Form 20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO


o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transaction period from to

COMMISSION FILE NUMBER: 000-51839

CHINA GRENTECH CORPORATION LIMITED

(Exact name of Registrant as specified in its charter)

Cayman Islands
(Jurisdiction of incorporation or organization)

15^th Floor, Block A, Guoren Building
Keji Central 3^rd Road
Hi-Tech Park, Nanshan District
Shenzhen 518057, People’s Republic of China
(Address of principal executive offices)

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


		Name of Each Exchange
Title of Each Class		On Which Registered
American Depositary Shares, each representing 25 ordinary shares of par value US$0.00002 per share		The Nasdaq Global Select Market
Ordinary shares of par value US$0.00002 per share*		The Nasdaq Global Select Market *


*		Not for trading, but only in connection with the registration of American Depositary Shares.

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

None
(Title of Class)

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

None
(Title of Class)

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

As of December 31, 2008, 601,978,775 ordinary shares, par value US$0.00002 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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


U.S. GAAP þ		International Financial Reporting Standards as issued by the International Accounting Standards Board o		Other o

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

Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

FORWARD-LOOKING STATEMENTS

This annual report filed on Form 20-F contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, cash flows, dividends, financing plans, business strategies, capital and other expenditure, competitive positions, availability of capital, growth opportunities for new and existing products, availability and deployment of new technologies, plans and objectives of management, mergers and acquisitions, and other matters.

Statements in this Form 20-F that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words “estimate,” “project,” “intend,” “expect,” “believe,” “plan” and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by us or on our behalf, including with respect to the matters referred to above. These forward-looking statements are necessarily estimates reflecting the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this annual report. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation:

•

our company’s reliance on business relationships with the Chinese telecommunications operators and base station equipment manufacturers, in particular, the annual capital spending by Chinese telecommunications operators;

•

risks associated with large accounts receivable, long collection periods and accounts receivable cycles;

•

fierce competition in the wireless communication industry;

•

growth of, and risks inherent in, the wireless communication industry in China;

•

uncertainty as to future profitability and our company’s ability to obtain adequate financing for our planned capital expenditure requirements;

•

uncertainty as to our company’s ability to continuously develop and manufacture new radio frequency, or RF, technology and keep up with changes in RF technology;

•

uncertainty as to future capital expenditure on telecommunication infrastructure by the Chinese telecommunications operators;

•

uncertainty as to cost of raw materials and price fluctuations imposed by suppliers;

•

future changes to the regulations and policies governing the telecommunications industry in China, including possible future industry restructuring;

•

limitation on our company’s production capacity for RF products;

•

risks associated with possible defects and errors in our wireless coverage products or RF products;

•

uncertainty as to our company’s ability to protect and enforce our intellectual property rights; and

•

uncertainty as to our company’s ability to attract and retain qualified executives and personnel.

SUPPLEMENTAL INFORMATION

On August 25, 2005, we subdivided each of our issued and unissued ordinary shares, par value US$0.01 per share, into 500 ordinary shares, par value US$0.00002 per share. Unless otherwise specified, we present ownership of our ordinary shares throughout this annual report as if our ordinary shares were so subdivided since our inception, with a par value of US$0.00002 per share.

For the purposes of this annual report, all geographical and statistical references to “China,” “mainland China” and “PRC” in this annual report are to the People’s Republic of China and do not include the Hong Kong Special Administrative Region, or Hong Kong, the Macau Special Administrative Region, or Macau, and Taiwan. References to “provinces” of China are to the provinces, municipalities under direct administration of the PRC central government and provincial-level autonomous regions of China.

All references to “RMB” or “Renminbi” are to the legal currency of China, and all references to “U.S. dollar” or “US$” are to the legal currency of the United States of America, or the United States or the U.S. For your convenience, this annual report contains translations of Renminbi amounts into U.S. dollars at the noon buying rate for U.S. dollars in effect on December 31, 2008, the last business day in 2008, in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York at RMB6.8225 = US$1.00.

On June 19, 2009, the noon buying rate in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York was RMB6.8360 = US$1.00. See “Exchange Rate Information.” We make no representation that any amounts in Renminbi or U.S. dollars referred to in this annual report could be or could have been converted into each other at any particular rate or at all.

We have approximated all numbers in this annual report to their closest round numbers. Also due to rounding, figures shown as totals in tables may not be an arithmetic aggregation of the figures preceding them.

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

SELECTED FINANCIAL DATA

The following tables present our selected consolidated financial data as of and for the years ended December 31, 2004, 2005, 2006, 2007 and 2008.

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and we publish our financial statements in Renminbi. We have derived the consolidated statement of operations information and selected cash flow information for the years ended December 31, 2006, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007 and 2008 from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of operations information for the years ended December 31, 2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements which are not included in this annual report. Our historical results do not necessary indicate the results that may be expected for any future periods.


	Year ended December 31,
	2004			2005			2006			2007			2008			2008
	(RMB)			(RMB)			(RMB)			(RMB)			(RMB)			(US$)
	(in thousands, except for per share and number of shares data)
Consolidated statements of operations information
Revenues		566,504			716,270			832,795			979,302			984,657			144,325
Cost of revenues		(241,930	)		(328,064	)		(437,040	)		(611,436	)		(751,367	)		(110,131	)

Gross profit		324,574			388,206			395,755			367,866			233,290			34,194
Operating expenses
Research and development costs		(16,326	)		(30,616	)		(47,671	)		(56,525	)		(70,232	)		(10,294	)
Sales and distribution expenses		(71,035	)		(91,489	)		(112,948	)		(126,816	)		(138,524	)		(20,304	)
General and administrative expenses		(29,744	)		(41,057	)		(55,944	)		(68,498	)		(127,028	)		(18,618	)
Impairment of goodwill		—			—			—			—			(27,589	)		(4,044	)

Total operating expenses		(117,105	)		(163,162	)		(216,563	)		(251,839	)		(363,373	)		(53,260	)

Operating income/(loss)		207,469			225,044			179,192			116,027			(130,083	)		(19,066	)
Other income/(expense)
Interest income		4,006			3,213			19,186			22,313			31,257			4,581
Interest expense		(39,392	)		(36,105	)		(28,026	)		(35,347	)		(54,844	)		(8,039	)
Investment income		899			159			238			318			4,873			714
Foreign currency exchange gain/(loss)		—			5,584			(9,875	)		(18,791	)		(10,418	)		(1,527	)
Grant income		716			16,732			7,670			7,355			15,209			2,229

Total other income/(expense)		(33,771	)		(10,417	)		(10,807	)		(24,152	)		(13,923	)		(2,042	)

Income/(loss) before income tax expense and minority interests		173,698			214,627			168,385			91,875			(144,006	)		(21,108	)
Income tax expense		(16,020	)		(26,097	)		(18,277	)		(10,321	)		(3,157	)		(463	)

Income/(loss) before minority interests		157,678			188,530			150,108			81,554			(147,163	)		(21,571	)
Minority interests, net of tax		(11,117	)		(7,086	)		(1,267	)		982			796			117

Net income/(loss)		146,561			181,444			148,841			82,536			(146,367	)		(21,454	)
Dividends, accretion to redemption value and foreign currency rate movements on mandatorily redeemable convertible preference shares		(3,509	)		(2,428	)		(549	)		—			—			—

Net earnings/(loss) available to ordinary shareholders		143,052			179,016			148,292			82,536			(146,367	)		(21,454	)

Net earnings/(loss) per share available to ordinary shareholders:
Basic		0.31			0.38			0.25			0.13			(0.24	)		(0.04	)
Diluted		0.29			0.36			0.25			0.13			(0.24	)		(0.04	)
Weighted average number of ordinary shares:
Basic		466,365,500			466,365,500			584,580,799			624,624,852			610,158,841			610,158,841
Diluted		500,000,000			500,000,000			593,150,684			624,624,852			610,158,841			610,158,841
Total cash dividend declared to ordinary shareholders		54,411			29,653			7,609			—			—			—


	Year ended December 31,
	2004		2005		2006		2007		2008		2008
	(RMB)		(RMB)		(RMB)		(RMB)		(RMB)		(US$)
	(in thousands)
Consolidated balance sheet information
Cash and cash equivalents		302,932		128,608		467,423		316,778		293,353		42,998
Pledged time deposits		95,908		76,250		238,618		259,786		122,368		17,936
Accounts receivable, net		248,662		537,321		747,859		925,838		728,260		106,744
Inventories		296,404		370,136		434,406		542,094		520,619		76,309
Total current assets		1,014,447		1,172,072		1,948,407		2,107,691		1,779,666		260,853
Property, plant and equipment, net		96,505		120,356		161,503		225,069		412,259		60,426
Construction in progress		—		—		7,100		134,637		2,816		413
Long-term accounts receivable		126,649		162,032		268,957		389,505		551,210		80,793
Total assets		1,250,539		1,475,469		2,415,834		2,997,299		2,838,970		416,119
Short-term bank loans		164,850		160,614		336,050		456,050		480,207		70,386
Total current liabilities		662,838		738,551		866,435		1,249,081		1,266,617		185,652
Long-term bank loans		171,325		167,053		—		150,000		130,000		19,055
Total liabilities		834,163		905,604		866,435		1,405,019		1,401,369		205,404
Mandatorily redeemable convertible preference shares		45,184		45,441		—		—		—		—
Total shareholders’ equity		348,790		506,720		1,530,428		1,586,517		1,433,247		210,077


	Year ended December 31,
	2004			2005			2006			2007			2008			2008
	(RMB)			(RMB)			(RMB)			(RMB)			(RMB)			(US$)
	(in thousands)
Consolidated cash flow information
Net cash provided by / (used in) operating activities		218,244			(112,611	)		(114,778	)		(120,228	)		5,056			741
Net cash provided by / (used in) investing activities		(74,337	)		(20,900	)		(243,150	)		(294,437	)		28,113			4,121
Net cash provided by / (used in) financing activities		(22,963	)		(40,813	)		708,514			272,619			(52,085	)		(7,634	)
Cash and cash equivalents at the end of year		302,932			128,608			467,423			316,778			293,353			42,998

EXCHANGE RATE INFORMATION

We prepare our financial statements in Renminbi. Solely for the convenience of the reader, this annual report contains translations of Renminbi amounts into U.S. dollars, and vice versa, at RMB6.8225 = US$1.00, the noon buying rate on December 31, 2008, in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. You should not assume that Renminbi amounts could actually be converted into U.S. dollars at these rates or at all.

On June 19, 2009, the noon buying rate in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York was RMB6.8360 = US$1.00.

The following table sets forth, for the periods indicated, the noon buying rates for U.S. dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York:


	Noon buying rate
Period	Period end		Average⁽¹⁾		High		Low
	(RMB per US$1.00)
2004		8.2765		8.2768		8.2774		8.2764
2005		8.0702		8.1940		8.2765		8.0702
2006		7.8041		7.9723		8.0702		7.8041
2007		7.2946		7.6072		7.8127		7.2946
2008		6.8225		6.9477		7.2946		6.7800
December		6.8225		6.8539		6.8842		6.8225
2009 January		6.8392		6.8360		6.8403		6.8225
February		6.8395		6.8363		6.8470		6.8241
March		6.8329		6.8360		6.8438		6.8240
April		6.8180		6.8306		6.8361		6.8176
May		6.8278		6.8235		6.8326		6.8176
June (through June 19, 2009)		6.8360		6.8337		6.8371		6.8264

RISK FACTORS

Risks Relating to Our Company

We derive a significant portion of our revenues from China United Telecommunications Corporation and its affiliates, or the China Unicom group, and China Mobile Communications Corporation and its affiliates, or the China Mobile group, and our revenues could decline significantly if either of them reduces its purchases of our wireless coverage products and services

We provide most of our wireless coverage products and services to the China Unicom group and the China Mobile group. This is primarily because the China Unicom group and the China Mobile group were two major licensed wireless operators in China. In 2006, 2007 and 2008, we derived 35.9%, 38.6% and 24.8% respectively, of our revenues from China Unicom group’s local affiliates and 33.3%, 32.4% and 39.6%, respectively, from China Mobile group’s local affiliates. In addition, as of December 31, 2006, 2007 and 2008, 40.4%, 40.1% and 39.1%, respectively, of our gross accounts receivable were attributable to China Unicom group’s local affiliates and 30.2%, 28.8% and 36.2%, respectively, to China Mobile group’s local affiliates.

We typically entered into contracts with individual local affiliates of our major customers and treated these local affiliates as separate customers. Although it has been our business practice to interact with each local affiliate individually, they are under the common control of their parent company. Due to changes to the equipment procurement policies of our major customers in 2007 and 2008, including the China Unicom group and the China Mobile group, procurement decisions for equipment are now made by the parent company and its local affiliates through a centralized bidding process, which has led to intensified industry-wide pricing pressure. For more details, see “Risk Factors—Risks Relating to Our Company—Changes in the procurement policies by our major customers may adversely affect our revenue and profit margin on our wireless coverage products.”

We also experience delays in payments from the China Unicom group and the China Mobile group during the ordinary course of our business. As explained in the next risk factor, this is largely due to our limited bargaining leverage and the resulting lack of a specific timetable in our sale and purchase contracts to require our customers to issue completion certificates and to perform preliminary inspections, which are pre-conditions to their initiation of payments. Despite our constant attempts, we have not been able to significantly change this prevalent practice in our industry due to our limited bargaining leverage, and we expect this practice to continue in coming periods.

The restructuring of China’s telecommunications operators announced in May 2008 has been completed, and licenses to operate third generation wireless communications, or 3G, networks were granted in China in January 2009 with the licensees announcing plans to increase their capital expenditure on 3G network construction. However, telecommunications operators may cease or reduce their planned capital expenditure in the future due to reasons beyond our control. Additionally, the competitive situation in the wireless communication market in China may be altered, or the newly restructured operators may change suppliers or sourcing policies in the future. If any of the Chinese telecommunications operators decides to significantly change its procurement methods for wireless coverage products and services, reduces or eliminates the purchase of our products and services or becomes unable or refuses to pay for our products and services it has purchased, our revenues could decline significantly.

Because we have limited bargaining leverage with the China Unicom group and the China Mobile group, some contractual terms and market practices are materially adverse to our interest

The China Unicom group and the China Mobile group award contracts through competitive bidding. According to BAYES (Beijing) Information Consulting Ltd., Co., or BAYES, a market research and consulting firm focusing on innovative technologies, there are seven major entities, including our company, competing in the wireless coverage market in China. According to BAYES, these seven major players in aggregate accounted for approximately 37.0%, 42.9% and 40.5% of total market share of the PRC wireless coverage market in 2006, 2007 and 2008, respectively. As the China Unicom group and the China Mobile group were the two major licensed wireless operators in China prior to the industry restructuring which was completed in 2008 and even after the restructuring they remain major industry participants, we have limited negotiating leverage with these key clients in the bidding process. As a result, many proposed contractual terms and market practices subject to bidding are materially adverse to our interest. For example, most of our contracts, in the form contained in the bidding materials, do not specify a timetable for our customers to perform the preliminary inspection of products we install. This affects our revenues as the preliminary inspection by our wireless operator customers is a condition to our recognition of service revenue. As a result of these contractual terms and market practices, we are required to finance significant operating expenses before we recognize revenues and to finance significant accounts receivable once we recognize revenues. Any worsening of these terms and conditions could have a material adverse effect on our liquidity and cash flows from operations. Also see “—We have long accounts receivable cycles and long collection periods, and our liquidity and cash flows from operations will deteriorate if our accounts receivable cycles or collection periods continue to lengthen” below for additional cash flow and liquidity risks resulting from these market practices.

Changes in the procurement policies by our major customers may adversely affect our revenue and profit margin on our wireless coverage products

Historically we have been awarded contracts by the local affiliates of our major customers through bidding and negotiation, and these contracts covered wireless coverage equipment and services. For more details on the bidding process conducted by wireless operators in China, please see “Item 4. Information on the Company—Business—Our Wireless Coverage Products and Services—Our Sales Cycle—Bidding Process.” China Mobile group, in an effort to shift to a more centralized procurement model, adopted a new procurement policy in 2007 whereby the bidding processes for wireless coverage equipment and services would be separately conducted, and procurement decisions for wireless coverage equipment and services would be made by the parent company and its local affiliates respectively. In addition, China Unicom group and China Telecom Corporation and its affiliates, or the China Telecom group, also adopted a similar procurement policy starting in 2008. Under the new policy, even if we win the bid for wireless coverage equipment, we may not win the bid for services, or vice versa. Consequently, we may lose revenue with respect to any single wireless coverage project if we cannot win both equipment contract and service contract for the project. Further, the change in procurement policy aims to encourage more competitive pricing among providers of wireless coverage equipment, which has led to a decrease selling price for equipment. As a result, our profit margin may be adversely affected.

We have long accounts receivable cycles and long collection periods, and our liquidity and cash flows from operations will deteriorate if our accounts receivable cycles or collection periods continue to lengthen

Our wireless coverage revenues consist of two components: (i) sale of equipment and (ii) integrated services.

On a typical equipment sale project, after we win the centralized bids for the sale of equipment to the telecommunications operators, we begin our delivery of equipment. When our customer issues a delivery certificate to confirm the acceptance of the products we have delivered and signs a contract with us, we recognize our revenue from the sale of equipment. According to the payment terms, we typically have the right to collect 70% to 80% of our equipment sale payment after delivery and the remaining balance is due after final inspection or the expiration of the warranty period, as further discussed below.

For a typical integrated service project, after we win the integrated service bids from the local operators, we begin the installation. The operator will issue a completion certificate and sign a contract with us after we finish the installation. After the coverage network operates for a certain period, the customer will issue a preliminary inspection certificate to us and then we recognize our revenue for services. Some of our customers conduct two inspections prior to the beginning of the warranty period. The final inspection usually occurs 6 to 12 months after the preliminary inspection. According to the payment terms, we typically have the right to collect 30% to 50% of our integrated service fees after we have rendered our services in full. We have the right to collect up to 70% to 80% of our integrated service fees after preliminary inspection and the remaining balance is due for payment after final inspection or the expiration of the warranty period.

Prior to the implementation of the centralized procurement policy, we mainly bid our wireless coverage equipment projects as a bundle sales contract which was comprised of both sales of equipment and integrated services. We typically had the right to collect approximately 40% of the bundle sales contract value upon signing of the contract and the issuance of the completion certificate, and the remaining contract balance was due upon the issuance of a preliminary inspection certificate and final inspection certificate similar to the integration service project mentioned above.

On a weighted average basis, our historical contractual payment schedule is approximately as follows:

•

42% of the contract value due upon the signing of the contract and the issuance of the completion certificate or delivery certificate,

•

an additional 36% due upon the issuance of the preliminary inspection certificate,

•

a further 18% due upon the issuance of the final inspection certificate, and

•

the final 4% due upon the expiration of our warranty period.

Because our contracts often do not stipulate when our customers must conduct the relevant inspections, our customers may delay their payments. Even when a payment has become contractually due, it may take a few months to a year for our customers to settle the balance. To the extent revenue recognized under a contract is not yet paid, it is recorded as an account receivable. From time to time, we sell a portion of our accounts receivable to third parties to meet our working capital needs. Installment intervals range from six months to three years, and the amounts of individual payments have varied and may continue to vary in the future. As of December 31, 2008, we had in aggregate gross accounts receivable, including amounts not yet due pursuant to contractual terms, of RMB1,249.2 million (US$183.0 million). Of this total amount, RMB571.9 million (US$83.8 million), or 45.8%, had been outstanding for less than 12 months from the time the revenue was recognized, RMB392.1 million (US$57.5 million), or 31.4%, had been outstanding for 12 to 24 months from the time the revenue was recognized, RMB184.4 million (US$27.0 million), or 14.8%, had been outstanding for 24 to 36 months from the time the revenue was recognized, and RMB100.8 million (US$14.8 million), or 8.1%, had been outstanding for over 36 months from the time the revenue was recognized. Accounts receivables with a longer outstanding period represent the amounts outstanding for products which are still in the warranty period.

Our principal customers, such as China Mobile group and China Unicom group, may delay in paying their installments to us as they come due and, because of our limited bargaining leverage and our need to maintain an ongoing relationship with these principal customers, it is impracticable for us to obtain a significant improvement in their payment patterns. As of December 31, 2008, accounts receivable that became due under our contracts and remained unpaid amounted to RMB632.1 million (US$92.6 million), or 50.6%, of our gross accounts receivable of RMB1,249.2 million (US$183.0 million), as compared to RMB505.3 million, or 38.3%, of our gross account receivable as of December 31, 2007. As of December 31, 2008, our allowance for doubtful accounts amounted to RMB25.3 million (US$3.7 million), which was mainly related to certain aged individual account receivables due from operator customers and our collection cost may outweigh the aggregate amount of those outstanding account receivables. In addition, we wrote off RMB43.6 million (US$6.4 million) in doubtful accounts in 2008, which was mainly related to aged receivable balances due from our non-operator customers who have been recently experiencing financial difficulties caused by a loss of market share due to changes in the procurement policies by the major telecommunications operators and tightening of credit controls by PRC banks. We also granted settlement discounts to operator customers in order to accelerate our collection of account receivables which may be affected by the telecommunication industry restructuring in 2008. We cannot assure you that our past allowance practice will not change in the future or that our allowance will be sufficient to cover defaults in our accounts receivable. You should refer to “Item 5. Operating and Financial Review and Prospectus—Key Factors Affecting Our Results of Operations—Revenue Recognition Policy and Accounts Receivable Cycle” for further details on our revenue recognition policy and collection periods. Our liquidity and cash flows from operations will deteriorate if our accounts receivable cycles or collection periods continue to lengthen.

We often begin work on a project before we have a contract for our products and services, which may materially and adversely affect our cash flows from operating activities and liquidity

In line with industry practice in China, when a customer accepts our bid for our wireless coverage products or integrated services or both, it does not immediately sign a contract with us. Our customers sign the contract with us upon the delivery certificates or completion certificates have been issued. According to our historical weighted average contractual terms, we only have the right to collect approximately 42% of the total contract amount when we received the delivery certificates or completion certificates. Although we believe that our bidding documents, together with our customers’ acceptances of our bids, effectively constitute binding contracts under PRC law, our PRC counsel has advised us that enforcement of our rights to payment in the PRC courts may be difficult. In particular, it is unclear what terms and provisions need to be included in a bid and acceptance in order for a payment obligation to exist under PRC law. As a result, we effectively assume the risk of loss for our projects before the customer signs a contract with us. In addition, in line with current industry practice in China, most of our bid documents do not specify a time period or date by which our customers must issue completion certificates or sign a sale and purchase contract. As a result, our sales and marketing staff spend a significant amount of time persuading customers to conduct inspections, issue completion certificates and sign contracts. These unfavorable practices are in large part attributable to the market dominance of our customers and the competitive landscape of the wireless coverage industry. We expect that this unfavorable industry practice in China will continue and that it will continue to materially and adversely affect our cash flows from operating activities and liquidity.

We historically recognized significantly lower revenues in the first quarter, which sometimes resulted in net losses in the first quarter, and our revenues may fluctuate significantly from quarter to quarter in the future, resulting in quarterly net losses

Our customers typically set their annual budgets at the beginning for each year. Once the annual budget is set, the customers will commence the bidding process for specific projects. In addition, we did not recognize integrated service revenues until the preliminary inspection is completed. In other words, the amount of revenues we could recognize is typically lower during the earlier part of the year, especially during the first quarter. However, since the adoption of the centralized procurement model by the major telecommunications operators in China, we have begun to recognize our revenues from the sale of our products when delivery has occurred and the customer has signed a contract with us and issued a delivery certificate to us. The change in revenue recognition has reduced the effect of seasonality on our business.

Our customers generally use the same team to manage different aspects of a project, including bidding, contracting and payment. Their work is performed in accordance with their internal annual and semi-annual project management process. As a result, our customers prefer to perform completion inspections and sign contracts for each batch of installed projects at the same time. We typically recognize higher levels of revenue during the second and third quarter than that of the first quarter, because more projects are installed and inspected, and for which completion certificates are issued, during the second and the third quarter. During the fourth quarter, especially in December, our principal customers, being public companies and influenced by their semi-annual reporting obligations, usually perform completion inspections, issue completion certificates and sign contracts for a significant majority of our projects. Therefore, we typically recognize the highest level of revenue during the fourth quarter.

Despite the quarterly revenue fluctuations, our overall volume of contracts has increased, resulting in increasing costs associated with servicing these contracts. Fluctuations in quarterly revenue with expanding costs have resulted in net losses being incurred in certain quarters of recent years, particularly in the first quarter. In 2006, 1.8%, 21.6%, 22.5% and 54.1% of our annual revenues were generated in the first, second, third and fourth quarters of that year, respectively, and we reported net losses of RMB35.7 million in the first quarter. In 2007, 3.2%, 20.7%, 27.9% and 48.2% of our annual revenues were generated in the first, second, third and fourth quarters of that year, respectively, and we reported a net loss of RMB44.8 million in the first quarter. In 2008, 7.3%, 18.9%, 21.6% and 52.2% of our annual revenues were generated in the first, second, third and fourth quarters of that year, respectively, and we reported a net loss of RMB41.5 million (US$6.1 million) in the first quarter. You should refer to “Item 5. Operating and Financial Review and Prospectus—Key Factors Affecting Our Results of Operations—Revenue Recognition Policy and Accounts Receivable Cycle” and “—Significant Quarterly Fluctuations of Our Results of Operations” for further details on our revenue fluctuation and other quarterly financial information. However, past quarterly results may not provide an accurate indication of future performance or fluctuation. Whether we continue to recognize significantly lower revenues in the first quarter will depend largely upon the timing of our customers’ project management processes. We anticipate that we may continue to experience fluctuations in revenues on a quarterly basis and may continue to experience net losses as a result, particularly in the first quarter.

We rely on bank financing, including issuing bills payable and sale of receivables, to finance our operations; any expansion of our business will require further financing and will increase our financial leverage

We tend to collect more payments primarily in the fourth quarter than other quarters of each year. In 2006, 2007 and 2008, 53.8%, 62.4% and 43.8%, respectively, of our total annual collections were made in the fourth quarter. This is because our customers prefer to pay for our completed projects toward the end of their budget year. However, we commence our production and arrange installation of products for a significant number of projects beginning in the second quarter of the year and typically complete and deliver a majority of our wireless coverage products and services during the third and fourth quarters. As a result, we tend to generate more cash flow from operating activities toward the end of the year and encounter increasing working capital needs during the middle part of the year, especially the third quarter. We are therefore highly dependent on bank financing, including issuing bills payable and selling accounts receivable, to fund our working capital requirements and maintain liquidity. Historically, we have relied on short-term bank loans to finance our working capital needs. As of December 31, 2008, we had an aggregate of RMB500.2 million (US$73.3 million) of short-term bank loans and RMB130.0 million (US$19.1 million) of long-term loans outstanding and RMB110.6 million (US$16.2 million) in bills payable. As of December 31, 2008, interest rates on our bank loans ranged from 4.9% to 8.4%, and interest rates on our bills payable financing ranged from 3.6% to 6.9%. In 2007 and 2008, we sold an aggregate of RMB200.4 million and RMB202.2 million (US$29.6 million), respectively, of our accounts receivable to third party financial institutions. We expect external financing required for expanding our operations will increase our financial leverage. See “—Our inability to access long-term working capital financing due to the current regulatory conditions in China has adversely affected, and could continue to have a negative impact on, our liquidity” below.

We may be unable to generate sufficient cash to pay the principal and interest due on our indebtedness. Our ability to service our debts will largely depend on our ability to collect accounts receivable from our customers and on our future operating performance. If we do not have sufficient available sources of liquidity to repay our outstanding indebtedness, we may have to refinance our obligations. However, we cannot assure you that financing or refinancing will be available on terms acceptable to us or at all. If we encounter any difficulties in generating sufficient cash to pay our outstanding indebtedness or in securing financing or refinancing or receivable selling arrangements on terms satisfactory to us as and when required, our business and liquidity will be materially and adversely affected, and we will be unable to expand our business.

