               | (Amounts in thousands) 
| |                                               |                        
| | Balance at the beginning of the year          | 375,358                
| | Additions/(deductions) to income tax expenses | 24,463                 
| |                                               |                        
| | Balance at the end of the year                | 399,821                

F-43

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (d) Recent accounting pronouncements
>   (i) HK GAAP
>   The HKICPA has undertaken to converge by January 1, 2005
>   all Hong Kong Financial Reporting Standards (" HKFRSs") with International
>   Financial Reporting Standards ("IFRSs") issued by the International Accounting
>   Standards Board. As a result, the HKICPA has issued a number of new and
>   revised HKFRSs, including Hong Kong Accounting Standards ("HKAS"), HKAS
>   Interpretations ("HKAS-INTs") and HKFRSs, which were aligned with the
>   requirements of IFRSs in effect as at December 31, 2004 in all material
>   respects and are effective for accounting periods beginning on or after
>   January 1, 2005. As a consequence, the corresponding Statements of Accounting
>   Practices ("SSAP") and Interpretations are superseded effective January 1,
>   2005. The applicable HKFRSs required to be adopted by the Group for the year
>   ending December 31, 2005 are set out below.

| | HKFRSs issued | Standards superseded            
| | ------------- | --------------------------------
| |               |                                 
| | HKAS 1        | Presentation of
    Financial   
| |               | Statements                      
| | HKAS 2        | Inventories                     
| | HKAS 7        | Cash Flow
    Statements        
| | HKAS 8        | Accounting
    Policies, Changes
| |               | in Accounting
    Estimates and 
| |               | Errors                          
| |               |                                 
| | HKAS 10       | Events After the
    Balance    
| |               | Sheet Date                      
| | HKAS 12       | Income Taxes                    
| | HKAS 14       | Segment Reporting               
| | HKAS 16       | Property, Plant
    and         
| |               | Equipment                       
| | HKAS 17       | Leases                          
| | HKAS 18       | Revenue                         
| | HKAS 19       | Employee Benefits               
| | HKAS 21       | The Effects of
    Changes in   
| |               | Foreign Exchange
    Rates      
| | HKAS 23       | Borrowing Costs                 
| | HKAS 24       | Related Party
    Disclosures   
| | HKAS 27       | Consolidated and
    Separate   
| |               | Financial
    Statements        
| |               |                                 
| |               |                                 
| | HKAS 31       | Interests in
    Joint Ventures 
| |               |                                 
| | HKAS 32       | Financial
    Instruments:      
| |               | Disclosure and
    Presentation 
| | HKAS 33       | Earnings Per
    Share          
| | HKAS 36       | Impairment of
    Assets        
| | HKAS 37       | Provisions,
    Contingent      
| |               | Liabilities and
    Contingent  
| |               | Assets                          
| | HKAS 38       | Intangible Assets               

F-44

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (d) Recent accounting pronouncements (Continued)
>   (i) HK GAAP (Continued)

| | HKFRSs issued | Standards superseded          
| | ------------- | ------------------------------
| |               |                               
| | HKAS 39       | Financial
    Instruments:    
| |               | Recognition and               
| |               | Measurement                   
| | HKFRS 2       | Share-based
    Payment       
| | HKFRS 3       | Business
    Combinations     
| | HKAS-INT 21   | Income Taxes -
    Recovery of
| |               | Revalued
    Non-Depreciable  
| |               | Assets                        

> We are currently assessing the potential impact that the
>   adoption of the HKAS on January 1, 2005 may have on our financial statements
>   presented in accordance with Hong Kong GAAP but are not yet in a position to
>   state whether these new HKAS would have a significant impact on its results.