If the wireless communication sector in China does not maintain its current pace of growth, or if the telecommunications operators reduce their investments for 3G network coverage in the near future, the profitability and future prospects of our business and our liquidity could be materially and adversely affected

We generate most of our revenues from the provision of wireless coverage products and services to telecommunications operators in China. Our future success depends on the continued growth of the PRC wireless communication industry. Any slowdown in the development of the wireless communication industry in China or reduction in our customers’ expenditure on wireless coverage products and services may reduce market demand for our products and services. 3G network deployment requires significant capital investment by PRC telecommunications operators, including investments in wireless coverage products and services and RF parts and components. Therefore, we believe that issuance of 3G licenses will in general have a positive impact on the growth of our business. Although telecommunications operators have been increasing their capital expenditure for 3G network construction in China, it is uncertain as to how long this investment trend would continue, and any reduction of the capital expenditure for 3G network development will negatively impact our business growth and liquidity.

We may fail to offer products that meet industry standards or our customers’ specific requirements, and as a result we may lose customers or orders or incur significant warranty or other costs, and our revenue growth may be materially and adversely affected

The development of our products is based upon a complex technology, and requires significant time and expertise in order to meet industry standards and customers’ specifications. Our customers also have their own sets of standards and criteria relating to their requirements for wireless coverage or base station RF products, including standards and criteria issued by the relevant governmental authorities. We must satisfy these standards and criteria in order to be eligible to supply our products and services to those customers. If we are unable to continue to meet these standards and criteria, we may become ineligible to provide our products and services that have in the past generated most of our revenues and profitability. Furthermore, quality and performance problems could damage our reputation and our relationships with existing and prospective customers and could have a material and adverse effect on our revenue growth.

We customarily provide our customers with one to three years of warranty protection, under which we agree to repair or replace defectively installed wireless coverage products at no additional cost to our customers. Our contracts generally do not contain disclaimers or limitations on product liabilities for special, consequential and incidental damages, nor do we typically cap the amounts our customers may recover for damages. In addition, we do not currently maintain any insurance for product liability or warranty claims. Our failure to offer products and services that meet our customers’ specific requirements could give rise to substantial liabilities under our warranties and otherwise.

Our research and development efforts may not lead to successful development of commercially viable or acceptable products, which could cause a decline in customer use of our products

The markets in which we compete are characterized by:

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rapidly changing technology;

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evolving industry standards and transmission protocols;

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frequent improvements in products and services; and

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fierce competition from well-funded and technologically advanced companies.

To succeed, we must continually improve our current products and develop and introduce new or enhanced products that adequately address the requirements of our customers and are competitive in terms of functionality, performance, quality and price. We expend considerable efforts in the development of new and enhanced RF technology and in its commercial applications, including the development of 3G products and base station RF components. Although we have successfully developed products that meet customers’ requirements in the past, there is no assurance that any of our research and development efforts will necessarily lead to any new or enhanced products or generate sufficient market share to justify commercialization. For example, 3G is a new and evolving technology. We cannot assure you that our research and development efforts will yield new wireless coverage products that are readily deployable in 3G networks or that our customers will be satisfied with the performance of our 3G coverage products. Under those circumstances, we will not be able to recoup our research and development costs and expenses, we may not be able to serve our customers’ 3G needs, and customers may refuse to use our products.

Gross profit margins for our products and services vary substantially and any deterioration in the gross profit margin for our principal products and services will have a material and adverse effect on our results of operations

Gross profit margins for our products and services vary substantially. Although the gross profit margin for our wireless coverage products and services has been on average higher than the gross profit margin of our RF parts and components, all of our wireless coverage products have been subject to downward pricing pressure due to the fierce competition. In addition, the gross profit margin of our products has fluctuated significantly from year to year. For example, excluding provisions for inventory, the gross profit margin of our wireless coverage products and installation services was 31.1% in 2008, compared to 40.2% in 2007 and 48.0% in 2006. Further, due to the rapidly changing technology and evolving industry standards and transmission protocols or changes in the procurement policies of our major customers, our historical gross profit margin is not an accurate measure for estimating our future gross profit margins. Any deterioration in the gross profit margin for our principal products and services will have a material and adverse effect on our results of operations.

Our industry is highly competitive and our inability to compete effectively would hurt our current business and future growth potential

Our industry is extremely competitive and is characterized by rapid technological advancement, frequent development of new products, evolving industry standards and a downward pricing trend over the life cycle of a product. According to BAYES, there were seven major companies providing wireless coverage products and services in China, which collectively held approximately 40.5% market share in China as of December 31, 2008, and the top three providers, including our company, accounted for approximately 26.2% of the total market share in 2008. We compete on the following principal bases:

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research and development capability;

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product quality;

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scope and flexibility of product offering;

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after-sale service capability;

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pricing; and

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relationships with wireless operators

If we fail to compete effectively in the future, our current business and future growth potential would be adversely affected.

We have limited experience in operating outside mainland China, and failure to achieve our overseas expansion strategy may have an adverse effect on our business growth in the future

Our future growth depends, to a considerable extent, on our ability to expand our customer base in both the domestic and overseas markets. We have been exploring new business opportunities outside mainland China for our wireless coverage products and services. In 2008, we had operations in Indonesia, Singapore, India, Philippines, Vietnam and Pakistan where we have obtained local wireless service projects. However, we have limited experience in operating outside mainland China or with foreign regulatory environments and market practices, and cannot guarantee that we will be able to penetrate any overseas market. In connection with our initial efforts to expand overseas, we have encountered many obstacles, including cultural and linguistic differences, difficulties in keeping abreast of market, business and technical developments in foreign jurisdictions, and political and social disturbances. For example, our products and services sold in China are tailored to the specifications of our domestic operators and their wireless systems and are not readily deployable overseas. To meet the requirements of our potential overseas customers, we have to adjust some of our technical parameters such as transmission frequencies and make other modifications. In addition, recent political instability in some Southeast Asian countries has hindered our expansion efforts into those wireless coverage markets. Failure in the development of overseas markets may have an adverse effect on our business growth in the future.

We rely on key managerial and technical personnel, and failure to attract or retain such personnel may compromise our ability to develop new products and to effectively carry on our research and development and other efforts

Our future growth and success depend largely on the efforts and abilities of our senior management and senior technical staff, particularly Mr. Yingjie Gao, our chairman and chief executive officer, and our other senior technicians and engineers. We have entered into employment agreements with these individuals. These employment agreements have an initial term of three years, subject to the right of termination under specified circumstances, such as a material breach of their contractual obligations. If we lose the services of Mr. Gao or any other senior technicians or engineers, our operations will be materially and adversely affected. We also believe that our future success will depend in large part upon our ability to attract and retain senior, experienced and highly qualified scientific and technical personnel.

The wireless coverage industry is characterized by a high level of employee mobility. Competition in China for experienced RF technology experts is intense. In 2006, 2007 and 2008, our employee turnover rate was 24.6%, 29.1% and 29.3%, respectively, as determined by dividing the number of our employees departing during the year over the total number of employees at the end of the year. There are few senior-level research and development or technical personnel available for hire as the costs of hiring and retaining such individuals are high, and such personnel may not remain with us once hired. If we are unable to successfully attract or retain senior-level research and development employees, our ability to develop new technologies and products and to effectively conduct our operations could be compromised and our ability to carry on our research and development and other efforts could be materially and adversely affected.

We hire third parties to carry out some of the initial installation of our wireless coverage products, are liable for the failure or inadequacy of their services, and may be vulnerable to the loss and unavailability of their services

We hire independent third party contractors to carry out some of the initial installation of our wireless coverage products, which include affixing the products to the customers’ physical structure and interconnection of the products under the supervision of engineers from our technical support team. Although Shenzhen Kaixuan Communication Technology Co., Ltd., one of our subsidiaries in China, is primarily responsible for our installation services, we also outsource some of our initial installation work to independent third party contractors located across China. Under our contracts, we are responsible to our customers not only for the quality of our wireless coverage products but also for the quality of the installation service. We therefore effectively take the credit and workmanship risks of these independent contractors. To the extent our independent third party contractors fail to install our products properly, we will be liable to cure the defects. We typically contract our initial installation work to those contractors located near the project sites for cost efficiency reasons. If any of the local contractors becomes unavailable and we are not able to find any suitable replacement, we will be forced to use contractors located farther away from the project sites. This is likely to delay our projects or increase our project costs. It is also possible that we may not be able to find suitable replacements at all to complete our project installations on schedule. In each case, our business would be harmed, and our reputation would be adversely affected if we fail to find the appropriate third party contractors to carry out some of the initial installation.

We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property

Our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary technology and operate without infringing upon the intellectual property rights of others. The legal regime in China for the protection of intellectual property rights is still at its early stage of development. China adopted its first statute on the protection of trademarks in 1979. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations such as Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made by China over the years with a view to enhancing its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United States, and enforcement of such laws and regulations in China has not achieved the levels reached in those countries. Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological innovation and non-compliant infringement.

We rely on trade secrets and registered patents and trademarks to protect our intellectual property. We have also entered into confidentiality agreements with our management and employees relating to our confidential proprietary information. However, the protection of our intellectual properties may be compromised as a result of:

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departure of any of our management members or employees in possession of our confidential proprietary information;

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breach by such departing management member or employee of his or her confidentiality and non-disclosure undertaking to us;

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expiration of the protection period of our registered patents or trademarks;

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infringement by others of our proprietary technology and intellectual property rights; or

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refusal by relevant regulatory authorities to approve our patent or trademark applications.

Any of these events or occurrences may have a material adverse effect on our operations. There is no assurance that the measures that we have put into place to protect our intellectual property rights will be sufficient. As the number of patents, trademarks, copyrights and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality of the products in the market further overlap, we believe that business entities in our industry may face more frequent infringement claims. Litigation to enforce our intellectual property rights could result in substantial costs and may not be successful. If we are not able to successfully defend our intellectual property rights, we might lose rights to technology that we need to conduct and develop our business. This may seriously harm our business, operating results and financial condition, and enable our competitors to use our intellectual property to compete against us.

Furthermore, if third parties claim that our products infringe their patents or other intellectual property rights, we might be required to devote substantial resources to defending against such claims. If we are unsuccessful in defending against such infringement claims, we may be required to pay damages, modify our products or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.

If we lose certain government tax concessions, our profitability may be materially and adversely affected

Prior to January 1, 2008, the PRC’s statutory income tax rate was 33%. However, our subsidiaries, Shenzhen GrenTech Co. Ltd., or Shenzhen GrenTech, Shenzhen Lingxian Technology Co. Ltd., or Shenzhen Lingxian, Shenzhen Kaixuan Communication Co. Ltd., or Shenzhen Kaixuan, Shenzhen GrenTech RF Communication Ltd., or Shenzhen GrenTech RF, were established in the Shenzhen Special Economic Zone and were entitled to the preferential income tax rate of 15%. Furthermore, Shenzhen GrenTech and Shenzhen Lingxian were granted an additional 50% relief from the preferential income tax rate of 15% and were subject to a reduced income tax rate of 7.5% for 2006 and 2007.

On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law, which took effect as of January 1, 2008. The new tax law also provides a 5-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws and regulations. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012, respectively. Further, entities that qualified as “Advance and New Technology Enterprises” (“ANTE”) under the new tax law are entitled to a preferential income tax rate of 15%. However, the recognition criteria and procedures for obtaining ANTE status under the new tax law were not issued until April 2008. As of December 31, 2008, Shenzhen GrenTech had not completed all the procedures required under the new tax law that would entitle it to the ANTE preferential tax rate of 15%. Based on the above, the transitional tax rates of 18%, 20%, 22%, 24% and 25% are applied in measuring income tax effects of Shenzhen GrenTech, Shenzhen Lingxian and Shenzhen Kaixuan for 2008, 2009, 2010, 2011 and 2012, respectively, where applicable. In March 2009, Shenzhen GrenTech obtained the ANTE certificate granting it the preferential income tax rate of 15% under the new tax law retroactively from January 1, 2008 to December 31, 2010 (at which time it may apply for a renewal of its ANTE status, according to the current tax laws). The retroactive application of the ANTE tax rate is expected to result in an additional income tax benefit of RMB4.1 million. Shenzhen GrenTech RF was established after March 16, 2007 and therefore is subject to income tax at a rate of 25% beginning on January 1, 2008. The enactment of the new law could adversely affect our financial condition and results of operations. Moreover, our historical operating results may not be indicative of our operating results for future periods as a result of the expiration of the tax holidays we enjoy.

We may be treated as a resident enterprise for PRC tax purposes following the effectiveness of the new enterprise income tax law on January 1, 2008, which may subject us to PRC income tax for our global income and withholding income tax for any dividends we pay to our non-PRC shareholders on profits earned after January 1, 2008

Under the new PRC enterprise income tax law, enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate for their global income. The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It is still not entirely clear under what situations an enterprise’s de facto management body is considered to be located in China. However, all of our management is currently based in China, and will likely remain in China for the foreseeable future. Accordingly, we may be considered a “resident enterprise” and may therefore be subject to the enterprise income tax of 25% of our global income and as a result, the amount of dividends we can pay to our shareholders could be reduced. We cannot confirm whether we will be considered a “resident enterprise” as the implementation rules are unclear at the moment.

In addition, under the implementation rules of the new enterprise income tax law, dividends paid to “non-resident enterprises” by “resident enterprises” on profits earned after January 1, 2008 are regarded as income from “sources within the PRC” and therefore subject to a 10% withholding income tax, while dividends on profits earned before January 1, 2008 are not subject to the withholding income tax. A lower withholding income tax rate of 5% may be applied if the foreign holding company is registered in a jurisdiction that has a tax treaty arrangement with China. Although our company is incorporated in the Cayman Islands, it remains unclear whether the gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any dividends paid to our shareholders which are considered “non-resident enterprises” may be subject to withholding income tax and the value of the investment in our shares or ADSs may be adversely and materially affected.

If our idle or insufficient production capacity significantly increases during any particular period, our results of operations for that period may be materially and adversely affected

We plan the utilization of our production capacity primarily based on our projected orders from our customers. We cannot guarantee the accuracy of our internal projections for demands of our products and the effectiveness of our planning for production capacity utilization. For example, we currently have a monthly production capacity of 4,108 sets of wireless coverage products and 38,000 sets of RF parts and components for base stations. Our actual average monthly production at the Shenzhen facility in 2008 amounted to approximately 2,914 sets of wireless coverage products and 30,889 sets of RF parts and components for base stations. It costed approximately RMB1.3 million (US$0.2 million) to add or remove an assembly line for wireless coverage products, and approximately RMB4.3 million (US$0.6 million) to add or remove an assembly line for RF parts and components. If our projections are inaccurate, there may be periods when we will have idle or insufficient production capacity for all or some types of our products. Any significant increase in our idle or insufficient production capacity during any particular period may materially and adversely affect our results of operations for that period.

Our operations may be adversely affected by shortages of raw materials and the volatility in the prices of raw materials

We purchase raw materials such as various electronic components, metal cases for modules and wireless coverage products, electronic cables, packaging materials and other accessories. In order to meet our production delivery schedules, we must obtain sufficient quantities of high quality raw materials in a timely manner. In this respect, we do not enter into long-term contracts with our suppliers of raw materials. As a result, our operations are vulnerable to changes in the supply and prices of raw materials. No assurance can be given that we will be able to obtain sufficient quantities of raw materials in the future and no assurance can be given that our operations will not be adversely affected by increases in prices of raw materials.

If we fail to acquire raw materials on time or on acceptable terms and consequently fail to fill our customers’ orders in a timely and cost-effective manner, our business operations may be materially and adversely affected

We rely on third-party suppliers for our raw materials. Although we purchased raw materials from over 422 suppliers in 2008, our ten largest suppliers in 2008 supplied approximately 40.7% of our orders for raw materials. In December 2008, we divested our two wholly-owned subsidiaries in Quanzhou, namely, Quanzhou Lake Communication Company Limited (“Lake Communication”) and Quanzhou Lake Microwave Company Limited (“Lake Microwave”). Since then, we have continued to purchase certain RF parts and components from Lake Communication and Lake Microwave. We have also established our new production lines for RF parts and components for wireless coverage products and expanded our production capacity at our Shenzhen facility. If any of our major suppliers fails to deliver our required raw materials in time for our production, and we are unable to find the required raw materials from other suppliers in a timely manner and on acceptable terms, there will be a delay in our provision of products and services to our customers. Such delays would damage our relationship with our customers and may materially and adversely affect our business operations.

We maintain limited insurance coverage, and any significant product liability claim could have a material and adverse effect on our financial condition

We currently do not maintain any product liability insurance for our products and services, nor do we carry any business interruption insurance, third-party liability insurance for personal injuries, or environmental damage insurance for environmental emissions or accidents on our properties or relating to our operations. There is no assurance that there will not be any product liability claims against us in relation to our products. Furthermore, we cannot assure you that we will not experience any major accidents in the course of our operations, which may cause significant property damage and personal injuries. The occurrence of any such accidents and their consequential losses may not be adequately covered, or at all, by our insurance policies. Losses incurred, or payments we may be required to make, may have a material and adverse effect on our financial condition.

The interest of our principal shareholders may differ from your interest and their vote may disadvantage our minority shareholders

Since the completion of our initial public offering in March 2006, several of our current principal shareholders continue to be our largest shareholders with the following equity interest in our company as of December 31, 2008:

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Guoren Industrial Developments Limited (Yingjie Gao, our chairman and chief executive officer, has the sole power to vote or to direct the vote and the sole power to dispose or to direct the disposition of the shares held by this company) with 25.2%;

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Drag Investments Limited (majority-owned by Professor Kunjie Zhuang, a director and a technology consultant) with 10.8%; and

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Heng Xing Yue Investments Limited (partially-owned by Rong Yu, a director and our chief financial officer) with 9.1%.

The foregoing parties will be able to exercise substantial control over our business by voting at shareholders’ meetings or board meetings on matters of significance, such as:

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composition of our board of directors;

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selection of our senior management;

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amount and timing of dividends and other distributions;

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our overall strategic and investment decisions;

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issuance of securities and adjustment to our capital structure;

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amendment to our memorandum and articles of association; and

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other corporate actions requiring approval of our shareholders, including election and removal of directors, merger, consolidation or sale of our assets, or any other change of control event that may benefit our other shareholders generally.

The interest of any of these principal shareholders may differ from your interest. There is no assurance that any of these principal shareholders will vote in a way that benefits you. If circumstances arise in which the interest of any of these principal shareholders conflicts with the interest of other holders of our shares or ADSs, you as a minority shareholder could be disadvantaged.

Our primary source of funds for dividends and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders is negatively affected by those restrictions and uncertainties

We are a holding company established in the Cayman Islands and conduct our core business operations through our principal operating subsidiary, Shenzhen GrenTech, in China. As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from Shenzhen GrenTech and its subsidiaries. If Shenzhen GrenTech or its subsidiaries incur debt on their own behalf, the debt instruments may restrict their ability to pay dividends or make other distributions, which in turn would limit our ability to pay dividends on our shares and ADSs. Under current PRC law, because we are incorporated in the Cayman Islands, our PRC subsidiary, Shenzhen GrenTech, is regarded as a wholly foreign-owned enterprise in China. Dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises and sino-foreign joint ventures, are subject to 10% PRC corporate withholding tax. For further details, see “—We may be treated as a resident enterprise for PRC tax purposes following the effectiveness of the new enterprise income tax law on January 1, 2008, which may subject us to PRC income tax for our global income and withholding income tax for any dividends we pay to our non-PRC shareholders on profits earned after January 1, 2008” stated above. In addition, PRC law permits payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. In addition, if any undistributed profits of our PRC subsidiary, Shenzhen Grentech, are used to increase its registered capital so that our equity interests in our PRC subsidiary are increased, approval of the PRC government is required. Under PRC law, Shenzhen GrenTech, a wholly foreign-owned enterprise, is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds for dividend payments from Shenzhen GrenTech is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders. Moreover, any transfer of funds from us to Shenzhen GrenTech, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and Shenzhen GrenTech could restrict our ability to act in response to changing market conditions.

If we continue to have any material weakness in our internal control over financial reporting, we may be unable to timely and accurately report our financial results, comply with disclosure controls and procedures, internal control over financial reporting and other reporting obligations or prevent fraud, which could harm our business and operating results, the trading price of our stock and our access to capital

We are subject to the reporting requirements of the U.S. Securities and Exchange Commission, or SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring public companies such as ourselves, to include a report of management of their internal control structure and procedures for financial reporting in their annual reports on Form 10-K or Form 20-F, as the case may be, that contain an assessment by management of the effectiveness of their internal controls over financial reporting. In addition, an attestation report of our independent registered public accountants on the effectiveness of our internal controls over financial reporting is also required.

These requirements first became applicable with respect to this annual report on Form 20-F for the fiscal year ended December 31, 2007. In connection with our evaluation of internal controls over financial reporting, we identified certain material weaknesses and our management concluded that our company did not have effective internal control over financial reporting as of December 31, 2007. In addition, we identify three material weaknesses in this annual report, and our management concluded that our company did not have effective internal controls over financial reporting as of December 31, 2008. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our efforts regarding internal controls are discussed in detail in this annual report under Item 15 “Controls and Procedures.” An attestation report of our independent registered public accountants on the effectiveness of our internal controls over financial reporting is also included in this annual report on page F-2.

Although we believe that the consolidated financial statements included in this Form 20-F present fairly, in all material respects, our financial position, results of operations and cash flow for the periods presented in conformity with U.S. GAAP, we cannot be certain that any remedial measures we take will ensure that we design, implement, and maintain adequate controls over our financial processes and reporting in the future or will be sufficient to address and eliminate these material weaknesses. Our independent registered public accounting firm may also identify additional weaknesses or deficiencies in the course of its ongoing assessment of our internal controls. Remedying these material weaknesses that have been identified, and any additional deficiencies, significant deficiencies or material weaknesses that our independent registered public accounting firm may identify in the future, could require us to incur additional costs, divert management resources or make other changes. We have set up a project team, led by our internal audit manager, to implement remedial plans for the material weaknesses after the issues are identified as discussed in detail in this annual report under Item 15 “Remediation Plan”. Our management, including the chief executive officer and chief financial officer, has approved such plans to address the material weaknesses. Any delay or failure to design and implement new or improved controls, or difficulties encountered in their implementation or operation, could harm our operating results, cause us to fail to meet our financial reporting obligations, or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. Disclosure of our material weaknesses, any failure to remediate such material weaknesses in a timely fashion or having or maintaining ineffective internal controls could cause investors to lose confidence in our reported financial information, which could negatively impact the market price of our ADSs.

We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors

We may be classified as a passive foreign investment company, or PFIC, by the U.S. Internal Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse U.S. federal income tax consequences to you if you are a U.S. investor. For example, U.S. investors who owned our ordinary shares or ADSs during any taxable year in which we were a PFIC generally are subject to increased U.S. tax liabilities and reporting requirements for that taxable year and all succeeding years, regardless of whether we actually continue to be a PFIC, although a shareholder election to terminate such deemed PFIC status may be available in certain circumstances. The same adverse U.S. federal income tax consequences will apply to U.S. investors who acquire our ordinary shares or ADSs during the current taxable year of 2009 or any subsequent taxable year if we are treated as a PFIC for that taxable year.

The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill, from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75.0% or more of our gross income for such taxable year is passive income, or (b) 50.0% or more of the average percentage of our assets during such taxable year either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25.0% or more of the shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.

We do not believe that we are currently a PFIC. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC for the current or any future taxable year or that the IRS will not challenge our determination concerning our PFIC status. For further discussion of the adverse U.S. federal income tax consequences of our possible classification as a PFIC, see Item 10.E. “Additional Information — Taxation.”

A prolonged slowdown in the PRC economy may materially and adversely affect our results of operations, financial conditions, prospects and future expansion plans

Since the second half of 2008, global credit and capital markets, particularly in the United States and Europe, have experienced difficult conditions. These challenging market conditions have resulted in reduced liquidity, greater volatility, widening of credit spreads, lack of price transparency in credit markets, a reduction in available financing and lack of market confidence. These factors, combined with declining business and consumer confidence and increased unemployment in the United States and elsewhere in the world, have precipitated a global economic slowdown, including a slowdown in the rate of economic growth in recent quarters in China. Given the dramatic change in the overall credit environment and economy, it is difficult to predict how long these conditions will exist and the extent to which we may be affected. The uncertainty and volatility of credit and capital markets and the overall slowdown in the PRC economy may have an adverse effect on our business. Furthermore, there can be no assurance that measures implemented by governments around the world to stabilize the credit and capital markets and new economic stimulus measures in China will improve market confidence and the overall credit environment and economy. As a result, prolonged disruptions to the global credit and capital markets and the global economy may materially and adversely affect the Chinese economy, consumer spending in China and our business, results of operations, financial condition, prospect and future expansion plans.

Risks Relating to Our Industry

Our business might become subject to new regulatory restrictions, which may restrict the way in which we conduct our business and subject us to severe penalties, and we may be materially and adversely affected by any change in the composition of the primary telecommunications operators in China

We are subject to regulation by PRC law with respect to the products we manufacture and sell in China. We must obtain regulatory approvals from the national and local government authorities before we may manufacture and sell our products. The PRC Ministry of Industry and Information Technology, or MIIT, which was created by the State Council of the PRC in March 2008 to assume, among other things, the duties of the former Ministry of Information Industry, is the primary central government agency responsible for regulating the PRC wireless communication industry and has broad discretion and authority to regulate our industry in China. The introduction of any new transmission protocol will require the approval of MIIT and other regulatory bodies. MIIT has adopted, and may adopt in the future, regulations that impose stringent standards on the wireless communication industry in China, with which we must comply. New regulations or readjustment of previously implemented regulations could require us to change our business plan, increase our costs or limit our ability to sell our products or services. Our failure to comply with these regulations may subject us to various penalties, including fines and suspension or discontinuation of our operations. Therefore, enactment by the PRC government of new laws or regulations or a change in the interpretation of existing laws or regulations may also materially and adversely affect our business.

The PRC government has considerable control over the structure and overall development of the telecommunications industry in China. It also maintains substantial ownership in all major telecommunications operators in China. Prior to 1994, PRC government-controlled entities held a monopoly over the telecommunication networks across China. In order to introduce competition into the telecommunications industry, the PRC government in 1994 separated China’s telecommunication business into four independent sectors: fixed-line, wireless, satellite and paging. In 2002, the PRC government further separated the then China Telecom group into two companies along geographical boundaries, with the portion in southern China as the current China Telecom group and the northern portion as the current China Network Communications Group Corporation and its affiliates, or the China Netcom group. In May 2008, the PRC government announced a restructuring plan for the country’s telecommunications operators. Under the restructuring plan, the nation’s largest mobile phone operator, China Mobile, merged with fixed-line company, China Tietong. The GSM business of China Unicom, a wireless mobile phone operator, merged with fixed-line company China Netcom Group. China Telecom Corp., the country’s largest fixed-line phone operator, acquired China Unicom’s Code Division Multiple Access, or CDMA, mobile network business. China Telecom also acquired China Satcom, which offers satellite-based communications services. The restructuring of China’s telecommunications operators was completed in early 2009. However, the restructuring may disrupt our existing relationships with our customers and result in changes in supplier and sourcing policies of these companies, all of which have been critical to our business growth and profitability.

Risks Relating to Business Operations in China

Changes in China’s political and economic policies and conditions could cause a substantial decline in the demand for our products and services

Historically, we derived almost all of our revenues from a single market, mainland China. We anticipate that mainland China will continue to be our primary production and sales base in the near future and currently almost all of our assets are located in China and all of our services are performed in China. While the PRC government has pursued economic reforms to transform its economy from a planned economy to a market-oriented economy since 1978, a large part of the PRC economy is still being operated under varying degrees of control by the PRC government. By imposing industrial policies and other economic measures, such as restrictions on lending to certain sectors of the economy, control of foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the development of the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to be refined and improved. Other political, economic and

social factors may also lead to further adjustments of the PRC reform measures. This refining and adjustment process may not necessarily have a positive effect on our operations and our future business development. For example, the PRC government has in the past implemented a number of measures intended to slow down certain segments of the PRC economy that the government believed to be overheating, including placing additional limitation on the ability of commercial banks to make loans by raising bank reserve-against-deposit rates. Our operating results may be materially and adversely affected by changes in the PRC economic and social conditions and by changes in the policies of the PRC government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional restrictions on currency conversion.

Changes in foreign exchange regulation in China may affect our ability to pay dividends in foreign currencies

We currently receive all of our operating revenues in Renminbi. Currently, Renminbi is not a freely convertible currency and the restrictions on currency exchanges in China may limit our ability to use revenues generated in Renminbi to fund our business activities outside China or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade- and service-related foreign exchange transactions, foreign debt service and payment of dividends. In accordance with the existing foreign exchange regulations in China, our PRC subsidiary, Shenzhen GrenTech, is able to pay dividends in foreign currencies, without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our Renminbi-denominated earnings into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay us dividends in foreign currency without prior approval from SAFE. In addition, conversion of Renminbi for most capital account items, including direct investments, is still subject to government approval in China and companies are required to open and maintain separate foreign exchange accounts for capital account items. This restriction may limit our ability to invest earnings of Shenzhen GrenTech.

Fluctuation in the value of Renminbi could adversely affect the value of, and dividends payable on, our shares and ADSs in foreign currency terms

The value of Renminbi is subject to changes in PRC government policies and depends to a large extent on China’s domestic and international economic, financial and political developments, as well as the currency’s supply and demand in the local market. For over a decade from 1994, the conversion of Renminbi into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates on the world financial markets. The official exchange rate for the conversion of Renminbi into U.S. dollars remained stable until Renminbi was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi was be permitted to fluctuate within a band against a basket of foreign currencies. As a result, as of May 31, 2009, the Renminbi has appreciated approximately 17.5% against the U.S. dollar since July 2005. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy, which could result in a further and more significant appreciation in the value of Renminbi against the U.S. dollar. Further revaluations of Renminbi against the U.S. dollar may also occur in the future. Since our income and profits are denominated in Renminbi, any appreciation of Renminbi would increase the value of, and any dividends payable on, our shares and ADSs in foreign currency terms. Conversely, any depreciation of Renminbi would decrease the value of, and any dividends payable on, our shares and ADSs in foreign currency terms. In addition, we have U.S. dollar-denominated bank deposits in our offshore bank account, which is subject to PRC foreign exchange control regulations and could not be exchanged into Renminbi freely, any appreciation of Renminbi could adversely affect the value of our U.S. dollar-denominated bank deposits.

The uncertain legal environment in China could limit the legal protections available to you

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, the civil law system is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Our PRC subsidiary, Shenzhen GrenTech, is a wholly foreign-owned enterprise and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to wholly foreign-owned enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes of existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of these laws, regulations and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you. For example, it is not clear if a PRC court would enforce in China a foreign court decision brought by you against us in shareholders’ derivative actions.

Moreover, the enforceability of contracts in China, especially with governmental entities, is relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations, we might not have adequate remedies. Such uncertainties or inability to enforce our contracts could materially and adversely affect our revenues and earnings.

We face risks related to health epidemics and other outbreaks of contagious diseases, including influenza A (H1N1), avian flu and SARS, which could materially and adversely affect our overall operations and results of operations

Our business could be adversely affected by the effects of influenza A (H1N1), avian flu, SARS, or other epidemic outbreaks. In April 2009, an outbreak of influenza A caused by the H1N1 virus occurred in Mexico and United States, and spread into a number of countries rapidly. There have been reports of outbreaks of a highly pathogenic avian flu, caused by the H5N1 virus, in certain regions of Asia and Europe. Over the years, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases. An outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. In addition, our operating results for 2003 were adversely affected by the outbreak of SARS, a highly contagious form of atypical pneumonia known as severe acute respiratory syndrome. Any prolonged occurrence or recurrence of these contagious diseases or other adverse public health developments may have a material adverse effect on our business operations and could potentially disrupt our operations to the extent that any one of our employees is suspected of having the infection or that any of our facilities is identified as a possible source of spreading the virus or disease. We may be required to quarantine employees who are suspected of having an infection. We may also be required to disinfect our facilities and therefore suffer a suspension of production of indefinite duration. Any quarantine or suspension of production at any of our facilities will adversely affect our overall operations. In addition, any such outbreak will likely restrict the level of economic activities in the affected areas, which could materially and adversely affect our business and results of operations.

Recent regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and adversely affect our business and prospects

In October 2005, SAFE issued a circular concerning foreign exchange regulations on investments by PRC residents in China through special purpose companies incorporated overseas. The circular states that, if PRC residents use assets or equity interests in their domestic entities as capital contribution to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, such PRC residents must register with local SAFE branches with respect to their overseas investments in offshore companies and must also file amendments to their registrations if their offshore companies experience material events, such as changes in share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations. Our shareholders have completed the relevant SAFE registration procedures as currently required.

As it is uncertain how SAFE will interpret or implement its circular, we cannot predict how this circular and other SAFE circulars will affect our business operations or future strategies. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our business and prospects.

ITEM 4. INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT

Our legal and commercial name is China GrenTech Corporation Limited. Our principal executive offices are located at 15th Floor, Block A, Guoren Building, Keji Central 3^rd Road, Hi-Tech Park, Nanshan District, Shenzhen 518057, People’s Republic of China. Our telephone number is (86-755) 2663-8900. Our registered offices are located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. We have appointed CT Corporation System, 111 Eighth Avenue, 13th Floor, New York, New York 10011, United States of America, with telephone number 1-212-894-8940, as our agent for service of processes for actions brought under the U.S. securities laws.

The diagram below illustrates our current corporate structure with major operating subsidiaries:


(1)		The remaining 1% interest in Shenzhen Lingxian is owned by Ms. Xiujun Zhang, an employee of ours.

We were incorporated on December 3, 2003 in the Cayman Islands as an exempted company with limited liability under the Cayman Islands Companies Law. We hold, through our wholly owned subsidiary, GrenTech (BVI) Limited, or GrenTech BVI, 100% of the equity interest of Shenzhen GrenTech. Shenzhen GrenTech was formed on July 5, 1999 by Mr. Gao and Professor Zhuang, as a domestic limited liability company in China. Subsequent to our incorporation, we converted Shenzhen GrenTech into a wholly foreign-owned enterprise under PRC law in order to benefit from various tax and other incentives available to foreign-invested enterprises in China.

Since our inception in 1999, we have been focused on the development and application of our RF technologies for commercial uses. In 2000, we produced and commercialized our first integrated repeater. In 2001, we began the testing of CDMA repeaters, which we subsequently began selling to the China Unicom group later that year. In 2003, we completed our first personal handy phone system, or PHS, network coverage project. In March 2007, we were among the first PRC enterprises to obtain relevant government approvals for the development and production of repeaters and trunk amplifiers for use in TD-SCDMA networks, which is a domestically developed 3G standard.

In December 2008, we divested two wholly-owned subsidiaries, Quanzhou Lake Communication Company Limited (“Lake Communication”) and Quanzhou Lake Microwave Company Limited (“Lake Microwave”). We sold Lake Communication to Mr. Haifan Zhuang, son of Professor Zhuang who is our director and technology consultant and one of our major shareholders, for a total consideration of RMB101.3 million (US$14.8 million), and sold Lake Microwave to Mr. Haifan Zhuang and Lake (HK) Technology Company Limited, an affiliated company of Professor Zhuang, for a total consideration of RMB0.9 million (US$0.1 million).

Lake Communication was formed in August 1989 by Mr. Haifan Zhuang, as a collectively owned enterprise in China and was subsequently converted and registered as a limited liability company in 1999. Lake Communication specializes in RF part and component production, and it has been supplying RF modules to our wholly-owned subsidiary, Shenzhen GrenTech, for manufacturing network coverage equipment. Lake Microwave was formed in March 1993 by Lake Microwave Communication Equipment Co., Ltd. as a Sino-foreign equity joint venture. Lake Microwave focuses on the research and development of RF technologies, including the design and development of RF integrated circuits and other new RF technologies.

As consideration for the acquisition, Shenzhen GrenTech was released from its account payable obligations in the aggregate amount of RMB106.3 million due to Lake Communication and Lake Microwave, while Mr. Haifan Zhuang and Lake (HK) Technology Company Limited acquired Lake Communication and Lake Microwave subject to their existing outstanding debt obligations. The terms of the transaction were negotiated on an arms’ length basis and approved by our independent directors. The transfer of the equity interest in Lake Communication and Lake Microwave were completed in December 2008.

Currently, we conduct our business in China through our indirect wholly-owned subsidiary, Shenzhen GrenTech, and our other indirect wholly-owned subsidiaries:

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Shenzhen Lingxian Technology Co., Ltd., or Shenzhen Lingxian;

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Shenzhen GrenTech RF Communication Ltd., or Shenzhen GrenTech RF;

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Shenzhen Kaige Communication Technology Co., Ltd., or Shenzhen Kaige; and

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Shenzhen Kaixuan Communication Technology Co., Ltd., or Shenzhen Kaixuan.

Shenzhen Lingxian

Shenzhen Lingxian was formed in February 2002 by Shenzhen GrenTech as a domestic limited liability company in China. Shenzhen Lingxian purchases RF parts and components from Lake Communication and manufactures semi-finished repeaters for Shenzhen GrenTech. In addition, starting in 2007, Shenzhen Lingxian has began to develop monitoring software for wireless coverage equipments and sell such software to Shenzhen GrenTech. As of December 31, 2008, we owned 99% of the equity interest in Shenzhen Lingxian and Ms. Xiujun Zhang, one of our employees, owned the remaining 1% equity interest.

Shenzhen GrenTech RF

Shenzhen GrenTech RF was established in March 2008 by Shenzhen GrenTech as a domestic limited liability company in China. Shenzhen GrenTech RF primarily focuses on researching and developing, manufacturing and sales of RF parts and components for the base station manufacturers. As of December 31, 2008, we indirectly owned 100% of the equity interest in Shenzhen GrenTech RF.

Shenzhen Kaige

We, through Shenzhen GrenTech, acquired Shenzhen Kaige and its wholly owned subsidiary, Shenzhen Kaixuan, from an independent third party for a total consideration of RMB57.9 million (US$7.9 million) in December 2007. Shenzhen Kaige, through its subsidiary, Shenzhen Kaixuan, primarily provides installation services of our wireless coverage products. As of December 31, 2008, we indirectly owned 100% of the equity interest in Shenzhen Kaige.

Shenzhen Kaixuan

Shenzhen Kaixuan is 100% owned by Shenzhen Kaige, which we acquired through Shenzhen GrenTech in December 2007. Shenzhen Kaixuan primarily focuses on the research and development of integration technology for information network systems and provides installation services of our wireless coverage products. As of December 31, 2008, we indirectly owned 100% of the equity interest in Shenzhen Kaixuan.

BUSINESS

Overview

We are a leading provider of wireless coverage products and services in China. We believe that we are also a leading developer of radio frequency, or RF, technology in China. RF is the fundamental technology that enables wireless communication products to transmit and receive signals. Our core research and development efforts in RF technology and our integrated design, engineering and production processes have allowed us to design, develop and produce in-house our two main product lines, namely, (i) wireless coverage products and services, which are supplied to telecommunications operators, and (ii) base station RF parts and components, which are supplied to base station equipment manufacturers.

We have a strong in-house RF technology research and development capability. Our team of 337 researchers and technicians with extensive experience in the wireless communication industry in China are based in Shenzhen. As of June 30, 2009, we have 101 registered patents and 108 pending patent applications with the Patent Office of the National Intellectual Property Office of China. Our RF expertise has provided a platform from which we intend to further broaden our product offerings. Our integrated development, engineering and production capabilities provide us with a distinct competitive advantage over our competitors in China by allowing us to quickly respond to customized design requests from our customers while keeping down our production costs.

Our wireless coverage products enable telecommunications operators to expand the reach of their wireless communication networks to indoor and outdoor areas, such as buildings, highways, railways, tunnels and remote regions. Our wireless coverage products include indoor coverage products and outdoor coverage products. To date, we have developed over 547 models of wireless coverage equipment. We provide most of our wireless coverage products and services to local affiliates of the two leading wireless operators in China, the China Unicom group and the China Mobile group. Since 2004, we have also provided a portion of our wireless coverage products and services to the China Netcom group and the China Telecom group. According to BAYES, in 2008, we were the second largest provider of wireless coverage products and services in China. In recent years, the wireless coverage market in China has benefited from increased capital expenditure by PRC wireless operators. Further, the capital expenditure of the wireless coverage industry in China is expected to reach RMB6.5 billion in 2009, RMB8.0 billion in 2010, RMB9.4 billion in 2011, RMB10.6 billion in 2012 and RMB11.5 billion in 2013 according to BAYES. We believe that the increasing capital expenditure will afford us an opportunity to grow our revenues in the wireless coverage market. In addition, the Chinese telecommunication restructuring plan significantly altered the industry, creating three new operators that have both mobile and fixed-line services. In the past, Chinese fixed-line operators, which were split along geographical lines, were not permitted to offer mobile services, while mobile operators were not allowed to offer fixed-line services. By restructuring the operators into companies that offer both types of services, the Chinese government enhanced the competitiveness of the three remaining operators. Moreover, 3G licenses were issued to the three telecommunications operators in January 2009 by the PRC government. China Mobile received the TD-SCDMA license, China Unicom received the WCDMA license and China Telecom received the CDMA2000 license. Since then, all operators have started the construction of 3G networks. We believe that, due to the recent issuance of 3G licenses, telecommunications operators in China will significantly increase their capital expenditure and investment in wireless coverage and base station products, which we believe will drive the growth of our business.

Our RF parts and components are supplied to base station equipment manufacturers. These customers use our RF parts and components in their base station manufacturing. To date, we have become a qualified supplier of RF parts and components to several major domestic and foreign base station manufacturers, such as Huawei Technologies Co., Ltd., ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel Shanghai Bell Co., Ltd., Nokia Siemens Network and Ericsson (China) Co., Ltd. We have developed over 153 types of base station RF modules. We have begun supplying base station RF modules in bulk quantities to ZTE Corporation and Huawei Technologies Co., Ltd. since 2006, to Datang Mobile Communications Equipment Co., Ltd. and China Potevio Co., Ltd. since 2007 and to Nokia Siemens Network and Ericsson (China) Co., Ltd. since 2008. With rising production costs incurred by base station equipment manufacturers, more global base station equipment manufacturers have chosen to procure base station RF parts and components mainly in China in order to reduce their costs. We believe the demand for base station RF parts and components will grow rapidly and our revenues from base station RF modules will become one of our revenue growth drivers in coming periods.

Our revenues were RMB832.8 million in 2006, RMB979.3 million in 2007 and RMB984.7 million (US$144.3 million) in 2008. Our gross profit was RMB395.8 million in 2006, RMB367.9 million in 2007 and RMB233.3 million (US$34.2 million) in 2008. Our operating income was RMB179.2 million in 2006 and RMB116.0 million in 2007, and we had an operating loss of RMB130.1 million (US$19.1 million) in 2008. Our net income was RMB148.8 million in 2006 and RMB82.5 million in 2007, and we had a net loss of RMB146.4 million (US$21.5 million) in 2008.

Our Wireless Coverage Products and Services

Our principal business is the provision of wireless coverage products and services in China with our self-developed RF technology. In 2006, 2007 and 2008, revenues generated from the provision of wireless coverage products and services accounted for approximately 95.3%, 82.3% and 77.5% of our revenues, respectively.

Wireless Coverage Products

We produce a wide range of wireless coverage products, including repeaters, trunk amplifiers and base station amplifiers. The principal functions of wireless coverage products are to extend wireless coverage and improve radio signal quality. Our wireless coverage products support various transmission protocols, including GSM, CDMA, TD-SCDMA, WCDMA and CDMA2000. We participated in the formulation of TD-SCDMA and WCDMA repeater standards by the China Communications Standards Association, or CCSA, and wireless coverage network management standard by China Mobile group. We were selected to build TD-SCDMA trial network coverage systems for the 2008 Beijing Olympics, TD-SCDMA network coverage phase II in 28 cities in China in 2008 and were selected by China Unicom group as its sole provider to build CDMA-2000 coverage system in Macau in 2008.

We use our wireless coverage products in two principal function areas: indoor and outdoor coverage. We provide a customized solution for each project, taking into account factors such as existing coverage of the base stations, target coverage requirements, unique geographic and topographic features of the vicinity and other project-specific conditions.

Indoor Coverage. In order to achieve effective coverage and distribution in indoor environments, such as high-rise buildings, underground areas and elevators, we use antennas, couplers, trunk amplifiers, repeaters and other accessories to construct a complete indoor coverage distribution system that enables evenly distributed emissions of radio signals from the base stations to cover the entire facility. Our indoor coverage products support various transmission protocols, such as GSM networks (1,800 MHz and 900 MHz), CDMA, TD-SCDMA, CDMA-2000 and WCDMA. We also provide point of interface, or POI, products that are capable of supporting multiple protocols simultaneously, which offers effective coverage platform solutions in subways, indoor stadiums and other large indoor facilities.

Outdoor Coverage. We design our outdoor coverage products to provide wireless coverage in specified geographic and topographic regions. Depending on the particular coverage requirements, our outdoor coverage products may consist of antennas and repeaters and other accessories to transmit and extend radio signals from base stations to blind and weak spots or areas where network coverage does not exist or is weak. Our outdoor coverage products are typically used in areas such as highways, railways, subways and tunnels.

Our Services

Our integrated design, engineering and production processes allow us to provide wireless coverage services to our customers. The services we provide include:

Design Services. At the outset of each project, our design team implements a series of tests to evaluate our customer’s specific network coverage on the project site and identify any network deficiencies. These tests include magnetic environment, base station signals and coverage tests. Once the testing is complete, our design team, working closely with our sales and marketing team, which is familiar with the customer and its needs, prepares and submits a detailed design plan to our customer for the proposed wireless coverage products and services. This process allows us to develop solutions that are tailored to each specific customer’s requirements. Upon finalization of our design plan, our customer confirms its instructions to proceed with the product development, engineering and installation.

Installation of Wireless Coverage Products. Once we receive confirmation for the design plan from our customer, we proceed with product development and engineering, and begin discussions with the property owner or the manager of the building, in collaboration with our customer, to arrange the installation of the wireless coverage products. After we engineer, produce and assemble the products, we deliver them from our production facility to the project site. In general, one of our subsidiaries, Shenzhen Kaixuan, is responsible for the installation of our wireless coverage products. We also hire third-party contractors to carry out the initial installation under the supervision of our project design and technical service team. We use more than 230 contractors across China, all of whom are independent third parties. After completion of the initial installation process and the connection of our products to the customers’ base stations, we test the system to evaluate its performance and make adjustments to optimize its functionality. We test the products at the customer’s premises to ensure that they function properly before our customer issues the completion certificate. After the issuance of the completion certificate, the inspection of our installed wireless coverage products begins with further testing of our products by our customer.

Project Warranties. We provide service warranties to our wireless coverage customers for a period typically ranging from one to three years following the final inspection of our wireless coverage products. During the warranty period, we agree to repair or replace defectively installed products and to provide other warranty services to our customers, such as a centralized Internet-based system to monitor the performance of our wireless coverage products and regular on-site inspections of our installed wireless coverage products. In addition, we provide other warranty services such as online technical support and telephone hotline support to our customers. Our objective is to respond to our customers within 24 hours after receipt of any technical support request.

Our Sales Cycle

Our nationwide sales and marketing team actively pursues business opportunities across all provinces and municipalities in China. All telecommunications operators, in an effort to shift to a more centralized procurement model in order to encourage more competitive pricing, adopted a new procurement policy since 2007 whereby the bidding processes for wireless coverage equipment and for services would be separately conducted, and procurement decisions would be made by the parent company and local affiliates, respectively. Under the new policy, providers of wireless coverage products such as ourselves may not win the bid for the servicing contracts even after winning the bid for equipment contracts, or vice versa. This change in our major customers’ overall procurement policy may cause us to lose revenue with respect to any single wireless coverage project if we cannot win both equipment contract and service contract for the project.

The sales cycle for our wireless coverage equipment can be divided into the following phases:

Bidding Process. Our sales cycle for our wireless coverage products begins when a wireless operator or one of its subsidiaries requests proposals from us. After we complete a preliminary evaluation of the project, including its feasibility and profitability, we submit bids to the potential customer.

Wireless operators in China select the winning bid based on a number of factors and considerations, including:

•

pricing;

•

research and development capabilities;

•

quality of products in terms of performance, functionality and reliability;

•

overall financial strength and operational scale;

•

range and standards of services to be provided, including after-sale services.

Typically, wireless operators in China request that bids also include the following terms:

•

specifications contained in customers’ bid invitations; and

•

operational manuals and staff training.

Delivery. After we receive the purchase order from the regional customers, we will begin our delivery of equipment and the customers will then provide us with delivery certificates.

Contract Signing. Upon receipts of delivery certificate, we will enter into contracts with our customers.

Payment. According to the payment terms, we typically have the right to collect 70% to 80% of our equipment sale contract sum after 30-60 days of delivery and the remaining balance will be due depending on the payment terms negotiated with different customers, which are often linked with the inspection and warranty period of the project. However, customers may not promptly make the payments and generally take longer to make the payments.

The sales cycle for our wireless coverage integrated services can be divided into the following phases:

Bidding Process. Our nationwide sales and marketing team actively pursues business opportunities across all provinces and municipalities in China. The process begins when a wireless operator requests proposals from us for wireless coverage integrated services. After we complete a preliminary evaluation of the project, including its feasibility and profitability, we submit bids to the potential customer.

Wireless operators in China select the winning bid based on a number of factors and considerations, including:

•

pricing;

•

project design, installation and after sales services capacities; and

•

overall financial strength and operational scale.

If we win the bid, the operator generally issues a written letter of acceptance. Occasionally, the operator gives us verbal notice only. The design, engineering, implementation and installation stages begin after the operator confirms our winning bid. According to the PRC Law on Invitation and Submission of Bids and the PRC Contract Law, a letter of acceptance issued by the bid-inviting party or a verbal confirmation of acceptance by the bid-inviting party, together with its bid invitation materials and our bid-tendering materials, constitutes a legally binding contract between the bid-inviting party and the winning bidder. We believe that, upon the acceptance of our bid by our customers, we have a legally enforceable right against our customers as a matter of contract law; however, our PRC counsel has advised us that enforcement of our rights to payment in the PRC courts may be difficult. For more details, see Item 3. “Key Information—Risk Factors—Risks Relating to Our Company—We often begin work on a project before we have a contract for our products and services, which may materially and adversely affect our cash flows from operating activities and liquidity.” To date, we have not had any disputes with our customers in respect of any of our successful bids confirmed verbally or in writing by our customers.

Design and Installation. When we win the bid, we begin to locate a site at the customer’s premises which is suitable for installation according to the customer’s overall plan. We then perform signal tests and design the installation plan. We begin our installation after the customer accepts our installation plan. After completion of the installation process, we test the system to evaluate its performance and make adjustments to optimize its functionality. Upon completion of the installation of our wireless coverage products for a project, we request that our customer issue a completion certificate to confirm completion of the initial installation. We are often engaged in a number of projects with one customer at the same time. To reduce the administrative burden of managing multiple projects, our customers often group projects together and issue completion certificates for all the projects at the same time, resulting in the delay of receipt of completion certificates until the completion of the last project.

Contract Signing. The current industry practice in China is to formally sign a sale and purchase contract after the initial installation of wireless coverage products on a project, with confirmation of completion of the initial installation evidenced through the issuance of a completion certificate by our customer.

Inspection and Warranty Period. After the issuance of the completion certificate, the inspection of our installed wireless coverage products starts, by which our customer performs a further testing of our wireless coverage products for a project. Often, our contracts do not specify the date by which an inspection must be performed. Sometimes, the inspection may be delayed by as long as six to 12 months after issuance of the completion certificate. When our project passes the inspection, our warranty period begins. Most of our customers conduct two inspections prior to the beginning of the warranty period. The second inspection usually occurs six to 12 months after the initial inspection. Some of our customers conduct one inspection before the warranty period begins.

Payment. Our sale and purchase contracts permit our customers to pay in installments upon the occurrence of contractually stipulated payment events during the sales cycle. Contractual terms for the installment payments vary between our customers. Typical payment events include delivery of our products, satisfactory preliminary inspection, satisfactory final inspection and expiration of our warranty period. At the occurrence of each payment event, customers are generally required to pay a percentage of the contract price. Although the typical payment terms are up to 30 days after the occurrence of each payment event, customers may not promptly pay the installment and generally take longer to make the payment. For more details on payment from our customers, please see Item 5. “Operating and Financial Review and Prospectus—Liquidity and Capital Resources—Accounts Receivable and Receivable Selling.”

Selected Completed Projects

We completed 10,539 projects in 2006, 12,764 projects in 2007 and 11,462 projects in 2008. The following list represents select wireless coverage projects for the year ended December 31, 2008. These projects demonstrate different applications of our wireless coverage products, such as for office buildings, shopping centers, hotels, airports, highways, tunnels and scenic areas, as well as different geographic locations.


Project	Location	Customer	Completion date
*Indoor coverage*
Southern Beijing Railway Station	Beijing	China Netcom Group	June 2008
Beijing Olympic Venues	Beijing	China Mobile group	June 2008
Guangzhou Pazhou International Convention Center	Guangzhou	China Mobile group	March 2008
Baoli World Trade Center Phase I & II	Guangzhou	China Unicom group	September 2008
Petro China Building	Beijing	China Mobile group	September 2008
Shanghai Mint	Shanghai	China Telecom group	May 2008
Shanghai Tan Mansion	Nanning	China Unicom group	October 2008
Shenzhen China Travel (HK) Building	Shenzhen	China Mobile group	July 2008
Diwang Tower of Nanning	Nanning	China Telecom group	November 2008
The National Bureau of Statistics	Beijing	China Mobile group	June 2008
*Outdoor coverage*
Macau Weather Bureau	Macau	China Unicom group	April 2008
Bayingou Dushanzi Resort	Xinjiang	China Mobile group	August 2008
Quanzhou Overseas Chinese District Gymnasium	Fujian	China Mobile group	May 2008
Zhuhai Tangjia Golf Club	Zhuhai	China Unicom group	November 2008
Chengdu Hi-Tech West District Council Center	Chengdu	China Unicom group	August 2008
Badaling Highway	Beijing	Beijing JustTop Network Communication Co., Ltd.	January 2008
Beijing Sanlitun Shishang Street District	Beijing	China Mobile group	June 2008
Qiaoxiang Village Phase I & II	Shenzhen	China Mobile group	November 2008
Zunchong Highway Liangchahe Tunnel	Zunyi	China Mobile group	April 2008
Xiaying Village portion of Beijing-Guangzhou Railway	Beijing	China Mobile group	September 2008

Our RF Parts and Components

In addition to the provision of wireless coverage products and services, we also develop, manufacture and supply RF parts and components for base stations. RF parts and components are essential building blocks for all forms of wireless communication products. They provide the fundamental channel for transmitting and receiving radio signals. RF parts and components can be classified into active and passive modules. Active modules contain electronic components such as transistors and diodes and require external power to operate. Their principal functions are to amplify and alter radio signals. Passive modules do not contain any electronic components. They rely on a combination of integrated circuits and magnetic fields emitted by their components to function. Their principal functions are to filter, combine and split RF signals.