F-45

---



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (d) Recent accounting
>   pronouncements (Continued)
>   (ii)

In November 2004, the Financial Accounting Standards Board,
  or the FASB, issued FASB Statement No. 151, "Inventory Costs - an amendment of ARB No. 43" ("SFAS No. 151"), which is the result of its efforts to converge
  U.S. accounting standards for inventories with International Accounting
  Standards. SFAS No. 151 requires idle facility expenses, freight, handling
  costs, and wasted material (spoilage) costs to be recognized as current-period
  charges. It also requires that allocation of fixed production overheads to the
  costs of conversion be based on the normal capacity of the production
  facilities. SFAS No. 151 will be effective for inventory costs incurred during
  fiscal years beginning after June 15, 2005. The Group is currently assessing
  the impact of this statement on its results of operations, financial position
  and cash flows upon adoption and has not yet completed that assessment.

In December 2004, the FASB issued SFAS No. 123 (revised
  2004) ("SFAS No. 123(R)") "Share-Based Payment". SFAS No. 123(R) replaces SFAS
  No. 123 "Accounting for Stock-Based Compensation", supersedes APB Opinion No.
  25 "Accounting for Stock Issued to Employees" and amends SFAS No. 95
  "Statement of Cash Flows". SFAS No. 123(R) requires all share-based awards to
  employees, including grants of employee stock options, to be recognized in the
  financial statements based on their grant-date fair values. The related
  compensation costs are to be recognized over the period during which an
  employee is required to provide service in exchange for the award. Excess tax
  benefits are to be recognized as an addition to paid-in capital and reflected
  as financing cash inflows in the statement of cash flows. For public entities
  that do not file as small business issuers, SFAS No. 123(R) is effective for
  all awards granted after June 15, 2005, and to awards modified, repurchased,
  or cancelled after that date. The Group will adopt the modified prospective
  application transition method under the transition provisions of SFAS No.
  123(R) to new and existing plans as at January 1, 2006. The grant-date fair
  values of unvested awards that are outstanding on the date of adoption will be
  charged to expense over their remaining vesting periods. The Group is
  currently assessing the impact of this statement on its results of operations,
  financial position and cash flows upon adoption and has not yet completed that
  assessment.

In December 2004, the FASB issued SFAS No. 153, "Exchanges
  of Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS 153")
  effective for nonmonetary asset exchanges occurring in the fiscal year
  beginning January 1, 2006. SFAS 153 requires that exchanges of productive
  assets be accounted for at fair value unless fair value cannot be reasonably
  determined or the transaction lacks commercial substance. The Group is
  currently assessing the impact of this statement on its results of operations,
  financial position and cash flows upon adoption and has not yet completed that
  assessment.

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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

> (d) Recent accounting pronouncements (Continued)
>   (iii) US GAAP (Continued)
>   In March 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
>   Corrections" ("SFAS 154") - a replacement of APB Opinion No. 20 and FAS No. 3
>   effective for accounting changes made in fiscal years beginning after December
>   15, 2005. SFAS 154 requires retrospective application to prior periods'
>   financial statements of changes in accounting principle, unless it is
>   impracticable to determine either the period-specific effects or the
>   cumulative effect of the change. It also requires that retrospective
>   application of a change in accounting principle be limited to the direct
>   effects of the change. In direct effect of a change in accounting principle
>   should be recognized in the period of the accounting change. SFAS also
>   requires that a change in depreciation, amortization, or depletion method for
>   long-lived, nonfinancial assets be accounted for as a change in accounting
>   estimate effected by a change in accounting principle. The Group is currently
>   assessing the impact of this statement on its results of operations, financial
>   position and cash flows upon adoption and has not yet completed that
>   assessment.
>   The SEC issued SAB 107 in March 2005. SAB 107 summarizes the views of the
>   SEC staff regarding the interaction between SFAS No. 123R and certain
>   Securities and Exchange Commission rules and regulations and provides the
>   staff's views regarding the valuation of share-based payment arrangements for
>   public companies. The Group is currently analysing the effects of this SAB and
>   will adopt SAB 107 concurrently with SFAS No. 123.



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