We mainly produce passive modules. Our passive modules include filters, duplexers, multi-frequency splitters, combiners and couplers and antenna. Compared to traditional filters, our patented filters are able to generate a more powerful electromagnetic force with which to transmit microwave signals and are capable of significantly reducing the level of external and internal interference that disrupts wireless transmissions.

Base Station RF Parts and Components

Since the fourth quarter of 2005, we have focused on developing base station RF parts and components which are major building blocks of base stations and also the most crucial step in the manufacturing of base stations. Their costs account for more than 50% of the overall production costs of base stations. We believe the shifting of procurement for base station RF parts and components to China has become a trend and will accelerate the demand for base station RF parts and components in China, from which we expect to benefit. We have begun supplying base station RF modules in bulk quantities to ZTE Corporation and Huawei Technologies Co., Ltd. since 2006, to Datang Mobile Communications Equipment Co., Ltd. and China Potevio Co., Ltd. since 2007 and to Nokia Siemens Network and Ericsson (China) Co., Ltd. since 2008. We expect that revenues from base station RF modules to become one of our revenue growth drivers in coming periods.

The business cycle of RF parts and components involves the following phrases:

•

We first go through stringent certification processes to become a certified supplier of base station equipment manufacturers. Each equipment manufacturer has its own unique certification process, the principal conditions of which include production capacity, management efficacy, quality control, environment protection, and overall reputation. To date, we have been certified by seven major base station equipment manufacturers.

•

We next obtain technology certification from our equipment manufacturer customers and conduct product development according to the customer specifications. All of our RF products and components are customized for each client’s unique specifications.

•

We then provide samples for certification by our base station equipment manufacturer customers. We have to date developed more than 153 types of RF modules and RF subsystem products for various equipment manufacturer customers.

•

Thereafter, we obtain purchase orders with trial quantities, and if our customers are satisfied with the trials, our customers will request proposals from us for RF parts and components. We then submit bids to the customers.

•

If we win the bid, we will proceed to bulk production.

•

We generally provide a credit period for payment to our customers and payments are usually made within 90 to 180 days of delivery.

Base Station RF Subsystem

Since 2007, we began to develop remote RF unit, or RRU, which is an crucial part of a 3G signal distribution system. Through this distribution system, we can locate RRU close to an antenna and connect RRU and indoor baseband unit, or BBU, by the fiber. The distribution distance between BBU and RRU by using fiber are longer than using coaxial cable. By using RRU, operators will have flexibility in choosing their own location and network layout. Moreover, RRU is reliable, easy to maintain and cost-saving.

Production

Production Facilities

Our production facilities are located in Shenzhen. Prior to the divestiture of our two wholly-owned subsidiaries in Quanzhou, namely, Lake Communication and Lake Microwave, in December 2008, we had a production facility in Quanzhou and an additional production facility in Shenzhen. Since then, we have increased our main production lines and expanded our production capacity at our production facilities in Shenzhen. We plan the utilization of our production capacity based on projected orders from customers for our wireless coverage products and RF products.

As of December 31, 2008, the production capacity and utilization rate of our production facilities were as follows:

Production facilities

Type of products

Capacity

Utilization

(sets per month)

Shenzhen

Wireless coverage products

4,108

2,914

RF parts and components for base stations

38,000

30,889

In 2009, we established new production lines for RF parts and components for wireless coverage products. Our current capacity for these new production lines is approximately 12,000 sets per month.

Production Process

Our integrated design, engineering, production and quality control capabilities enable us to customize products to meet specific customer requirements and to increase production efficiencies. To minimize component costs and enable us to implement our low cost strategy, we produce our RF parts and components with our own low-cost proprietary production process and rely on strict control of our production process. In addition, our production personnel are intensively involved in product design to ensure that production considerations are addressed early in the design process and to minimize the number of products that fail to meet our quality control standards.

Our production processes may be divided into two primary categories and consist of numerous individual steps throughout the entire process. The categories include (i) production of our RF parts and components, and (ii) production of wireless coverage products with our own RF parts and components. The production process for our RF parts and components may be generally divided into the following steps:

•

integrated circuit board processing;

•

covering and welding;

•

manufacturing and assembly;

•

testing; and

•

quality control.

Most of our completed RF parts and components for repeaters are used in the production of our wireless coverage products. We sell our base station RF module directly to equipment manufacturers. The general steps for the production of our wireless coverage products are wiring, assembly, functional testing and quality control. After the completion of the wireless coverage products, we install the products according to the design plans approved by our customers.

Production is highly labor intensive as it involves manual labor to assemble the modules and products. In order to produce high-quality and precise products that meet our customers’ specifications, we employ highly skilled labor. We combine various production equipment, such as spectrum analyzers, signal generators and vector network analyzers, according to our manufacturing process technologies to produce our modules and products. Only a small portion of our production processes, including integrated circuit board processing and covering and welding, is automated.

Quality Control

We place considerable emphasis on quality control. We adhere to a strict system of quality control over our operations, from sourcing of raw materials to production, packaging and inventory storage to sale, delivery and installation. We have established various quality-control checkpoints at different stages of our production process to closely monitor the quality of our production and to ensure that our products meet all our internal benchmarks and customers’ specifications. In 2000, we were ISO9001-certified for our research and development, production and quality control processes at our research and development facilities as well as at our production facilities in Shenzhen and Quanzhou. We have also developed and now bulk produce base station RF modules that are in compliance with the European Union’s ROHS national enforcement body, which means that these products do not exceed specified levels of lead, cadmium, mercury and other chemicals. These RF modules are incorporated into base stations that are sold in Europe.

Quality Control for Raw Materials. We purchase raw materials only from suppliers on our approved vendor list, and only those suppliers that pass our assessment are admitted to our approved vendor list. Our staff in the purchasing department assess various aspects of a supplier, including its overall ability, technical capability, quality control over its production process and its financial health. In some cases, our customers require us to purchase raw materials from their approved list of suppliers. In such event, suppliers designated by our customers are also subject to our assessment and approval. Raw materials, upon delivery, are subject to incoming inspection by our quality control team. Raw materials that fail to pass our incoming inspection are returned to the suppliers. Suppliers who experience repeated returns are removed from our approved vendor list. Raw materials provided by our customers’ designated suppliers are also subject to the same incoming inspection procedures.

Quality Control During Production. At various stages of the production process, semi-finished products are tested to ensure their quality and compliance with all internal production benchmarks before proceeding to the next stage of the production process.

Final Testing Before Delivery. Following completion of the production process, our products are inspected and tested thoroughly to ensure that all customers’ specifications are met before our products are delivered.

Testing at Customer Site. After completion of the installation process, we test the wireless coverage products to evaluate their performance and make adjustments to optimize their functionality. Our customers will also perform further testing of our wireless coverage products after installation.

Warranty. For our wireless coverage products, we usually provide warranties for one to three years following the final inspection by our customers. During the warranty period, we are responsible for any quality defects in our products. For our RF parts and components, our customers will examine our products and are entitled to return any RF parts and components that do not comply with their prescribed specifications at the time of delivery. We also provide warranties ranging from one to three years during which period we provide free repairs for returned products with quality defects.

We have established a dedicated technical service team that provides after-sale services principally to our wireless coverage customers. Our goal is to ensure that we deal with inquiries and complaints of our customers in a prompt and satisfactory manner. In cases where customers report defects of our products during our warranty period, we send technical staff to our customers’ sites to carry out repairs at no cost to the customers. We do not, however, maintain any product liability insurance. For a discussion on the risks associated with our lack of product insurance coverage, please refer to “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We maintain limited insurance coverage and any significant product liability claim could have a material and adverse effect on our financial condition.”

Research and Development

We have strong in-house RF technology research and development capabilities. As of December 31, 2008, our in-house research and development team had 337 engineers and technicians from the wireless communication industry in China. Our key research and development experts have over 10 years of experience each in the telecommunications industry. We have a research and development facility in Shenzhen. Our research and development activities focus on new generation RF core technology, new product development, functionality enhancement and manufacturing process improvement.

RF Technology

RF is the fundamental technology that enables wireless telecommunications products to transmit and receive signals. Our capabilities span a wide range of RF technologies, covering the complete radio frequency from 350 MHz to 50 GHz. Our technology allows our RF-based wireless coverage products to support a wide range of communication protocols including GSM, CDMA, TD-SCDMA,WCDMA, CDMA2000 and digital trunk communications. We have made significant innovations in a number of core RF technologies, particularly those relating to filters and power amplifiers. Our filters are able to generate a more powerful electromagnetic force with which to transmit microwave signals and significantly reduce the level of external and internal interference that disrupts wireless transmissions. Our RF power amplifiers are distinguished by their high linearity and power efficiency standards.

In our efforts to commercialize our RF technology, we have formulated several of our own design and development standards, including those relating to filters, power amplifiers, antennas and next-generation RF integrated circuits and multiple chip module technologies. In response to the industry demand for production of small volumes of a large variety of RF parts and components, we have developed our own production techniques, such as an automatic covering technique, which manufactures these products in a more efficient manner. Furthermore, we are developing an automatic testing platform that enables us to conduct various tests throughout our production process. In addition, in the course of our research and development, we have accumulated a database of basic testing data, and have established our own integrated circuit board format, design technique, and testing and adjustment techniques.

Research and development expenditure for each of the three years ended December 31, 2008 were RMB47.7 million, RMB56.5 million and RMB70.2 million (US$10.3 million), respectively, representing approximately 5.7%, 5.8% and 7.1% of our revenues and 22.0%, 22.4% and 19.3% of our total operating expenses, respectively.

Sales, Marketing and Key Customers

Sales and Marketing Team

As of December 31, 2008, we had 357 sales and marketing professionals located in 28 offices covering 30 provinces and municipalities across China. We require our sales and marketing professionals to undergo extensive and ongoing training to constantly refresh their product knowledge and to keep them apprised of the latest trends and developments in the PRC wireless communication industry. Through the efforts of our sales and marketing team over the past few years, we were, as reported by BAYES, the second largest supplier of wireless coverage products and services in China in 2008.

Because of the technical nature of our product offerings, we emphasize close collaboration between our sales and marketing team and our project design and technical service team in order to provide optimal service to our wireless coverage customers. As of December 31, 2008, we had 1,333 engineers and technicians on our project design and technical service team servicing these customers. These professionals perform network testing and evaluation, formulation of design plan and implementation of wireless coverage projects. We also rely on them for after-sale technical services to our wireless coverage customers.

We also have a dedicated sales and marketing team for base station equipment manufacturer customers of our base station RF products, all 13 members of which have extensive technical knowledge and are familiar with customer specifications and demands. They are also responsible for providing after-sale technical services to our equipment manufacturer customers.

In order to encourage our sales and marketing team to pursue new business opportunities, we offer incentive bonus programs that pay performance-based, year-end cash bonuses.

Pricing

The PRC market for wireless coverage products and services and other RF products is highly price-sensitive. In our business, prices tend to vary based on a number of factors, including:

•

type, quantity and composition of RF products;

•

internal target gross margin objectives;

•

region in which the products are sold; and

•

current market conditions, including the prevailing prices offered by our competitors.

We typically participate in bidding to win orders for our products. We determine our pricing primarily on the basis of the above listed factors, with appropriate consideration given to the size of the transaction and the significance of the business opportunity to our growth. We impose minimum requirements internally for gross profit margins in our bidding processes. We believe that economies of scale in our operations, coupled with our proprietary RF technologies and our integrated design, development, engineering and production processes, allow us to price our products and services competitively.

Key Customers

Our two largest customers are the China Unicom group and the China Mobile group. Since 2004, we have also provided wireless coverage products and services to the China Telecom group and the China Netcom group. The following table sets forth our revenues attributable to our sales to the China Unicom group, the China Mobile group, the China Telecom group, the China Netcom group and base station equipment manufacturers in absolute terms and as a percentage of our revenues for the periods specified:


	Year ended December 31,
	2006					2007					2008
	(RMB)		(%)			(RMB)		(%)			(RMB)		(US$)		(%)
	(in millions, except for percentages)
Wireless coverage products:
China Unicom group		298.7		35.9	%		377.8		38.6	%		244.5		35.8		24.8	%
China Mobile group		277.1		33.3			317.7		32.4			390.3		57.2		39.6
China Telecom group		89.2		10.7			49.6		5.1			75.4		11.1		7.7
China Netcom group⁽¹⁾		69.2		8.3			20.5		2.1			4.7		0.7		0.5
Overseas customers		10.0		1.2			11.6		1.2			8.1		1.2		0.8
Others		56.6		6.8			28.6		2.9			40.1		5.8		4.1

Subtotal		800.8		96.2			805.8		82.3			763.1		111.8		77.5

RF products:
Base station equipment manufacturers		32.0		3.8			173.5		17.7			221.6		32.5		22.5


Total		832.8		100.0	%		979.3		100.0	%		984.7		144.3		100.00	%

(1)

As part of the restructuring of the Chinese telecommunications operators, China Netcom group merged with China Unicom group in 2008.

With the adoption of the centralized procurement policy by China Mobile group in 2007 and by China Unicom group and China Telecom group in 2008, purchasing decisions for equipment providers are made by the national headquarters of these entities. However, we will continue to contract directly with their local operational units after the decisions are made for equipment procurement, and will interact directly with the local operational units in our day-to-day business operations. Although it has been our business practice to interact with local affiliates separately, they are, nevertheless, under the common control of their parent company, and in our customer concentration analysis, we consider the national group each as a single customer. There have also been instances where decisions made by one local affiliate affect the decisions of other local affiliates within the national group.

We intend to further strengthen our relationship with the China Unicom group and the China Mobile group, and at the same time, further develop relationships with the China Telecom group. To accomplish that goal, we have identified specific members of our sales and marketing team as our dedicated customer relationship contacts to service our existing and potential customers. In 2008, we generated approximately RMB75.4 million (US$11.1 million) from the China Telecom group, accounting for approximately 7.7%, of our revenues in the year.

For further information about our reliance on the China Unicom group and the China Mobile group, please refer to “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We derive a significant portion of our revenues from the China Unicom group and the China Mobile group and our revenues could decline significantly if either of them reduces its purchases of our wireless coverage products and services.”

In addition, we have become a qualified supplier of RF parts and components to several major domestic and foreign base station manufacturers, which are Huawei Technologies Co., Ltd., ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel Shanghai Bell Co., Ltd., and Nokia Siemens Network and Ericsson (China) Co., Ltd. We have begun supplying base station RF modules in bulk quantities to ZTE Corporation and Huawei Technologies Co., Ltd. since 2006, to Datang Mobile Communications Equipment Co., Ltd. and China Potevio Co., Ltd. since 2007 and to Nokia Siemens Network and Ericsson (China) Co., Ltd. since 2008.

Suppliers and Raw Materials

The raw materials used to produce our products mainly include various electronic components, metal cases for modules and wireless coverage products, electronic cables, packaging materials and other accessories. We source most of our raw materials inside China except for some electronic components that are purchased from sales agents of foreign companies in China. We procure raw materials from companies that have satisfied our supplier review and have been selected through a competitive bidding process. Base on their products supplied to us, our suppliers are divided into three categories: core suppliers, major suppliers and general suppliers. We have established different performance criteria and scope of cooperation for each category of suppliers. All of our suppliers are subject to stringent review procedures by our team of specialists in supplier certification, which covers the areas of technology, quality, response time, pricing, environmental protection and social responsibility. We currently have nine core suppliers for our core manufacturing processes of mechanical processing, electronic plating and modules. All of these suppliers are leaders in their respective sectors and have a proven track record of supplying to globally-renowned companies. In the near future, we plan to separate the sources the supplies of our research and development projects from those for mass production, streamline the existing organization of suppliers and establish price management systems, in order to build a company-wide logistics information platform. In some cases, our customers require us to purchase raw materials from their approved suppliers. Our raw material purchases are paid in Renminbi and typically have a credit term of 90 days. As we have an extensive list of suppliers, we do not rely on any single supplier or group of suppliers to provide any of our raw materials. In 2006, 2007, and 2008 purchases from our top five raw material suppliers accounted for approximately 19.3%, 24.8% and 28.0% of our total purchases of raw materials, respectively.

Competition

The wireless coverage market in China is very competitive and is characterized by rapid technological advancements, frequent development of new products, and downward pricing trends over the life of a product. In their requests for proposals, PRC telecommunications operators typically request a complete analysis and proposal for the design, installation and warranty. The provision of wireless coverage products and services requires the skills and efforts of a large number of technical personnel to put together the design plan, to supervise the installation by third parties and to provide after-sale services. Compared with international providers, PRC domestic providers have the advantage of having a lower cost base and, as such, currently dominate the market in China. According to BAYES, there were seven major providers of wireless coverage products and services, which collectively held approximately 40.5% market share in China as of December 31, 2008. Competition among these wireless coverage product and service providers over the past five years has resulted in the emergence of a few dominant players. According to BAYES, the top three providers of wireless coverage products and services in China were all PRC companies and included Comba Telecom Systems Holdings Ltd., or Comba, Wuhan Hongxin Telecommunication Technologies Co., Ltd, or WHTT, and our company. Together, the top three dominant players accounted for approximately 26.2% of the total market share in 2008, with Comba, our company and WHTT representing 10.0%, 8.4% and 7.8% of the total market in terms of the contract amount, respectively.

The competitive environment of the PRC wireless coverage market has undergone the following changes in recent years, and we expect will continue to experience similar trends:

•

steadily increasing market demand;

•

increasing technical requirements;

•

increasing number of transmission protocols, from GSM and CDMA to 3G protocols such as TD-SCDMA and WCDMA;

•

expanding customer base, beginning with the China Mobile group and the China Unicom group, and now including the China Telecom group and overseas customers; and

•

increasing demand for 3G network construction and the triggering of expanded market opportunities that are expected to attract new competitors to enter into the wireless coverage market.

We believe that the key factors considered by customers when choosing a vendor for wireless coverage products and services include the vendor’s overall capabilities, such as ability to provide integrated coverage solutions, research and development capability, products quality, scope and flexibility of product offering, project design and installation capability, after-sale service capability, pricing, financial strength, as well as the customer’s previous experience and relationships with the vendor. We believe that our in-house RF technology research and development capability, our fully integrated production capability and our ability to provide integrated wireless coverage solutions to our customers give us a competitive advantage over our main competitors, Comba and WHTT. On the other hand, we have a shorter operating history than both Comba and WHTT and, therefore, a shorter historical relationship with the China Unicom group and the China Mobile group relative to them. In order to remain competitive and grow our business, we must strengthen our relationships with our existing customers, develop relationships with new customers and expand into new products and markets.

The market for RF parts and components is also competitive in China. We believe the entry barrier for base station RF modules is higher compared to the entry barrier for wireless coverage products, because of higher capital requirements, longer development cycles and more stringent technical requirements. We mainly compete with Andrew Corporation, Radio Frequency Systems, Powerwave Technologies, Inc., Wuhan Fingu Electronic Technology Co., Ltd. and Mobi Antenna Technologies (Shenzhen) Co., Ltd. in China.

In the mid- to lower-end market for RF parts and components, we and other suppliers tend to compete on speed of supply largely because customers in this market sector generally require supply on short notice. Although overseas manufacturers may have more advanced technologies, they often lack a sales network and/or sufficient technical support in China. Among domestic manufacturers, we have a competitive edge due to our strength in RF technology, our low production cost and our relatively strong financial position. To date, we have become a qualified supplier of RF parts and components to seven major domestic and foreign base station manufacturers, which are Huawei Technologies Co., Ltd., ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel Shanghai Bell Co., Ltd., Nokia Siemens Network and Ericsson (China) Co., Ltd. Although these arrangements will stabilize our market and incentivize our research and development efforts, we do not expect them to reduce our research and development expenses.

In addition, China has gradually lifted its import restrictions, lowered import tariffs and relaxed foreign investment restrictions after its entry into the World Trade Organization in December 2001. This has led to increased competition from foreign wireless equipment companies, such as Andrew Corporation, Sagem Communication, Allgon Mobile Communications, Inc. and Powerwave Technologies, Inc., which are significantly larger and financially stronger than us. Many of our foreign competitors have established PRC-based manufacturing facilities to lower production costs, which has further intensified price competition in the marketplace.

Property

Owned Property

In October 2007, we moved our research and development and production facilities in Shenzhen to a property that we own inside Hi-Tech Park, Nanshan District, Shenzhen with a total site area of approximately 19,570 square meters and a gross floor area of approximately 73,000 square meters, namely our headquarters, Guoren Building. In July 2008, we also moved our principal executive office to this property. We executed the relevant sale and purchase agreement in January 2006 with the Shenzhen land bureau, and obtained the land use rights to this property. We occupy the property in Shenzhen for manufacturing, research and office purposes. In addition to our own usage, we have spare office space with a gross floor area of approximately 15,000 square meters available for lease by third parties. We leased a portion of this spare office space in 2009.

In addition, our wholly-owned subsidiary, Shenzhen Kaige, also owns an office premise with a gross floor area of 1,476.4 square meters in Futian, Shenzhen. We plan to lease out this office premise.

Leased Property

We also lease properties for our sales offices and warehouses from time to time. Our leases generally have a term of five to 60 months and are due to expire between January 2009 and July 2012. Under most of our leases, we have a right of first refusal to renew them on similar terms and for similar periods as the previous contracts. Our total rental payments in 2008 were RMB8.1 million (US$1.2 million).

Intellectual Property Rights

We rely on copyright, patent, trademark and other intellectual property law, nondisclosure agreements and technical know-how to protect our intellectual property and proprietary rights. We have entered into confidentiality and licensing agreements with our employees, suppliers and distributors. Our senior employees and employees who work in our research and development department and other technical departments are required to sign agreements acknowledging that we own the rights to all technology, inventions, trade secrets, works of authorship, developments and other processes generated in connection with their employment with us or their use of our resources or relating to our business or our property and that they must assign any ownership rights that they may claim in those works to us.

As of June 30, 2009, we have 101 registered patents and 108 pending patent applications with the Patent Office of the National Intellectual Property Office of China, including our repeaters, filters and antennas as well as wireless local area network, or WLAN, technology and products. Most of our patent applications only cover patent protection in China; however, starting in 2008, we have applied for patent protection from Patent Cooperation Treaties organizations in relation to certain parts of our patents.

We have nine registered trademarks, four registered with China’s Trademark Office of the State Administration for Industry and Commerce and one registered in Hong Kong. We have also filed applications for registration of ten trademarks in China. In addition, we are the registered owner of the domain name, www.grentech.com.cn. We also own copyrights to 21 types of computer software which are registered in China and related to our wireless coverage product monitoring and wireless access system.

In 2006, 2007 and 2008, we generated revenues of RMB441.3 million, RMB445.1 million and RMB475.0 million (US$69.6 million), respectively, from the sales of our patented products, representing 53.0%, 45.4% and 48.2% of our revenues, respectively. We are not aware of any infringement or unauthorized use of our intellectual property rights. We will take appropriate legal actions to protect our rights if there is any unauthorized use or infringement of our rights in the future. To date, we have not been sued for infringement of intellectual property rights by any third party.

Insurance

We have casualty insurance coverage on our property, our goods in transit, and our employees’ personal risks. We do not have insurance coverage on our other assets, inventories, interruption of business or product liabilities.

Employees

As of December 31, 2008, we had a total of 3,057 full-time employees. A breakdown of our employees by function as of the same date is set forth below:


	Number of employees
Management and administrative		224
Research and development		337
Production and quality control		806
Project design and technical service		1,333
Sales and marketing		357

Total		3,057

In order to maintain quality, knowledge and skill levels of our employees, we place a strong emphasis on training. We provide training to our employees periodically, ranging from introductory training for new employees, technical training, performance enhancement training, professional enhancement training, team-building and communications training.

As required by PRC regulations, we participate in statutory retirement plans organized by the respective PRC municipal governments in the areas where we operate. We have no obligation beyond the monthly contributions of 8% to 9% of basic staff salaries. Our contributions to the statutory retirement plans are charged to the consolidated statement of operations as and when incurred. The total amount of contributions we made to employee benefit plans in 2006, 2007 and 2008 was RMB11.0 million, RMB12.0 million and RMB16.8 million (US$2.5 million), respectively.

None of our employees are currently unionized, but they have the statutory right under PRC law to join or organize workers’ unions in China. We have not experienced any significant difficulty in recruiting employees nor have had any significant staff compensation or labor disputes. We consider our relations with our employees to be good.

We enter into employment contracts with most of our officers, managers and employees, which contain a non-compete clause both for the period of their employment with our company and generally for three years thereafter.

Legal Proceedings

We are not currently a party to any material litigation and are not aware of any pending or threatened material litigation.

Industry Regulation in China

The PRC government regulates the various aspects of the research, development and production of radio transmission equipment and installation of wireless coverage equipment in China. MIIT and its counterparts in the local governments are the principal regulators of the telecommunication and related industries in China.

Research, Development and Production of Radio Transmission Equipment

In order to engage in the research and development business for a new type of radio transmission equipment in China, an entity must file with the Radio Management Bureau of MIIT. In order to conduct a radio transmission with equipment under research and development, the entity must set up a temporary station in accordance with relevant regulations for that purpose.

A manufacturer of radio transmission equipment in China must file a product type certificate and a product type code for its radio transmission equipment with the Radio Management Bureau of MIIT. The manufacturer must mark the product type approval code on the labels of its finished equipment. Without prior authorization from the PRC government, manufacturers may not produce or sell any model of radio transmission equipment with specifications lower than those required in the approval certificate. Unless the type of radio transmission equipment has been approved by the Radio Management Bureau, the manufacturer may not produce, sell, use or advertise such equipment in China. The manufacturer may, however, produce radio transmission equipment for the export market without such approval from the Radio Management Bureau.

Connection of Radio Communication Equipment with a Public Telecommunication Network

China has a network access license system to regulate the connection of radio communication equipment with a public telecommunication network. Without a network access license issued by MIIT, radio communication equipment may not be connected to a public telecommunication network or sold in China. Network access licenses have a term of three years. A manufacturer that wishes to continue production and sale of radio communication equipment beyond the three-year term may apply to extend the license for an additional three-year term. The manufacturer must affix the network access license marks on its radio communication equipment as well as on its packaging and advertising materials. The manufacturer must apply for a new network access license if there is any change to the equipment that is inconsistent with the scope of the network access license.

Installation of Wireless Coverage Equipment

Installation of wireless coverage equipment constitutes construction work under applicable regulations in China. Construction companies are subject to various on-going qualification requirements and must obtain a construction enterprise qualification certificate from the relevant authorities in China.

China classifies construction companies into three categories, namely,

•

lead project contractors,

•

specialized contractors, and

•

service subcontractors.

A lead project contractor may carry out the entire project by itself and may subcontract ancillary work to specialized contractors or service subcontractors. Specialized contractors may carry out an entire project undertaking alone and may subcontract labor work to service subcontractors. Service subcontractors may undertake labor work from lead project contractors and specialized contractors. The PRC regulations impose different qualifications on lead project contractors, specialized contractors and service subcontractors. Each qualification is further divided into various grades in accordance with a set of specific criteria.

Qualification certificates of construction companies are subject to the annual review and renewal. The administrative authorities have the authority to close down companies that undertake construction projects without proper qualification certificates and to impose a fine of 2% to 4% of the contract value so involved. Illegal gains so received are also subject to forfeiture. For companies undertaking projects beyond the permitted scope of their respective quality grading, the administrative authorities may stop such illegal activities and impose a fine of 2% to 4% of the contract value so involved. The government may also order offending companies to suspend and restructure their operations and downgrade their qualifications. Serious offenders may have their construction enterprise qualification certificates revoked and any illegal gains forfeited.

Our Compliance with Regulations

Shenzhen GrenTech produces, sells and engages in research and development activities relating to RF technology and other wireless coverage products. Accordingly, Shenzhen GrenTech is required to obtain and has obtained product type approval certificate and product type approval code for radio transmission equipment issued by MIIT.

Shenzhen Lingxian primarily develops monitoring software for wireless coverage equipment and sells such software to Shenzhen GrenTech, which are not regarded as communication equipment under PRC law.

Shenzhen GrenTech RF develops, manufactures and sells RF parts and components, which are not regarded as communication equipment under PRC law.

Other than holding 100% equity interest in Shenzhen Kaixuan and certain real property interest in China, Shenzhen Kaige does not have any other business operation.

Shenzhen Kaixuan mainly provides installation services of our wireless coverage products, and develops and sells integration technology for information network systems. Shenzhen Kaixuan is required to obtain and has obtained a certificate for qualification issued by MIIT under PRC law. Shenzhen Kaixuan has obtained a construction enterprise qualification certificate and is qualified in China to engage in electronic engineering projects such as communication and integrated information network projects. We also ensure that all contractors we select for our installation work have proper construction enterprise qualification certificates.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and related notes included in this annual report on Form 20-F . The audited consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties.

OVERVIEW

Our wireless coverage products enable telecommunications operators to expand the reach of their wireless communication networks to indoor and outdoor areas, such as buildings, highways, railways, tunnels and remote regions. Our wireless coverage products include indoor coverage products and outdoor coverage products. To date, we have developed over 547 models of wireless coverage equipment. We provide most of our wireless coverage products and services to local affiliates of the two leading wireless operators in China, the China Unicom group and the China Mobile group. Since 2004, we have also provided a portion of our wireless coverage products and services to the China Netcom group (prior to its merger into the China Unicom group in 2008) and the China Telecom group. According to BAYES, we were the second largest provider of wireless coverage products and services in China in 2008. In recent years, the wireless coverage market in China has benefited from increased capital expenditure by PRC wireless operators. Further, the capital expenditure of the wireless coverage industry in China is expected to reach RMB6.5 billion in 2009, RMB8.0 billion in 2010, RMB9.4 billion in 2011, RMB10.6 billion in 2012 and RMB11.5 billion in 2013, according to BAYES. We believe that the increasing capital expenditure will afford us an opportunity to grow our revenues in the wireless coverage market. In addition, the Chinese telecommunication restructuring plan significantly altered the industry, creating three new operators that have both mobile and fixed-line services. In the past, Chinese fixed-line operators, which were split along geographical lines, were not permitted to offer mobile services, while mobile operators were not allowed to offer fixed-line services. By restructuring the operators into companies that offer both types of services, the Chinese government enhanced the competitiveness of the three remaining operators. Moreover, 3G licenses were issued to the three telecommunications operators in January 2009 by the PRC government. China Mobile received the TD-SCDMA license, China Unicom received the WCDMA license and China Telecom received the CDMA2000 license. Since then, all operators have started the construction of 3G networks. We believe that, due to the recent issuance of 3G licenses, telecommunications operators in China will significantly increase their capital expenditure and investment in wireless coverage and base station products, which we believe will drive the growth of our business.

Our RF parts and components are supplied to base station equipment manufacturers. These customers use our RF parts and components in their base station manufacturing. To date, we have become a qualified supplier of RF parts and components to several major domestic and foreign base station manufacturers, such as Huawei Technologies Co., Ltd., ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel Shanghai Bell Co., Ltd., and Nokia Siemens Network Ericsson (China) Co., Ltd. We have developed over 153 types of base station RF modules. We have begun supplying base station RF modules in bulk quantities to ZTE Corporation and Huawei Technologies Co., Ltd. since 2006, and to Datang Mobile Communications Equipment Co., Ltd. and China Potevio Co., Ltd. since 2007 and to Nokia Siemens Network and Ericsson (China) Co., Ltd. since 2008. With rising production costs incurred by base station equipment manufacturers, more global base station equipment manufacturers have chosen to procure base station RF parts and components mainly in China in order to reduce their costs. We believe the demand for base station RF parts and components will grow rapidly and our revenues from base station RF modules will become one of our revenue growth drivers in coming periods.

KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS

The following are key factors that affect our financial condition and results of operations. They are important to the understanding of our business:

Expenditure by Wireless Operators and Base Station Equipment Manufacturers

Our business is largely dependent on the demand for our wireless coverage products and services from wireless operators in China. Accordingly, the amount of wireless network capital expenditure by our customers, especially our two largest customers, the China Unicom group and the China Mobile group, has had and will continue to have a material impact on our revenues. In addition, revenues from the sales of our RF parts and components have accounted for an increasing percentage of our sales in 2006, 2007 and 2008. As a result, we expect the growth in the domestic demand for these products will continue to drive our revenue growth.

Our Business Practice with Wireless Operators and Its Implication on Our Financial Condition and Results of Operations

We generally begin working on a wireless coverage project upon winning a bid but before signing a formal contract. Our customers are not required to pay for our products and installation services until after the signing of the formal contract, which typically takes place when we complete the initial installation of the wireless coverage products and our customer issues a completion certificate. Furthermore, our contracts with wireless operators generally provide a fixed price and permit them to pay the purchase price in installments upon the occurrence of various payment events, such as the signing of the contract, issuance of the preliminary and final inspection certificates and expiration of the warranty period. Our arrangements with our wireless operator customers are consistent with industry practices in China. As a result of these practices, an understanding of our revenue recognition policy and accounts receivable cycle is critical to the understanding of our results of operations.

Revenue Recognition Policy and Accounts Receivable Cycle

We derive revenues principally from the provision and sale of wireless coverage products and services and, to a lesser extent, from the sale of RF parts and components.

We recognize revenues when:

•

the risk and rewards are transferred;

•

delivery has occurred;

•

persuasive evidence of an arrangement exists;

•

price to the buyer is fixed and determinable;

•

collectibility is reasonably assured; and

•

we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.

For our sale of equipment, we only begin to recognize revenues when delivery has occurred, the customer has signed a sale and purchase contract with us and issued a delivery certificate to us.

For our integrated services, we recognize revenues when the services have been rendered in full and the customer has signed a contract with us and issued a preliminary inspection certificate which indicates the customer’s acceptance of the installation services provided.

Under the payment terms of our contracts and as a customary practice of the wireless coverage industry in China, we allow our customers to pay the contract amount in installments upon the occurrence of certain events, such as the delivery, the issuance of the completion certificate, the issuance of the preliminary inspection certificate, the issuance of the final inspection certificate, and the expiration of the warranty period. The installment terms of our contracts range from six months to three years. On a weighted average basis, under our contracts, approximately 42% of the contract value is due upon the delivery or the issuance of the completion certificate, approximately 36% is due upon the issuance of the preliminary inspection certificate, approximately 18% is due upon the issuance of the final inspection certificate and approximately 4% is due upon the expiration of the warranty period. To the extent revenue recognized under a contract is not yet paid, we record it as an account receivable. We record the portion of the amounts due under our contract payment terms in excess of the revenue recognized as deferred income, which is included in other payables. We classify amounts due beyond one year determined by contractual terms and customers’ payment history as long-term accounts receivable and we discount them at the prevailing interest rate as published by the People’s Bank of China, the PRC central bank. We make provisions for estimated settlement discounts we may provide to our customers and record them as a reduction in revenues. The settlement discount is our best estimate based on our past billing and collection experience with our customers and our negotiation with customers. We determine such discount separately on a contract by contract basis. In addition, we will review our settlement discounts periodically to ascertain that these settlement discounts are sufficient but not excessive.

We wrote back RMB5.1 million and RMB4.3 million in settlement discounts in 2006 and 2007, respectively. We made provisions for settlement discounts of RMB13.8 million (US$2.0 million) in 2008 in order to accelerate the collection of account receivables which may have been affected by the telecommunication industry restructuring in 2008. We sold an aggregate of RMB202.2 million (US$29.6 million) of our accounts receivable to banks in 2008. Our sale of accounts receivable was with limited-recourse where we receive 100% of the face value of accounts receivable sold, net of bank fees. We must, however, keep at the bank a time deposit as a pledge in the amount of 10% to 20% of the aggregate accounts receivable we sold to the bank that remain unsettled by our customers at all times. See “— Liquidity and Capital Resources — Accounts Receivable and Receivable Selling” for additional information on our accounts receivable position and our receivable selling arrangements. See “— Revenues — Provision of Wireless Coverage Products and Services” for additional discussions on our policy of recognizing wireless coverage products and services revenues. The gap of time between our recognition of revenues and the occurrence of various payment events has created a long accounts receivable cycle. The time difference between payment events typically ranges from six months to three years. In addition, our accounts receivable cycle can be further lengthened if our customers do not promptly make installment payments upon the occurrence of the related payment events.

As a result of the centralized procurement policies recently adopted by our major customers, contracts for sales of our wireless coverage products and installation services are negotiated and entered into separately. For certain of our stand-alone wireless coverage equipment contracts, we recognize revenue when the risk and reward of ownership and title of our wireless coverage products are transferred to our customers, which typically coincide with time of delivery when a delivery acceptance letter is signed according to the terms of such contracts. For other stand-alone wireless coverage equipment contracts and our stand-alone installation service contracts, we recognize revenue based on the same recognition criteria as those respectively used for our combined wireless coverage product and installation service contracts discussed above.

We recognize revenues from the sale of stand-alone RF parts and components when the risk and reward of ownership and title of these parts and components and products have been transferred to our customers, which typically coincide with delivery and acceptance of these parts and components and products by our customers.

Liquidity Concern Arising out of Our Accounts Receivable Cycle and Revenue Cycle

Our contract practice described above has resulted in a significant working capital demand for the operation of our business. This includes, among other things, a substantial build-up of inventories, in particular, finished goods, and long accounts receivable cycle. Our revenue cycle also impacts our liquidity needs. We tend to recognize more revenues and collect most of them during the fourth quarter of the year. In 2006, 2007 and 2008, our collections in the fourth quarter constituted 53.8%, 62.4% and 43.8% of our total collections during the respective years. However, we commence our production and arrange installation of products for a significant number of projects beginning in the second quarter of a year and typically deliver and install much more during the third and fourth quarters. As a result of our revenue cycle and our long accounts receivable cycle, we tend to have more working capital toward the end of the year and the first part of the subsequent year and tend to have less working capital during the middle part of the year, especially the third quarter. Our ability to rely on cash generated from our operations to finance our working capital and other needs of our operations is therefore substantially limited. Accordingly, we are highly dependent on bank financing and the sale of accounts receivable to fund our working capital requirements and to support our liquidity. Historically, we have principally relied on bank loans to finance our working capital needs. As of December 31, 2006, 2007 and 2008, we had an aggregate of RMB336.1 million, RMB456.1 million and RMB500.2 million (US$73.3 million), respectively, of short-term bank loans outstanding. As of December 31, 2008, we had an aggregate of RMB665.0 million (US$97.5 million) in short-term bank loans and bills payable facilities, of which RMB425.0 million (US$62.3 million) in short-term bank loans had been drawn and RMB110.6 million (US$16.2 million) in bills payable had been utilized. As of December 31, 2008, RMB40.0 million (US$5.9 million) in short-term bank loans and RMB115.2 million (US$16.9 million) in bills payable remained committed but not yet drawn or utilized. As of December 31, 2008, we had an aggregate of RMB130.0 million (US$19.1 million) in long-term bank loans outstanding. In addition, we had accounts receivable selling arrangements in the aggregate of RMB360.0 million (US$52.8 million), of which RMB319.8 million (US$46.9 million) had been drawn and RMB40.2 million (US$5.9 million) remained committed but not yet utilized as of December 31, 2008. Utilization of the unutilized bill payables facilities requires pledge of bank deposit in the amount of approximately 20% to 40% of the utilized facilities, and utilization of account receivable selling arrangements requires pledge of bank deposit in the amount of approximately 10% to 20% of the utilized facilities. We expect to continue to rely on bank loans, including bills payable, and the sale of our accounts receivable to finance our working capital needs as we grow our business. See “— Liquidity and Capital Resources — Accounts Receivable and Receivable Selling” for a discussion on our accounts receivable position and our bank borrowing and receivable selling arrangements.

Significant Quarterly Fluctuations of Our Results of Operations

We have historically generated a majority of our revenues from our wireless coverage products and services, and we have typically generated substantially less revenues in the first quarter of each year. Our customers usually perform completion inspections, issue completion certificates and sign sale and purchase contracts with us for the vast majority of our projects in June and December each year. This is because our customers generally use the same team to manage different aspects of a project, including bidding, contracting and payment, and their work is performed in accordance with their internal annual and semi-annual project management processes. As a result, our customers prefer performing completion inspections and signing contracts for all installed projects at the same time. Our principal customers are publicly traded companies, and their project management process is also influenced by their semi-annual reporting obligations. As a result, our revenues in the first quarter are much less than the second quarter, and our revenues in the third quarter are much less than the fourth quarter. We have therefore historically reported net losses in the first quarter, reflecting a combination of (1) the increased costs of performing our ongoing wireless coverage contracts as a result of the growth in volume of contracts and (2) lower levels of revenues generated during the first and third quarters. In 2006, 1.8%, 21.6%, 22.5% and 54.1% of our annual revenues were generated in the first, second, third and fourth quarters, respectively, and we reported a net loss of RMB35.7 million in the first quarter. In 2007, 3.2%, 20.7%, 27.9% and 48.2% of our annual revenues were generated in the first, second, third and fourth quarters, respectively, and we reported a net loss of RMB44.8 million in the first quarter. In 2008, 7.3%, 18.9%, 21.6% and 52.2% of our annual revenues were generated in the first, second, third and fourth quarters, respectively, and we reported a net loss of RMB41.5 million (US$6.1 million) in the first quarter. As the volume of our contracts grows, we expect to continue to generate losses, particularly in the first quarter when revenue levels have been historically low. You should read “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We historically recognized significantly lower revenues in the first quarter, which sometimes resulted in net losses in the first quarter, and our revenues may fluctuate significantly from quarter to quarter in the future, resulting in quarterly net losses” for additional disclosure.

The following table sets forth our unaudited consolidated statements of operations and selected consolidated balance sheet data for each of the 12 quarters ended December 31, 2008:


	Three months ended
	March 31,			June 30,			Sept, 30			Dec 31,			March 31,			June 30,			Sept, 30			Dec 31,			March 31,			June 30,			Sept, 30			Dec 31,
	2006			2006			2006			2006			2007			2007			2007			2007			2008			2008			2008			2008
	(in thousands of RMB)
Revenues		14,796			179,976			187,729			450,294			31,286			203,024			273,214			471,778			71,389			186,341			212,478			514,449
Cost of revenues		(6,787	)		(90,505	)		(98,659	)		(241,089	)		(18,300	)		(120,378	)		(165,634	)		(307,124	)		(49,420	)		(124,216	)		(149,635	)		(428,096	)
Gross profit		8,009			89,471			89,070			209,205			12,986			82,646			107,580			164,654			21,969			62,125			62,843			86,353
Operating expenses:
Research and development costs		(8,393	)		(8,306	)		(13,882	)		(17,090	)		(13,201	)		(14,326	)		(13,286	)		(15,712	)		(15,328	)		(17,815	)		(15,477	)		(21,612	)
Sales and distribution expenses		(24,138	)		(26,606	)		(25,905	)		(36,299	)		(28,599	)		(31,854	)		(33,636	)		(32,727	)		(28,810	)		(31,014	)		(26,841	)		(51,859	)
General and administrative expenses		(11,109	)		(10,967	)		(11,377	)		(22,491	)		(13,405	)		(15,655	)		(14,473	)		(24,965	)		(14,158	)		(18,225	)		(17,816	)		(76,829	)
Impairment of goodwill		—			—			—			—			—			—			—			—			—			—			—			(27,589	)
Total operating expenses		(43,640	)		(45,879	)		(51,164	)		(75,880	)		(55,205	)		(61,835	)		(61,395	)		(73,404	)		(58,296	)		(67,054	)		(60,134	)		(177,889	)
Operating income/(loss)		(35,631	)		43,592			37,906			133,325			(42,219	)		20,811			46,185			91,250			(36,327	)		(4,929	)		2,709			(91,536	)
Other (expense)/income
Interest income		859			5,761			8,108			4,458			2,456			1,776			2,525			15,556			5,472			4,764			4,482			16,539
Interest expense		(8,897	)		(6,369	)		(4,063	)		(8,697	)		(6,062	)		(6,525	)		(8,398	)		(14,362	)		(13,242	)		(13,990	)		(15,349	)		(12,263	)
Investment income		238			—			—			—			—			318			—			—			296			—			—			4,577
Foreign currency exchange gain/(loss)		1,101			—			(6,333	)		(4,643	)		(2,788	)		(2,941	)		(4,369	)		(8,693	)		(7,029	)		(2,904	)		(974	)		489
Grant income		127			100			—			7,443			120			3,310			1,000			2,925			2,030			91			110			12,978
Total other (expense)/income		(6,571	)		(508	)		(2,288	)		(1,439	)		(6,274	)		(4,062	)		(9,242	)		(4,574	)		(12,473	)		(12,039	)		(11,731	)		22,320
Income/(loss) before income tax benefit/(expense) and minority interests		(42,202	)		43,084			35,618			131,885			(48,493	)		16,749			36,943			86,676			(48,800	)		(16,968	)		(9,022	)		(69,216	)
Income tax (expense)/benefit		5,931			(3,583	)		(5,043	)		(15,582	)		3,441			(1,360	)		(3,816	)		(8,586	)		7,046			(277	)		363			(10,289	)
Income/(loss) before minority interests		(36,271	)		39,501			30,575			116,303			(45,052	)		15,389			33,127			78,090			(41,754	)		(17,245	)		(8,659	)		(79,505	)
Minority interests, net of tax		533			(68	)		162			(1,894	)		241			784			(5	)		(38	)		226			202			227			141
Net Income/(loss)		(35,738	)		39,433			30,737			114,410			(44,811	)		16,173			33,122			78,052			(41,528	)		(17,043	)		(8,432	)		(79,364	)
Dividends, accretion to redemption value and of foreign currency rate movements on mandatorily redeemable convertible preference shares		(909	)		360			—			—			—			—			—			—			—			—			—			—
Net earnings/(loss) available to ordinary shareholders		(36,647	)		39,793			30,737			114,410			(44,811	)		16,173			33,122			78,052			(41,528	)		(17,043	)		(8,432	)		(79,364	)


	As of
	March 31,		June 30,		Sept, 30		Dec 31,		March 31,		June 30,		Sept, 30		Dec 31,		March 31,		June 30,		Sept, 30		Dec 31,
	2006		2006		2006		2006		2007		2007		2007		2007		2008		2008		2008		2008
	(in thousands of RMB)
Cash and cash equivalents		36,064		647,751		399,680		467,423		290,346		303,642		205,319		316,778		216,193		43,089		67,954		293,353
Pledged time deposits		65,044		65,652		77,150		238,618		212,319		228,065		213,208		259,786		216,602		188,817		131,999		122,368
Accounts receivable, net		461,360		563,192		604,360		747,859		720,433		806,760		938,746		925,838		890,095		960,019		959,887		728,260
Long-term accounts receivable		176,387		214,331		298,228		268,957		247,728		281,830		312,217		389,505		369,329		341,675		387,573		551,210
Short-term bank loans		183,990		261,631		266,050		336,050		333,550		426,050		436,050		456,050		506,050		429,925		448,083		480,207
Long-term debt		165,952		—		—		—		—		150,000		150,000		150,000		150,000		130,000		130,000		130,000

We anticipate that we will continue to experience significant fluctuations in revenues, cost of revenues and other results of operations from quarter to quarter during any year if our telecommunication operator customers continue their current contract practice in the future. This quarterly fluctuation of revenues and operating results has affected and is likely to continue to affect our cash flow and working capital positions.

FINANCIAL OVERVIEW

Revenues

We derive our revenues from the provision of wireless coverage products and services and, to a lesser extent, the sale of RF parts and components. We expect that our revenues attributable to our RF parts and components will continue to increase in the future as we continue to launch new products and modules and as we expect the market demand for our parts and components to continue to grow.

The following table sets forth our revenue contribution by revenue source and as a percentage of our revenues for the periods indicated:


	Year ended December 31,
	2006					2007					2008
	RMB		%			RMB		%			RMB			US$			%
	(in millions, except for percentages)
Wireless coverage solutions
Sale of wireless coverage products		679.6		81.6	%		575.3		58.7	%		499.0			73.1			50.7	%
Installation services		108.9		13.1			223.5		22.8			277.9			40.7			28.2
RF parts and components		32.0		3.8			173.6		17.7			221.6			32.5			22.5
Write back/(provision) for settlement discounts		5.1		0.6			4.3		0.5			(13.8	)		(2.0	)		(1.4	)
Others		7.2		0.9			2.6		0.3			—			—			—
Total		832.8		100.0	%		979.3		100.0	%		984.7			144.3			100.0	%

Wireless Coverage Products and Services. Our wireless coverage products and services have historically been the single largest contributor to our revenues, and we expect this trend to continue in the near future. Our wireless coverage products and services contracts may involve multiple service elements, consisting of delivery of wireless coverage products and installation services. Our wireless coverage products include repeaters, trunk amplifiers, base station amplifiers and tower amplifiers, all of which we develop and manufacture in-house. Our wireless coverage products also include various accessories such as coaxial cables and antennas for installation. These accessories are purchased from third-party vendors.

We provide most of our wireless coverage products and services to the China Unicom group, the China Mobile group and the China Telecom group. The Chinese government completed a restructuring plan for the country’s telecommunications operators in 2008, and issued 3G licenses to the three telecommunications operators in January 2009. We believe, due to the recent issuance of 3G licenses, telecommunications operators in China will significantly increase their investments in wireless coverage products and services, which we believe will drive the growth of our business.

RF Parts and Components. Our RF parts and components include RF parts and components for base stations and repeaters. We consume a substantial portion of our repeater RF parts and components internally for incorporation into our wireless coverage products. During the fourth quarter of 2005, we began to develop base station RF parts and components. We are the qualified supplier of base station RF parts and components to seven major domestic and foreign base station manufacturers, which are Huawei Technologies Co., Ltd., ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel Shanghai Bell Co., Ltd, Nokia Siemens Network and Ericsson (China) Co., Ltd. Our sales of RF parts and components amounted to RMB32.0 million in 2006, RMB173.5 million in 2007 and RMB221.6 million (US$32.5 million) in 2008. We recognize revenues from the sale of RF parts and components at the time of transfer of the risks and rewards of ownership of these products, which coincides with our delivery of the products and transfer of title.

Cost of Revenues

Our cost of revenues consists of our cost of hardware and cost of related services. Our cost of revenues increased from RMB437.0 million in 2006 to RMB611.4 million in 2007 and RMB751.4 million (US$110.1 million) in 2008. Our cost of revenues as a percentage of revenues was 52.5%, 62.4% and 76.3% in 2006, 2007 and 2008, respectively. Although we expect unit production cost to continue to decrease in the future, we expect our gross profit margin to decrease slightly because we expect that the unit pricing of our products will continue to decrease as a result of intense market competition and, with respect to our wireless coverage products, the adoption of centralized bidding process by the wireless network operators, a downward pricing trend over the life of our maturing products, and an increasing percentage of the lower-margin products in our overall product mix.

The following table sets forth our cost of revenues contribution by category and as a percentage of total cost of revenues for the periods indicated:


	Year ended December 31,
	2006					2007					2008
	RMB		%			RMB		%			RMB		US$		%
	(in millions, except for percentages)
Cost of hardware		352.8		80.7	%		459.8		75.2	%		565.2		82.8		75.2	%
Cost of services		84.2		19.3			151.6		24.8			186.2		27.3		24.8
Total		437.0		100.0	%		611.4		100.0	%		751.4		110.1		100.0	%

Cost of Hardware. Cost of hardware includes our direct cost in manufacturing our wireless coverage products and RF parts and components, depreciation and amortization, purchase costs of raw materials and outsourced ancillary products from suppliers and manufacturers, as well as overhead such as compensation, bonuses and travel expenses of our own engineers and technicians engaged in the production process of our wireless products. Our cost of hardware also includes allowance for warranties. We accrue estimated warranty costs that we expect to incur during the warranty periods when we are required to provide free repair and replacement for defectively installed products. Our warranties generally extend for a period of 12 months to three years. Our allowance for warranties charged to cost of hardware in 2006, 2007 and 2008 amounted to 0.9%, 1.1% and 0.9% of our revenues, respectively. Our actual warranty expenditure in 2006, 2007 and 2008 were RMB7.7 million, RMB10.5 million and RMB8.7 million (US$1.3 million), respectively.

Cost of Services. Our cost of services primarily includes overhead such as salaries and travel expenses of our own installation staff, installation materials and related expenses, and costs that we incur to hire third parties to install our wireless coverage products. Certain installation costs are deferred and charged to expenses when the relevant sales revenues are recognized.

Operating Expenses

Our operating expenses consist of research and development costs, sales and distribution expenses and general and administrative expenses. The following table sets forth our operating expenses contribution by category and as a percentage of our total operating expenses for the periods indicated:


	Year ended December 31,
	2006					2007					2008
	RMB		%			RMB		%			RMB		US$		%
	(in millions, except for percentages)
Research and development costs		47.7		22.0	%		56.5		22.4	%		70.3		10.4		19.3	%
Sales and distribution expenses		113.0		52.2			126.8		50.4			138.5		20.3		38.1
General and administrative expenses		55.9		25.8			68.5		27.2			127.0		18.6		35.0
Impairment of goodwill		—		—			—		—			27.6		4.0		7.6
Total operating expenses		216.6		100.0	%		251.8		100.0	%		363.4		53.3		100.0	%

Research and Development Costs. These include the remuneration of our research and development staff, depreciation and maintenance expenses for research and development equipment, raw material costs and rental costs for premises used for our research and development activities. Our research and development costs are expensed as incurred. We incur research and development costs primarily in connection with the development of RF parts and components and wireless coverage products, including 3G-related products and RF technology. Our research and development costs accounted for 5.7%, 5.8% and 7.1% of our revenues in 2006, 2007 and 2008, respectively. We expect our research and development costs as a percentage of revenues will remain stable in the near future.

Sales and Distribution Expenses. These include marketing and promotion expenses, remuneration and expenses of our sales staff, the operational expenses of our marketing offices and a portion of our freight costs. Our sales and distribution expenses accounted for 13.6%, 12.9% and 14.1% of our revenues in 2006, 2007 and 2008, respectively. We expect our sales and distribution expenses as a percentage of our revenues to decrease in the near future due to the recent changes of our major customers’ centralized bidding and procurement policy, which we expect will reduce the number of contract bids in which we participate, and in turn will lower our sales and marketing expenses. Our current sales and marketing plans continue to focus on the PRC wireless operators. We are also expending a portion of our marketing resources, including hiring of additional marketing staff, to increase our sales of RF parts and components to base station equipment manufacturers. We intend to carefully evaluate the cost and benefit associated with any of our overseas market expansion activities and do not currently expect any material increases in our sales and distribution expenses as a result of our overseas expansion plan.

General and Administrative Expenses. This expense category includes the remuneration of administrative staff, daily operational expenses, depreciation of fixed assets and allowance for accounts receivable. Our general and administrative expenses accounted for 6.7%, 7.0% and 12.9% of our revenues in 2006, 2007 and 2008, respectively. We make allowance for accounts receivable to the extent that we consider the collection of such accounts receivable to be doubtful. Our bad debt expenses amounted to RMB2.0 million, RMB16.2 million and RMB57.6 million (US$8.4 million) in 2006, 2007 and 2008, respectively. The significant increase in bad debt expenses in 2008 was mainly due to the write-off of aged accounts receivable balances due from our non-operator customers. These customers have been experiencing financial difficulties caused by a loss of market share due to changes in the procurement policies by the telecommunications operators and tightening of credit controls by PRC banks. We expect our general and administrative expenses to decrease moderately as a percentage of our revenues in the near future as we expect to implement internal cost control and reduction measures.

Impairment of Goodwill. We recognized a goodwill impairment loss of RMB27.6 million (US$4.0 million) in 2008 due to the fact that the global economic downturn and other factors had adversely affected the market value of our ADSs as of the end of 2008, which value is used as a basis by us for the determination of fair value of the reporting unit used to identify and measure impairment of goodwill in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 142.

Interest Expense

Our interest expense primarily consists of (i) interest that we incur in bank borrowings, (ii) fees and discount charges incurred in connection with the sale of our accounts receivable, (iii) finance charges we incur on bills financing, and (iv) interest payable under the exchangeable bonds issued by several of our ordinary shareholders to our preference shareholders with us as the guarantor of such bonds. We incurred additional interest expense in 2008 as compared to 2007 due to increases in average interest rates and outstanding loan amounts to fund our working capital needs.

Our bills financing includes bills payable issued by us and acceptance drafts issued by our financing banks in favor of our vendors and suppliers as payments for goods and services we purchase from them and bills receivable discount facilities. Our bills payable allow our vendors and suppliers to receive payments in cash from our banks upon presentation in 30 to 180 days. Pursuant to our financing arrangements with banks in China, we must pay the amount outstanding under each bill payable to the bank on or prior to the stipulated presentation date. The aggregate amount of bills payable that may be outstanding to our credit from time to time is subject to the total line of credit established in our credit facility agreements with our banks. We negotiate and renew our bank credit facility agreements with our banks on an annual basis in line with the current banking industry practice in China.

The table below sets forth the components of our interest expense for the periods indicated:


	Year ended December 31,
	2006		2007		2008
	(RMB)		(RMB)		(RMB)		(US$)
	(in thousands)
Bank loan interest		13,709		24,345		35,186		5,157
Receivable discounting fee (1)		8,666		7,753		13,521		1,982
Financial charges on bills financing		1,082		1,192		1,763		259
Interest on exchangeable bonds (2)		3,341		—		—		—
Others (3)		1,228		2,057		4,374		641
Total		28,026		35,347		54,844		8,039


(1)		We receive proceeds from the sale of accounts receivable and record a receivable discounting fee. Discount on the sale of accounts receivable is recorded as interest expense in the period during which it occurs. The significant increase of receivable discounting fee in 2008 was due to expected delay in collection which would require further discounting on the sale of accounts receivable.


(2)		In 2003, several of our ordinary shareholders, including Guoren Industrial Developments Limited, Heng Xing Yue Investments Limited and Drag Investments Limited, issued an aggregate of US$20.7 million of 5% exchangeable bonds to our preference shareholders, Actis China, Standard Chartered Private Equity and JAFCO, which bonds were exchangeable into our ordinary shares held by these ordinary shareholders. These exchangeable bonds were redeemable at an amount equal to their principal amount plus 8% interest. Because we guaranteed the bonds, we accounted for the interest payment obligation on the exchangeable bonds as our obligation. These exchangeable bonds were exchanged into ordinary shares held by our ordinary shareholders upon the completion of our initial global offering in 2006. As a result, we were no longer required to accrue interest expense with respect to the exchangeable bonds in 2007.

(3)		Others mainly consist of bank fees.

Income Tax Expense

Minority Interests, Net of Tax

Minority interests, net of tax, represent the portion of our income that is attributable to the noncontrolling interests in our consolidated subsidiaries during the year. These subsidiaries include Shenzhen Lingxian and Lake Microwave. In December 2008, we divested Lake Microwave. The terms of the divestiture were negotiated on an arms’ length basis and approved by our independent directors. The transfer of the equity interest in Lake Microwave was completed in December 2008. For details, please refer to “Item 4. Information on the Company.”

Critical Accounting Policies

We prepare financial statements in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application assists management in making their business decisions.

Revenue Recognition. We derive revenue from the provision of wireless coverage products and installation services, and, to a lesser extent, the sale of RF parts and components. We recognize revenue when we consider the following criteria met:

•

the risk and rewards are transferred;

•

delivery has occurred;

•

persuasive evidence of an arrangement exists;

•

price to the buyer is fixed and determinable;

•

collectibility is reasonably assured; and

•

we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.

Our sale of wireless coverage products is accounted for as a unit of accounting that is separate from our provision of installation services. Our installation services include initial installation, connection of the products to the customers’ base stations and subsequent testing of the connection. We recognize revenues from provision of installation services when we have rendered the services in full and received the preliminary inspection certificate. We generally use our contracts to determine the existence of an arrangement. We regard our products to be rendered and accepted upon issuance of the delivery certificate, and regard our installation services to be delivered and accepted upon issuance of the preliminary inspection certificate. Our sale and purchase contracts are generally fixed-fee arrangements although they permit our customers to settle the contract sum in installments upon occurrence of various payment events. We assess collectibility based primarily on the creditworthiness of the customer as determined by our credit checks and analysis as well as by the customer’s payment history.

When we recognize our revenues from the provision of wireless coverage products and services, we also deduct an estimated settlement discount that we may give to our customers in the future to encourage prompt payment. The settlement discount is based on our past billing and collection experience with our customers and our negotiation with customers. We determine such discount separately on a contract by contract basis. If actual settlement discounts made differ from our estimates, an additional provision or write back is made upon settlement. We wrote back RMB5.1 million and RMB4.3 million in settlement discounts in 2006 and 2007, respectively, We made provisions for settlement discounts of RMB13.8 million (US$2.0 million) in 2008 in order to accelerate the collection of account receivables which may be affected by the telecommunication industry restructuring in 2008. The following table sets forth an analysis of the settlement discount accounts for 2006, 2007 and 2008:


	Year ended December 31,
	2006			2007			2008
	(RMB)			(RMB)			(RMB)		(US$)
	(in thousands)
Balance at beginning of year		20,057			14,982			10,657		1,562
(Reversal)/provided during the year		(5,075	)		(4,325	)		13,768		2,019
Balance at end of year		14,982			10,657			24,425		3,581

Allowance for Doubtful Accounts. Our wireless coverage customers pay by installments, creating long accounts receivable cycles. We provide for an allowance for doubtful accounts based on our best estimate of the amount of losses that could result from the inability or intention of our existing customers not to make the required payments. We generally review the allowance by taking into account factors such as historical experience, age of the accounts receivable balances and economic conditions. As of December 31, 2008, our allowance for doubtful accounts amounted to RMB25.3 million (US$3.7 million), which was mainly related to certain aged individual account receivables due from operator customers, and our collection cost may outweigh the aggregate amount of those outstanding account receivables. In addition, we wrote off RMB43.6 million (US$6.4 million) in doubtful accounts in 2008, which was mainly related to aged receivable balances due from certain customers who have been experiencing financial difficulties caused by a loss of market share due to changes in the procurement policies by major telecommunications operators and tightening of credit controls by PRC banks. The following table sets forth an analysis of the allowance for doubtful accounts for 2006, 2007 and 2008:


	Year ended December 31,
	2006		2007		2008
	(RMB)		(RMB)		(RMB)			(US$)
	(in thousands)
Balance at beginning of year		4,147		6,177		22,354			3,277
Derecognized on disposal of subsidiaries		—		—		(11,017	)		(1,616	)
Bad debt expense		2,030		16,177		57,574			8,439
Written off during the year		—		—		(43,588	)		(6,388	)
Balance at end of year		6,177		22,354		25,323			3,712

Inventories. Our inventories comprise raw materials, work in progress and finished goods. We state our inventories at the lower of cost or market value. We determine the cost of our inventories by using the weighted average cost method. Cost of work in progress and finished goods consists of direct materials, direct production cost and a proportional allocation of our production overhead. We determine the net realizable value of our inventories on the basis of anticipated sales proceeds less estimated selling expenses. At each balance sheet date, we identify inventories that are worth less than cost and write them down to their net realizable value and the difference is charged to our cost of revenues of that year. The amounts of write-down of inventories to net realizable value as of December 31, 2006, 2007 and 2008 were RMB0.7 million, RMB0.7 million and RMB42.2 million (US$6.2 million), respectively. The write-off of inventory in the amount of RMB42.0 million (US$6.2 million) in 2008 was mainly related to inventories that are no longer suitable for future network construction due to rapid advancement in wireless coverage technology and the rollout of large-scale 3G network construction.

Finished goods make up the majority of our inventories. Our high level of finished goods is primarily the result of the way we recognize our revenues from our provision of wireless coverage products and services. Our revenue recognition policy requires us to expense our finished goods in inventory at the point when the sale of products has been recognized as revenue. As a result, a considerable portion of our finished goods represents products that were delivered to our customers’ sites pending initial installation or that were installed pending the issuance of completion certificates and the signing of the sale and purchase contracts. Also included in finished good are deferred installation cost related to wireless coverage products delivered and installed for which the related preliminary inspection certificates have not been issued at the respective year-end dates. We delivered our finished goods to our customers’ sites in accordance with successful bids and project designs approved by our customers. These finished goods amounted to RMB233.9 million, RMB187.7 million and RMB187.0 million (US$27.4 million) as of December 31, 2006, 2007 and 2008, respectively. You should read “Business—Our Wireless Coverage Products and Services—Our Sales Cycle—Contract Signing” for additional information and analysis on our bidding and contracting practice. In addition, we control our installation costs by entering into fixed-price contracts with our installation contractors for wireless coverage products.

Allowance for Warranties. We account for estimated warranty cost as part of our cost of revenues at the time we recognize related revenues. We accrue estimated warranty costs that we may incur during the warranty periods when we are required to provide free repair and replacement for defectively installed products. Our warranties generally extend for a period of 12 months to three years. We determine our allowance for warranties primarily based on historical trends of warranty costs adjusted for specific conditions that may arise under each contract and the number of contracts under warranty at each financial year-end. Although we believe that the level of our allowance for warranties is appropriate, actual claims incurred in the future could differ from our estimates.

Impairment of Long-lived Assets. We review periodically the carrying amounts of long-lived assets, including property, plant and equipment and intangible assets with finite useful lives, to assess whether they are impaired. We test these assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable, such as change of business plan, obsolescence, and continuous loss suffered. When such a decline has occurred, we adjust the carrying amount to the estimated fair value. We measure the recoverability of assets by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset, or, for identifiable intangibles with finite useful lives, by determining whether the amortization of the intangible asset balance in the remaining life can be recovered through undiscounted future cash flows. In determining estimates of future cash flows, significant judgment in terms of projection of future cash flows and assumptions is required. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is measured by discounting forecasted operating cash flow or market value if readily determinable. Changes in estimates could have a major impact on the assessment of the value of our assets and could require us to book additional impairments.

Acquisitions. In 2007, we acquired the remaining 20% equity interest in Lake Communication, 100% equity interest in Shenzhen Kaige and 100% equity interest in Shenzhen Kaixuan. We allocate the cost of acquisitions based on the estimated fair value of the net assets acquired on the date of acquisition. This process is commonly referred to as the purchase price allocation. As part of the purchase price allocation, we are required to determine the fair value of any identifiable intangible assets acquired. The determination of the fair value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future. A change in the amount allocated to identifiable intangible assets would change the amount of amortization expense recognized related to those identifiable intangible assets. When a business combination involves an excess of fair value of the acquired net assets over cost and a contingent consideration agreement that, when resolved, might result in the recognition of an additional element of cost with respect to the acquired entity, we recognize a liability for the lesser of the maximum amount of contingent consideration or the initial amount of negative goodwill. If an amount of negative goodwill remains after we recognize this liability, we first write down the eligible acquired assets, and recognize any remaining unallocated amount as an extraordinary gain. We accounted for the acquisition of Lake Communication based on the additional equity interest under the purchase method and allocated the cost of acquisitions of Shenzhen Kaige and Shenzhen Kaixuan based on the purchase method.

Recoverability of the carrying amount of goodwill. Goodwill is evaluated for impairment at least annually. We have determined that our company and our subsidiaries together is a reporting unit for testing goodwill impairment. The first step screens for potential impairment of goodwill to determine if the fair value of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its carrying value.

In accordance with SFAS No. 142. Goodwill and Other Intangible Assets, we use our market capitalization as a basis for determination of fair value. Adjustments to market capitalization are made with consideration of factors such as control premium of our shares, volatility and transaction volume of our share price. These adjustments requires significant judgement and may affect our conclusion on whether or not an impairment charge should be recognized.

We performed goodwill impairment testing annually and determined that our fair value exceeded our net book value as of December 31, 2006 and 2007. In 2008, the economic downturn has adversely affected our market capitalization. Based on the step two of our impairment test performed, we determined that our goodwill of RMB27.6 million (US$4.0 million) was fully impaired. Accordingly, we recognized impairment loss of goodwill amounting to RMB27.6 million (US$4.0 million) in 2008.

Results of Operations

The following table sets forth our results of operations as a percentage of our revenues for the periods indicated:


	Year ended December 31,
	2006			2007			2008
Revenues		100.0	%		100.0	%		100.0	%
Cost of revenues		(52.5	)		(62.4	)		(76.3	)
Gross profit		47.5			37.6			23.7
Operating expenses:
Research and development costs		(5.7	)		(5.8	)		(7.1	)
Sales and distribution expenses		(13.6	)		(12.9	)		(14.1	)
General and administrative expenses		(6.7	)		(7.0	)		(12.9	)
Impairment of goodwill		—			—			(2.8	)
Total operating expenses		(26.0	)		(25.7	)		(36.9	)
Operating income/(loss)		21.5			11.9			(13.2	)
Other (expense)/ income:		(1.3	)		(2.5	)		(1.4	)
Income/(loss) before income tax expense and minority interests		20.2			9.4			(14.6	)
Income tax expense		(2.2	)		(1.1	)		(0.3	)
Income/(loss) before minority interests		18.0			8.3			(14.9	)
Minority interests, net of tax		(0.2	)		0.1			0.1
Net income/(loss)		17.9			8.4			(14.8	)
Dividends, accretion to redemption values and foreign exchange rate movements on mandatorily redeemable convertible preference shares		(0.1	)		—			—
Net income/(loss) available to ordinary shareholders		17.8			8.4			(14.8	)

2008 compared to 2007

Revenues. Our revenues increased slightly by RMB5.4 million to RMB984.7 million (US$144.3 million) in 2008 from RMB979.3 million in 2007. The increase in 2008 was primarily attributable to increased sales of installation services of wireless coverage products and RF parts and components caused by the telecommunications operators’ spending growth following the completion of the industry restructuring in the fourth quarter of 2008. The China Telecom group commenced CDMA equipment bidding immediately after its restructuring plan was announced, and the China Mobile group commenced the bidding process for its TD-SCDMA phase II network construction during the same time. Moreover, accelerated network expansion led to increased base station equipment demand by customers and thus increased our sales to domestic base station manufacturers. Our sales of installation services of wireless coverage products in 2008 increased by RMB54.4 million, or 24.3%, to RMB277.9 million (US$40.7 million) in 2008 from RMB223.5 million in 2007. In addition, our sales of RF parts and components in 2008 increased by RMB48.1 million, or 27.7%, to RMB221.6 million (US$32.5 million) in 2008 from RMB173.5 million in 2007. Our overall revenue growth in 2008 was partially offset by a decrease in sales of wireless coverage products by RMB76.3 million, or 13.2%, from RMB575.3 million in 2007 to RMB499.0 million (US$73.1 million) in 2008. This decrease was primarily due to the disruption of network construction projects during the 2008 Beijing Olympic Games and the operator restructuring process. Also, the fact that we increased our focus on obtaining higher margin orders also caused a decrease in our fourth quarter sales volume in the wireless coverage business.

Cost of Revenues. Cost of revenues increased by RMB140.0 million, or 22.9%, to RMB751.4 million (US$110.1 million) in 2008 from RMB611.4 million in 2007, compared to an increase of 0.6% in our overall revenues. The increase in cost of revenues was primarily attributable to increased overall sales volume in 2008. In addition, the management made a one-time write-off of RMB42.0 million (US$6.2 million) for inventory in 2008, which was charged to cost of revenues.

Gross Profit. As a result of the foregoing, gross profit decreased by 36.6% from RMB367.9 million in 2007 to RMB233.3 million (US$34.2 million) in 2008. Gross profit margin in 2008 decreased to 23.7% from 37.6% in 2007, primarily reflecting an increasing percentage of lower-margin products such as PHS products and RF parts in our overall product offerings and declining average selling prices of our wireless coverage equipment.

Research and Development Costs. Our research and development costs increased by RMB13.7 million, or 24.3%, to RMB70.2 million (US$10.3 million) in 2008 from RMB56.5 million in 2007, principally reflecting our recent development initiatives for base station models and 3G wireless coverage products. In 2008, we filed a total of 235 technology and product patent applications in China. To date, we have developed a number of TD-SCDMA and WCDMA trunk amplifiers and repeaters, and commenced bulk supply of radio remote unit (RRU) products to one of our key domestic base station manufacturers. In the base station RF module segment, we developed RF modules for two leading global base station manufacturers, and commenced trial supply for one of them. Research and development costs accounted for 7.1% of total revenue in 2008, compared to 5.8% in 2007.

Sales and Distribution Expenses. Sales and distribution expenses increased by RMB11.7 million, or 9.2%, to RMB138.5 million (US$20.3 million) in 2008 from RMB126.8 million in 2007. The increase was primarily attributable to increased wireless coverage business travel and communications expenses as telecommunications operators revitalized investments in the fourth quarter of 2008. Sales and distribution expenses accounted for 14.1% of total revenue in 2008, as compared to 12.9% in 2007.

General and Administrative Expenses. General and administrative expenses increased by RMB58.5 million, or 85.4%, to RMB127.0 million (US$18.6 million) in 2008 from RMB68.5 million in 2007. The increase in general and administrative expenses was primarily attributable to the write-off of RMB43.6 million (US$6.4 million) of bad debt incurred from wireless equipment sales to non-operators. In addition, costs related to stock option issuances and expenses associated with our Sarbanes-Oxley compliance measures added a total of RMB6.4 million (US$0.9 million) to the general and administrative expenses. General and administrative expenses accounted for 12.9% of total revenue in 2008, as compared to 7.0% in 2007.

Impairment of Goodwill. We recognized an impairment of goodwill of RMB27.6 million (US$4.0 million) in 2008. No impairment of goodwill was recognized in 2007. This was due to the fact that the global economic downturn and other factors had adversely affected the market value of our ADSs as of the end of 2008, which value is used as a basis by us for the determination of fair value of the reporting unit used to identify and measure impairment of goodwill in accordance with the provisions of SFAS No. 142.

Operating Loss. As a result of the foregoing, we had an operating loss of RMB130.1 million (US$19.1 million) in 2008 compared to operating income of RMB116.0 million in 2007.

Other Expense/Income. Our interest income increased to RMB31.3 million (US$4.6 million) in 2008 from RMB22.3 million in 2007 primarily due to the amortization of discounted income from prior years’ accounts receivable. Our interest expense increased to RMB54.8 million (US$8.0 million) in 2008 from RMB35.3 million in 2007 primarily resulting from increased average bank loan balances and an increase in the effective interest rate. Our investment income increased by RMB4.6 million from RMB0.3 million in 2007 to RMB4.9 million (US$0.7 million) in 2008 mainly due to the proceeds received from the divestiture of Lake Communication and Lake Microwave. We also reported a foreign currency exchange loss of RMB10.4 million (US$1.5 million) in 2008 compared to RMB18.8 million in 2007 primarily due to a decrease in foreign currency deposits and the appreciation of the RMB to U.S. dollar in 2008. Grant income increased to RMB15.2 million (US$2.2 million) in 2008 from RMB7.4 million in 2007, which was caused by additional projects for which we received government grants in 2008 compared to 2007.

Income Tax Expense. In 2008, we recognized an income tax expense of RMB3.2 million (US$0.5 million) as compared to RMB10.3 million in 2007. Our income tax expense decreased by RMB7.1 million from 2008 to 2007 mainly due to the fact that we incurred a net loss in 2008.

Minority Interests. Minority interests were RMB0.8 million (US$0.1 million) in 2008, as compared to RMB1.0 million in 2007.

Net Loss. As a result of the foregoing, we had a net loss of RMB146.4 million (US$21.5 million) in 2008 compared to a net income of RMB82.5 million in 2007.

2007 compared to 2006

Revenues. Our revenues increased by 17.6% to RMB979.3 million in 2007 from RMB832.8 million in 2006. The increase in 2007 was primarily attributable to increases in sales of RF parts and components and installation services of wireless coverage products from stand-alone installation service contracts, partially offset by decreases in sales and average selling prices of our wireless coverage products, including products for PHS networks, as a result of a more competitive market due in large part to the centralized bidding process adopted by our major customers. Revenues generated from wireless coverage products and services accounted for 82.3% of our total revenues in 2007, compared to 96.2% in 2006. Revenues generated from sales of RF parts and components increased by RMB141.5 million, or 441.9%, to RMB173.5 million from RMB32.0 million in 2006.

Cost of Revenues. Cost of revenues increased by RMB174.4 million, or 39.9%, to RMB611.4 million in 2007 from RMB437.0 million in 2006. The increase in our cost of revenues was primarily driven by larger sales volume.

Gross Profit. Gross profit decreased by 7.0% to RMB367.9 million in 2007 from RMB395.8 million in 2006. Gross profit margin in 2007 decreased to 37.6% from 47.5% in 2006 primarily due to the decrease in average selling price of our wireless coverage products. In addition, since the gross margin of RF products is lower than wireless coverage products, the increased sales of RF products also led to the decrease of our gross profit margin.

Research and Development Costs. Our research and development costs increased by 18.4% to RMB56.5 million in 2007 from RMB47.7 million in 2006 primarily due to additional research and technical personnel that were employed for the development of TD-SCDMA wireless coverage equipment and base station RF parts and components. Research and development costs accounted for 5.8% of total revenue in 2007, compared to 5.7% in 2006.

Sales and Distribution Expenses. Sales and distribution expenses increased by 12.3% to RMB126.8 million in 2007 from RMB112.9 million in 2006. The increase was primarily due to additional promotion activities that were organised to boost revenue from the China Mobile group and the China Unicom group and to develop the WLAN market and base station RF market overseas in 2007. Sales and distribution expenses accounted for 12.9% of total revenue in 2007, compared to 13.6% in 2006.

General and Administrative Expenses. General and administrative expenses increased by 22.4% to RMB68.5 million in 2007 from RMB55.9 million in 2006. The increase in general and administrative expenses was primarily attributable to an increase in allowance for accounts receivable of RMB16.2 million as a result of additional allowance provided for non-operator customers during the year, partially offset by decreases in office expenses and business entertainment and traveling expenses in 2007. General and administrative expenses accounted for 7.0% of total revenue in 2007, a slight increase as compared to 6.7% in 2006.

Operating Income. As a result of the foregoing, our operating income decreased by 35.3% to RMB116.0 million in 2007 from RMB179.2 million in 2006. Our operating margin in 2007 was 11.8% compared to 21.5% in 2006.

Other Expense/Income. Interest income increased to RMB22.3 million in 2007 from RMB19.2 million in 2006 primarily due to increased interest income arised from the amortization of discounted income from prior years’ accounts receivable. Interest expense increased to RMB35.3 million in 2007 from RMB28.0 million in 2006 primarily due to an increase in average bank borrowings and higher interest rates. We also had a foreign currency exchange loss of RMB18.8 million primarily due to the fact that our bank deposits denominated in U.S. dollars suffered an exchange loss from the appreciation of the Renminbi against U.S. dollars in 2007. Our grant income decreased slightly by RMB0.3 million between 2006 and 2007.

Income Tax Expense. In 2007, we recognized an income tax expense of RMB10.3 million. Our income tax expense decreased by RMB8.0 million between 2006 and 2007 due to a decrease in our profit before tax. Our effective tax rate changed from 10.9% in 2006 to 11.2% in 2007 which was primarily due to increased foreign currency exchange loss which was not tax deductible.

Minority Interests. Minority interests were RMB1.0 million in 2007, compared to RMB1.3 million in 2006.

Net Income. Net income decreased by 44.6% to RMB82.5 million in 2007 from RMB148.8 million in 2006.

Liquidity and Capital Resources

In line with the industry practice, we typically have a long receivable collection cycle. As a result, our cash provided by our sales in any given year may not be sufficient to fully meet our operating cash requirements in that year. We anticipate that our operations may continue to encounter such timing differences in cash flows in the near term. We used and will continue to use available financing means, including bank loans and receivable selling arrangements, to provide sufficient cash inflows to balance such timing differences in our cash flows. We believe that we maintain a good relationship with our major lending banks, and the limits of our bank borrowing facilities have been raised by the lending banks from time to time. We do not expect any difficulty in obtaining bank borrowing facilities to provide cash inflows to balance these timing differences in our cash flows. We also anticipate that near-term working capital and other capital requirements will increase due to our increased sales activities, increased research and development efforts related primarily to 3G products as well as RF parts and components. We anticipate meeting such increase in our near-term working capital and other capital requirements primarily through our internally generated cash and financing means available to us, including short-term bank loans and sales of accounts receivable.

We have procured bank borrowing facilities sufficient for our business operations from various banks, and we may obtain additional bank borrowing facilities. These bank borrowing facilities are generally short-term facilities. We may procure long-term bank borrowing facilities if there are material capital requirements and we anticipate we will have sufficient cash resources to repay the loans. We budget our capital periodically to manage our operational cash flow and meet our bank loan repayments. We do not expect to encounter any liquidity problem in the next 12 months.

As of December 31, 2008, we had available undrawn bank borrowing facilities in the aggregate of RMB40.0 million (US$5.7 million), unutilized bill payables facilities in the aggregate of RMB115.2 million (US$16.9 million) and unutilized accounts receivable selling arrangements in the aggregate of RMB40.2 million (US$5.9 million). Utilization of the unutilized bill payables facilities and accounts receivable selling arrangements requires pledges of bank deposits in an amount equal to 20%-40% and 10% to 20%, respectively, of the amount to be utilized.

In the event that we may be required to raise additional funds to meet any currently unanticipated working capital or capital expenditure requirements, we expect to rely on the same sources of funding, together with capital markets financings.

The following table summarizes our cash flows for the periods indicated:


	Year ended December 31,
	2006			2007			2008
	(RMB)			(RMB)			(RMB)			(US$)
	(in thousands)
Net cash (used in) / provided by operating activities		(114,778	)		(120,228	)		5,056			741
Net cash (used in) / provided by investing activities		(243,150	)		(294,437	)		28,113			4,121
Net cash provided by / (used in) financing activities		708,514			272,619			(52,085	)		(7,634	)
Cash and cash equivalents at the end of year		467,423			316,778			293,353			42,998

Net cash of RMB5.1 million (US$0.7 million) was provided by operating activities in 2008, as compared to net cash used in operating activities of RMB120.2 million in 2007 and RMB114.8 million in 2006. The improvement in operating cash flow was mainly due to our improved collections of accounts receivable. The repayments from our customers in 2008 increased by RMB276.8 million (US$40.6 million), or 34.9%, as compared to 2007 and accounts receivable decreased by RMB35.9 million (US$5.3 million), resulting in an improved operating cash flow position.

In 2008, we had a net cash of RMB28.1 million (US$4.1 million) provided by investing activities compared to a net cash of RMB294.4 million used in investing activities in 2007. The net investing cash inflow was mainly due to a decrease of RMB132.7 million (US$19.5 million) in the amount of pledge time deposits which was offset by the capital expenditure of RMB100.1 million (US$14.7 million) in related to construction of Guoren Building, production facilities and research and development facilities in 2008.

We had a net cash inflow of RMB52.1 million (US$7.6 million) from financing activities in 2008 as compared to RMB272.6 million of net financing cash inflow in 2007, mainly reflecting a decrease of RMB48.9 million (US$7.2 million) in proceeds from the collection of sold accounts receivable.

Accounts Receivable and Receivable Selling

We generally begin working on a wireless coverage project upon winning a bid but before the signing of a formal contract. Our sale and purchase contracts generally permit our customers to pay their purchase price in installments upon the occurrence of stipulated payment events, such as the signing of the sale and purchase contract, preliminary inspection, final inspection and the expiration of our warranty period under the sale and purchase contract. To the extent revenue recognized under a contract is not yet paid, we record it as an account receivable, net of any accounts receivable we sold to third parties. As a result, a long accounts receivable cycle results from the length of time between our recognition of revenues and the occurrence of various payment events. The period between each payment installment varies and typically ranges from six months to three years and the portion of the purchase price in each installment also varies.

The following table describes the concentration of our gross accounts receivable by customers and as a percentage of our gross accounts receivable balance as of December 31, 2008:


	As of December 31, 2008
	(RMB)		(US$)		(%)
	(in millions, except for percentages)
China Unicom group		488.0		71.4		39.1	%
China Mobile group		451.8		66.2		36.2
China Telecom group		144.4		21.2		11.6
Others		165.0		24.2		13.1
Total		1,249.2		183.0		100	%

The following table sets forth an aging analysis for our gross accounts receivable balances, determined from the time that the revenue is recognized, as of the dates indicated.


	As of December 31,
	2006					2007					2008
	RMB		%			RMB		%			RMB		US$		%
	(in millions, except for percentages)
Less than one year		700.9		69.7	%		831.1		63.1	%		571.9		83.8		45.8	%
Between one to two years		231.3		23.0			275.4		20.8			392.1		57.5		31.4
Between two to three years		68.0		6.8			153.8		11.7			184.4		26.9		14.8
Over three years		4.8		0.5			57.6		4.4			100.8		14.8		8.0
Total		1,005.0		100.0	%		1,317.9		100.0	%		1,249.2		183.0		100.0	%

The following table sets forth the classification of our gross accounts receivable balances into two categories, contractually due and non-contractually due, determined from due date of the installment payment:


	As of December 31,
	2006					2007					2008
	RMB		%			RMB		%			RMB		US$		%
	(in millions, except for percentages)
Contractually due		353.5		35.2	%		505.3		38.3	%		632.1		92.6		50.6	%
Non-contractually due		651.5		64.8	%		812.6		61.7	%		617.1		90.4		49.4	%
Total		1,005.0		100.0	%		1,317.9		100.0	%		1,249.2		183.0		100.0	%

To the extent revenues recognized under a contract are not yet paid, they are recorded as accounts receivable in our balance sheet, net of amounts sold to third parties. Out of our gross accounts receivable of RMB1,005.0 million, RMB1,317.9 million and RMB1,249.2 million (US$183.0 million) outstanding as of December 31, 2006, 2007 and 2008, respectively, RMB353.5 million, RMB505.3 million and RMB632.1 million (US$92.6 million), or 35.2%, 38.3% and 50.6% of our gross accounts receivable, represented gross accounts receivable that had passed the contractual payment dates in the respective periods and were subject to payment by our customers. In 2008, gross accounts receivable that had passed the contractual payment dates increased significantly due to the fact that in the fourth quarter of 2008, many projects were completed and completion certificates were issued which triggers payment obligations under these contracts. However, our customers required a period of time to approve payments, which resulted in a significant increase in our accounts receivable. Our gross accounts receivable that had not passed the relevant payment events represented 64.8%, 61.7% and 49.4% of our gross accounts receivable outstanding as of December 31, 2006, 2007 and 2008, respectively.

We calculate our accounts receivable days as the average beginning and ending accounts receivable balance for the year, divided by revenues during the year, multiplied by 360. Our accounts receivable days are long in absolute terms, approximately 369 days, 427 days and 469 days for 2006, 2007 and 2008, respectively. We believe that they are typical of industry standards with respect to wireless coverage projects in the PRC market. During the early stages of our company, we were restrained from aggressive collection efforts in order to remain competitive with the incumbents in the market. Since the beginning of 2004, however, we have taken measures, including expansion of our sales team, to facilitate our accounts receivable collection process. Despite these efforts, our accounts receivable days in 2008 still increased by 42 days to 469 days primarily due to the increasing trend of our revenue generated from the provision of wireless coverage products and services while its collection cycle remained long.

Within our sales team, we have also established monitoring procedures on our accounts receivable. Compensation of sales personnel has also been linked to collection efforts, with strong collection efforts rewarded and poor collection efforts penalized. As a result of our enhanced collection efforts, our customers settled RMB487.8 million, RMB591.5 million and RMB944.7 million (US$138.5 million) in accounts receivable due to us in 2006, 2007 and 2008, respectively.

Based on our principal customers’ recently implemented centralized procurement policies, under which contractual payment terms are generally more favorable to us than before, the amounts of first installment we receive are typically higher than those collected before the adoption of such centralized procurement policies. As a result, our accounts receivable cycle may be shortened in the future.

As a measure to further reduce our level of accounts receivable and to alleviate the associated risks, we have sold some of our accounts receivable to PRC domestic banks in China. We expect to continue to sell our accounts receivable in the future at terms acceptable to us to meet our working capital needs and to improve our liquidity. As of December 31, 2008, we had accounts receivable selling facilities in the aggregate amount of RMB40.2 million (US$5.9 million) that were committed but not yet utilized.

In June 2004, we entered into our first limited recourse receivable selling agreement with an independent PRC domestic bank for the sale of our accounts receivable. Subsequently, we entered into additional limited-recourse receivable selling agreements with one other independent PRC domestic bank. Most of these agreements had a term of no more than one year. Pursuant to these limited recourse receivable selling agreements, we agreed to use our reasonable efforts to persuade our customers to settle the accounts receivable we sold to these banks. In addition, we were responsible for servicing the accounts receivable sold until the maturity of these accounts receivable, which in general was 12 months from their sale under the receivable selling agreements. We were also required to place with the banks a pledged time deposit in an amount of not less than 10% of the accounts receivable sold as security for payment of the relevant accounts receivable by our customers. The banks were entitled to offset from our pledged time deposits up to 10% to 20% of any uncollectible accounts receivable that we sold to the banks. The banks would refund any balance of our pledged time deposits to us upon expiration of the receivable selling agreement or upon settlement of the accounts receivable that we sold to the banks. For accounts receivable sold under these receivable selling agreements, we were required to pay discount charges, commission fees or interest calculated on a monthly basis and a one-time handling or service fee. The monthly discount charges represent the interest calculated on a daily basis in respect of the balance of accounts receivable we sold to the banks by reference to the base rate published by the People’s Bank of China, the PRC central bank, on the date of the receivable selling agreement. The one-time handling or service fees ranged from 0.4% to 1% of the amount of accounts receivable that we sold to the banks. The banks did not encounter any significant default in repayments by customers on the account receivables that we sold to the banks in the past recent years.

Inventories

Our inventories comprise raw materials, work in progress and finished goods. Finished goods make up the majority of our inventories. Our high level of finished goods results primarily from the way we recognize revenues from the provision of wireless coverage products and services. Because we recognize our revenues only after satisfaction of relevant revenue recognition criteria, such as signing of sale and purchase contracts and issuance of completion certificates, we do not expense our finished goods in our inventory until we recognize the relevant revenues. Our work in progress inventory is generally minimal as we typically have a short production lead time. We use raw materials primarily in the production of our wireless coverage products and RF parts and components. We manage raw materials according to our production plan.

The following table sets forth an inventory balance breakdown by category as of the dates indicated:


	As of December 31,
	2006		2007		2008
	(RMB)		(RMB)		(RMB)		(US$)
	(in thousands)
Raw materials		65,395		137,723		163,589		23,978
Work in progress		5,135		14,014		15,539		2,278
Finished goods		363,876		390,357		341,491		50,053

Total		434,406		542,094		520,619		76,309

A considerable portion of our finished goods consists of finished goods and their related installation costs delivered to our customers’ sites that are not yet installed or have been installed but for which formal contracts are yet to be signed and/or completion certificates are yet to be issued. These finished goods and their related installation costs amounted to RMB233.9 million, RMB187.7 million and RMB187.0 million (US$27.4 million) as of December 31, 2006, 2007 and 2008, respectively.

The following table shows the aging analysis of our inventory by major category as of December 31, 2008:


	Finished goods							Work in progress							Raw materials							Total
	(RMB)		(US$)		(%)			(RMB)		(US$)		(%)			(RMB)		(US$)		(%)			(RMB)		(US$)		(%)
	(in thousands, except for percentages)
Age
Less than one year		319,071		46,767		93.4	%		15,539		2,278		100.0	%		163,589		23,978		100.0	%		498,199		73,023		95.7	%
One to two years		22,420		3,286		6.6	%		—		—		—			—		—		—			22,420		3,286		4.3	%
Over two years		—		—		—			—		—		—			—		—		—			—		—		—
Total		341,491		50,053		100.0	%		15,539		2,278		100.0	%		163,589		23,978		100.0	%		520,619		76,309		100.0	%

Borrowings

As of December 31, 2008, we had total short-term credit facilities of RMB665.0 million (US$97.5 million) from eight domestic banks, of which we had drawn RMB425.0 million (US$62.3 million) in bank loans and RMB110.6 million (US$16.2 million) in bills payable. As of December 31, 2008, we had an aggregate of RMB130.0 million (US$19.1 million) in long-term bank loans outstanding. As of December 31, 2008, we had available undrawn bank-committed facilities in the aggregate of RMB155.2 million (US$22.7 million) and unutilized accounts receivable selling arrangements in the aggregate of RMB40.2 million (US$5.9 million). Our bills payable allow our vendors and suppliers to receive payment in cash from our banks upon presentation in 30 to 180 days. Pursuant to our financing arrangements with banks in China, we must pay the amount under each bill payable to the bank on or prior to the stipulated presentation date. We negotiate and renew our bank credit facility agreements with our banks on an annual basis in line with the current banking industry practice in China. The weighted average interest rate for our bank borrowings was 6.66% as of December 31, 2008. Of the total outstanding amount of RMB425.0 million (US$62.3 million) drawn in bank loans under these facilities, RMB370.0 million (US$54.2 million) was unsecured and RMB55.0 million (US$8.1 million) was secured by a pledge of part of our bank deposits and accounts receivable. The total outstanding amount of RMB110.6 million (US$16.2 million) used in bills payable under these facilities was secured by RMB40.2 million (US$5.9 million) as pledged time deposits.

Part of our short-term loans are revolving facilities with a term of one year, which may be extended for terms of one year each with lender consent.

As of December 31, 2008, Shenzhen GrenTech provided guarantees for bank loans amounting to RMB22.3 million (US$3.3 million) and RMB12.0 million (US$1.8 million) to Lake Communication and Lake Microwave, respectively. These guarantees were entered into in October 2006 which was prior to the disposition of the equity interest in the Lake Communication and Lake Microwave. These guarantees will expire in August 2009 and September 2009 respectively.

Apart from the above, we have not granted any security interest or entered into any guarantees or similar commitments to secure or guarantee payment obligations of any third parties. In addition, we do not have any other written options on financial or non-financial assets. We expect to continue to rely on bank loan financing and receivable selling arrangements to finance our capital expenditure and working capital needs as we grow our business.

One of our short-term loan agreements requires us to maintain certain financial ratios and minimum amount of consolidated net worth. We have been in compliance with these covenants and do not expect that these covenants will limit our ability to finance our working capital.

Capital Expenditure and Contractual Commitments

Our capital expenditure consists of purchases of property, plant and equipment, such as equipment and machinery, motor vehicles and office equipment. In 2006, 2007 and 2008, our capital expenditure was RMB80.8 million, RMB269.0 million and RMB100.1 million (US$14.7 million), respectively. Our capital expenditure in 2007 and 2008 primarily consisted of expenditure incurred on the construction of Guoren Building and the significant decrease in capital expenditure in 2008 was primarily due to the decreased expenditure on construction of Guoren Building, which was substantially completed in 2007. Our capital expenditures have been and are expected to be funded by our internally generated cash and financing means available to us.

The following table sets forth our obligations and commitments to make future payments under contracts and commitments as of December 31, 2008:


	As of December 31, 2008
	Payment Due by Period
					Less than
	Total				1 Year				1-3 Years				After 3 Years
	RMB		US$		RMB		US$		RMB		US$		RMB		US$
	(in millions)
Short-term bank loans		425		62.3		425		62.3		—		—		—		—
Long-term debt		181.7		26.6		29.5		4.3		79.4		11.6		72.8		10.7
Bills payable		110.6		16.2		110.6		16.2		—		—		—		—
Operating lease commitments		5.4		0.8		4.8		0.7		0.6		0.1		—		—
Other capital commitments		0.5		0.1		0.5		0.1		—		—		—		—
Total contractual obligations		723.2		106.0		570.4		83.6		80.0		11.7		72.8		10.7

Off-Balance Sheet Arrangements and Contingent Liabilities

As of December 31, 2008, our accounts receivable sold to banks but not yet settled by our customers amounted to RMB40.2 million (US$5.9 million). We were subject to a limited recourse obligation for these accounts receivable pursuant to which we pledged to the banks deposits of 10% to 20% of the accounts receivable sold as guarantee for payment by our customers. As of December 31, 2008, these pledged deposits amounted to RMB30.4 million (US$4.5 million).

As of December 31, 2008, our commitments under operating leases for operating premises amounted to RMB5.4 million (US$0.8 million), of which RMB4.8 million, RMB0.5 million and RMB0.1 million is due for payment in 2009, 2010 and 2011, respectively.

As of December 31, 2008, our commitments for future purchase of property, plant and equipment amounted to RMB0.5 million (US$0.1 million), which is predominately related to the purchase of additional machinery and equipment for our production.

We do not have any other off-balance sheet guarantees, any other outstanding derivative financial instruments, interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts.

Inflation

Inflation in China has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, the change in the consumer price index in China was 1.5% in 2006, 4.8% in 2007 and 5.9% in 2008.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk. Virtually all of our revenues and expenses are denominated in Renminbi. However, a portion of the proceeds from our initial public offering has been placed in U.S. dollar deposit accounts, which amounted to US$10.7 million as of December 31, 2008. Any appreciation in Renminbi exchange rate against U.S. dollars would result in a foreign exchange loss to us. For the year ended December 31, 2008, we recorded a foreign exchange loss of RMB10.4 million (US$1.5 million) predominately related to such U.S. dollar bank deposits.

Interest Rate Risk. All of our short-term bank loans accrue interest at fixed rates, and we may be offered different interest rates for our short-term bank loans upon renewal. Our long-term bank loan accrues interest at variable interest rate, which is adjusted annually based on changes in market interest rates. However, we believe our exposure to fluctuations in interest rates is not significant.

Credit Risk. We have long accounts receivable cycles and long collection periods, and certain of our long aged receivable balances are subject to default risk for which allowance has been made. For a further discussion of these issues, please refer to “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We often begin work on a project before we have a contract for our products and services, which may materially and adversely affect our cash flows from operating activities and liquidity” and “—We have long accounts receivable cycles and long collection periods and our liquidity and cash flows from operations will deteriorate if our accounts receivable cycles or collection periods continue to lengthen.”

Corporate Structure

We are a holding company, and we rely principally on dividends and other distributions on equity paid by our PRC operating subsidiaries for our cash requirements, including the funds necessary to service any debt we may incur, financing we may need for operations other than through our PRC subsidiaries and the payment of dividends by us. Under the PRC laws, Shenzhen GrenTech, as a wholly foreign-owned enterprise, and Shenzhen Lingxian, Shenzhen GrenTech RF, Shenzhen Kaige and Shenzhen Kaixuan, as domestic limited liability companies in China, must allocate at least 10% of their after-tax profit to their statutory general reserve fund until the balance of the fund has reached 50% of their registered capital. Prior to 2006, Shenzhen Lingxian and Lake Communication, as domestic limited liability companies, were required to transfer between 5% and 10% of their after-tax profit to the statutory public welfare reserve fund. However, Shenzhen Lingxian and Lake Communication are no longer subject to such public welfare reserve requirement due to the amendment of PRC Company Law which became effective on January 1, 2006. Shenzhen GrenTech, as a wholly foreign owned enterprise, has complete discretion in allocating its after-tax profit to its employee welfare reserve fund. These reserve funds are not distributable as cash dividends. Any limitation on the payment of dividends by our PRC subsidiaries could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, and otherwise fund and conduct our businesses, as we have disclosed in “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—Our primary source of funds for dividend and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders is negatively affected by those restrictions and uncertainties.” In addition, any dividends we pay to our shareholders may be subject to a 10% withholding income tax. For further details, see “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We may be treated as a resident enterprise for PRC tax purposes following the effectiveness of the new enterprise income tax law on January 1, 2008, which may subject us to PRC income tax for our global income and withholding income tax for any dividends we pay to our non-PRC shareholders on profits earned after January 1, 2008.”

Taxation

Prior to January 1, 2008, the PRC’s statutory income tax rate was 33%. However, Shenzhen GrenTech, Shenzhen Lingxian, Shenzhen Kaixuan and Shenzhen GrenTech RF were established in the Shenzhen Special Economic Zone and were entitled to the preferential income tax rate of 15%. Furthermore, Shenzhen GrenTech and Shenzhen Lingxian were granted an additional 50% relief from the preferential income tax rate of 15% and were subject to a reduced income tax rate of 7.5% for 2006 and 2007.

On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law, which took effect as of January 1, 2008. The new tax law also provides a 5-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws and regulations. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012, respectively. Further, entities that qualified as “Advance and New Technology Enterprises” (“ANTE”) under the new tax law are entitled to a preferential income tax rate of 15%. However, the recognition criteria and procedures for obtaining ANTE status under the new tax law were not issued until April 2008. As of December 31, 2008, Shenzhen GrenTech had not completed all the procedures required under the new tax law that would entitle it to the ANTE preferential tax rate of 15%. Based on the above, the transitional tax rates of 18%, 20%, 22%, 24% and 25% are applied in measuring income tax effects of Shenzhen GrenTech, Shenzhen Lingxian and Shenzhen Kaixuan for 2008, 2009, 2010, 2011 and 2012, respectively, where applicable. Shenzhen GrenTech RF was established after March 16, 2007 and therefore are subject to income tax at 25% beginning on January 1, 2008. In March 2009, Shenzhen GrenTech obtained the ANTE certificate entitling to the preferential income tax rate of 15% under the new tax law retroactively from January 1, 2008 to December 31, 2010 (at which time it may apply for a renewal of its ANTE status, according to the current tax laws). Shenzhen GrenTech RF was established after March 16, 2007 and therefore is subject to income tax at a rate of 25% beginning on January 1, 2008.

Lake Communication and Lake Microwave became subject to the enterprise income tax rate of 25% commencing from January 1, 2008. In December 2008, we divested Lake Communication and Lake Microwave. The terms of the divestiture were negotiated on an arms’ length basis and approved by our independent directors. The transfer of the equity interest in Lake Communication and Lake Microwave were completed in December 2008. For details, please refer to “Item 5. Operating and financial review and prospects — Acquisitions and dispositions.”

Recent Accounting Pronouncements

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of SFAS No. 115

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including on Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the balance sheet, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. The Group adopted SFAS No. 159 on January 1, 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. We have determined not to adopt the fair value option under SFAS No. 159.

SFAS No. 141 (R), Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any controlling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value”. SFAS No. 141(R) also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after December 15, 2008. SFAS No. 141R will be applied prospectively to business combinations with an acquisition date on or after the effective date.

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. This statement is effective for fiscal years beginning on or after December 15, 2008, including prospective accounting for any noncontrolling interests that arose before the effective date. Except for the classification of minority interests as a component of equity, our management does not expect the initial adoption of SFAS No. 160 will have a material impact on our consolidated financial statements.

FASB Staff Position, No. FAS 142-3, Determination of the Useful Life of an Intangible Asset

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” and requires enhanced disclosures relating to: (a) the entity’s accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset; (b) in the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit), by major intangible asset class; and (c) for an entity that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term of a recognized intangible asset for each period for which a statement of financial position is presented, by major intangible asset class. FSP FAS 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are currently evaluating the impact that FSP FAS 142-3 will have on our consolidated financial statements.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and senior management

The following table sets forth information regarding our directors and executive officers as of the date hereof.


Directors and Executive Officers	Age		Position
Yingjie Gao		53	Chairman of the board and chief executive officer
Rong Yu		44	Director and chief financial officer
Kunjie Zhuang		72	Director
Liping Mao		43	Director
Cuiming Shi		68	Independent director
Xiaohu You		46	Independent director
Kin Kwong Mak		47	Independent director (audit committee financial expert)
Qi Wang		43	Vice president
Qingchang Liu		41	Vice president

Yingjie Gao has served as the chairman of our board of directors and our chief executive officer since our inception in 1999. Mr. Gao has over nine years of experience in management in the wireless communication network coverage industry and has over 16 years of experience in corporate operations and management in China. Prior to co-founding Shenzhen GrenTech in 1999, Mr. Gao was the chairman and general manager of Shenzhen Tomorrow Image Design Company Limited, a company that provides corporate image consultancy services to corporations, from 1993 to 1999. Mr. Gao graduated from Jilin Correspondence College in 1983.

Rong Yu has served as a director of our company since December 2001. Ms. Yu was our manager of our finance and accounting department when she joined our company in 1999. In 2003, she became our financial controller and vice president in charge of our financial management and accounting matters. In August 2005, she became our chief financial officer. Before joining us in 1999, Ms. Yu taught industrial accounting at Anhui Textiles School after receiving a bachelor’s degree in industrial accounting from Anhui College of Trade and Finance in 1987, and she also served as a finance manager for two other companies in her previous career.

Kunjie Zhuang has served as a director since our inception in 1999. Professor Zhuang also served as our chief technology officer from 1999 to December 2008. Professor Zhuang has over 48 years of experience in RF technology research and development and over 16 years of experience in the commercialization of RF technology. He is a well-recognized expert in RF technology in China. Prior to co-founding Shenzhen GrenTech in 1999, Professor Zhuang was the director of Microwave Technology Discipline since 1973 at Southeast University in China. Professor Zhuang received his bachelor’s degree in radio technology from Southeast University in 1958.

Liping Mao has served as a director of our company since January 2007. Mr. Mao joined our company in August 2000 and served as our Vice President from June 2004 to June 2009, responsible for overseeing sales and marketing. Mr. Mao has 19 years of experience in sales and marketing in electronics and telecommunication products. He graduated from People’s University of China in 1987 with a bachelor’s degree in law.

Cuiming Shi has served as a director of our company since March 2006. Mr. Shi graduated in 1963 from the Department of Management Engineering at the Beijing University of Posts and Telecommunications. From 1981 to 1987, Mr. Shi served as Deputy Director of the Department of Postal Economic Research and as Deputy Director General of the Bureau of Finance of the Ministry of Posts and Telecommunications. From 1987 to 1997, he was Director General of the Bureau of Finance, Director General of the Department of Operations and Finance and Director General of the Department of Finance of the Ministry of Posts and Telecommunications. He was previously the Chairman of the board of directors and the chief executive officer of China Mobile (Hong Kong) Limited, a company listed on The Stock Exchange of Hong Kong Limited and the New York Stock Exchange, and an executive director and executive vice-president of China Unicom Limited, a company listed on The Stock Exchange of Hong Kong Limited and the New York Stock Exchange. He is currently a consultant to CITIC Pacific Limited and the chairman of CITIC Telecom 1616 Ltd.

Xiaohu You has served as a director of our company since November 2004. He has been the director of the radio engineering department of Southeast University since 1996. Mr. You currently also serves as the head of National 3G Mobile Communications General Group, the head of National Fourth Generation Mobile Communications General Research Group and Director of Mobile Communications Laboratory, each at Southeast University in China. Professor You received his bachelor’s, master’s and doctorate degrees from Southeast University in 1982, 1985 and 1988, respectively.

Kin Kwong Mak has served as a director of our company since November 2004. Mr. Mak has been the managing director of Venfund Investment Management Limited, a Shenzhen based mid-market M&A investment banking firm since 2002. Prior to that, Mr. Mak spent 17 years at Arthur Andersen Worldwide where he was a partner and served as the managing partner of Arthur Andersen Southern China in his last position with the firm. Mr. Mak also serves as an independent director and audit committee chairman of China Security and Surveillance Technology, Inc. and Trina Solar Limited, both of which are companies listed in the U.S. Mr. Mak is a graduate of the Hong Kong Polytechnic University and a fellow member of the Association of Chartered Certified Accountants, UK, and the Hong Kong Institute of Certified Public Accountants, and a member of the Institute of Chartered Accountants, in England and Wales.

Qi Wang is a vice president of our company, responsible for base station RF business operations. Between 1988 and 1999, Mr. Wang was a department head of China Shenzhen Foreign Trade Group Corp. Ltd. and an assistant to the general manager of Shenzhen Baoren Marketing Co., Ltd. He joined our company in July 1999. Mr. Wang graduated with a bachelor’s degree in economics from Beijing University of International Economics and Business in 1988.

Qingchang Liu is a vice president of our company, responsible for our corporate finance activities. Mr. Liu has 16 years of experience in finance, securities trading and corporate reorganizations and was involved in the corporate restructuring of, and capital raisings of, a number of companies listed on the PRC domestic stock exchanges and the Hong Kong Stock Exchange. Mr. Liu graduated from China College of Finance in July 1991 with a bachelor’s degree in economics. He obtained a master’s degree in economics from the Shenzhen University in June 2003. Mr. Liu joined our company in June 2000.

The business address of our directors and executive officers is 15th Floor, Block A, Guoren Building, Keji Central 3^rd Road, Hi-Tech Park, Nanshan District, Shenzhen 518057, People’s Republic of China.

Board of Directors

Our board of directors currently consists of seven directors. A director is not required to hold any shares in our company by way of qualification. Following a declaration of interests pursuant to the provisions of our amended and restated articles of association, any separate requirement for audit committee approval under the applicable law or the relevant Nasdaq rules, a director may vote with respect to any contract, proposed contract or arrangement in which he or she is interested unless he or she is disqualified by the chairman of the relevant board meeting. A director may exercise all the powers of our company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of our company or of any third party. We approved the establishment of three committees of the board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee. We have also adopted a charter for each committee in compliance with the Sarbanes-Oxley Act of 2002 and the Nasdaq corporate governance rules. Each committee’s members and functions are described below.

Audit Committee

•

Our audit committee consists of our three independent non-executive directors, namely Mr. Kin Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. All of them satisfy the “independence” requirements of the Nasdaq Listing Rules and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. Such committee composition was established by our board of directors by reference to similarly situated issuers and is in line with Rule 5605(c) of the Nasdaq Listing Rules that requires the audit committees of listed companies to have a minimum of three independent directors. There are, however, no specific requirements under Cayman Islands law on the composition of our audit committee. The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. The audit committee is responsible for, among other things:

•

selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

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reviewing and approving all proposed related-party transactions;

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

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

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meeting separately and periodically with management and the independent auditors;

•

reviewing such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and

•

reporting regularly to the full board of directors.

Compensation Committee

Our compensation committee consists of Mr. Yingjie Gao, Professor Kunjie Zhuang, Mr. Kin Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. Mr. Mak, Mr. Shi and Professor You satisfy the “independence” requirements of the Nasdaq Listing Rules and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by our board of directors by reference to similarly situated issuers and differs from Rule 5605(d)(1)(B) and (2)(B) of the Nasdaq Listing Rules that requires the compensation committees of listed companies to be comprised solely of independent directors. There are, however, no specific requirements under Cayman Islands law on the composition of our compensation committee. Our compensation committee assists our board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. The compensation committee is responsible for, among other things:

•

reviewing and determining the compensation package for our senior executives;

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reviewing and making recommendations to our board with respect to the compensation of our directors;

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reviewing and approving officer and director indemnification and insurance matters;

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reviewing and approving any employee loan in an amount equal to or greater than RMB100,000; and

•

reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

Corporate Governance and Nominating Committee

Our corporate governance and nominating committee consists of Mr. Yingjie Gao, Ms. Rong Yu, Mr. Kin Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. Mr. Mak, Mr. Shi and Professor You satisfy the “independence” requirements of the Nasdaq Listing Rules and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by our board of directors by reference to similarly situated issuers and differs from Rule 5605(e)(1)(B) of the Nasdaq Listing Rules that requires the nominating committees of listed companies be comprised solely of independent directors. There are, however, no specific requirements under Cayman Islands law on the composition of our corporate governance and nominating committee. The corporate governance and nominating committee assists the board in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

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identifying and recommending to the board nominees for election or re-election to the board;

•

making appointments to fill any vacancy on our board;

•

reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills, experience and availability of service to us;

•

identifying and recommending to the board any director to serve as a member of the board’s committees;

•

advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and

•

monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

Duties of Directors

Under Cayman Islands law, our directors have a common law duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.

Employment and Service Agreements

Each of our executive directors has entered into an employment agreement and a service agreement with us for an initial term of three years. The employment agreement relates to the relevant executive position and the service agreement relates to the directorship. Each agreement will continue after the initial term from year to year until terminated by such director or removed by our shareholders as to the directorship or by our board of directors as to the relevant executive position with three to six months’ notice in writing served on the other party. Our employment agreements with our executive management members also prohibit our management members from illegally trading securities, restrict their use of our confidential information to their employment with us and require them not to compete with us within two years after their employment terminates. Our employment agreements also provide that any intellectual property created by our management members during their employment belong to us and remain the property of our company.

Each independent director is appointed for an initial term of three years commencing from his or her date of appointment and will continue after the initial term from year to year until terminated by such director or removed by our shareholders with three to six months’ notice in writing served on the other party.

Officers are appointed by and serve at the discretion of our board of directors. Each executive officer has entered into an employment agreement with us without a fixed term. Such employment will continue in force until terminated by either party with three to six months’ notice in writing served on the other party.

Compensation

All directors receive reimbursements from us for expenses which are necessarily and reasonably incurred by them for providing services to us or in the performance of their duties. Our directors who are also our employees receive compensation in the form of salaries, housing allowances, other allowances and benefits in kind in their capacity as our employees. Our executive directors do not receive any compensation in their capacity as directors apart from their salaries and other remunerations as members of our management team. We pay their expenses related to attending board meetings and participating in board functions. Our independent directors receive HK$300,000 per person each year in office as compensation, plus reimbursement of all reasonable out-of-pocket expenses incurred in discharging their duties, including attending board meetings and participating in board functions.

The aggregate cash compensation and benefits that we paid to our directors and executive officers for each of the three years ended December 31, 2008 were approximately RMB3.2 million, RMB7.7 million and RMB7.4 million (US$1.1 million), respectively. Under our current arrangements, the aggregate remuneration and benefits in kind which our directors and executive officers are entitled to receive in 2009 is expected to be approximately RMB7.4 million (US$1.1 million), excluding any discretionary bonuses which may be paid to our directors. No executive officer is entitled to any severance benefits upon termination of his or her employment with our company.

Indemnification

Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Pursuant to our memorandum and articles of association, our directors and officers, as well as any liquidator or trustee for the time being acting in relation to our affairs, will be indemnified and secured harmless out of our assets and profits from and against all actions, costs, charges, losses, damages and expenses that any of them or any of their heirs, executors or administrators may incur or sustain by reason of any act done, concurred in or omitted in or about the execution of their duties in their respective offices or trusts. Accordingly, none of these indemnified persons will be answerable for the acts, receipts, neglects or defaults of each other; neither will they be answerable for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to us may have been lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to us may be placed out or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts. This indemnity will not, however, extend to any fraud or dishonesty which may attach to any of said persons.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that the SEC views such indemnification against public policy as expressed in the Securities Act and is therefore unenforceable.

Share Option Scheme

Our share option scheme is a share incentive scheme which was adopted by our board of directors and approved by our shareholders on August 25, 2005. The purpose of this share option scheme is to recognize and acknowledge the contributions the eligible participants had or may have made to our company. The share option scheme provides the eligible participants an opportunity to have a personal stake in our company with the view to achieving the following objectives:

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motivate the eligible participants to optimize their performance efficiency for the benefit of our company; and

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attract and retain or otherwise maintain an on-going business relationship with the eligible participants whose contributions are or will be beneficial to our long-term growth.

The following table summarizes, as of May 31, 2009, the latest practicable date, options that we granted to several of our directors and executive officers and to other individuals as a group under our share option scheme:

Number of shares

Per ordinary share

to be issued upon

exercise

Name

exercise of options

price (US$)

Grant date

Date of Expiration

Rong Yu

200,000

0.21

March 14, 2008

March 14, 2013

1,400,000

0.0388

December 23, 2008

December 23, 2013

Qi Wang

150,000

0.21

March 14, 2008

March 14, 2013

1,350,000

0.0388

December 23, 2008

December 23. 2013

Qingchang Liu

150,000

0.21

March 14, 2008

March 14, 2013

1,350,000

0.0388

December 23, 2008

December 23, 2013

Cuiming Shi

100,000

0.21

March 14, 2008

March 14, 2013

150,000

0.0388

December 23, 2008

December 23, 2013

Xiaohu You

100,000

0.21

March 14, 2008

March 14, 2013

150,000

0.0388

December 23, 2008

December 23, 2013

Kin Kwong Mak

100,000

0.21

March 14, 2008

March 14, 2013

150,000

0.0388

December 23, 2008

December 23, 2013

Liping Mao

200,000

0.21

March 14, 2008

March 14, 2013

Other individuals as a group

9,000,000

0.21

March 14, 2008

March 14, 2013

23,450,000

0.0388

December 23, 2008

December 23, 2013

Eligible Participants

Under the share option scheme, our board of directors may, at its discretion, offer to grant an option to subscribe for such number of our ordinary shares at an exercise price as our directors may determine to:

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any full-time or part-time employees, executives or officers of our company or any of our subsidiaries;

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any directors, including non-executive directors and independent directors, of our company or any of our subsidiaries;

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any advisers, consultants and agents to us or any of our subsidiaries; and

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such other persons who, in the sole opinion of our board of directors, will contribute or have contributed to our development and operations and our quality of work, have shown initiative and commitment in performing his/her duties, or have provided service or contribution to our company for a specified length of time.

Maximum Number of Shares

The maximum number of ordinary shares in respect of which options may be granted (including ordinary shares in respect of which options, whether exercised or still outstanding, have already been granted) under this share option scheme must not in aggregate exceed 10% of the total number of ordinary shares in issue immediately following the completion of our initial public offering, being 625,000,000 ordinary shares.

In addition, the total number of ordinary shares issued and which may be issued upon exercise of the options granted under this share option scheme and any other share option schemes of ours (including both exercised and outstanding options) to each individual eligible participant in any 12-month period up to the date of grant may not exceed 1% of our shares in issue as of the date of grant.

Our board of directors may, subject to the approval of our shareholders in a general meeting, (i) renew this limit at any time, and/or (ii) grant options beyond the limit to eligible participant(s) specifically identified by our board of directors. However, no options may be granted under any schemes (including this share option scheme) if the number of our shares issuable upon exercise of all outstanding options will exceed 30% of our shares in issue from time to time.

Price of Shares

Our board of directors may, in its discretion, determine the subscription price of an ordinary share in respect of any particular option granted under this share option scheme. However, such subscription price cannot be less than the highest of (i) the closing price of the shares as quoted in the Nasdaq Global Select Market on the date of grant, (ii) the average of the closing prices of the shares as quoted in the Nasdaq Global Select Market for five business days immediately preceding the date of grant, and (iii) the nominal value of a share.

Restrictions on the Times of Grant of Options

A grant of options may not be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information has been disclosed to the public. In particular, no options may be granted during the one-month period before (i) the date of the board meeting for the approval of our results for any year, half-year, quarterly or other interim period, and (ii) our deadline to publish our results for any year, or half-year, or quarterly or other interim period.

Transferability

An option is personal to the grantee and may be exercised or treated as exercised, as the case may be, in whole or in part. Under the share option scheme, no grantee may, in any way, sell, transfer, charge, mortgage, encumber or create any interest (legal or beneficial) in favor of any third party over or in relation to any option or attempt so to do.

Exercise of Option and Duration of the Share Option Scheme

The period during which an option may be exercised will be determined by our board of directors, in its absolute discretion. However, no option may be exercised more than 10 years after it has been granted.

In addition, a grantee may be required to achieve any performance targets, as our board of directors may then specify in the grant, before any options granted under the share option scheme can be exercised.

Rights on Ceasing Employment or Death of an Employee

If the grantee of an option ceases to be an employee of our company or any of our subsidiaries

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by any reason other than death or termination of his employment on the grounds specified in paragraph “Right on Dismissal” in the scheme, the grantee may exercise the option up to the entitlement of the grantee as of the date of cessation (to the extent not already exercised) within a period of one month from such cessation; or

•

by reason of death, his personal representative(s) may exercise the option within a period of 12 months from such cessation, which date shall be the last actual working day with us or our subsidiary whether salary is paid in lieu of notice or not, failing which it will lapse.

Rights on Takeover/Winding-Up

If a general offer is made to all of our shareholders and such offer becomes or is declared unconditional during the option period of the relevant option, then the grantee of an option is entitled to exercise the option in full (to the extent not already exercised) at any time within 14 days after the date on which the offer becomes or is declared unconditional.

In the event of a voluntary winding-up of our company, we will give notice to all grantees before a general meeting of the shareholders, and each grantee is entitled to exercise all or any of his/her options (to the extent not already exercised), at any time not later than two business days prior to the proposed general meeting, by giving a written notice to us together with a remittance for the full amount of the aggregate subscription price for the shares.

Alteration of the Share Option Scheme

Our board has the authority to amend, suspend or terminate the share option scheme subject to our shareholders’ approval of amendments to the extent necessary to comply with applicable laws and provided no such action may affect awards previously granted under the scheme.

Employees

Please refer to Item 4. “Information on the Company—Business—Employees.”

Share Ownership

The following table sets forth information with respect to beneficial ownership of our ordinary shares as of May 31, 2009, the latest practicable date, by:

•

each of our executive officers and directors;

•

each person known by us to beneficially own 5% or more of our ordinary shares; and

•

all current directors and executive officers as a group.

As of May 31, 2009, 595,579,650 of our ordinary shares were outstanding. Except as otherwise indicated, we believe each shareholder named in this table has sole voting and investment power with respect to the shares shown as beneficially owned. None of our shareholders listed below has voting rights that are different from any of our other shareholders.


	Shares beneficially
	owned⁽¹⁾⁽²⁾
Name	Number of Shares		%
Directors and executive officers⁽³⁾
Yingjie Gao⁽⁴⁾		150,000,000		25.2	%
Rong Yu⁽⁵⁾		44,829,587		7.5	%
Kunjie Zhuang⁽⁶⁾		51,432,000		8.6	%
Liping Mao		—		—
Cuiming Shi		—		—
Xiaohu You		—		—
Kin Kwong Mak		—		—
Qi Wang⁽⁷⁾		10,520,935		1.8	%
Qingchang Liu		—		—
All current directors and executive officers as a group (9 persons)		256,783,022		43.1	%

Principal shareholders
Guoren Industrial Developments Limited⁽⁴⁾		150,000,000		25.2	%
Drag Investments Limited⁽⁶⁾		64,290,000		10.8	%
Heng Xing Yue Investments Limited⁽⁵⁾		54,377,375		9.1	%


(1)		Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act, and includes voting or investment power with respect to the ordinary shares.

(2)		Percentage of beneficial ownership of each listed person is based on 595,579,650 ordinary shares outstanding as of May 31, 2009, as well as the ordinary shares underlying share options exercisable by such person within 60 days of May 31, 2009.


(3)		The address of our current executive officers and directors is c/o China GrenTech Corporation Limited, 15th Floor, Block A, Guoren Building, Keji Central 3^rd Road, Hi-Tech Park, Nanshan District, Shenzhen 518057, People’s Republic of China.

(4)		Mr. Yingjie Gao, our chairman and chief executive officer, beneficially owns 150,000,000 ordinary shares, which are held through his wholly-owned company, Guoren Industrial Developments Limited. Guoren Industrial Developments Limited is a British Virgin Islands company with its business address at 15^th Floor, Block A, Guoren Building, Keji Central 3^rd Road, Hi-Tech Park, Nanshan District, Shenzhen 518057, People’s Republic of China. Its principal business is investment holding. Guoren Industrial Developments Limited is ultimately wholly-owned by The GRRF Trust, a family trust established by Mr. Yingjie Gao, our chairman and chief executive officer. Guoren Industrial Developments Limited, as the record holder, of which Mr. Gao is the sole director, continues to have sole power to vote or to direct the vote and the sole power to dispose or to direct the disposition with respect to such 150,000,000 ordinary shares. Mr. Gao, as the sole director of Guoren Industrial Developments Limited, also acts as the protector and the investment manager of The GRRF Trust. Credit Suisse Trust Limited acts as the trustee of The GRRF Trust and disclaims beneficial ownership of our ordinary shares. This share information is based upon a report on Schedule 13D/A filed by Guoren Industrial Developments Limited with the U.S. Securities and Exchange Commission on September 9, 2008.

(5)		Ms. Rong Yu, our director, chief financial officer and principal accounting officer, beneficially owns 44,829,587 ordinary shares, which are held indirectly through Heng Xing Yue Investments Limited and through her wholly-owned company, Well Sino Enterprises Limited, which is a shareholder of Heng Xing Yue Investments Limited. Heng Xing Yue Investments Limited is a British Virgin Islands company with its business address at 15^th Floor, Block A, Guoren Building, Keji Central 3^rd Road, Hi-Tech Park, Nanshan District, Shenzhen 518057, People’s Republic of China. Its principal business is investment holding. Heng Xing Yue Investments Limited is the record holder of an aggregate of 54,377,375 ordinary shares in our share capital. Ms. Rong Yu and Ms. Yin Huang are directors of Heng Xing Yue Investments Limited. Each beneficial owner of Heng Xing Yue Investments Limited has the voting rights with respect to the securities beneficially owned by him or her. This share information is based upon a report on Schedule 13G/A filed by Heng Xing Yue Investments Limited with the U.S. Securities and Exchange Commission on January 16, 2009.

(6)		Professor Kunjie Zhuang, our director, beneficially owns 51,432,000 ordinary shares, which are held through his majority-owned company, Drag Investments Limited. Drag Investments Limited is a British Virgin Islands company with its business address at 16th Floor, Zhongyin Tower, Caitian North Road, Futian District, Shenzhen 518026, People’s Republic of China. Its principal business is investment holding. Drag Investments Limited is 80%-owned by Professor Kunjie Zhuang, and 20%-owned by Mr. Haifan Zhuang, a son of Professor Kunjie Zhuang. Each beneficial owner of Drag Investments Limited has the voting rights with respect to the securities beneficially owned by him. This share information is based upon a report on Schedule 13G/A filed by Drag Investments Limited with the U.S. Securities and Exchange Commission on February 12, 2008.

(7)		Mr. Qi Wang, our vice president, beneficially owns 10,520,935 ordinary shares, which are held indirectly through Heng Xing Yue Investments Limited.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

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

RELATED PARTY TRANSACTIONS

Share-based compensation

Please refer to Item 6. “Directors, Senior Management and Employees—Compensation—Share Option Scheme” for a description of ordinary shares and share options we granted to our directors, officers and other individuals as a group.

Our Related-Party Transaction Policies

We have conducted our related-party transactions on normal commercial terms that are fair and reasonable and in the interests of our shareholders as a whole. We believe that the terms of our related-party transactions are comparable to the terms we could obtain from independent third parties. Our related-party transactions are subject to the review and approval of the audit committee of our board of directors. The charter of our audit committee as adopted by our board of directors provides that we may not enter into any related-party transaction unless and until it has been approved by the audit committee.

Divestiture of Network Coverage Module Manufacturing Subsidiaries, Lake Communication and Lake Microwave

In December 2008, we entered into a sale and purchase agreement with Mr. Zhuang Haifan and Lake (HK) Technology Ltd., to dispose of the entire equity interest in Lake Communication and Lake Microwave for consideration of RMB101.3 million (US$14.9 million) and RMB0.9 million (US$0.1 million) respectively. In connection with this sale and purchase, in December 2008, we entered into debt transfer agreement with Mr. Zhuang Haifan, Lake Communication, Lake Microwave and Lake (HK) Technology Ltd. in which Mr. Zhuang Haifan would assume the accounts payable obligation that Shenzhen GrenTech owed to Lake Communication, amounting to RMB102.2 million (US$15.0 million), as partial payment of the purchase price. In addition, Shenzhen GrenTech agreed to waive the right to receive a dividend receivable from Lake Communication, amounting to RMB15.2 million (US$2.2 million), which has been included in the calculation of the gain on disposal. As part of the acquisition, Mr. Zhaung Haifan also assumed the net liabilities (excluding the net receivable due from Shenzhen GrenTech of RMB87.0 million (US$12.8 million)) of Lake Communication and Lake Microwave totaling RMB4.6 million (US$0.7 million).

Interests of Experts and Counsel

Not Applicable.

ITEM 8. FINANCIAL INFORMATION

Our audited consolidated financial statements are set forth beginning on page F-1. Other than as disclosed elsewhere in this annual report, no significant change has occurred since the date of the annual financial statements.

Legal Proceedings

We are involved in legal proceedings in the ordinary course of our business. We are not involved in any litigation, arbitration or administrative proceedings that could have a material adverse effect on our financial condition or results of operations, taken as a whole. So far as we are aware, no such material litigation, arbitration or administrative proceedings are threatened.

Dividend Policy

We do not intend to pay any cash dividends on our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings for use in the operation and expansion of our business. Our board of directors has complete discretion as to whether we will pay dividends in the future, subject to the approval of our shareholders. Any future dividend declaration will be subject to various factors, including:

•

the level of our cash and retained earnings;

•

our expected financial performance;

•

our projected levels of capital expenditure and other investment plans;

•

the adequacy of our working capital; and

•

the dividend yield of similarly listed companies with similar growth prospects as well as comparable providers of wireless coverage products and services globally.

In addition, we are a holding company, and our cash flow depends on dividends from our operating subsidiaries in China. The ability of our subsidiaries in China to pay dividends to us is subject to various restrictions, including legal restrictions in China that permit payment of dividends only out of net income determined in accordance with PRC accounting standards and regulations. Under PRC law, Shenzhen GrenTech, as a wholly foreign owned enterprise, and Shenzhen Lingxian and Quanzhou Lake Communication Co., Ltd., or Lake Communication, both as domestic limited liability companies in China, must allocate at least 10% of their after-tax profit to their statutory general reserve fund until the balance of the fund has reached 50% of their registered capital. In addition, Shenzhen Lingxian and Lake Communication, as domestic limited liability companies, were required to transfer between 5% and 10% of their after-tax profit to the statutory public welfare reserve fund. As of January 1, 2006, however, Shenzhen Lingxian and Lake Communication are no longer subject to such public welfare reserve requirement due to the amendment of the PRC Company Law, which became effective on January 1, 2006. Shenzhen GrenTech, as a wholly foreign owned enterprise, has complete discretion in allocating its after-tax profit to its statutory welfare reserve fund. Lake Microwave, as a sino-foreign joint venture, has discretion in allocating any portion of its after-tax profits to its statutory general reserve fund, enterprise development reserve fund and employee welfare reserve fund. These reserve funds are not distributable as cash dividends. You should read “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—Our primary source of funds for dividend and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders is negatively affected by those restrictions and uncertainties” for additional information on our dividend and distribution restrictions.” In addition, any dividends we pay to our shareholders may be subject to a 10% withholding income tax. For further details, see “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We may be treated as a resident enterprise for PRC tax purposes following the effectiveness of the new enterprise income tax law on January 1, 2008, which may subject us to PRC income tax for our global income and withholding income tax for any dividends we pay to our non-PRC shareholders on profits earned after January 1, 2008.”

The depositary has agreed to distribute to the holders of our American depositary shares, or ADSs, any dividend we declare and pay on our ordinary shares that are evidenced by ADSs to the holders of our ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, less its fees and expenses payable under the deposit agreement. The depositary may send to you anything else we distribute on deposited securities by means it considers lawful and reasonably practical. If it cannot make the distribution that way, the depositary may decide to sell what we distributed and distribute the net proceeds in the same way as it does with cash or hold what we distributed if it cannot be sold. Cash dividends on our ordinary shares will be paid in U.S. dollars.

ITEM 9. THE OFFER AND LISTING

In connection with our initial public offering, our ADSs, each representing 25 ordinary shares, have been trading on the Nasdaq Global Select Market (formerly the Nasdaq National Market) since March 29, 2006 under the symbol “GRRF.” Prior to our initial public offering, there was no public market for our equity securities. The Nasdaq Global Select Market is the principal trading market for our ADSs, which are not listed on any other exchanges in or outside the United States.

As of December 31, 2008, we had a total of 601,978,775 ordinary shares issued and outstanding, which included one registered holder of American depositary receipts evidencing 15,380,000 ADSs. As of May 31, 2009, there were 595,579,650 ordinary shares issued and outstanding, which included one registered holder of American depositary receipts evidencing 15,380,000 ADSs. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. The depositary for the ADSs is Citibank, N.A.

The high and low market prices of the ADSs on the Nasdaq Global Select Market for the periods indicated are as follows.


	Price per ADS (US$)
	High		Low
Annual
2006 (from listing date)		22.50		8.21
2007		19.00		6.89
2008		9.12		0.78
Quarterly
First Quarter, 2007		19.00		9.06


	Price per ADS (US$)
	High		Low
Second Quarter, 2007		14.94		9.76
Third Quarter, 2007		14.03		6.89
Fourth Quarter, 2007		12.78		7.41
First Quarter, 2008		9.12		3.85
Second Quarter, 2008		6.20		4.37
Third Quarter, 2008		4.67		1.01
Forth Quarter, 2008		2.27		0.78
First Quarter, 2009		1.50		0.90
Monthly
December 2008		1.20		0.83
January 2009		1.50		0.96
February 2009		1.20		0.90
March 2009		1.45		0.95
April 2009		2.19		1.33
May 2009		3.68		1.65

ITEM 10. ADDITIONAL INFORMATION

SHARE CAPITAL

Not applicable.

MEMORANDUM AND ARTICLES OF ASSOCIATION

The section entitled “Description of Share Capital” contained in our registration statement on Form F-1 (File No. 333-132381) filed with the U.S. Securities and Exchange Commission is hereby incorporated by reference.

MATERIAL CONTRACTS

We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report on Form 20-F.

EXCHANGE CONTROLS

We receive substantially all of our revenues in Renminbi, which is not a freely convertible currency. Although central government’s policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or security, requires the approval of the State Administration of Foreign Exchange and other relevant authorities.

The People’s Bank of China, or PBOC, sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day. The PBOC also takes into account other factors, such as the general conditions existing in the international foreign exchange markets. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates in the world financial markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration for Foreign Exchange and other relevant authorities. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. As a result, as of May 31, 2009, the Renminbi has appreciated approximately 17.5% against the U.S. dollar since July 2005. The PRC government in the future may make further adjustments to the exchange rate system.

TAXATION

The following summary of the material Cayman Islands, PRC and United States federal income tax consequences relevant to the purchase, ownership or sale of our shares and ADSs is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly beneficial owners of shares or ADSs should consult their own tax advisers regarding the application of the considerations discussed below to their particular situations and the consequences, including United States federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.

Cayman Islands Taxation

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

PRC Taxation

Under the implementation rules of the new enterprise income tax law, dividends paid to “non-resident enterprises” by “resident enterprises” on profits earned after January 1, 2008 are regarded as income from “sources within the PRC” and therefore subject to a 10% withholding income tax, while dividends on profits earned before January 1, 2008 are not subject to the withholding income tax. Although our company is incorporated in the Cayman Islands, it remains unclear whether the gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any dividends paid to our shareholders which are considered “non-resident enterprises” may be subject to withholding income tax and the value of the investment in our shares or ADSs may be adversely and materially affected.

United States Federal Income Taxation

The following discussion is a summary of certain United States federal income tax consequences applicable to the ownership and disposition of shares or ADSs by a U.S. Holder (as defined below), but does not purport to be a complete analysis of all potential United States federal income tax effects. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), United States Treasury regulations promulgated thereunder, Internal Revenue Service (“IRS”) rulings and judicial decisions in effect on the date hereof. All of these are subject to change, possibly with retroactive effect, or different interpretations.

This summary does not address all aspects of United States federal income taxation that may be relevant to particular U.S. Holders in light of their specific circumstances (for example, U.S. Holders subject to the alternative minimum tax provisions of the Code) or to holders that may be subject to special rules under United States federal income tax law, including:

•

dealers in stocks, securities or currencies;

•

securities traders that use a mark-to-market accounting method;

•

banks and financial institutions;

•

insurance companies;

•

regulated investment companies;

•

real estate investment trusts;

•

tax-exempt organizations;

•

persons holding shares or ADSs as part of a hedging or conversion transaction or a straddle;

•

persons deemed to sell shares or ADSs under the constructive sale provisions of the Code;

•

persons who or that are, or may become, subject to the expatriation provisions of the Code;

•

persons whose functional currency is not the United States dollar; and

•

direct, indirect or constructive owners of 10% or more of the total combined voting power of all classes of our voting stock.

This summary also does not discuss any aspect of state, local or foreign law, or United States federal estate or gift tax law as applicable to U.S. Holders. In addition, this discussion is limited to U.S. Holders holding shares or ADSs as capital assets. Prospective purchasers are urged to consult their tax advisers about the United States federal, state and local tax consequences to them of the purchase, ownership and disposition of shares or ADSs.

For purposes of this summary, “U.S. Holder” means a beneficial holder of shares or ADSs who or that for United States federal income tax purposes is:

•

an individual citizen or resident of the United States;

•

a corporation or other entity classified as a corporation for United States federal income tax purposes created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

•

an estate, the income of which is subject to United States federal income taxation regardless of its source; or

•

a trust, if a court within the United States is able to exercise primary supervision over the administration of such trust and one or more “U.S. persons” (within the meaning of the Code) have the authority to control all substantial decisions of the trust, or if a valid election is in effect to be treated as a U.S. person.

If a partnership or other entity or arrangement classified as a partnership for United States federal income tax purposes holds shares or ADSs, the United States federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. If you are a partner of a partnership holding shares or ADSs, you should consult your tax advisers.

The discussion below is written on the basis that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be performed in accordance with the terms. If you hold ADSs, you generally will be treated as the owner of the underlying ordinary shares represented by those ADSs for United States federal income tax purposes. Accordingly, deposits or withdrawal of shares for ADSs will not be subject to United States federal income tax.

U.S. Holders

Taxation of Dividends and Other Distributions on the Shares or ADSs

Subject to the passive foreign investment company (“PFIC”) rules discussed below, distributions paid by the Company out of current or accumulated earnings and profits (as determined for United States federal income tax purposes) generally will be taxable to a U.S. Holder as foreign source dividend income, and will not be eligible for the dividends received deduction generally allowed to corporations. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s adjusted tax basis in the shares or ADSs and thereafter as capital gain. However, the Company does not maintain calculations of its earnings and profits in accordance with United States federal income tax accounting principles. U.S. Holders should therefore assume that any distribution by the Company with respect to the shares or ADSs will constitute dividend income. U.S. Holders should consult their own tax advisors with respect to the appropriate United States federal income tax treatment of any distribution received from the Company.

For taxable years beginning before January 1, 2011, dividends paid by the Company should be taxable to a non-corporate U.S. Holder at the special reduced rate normally applicable to long term capital gains, provided that certain conditions are satisfied. A U.S. Holder will not be able to claim the reduced rate for any year in which the Company is treated as a PFIC. See “Passive Foreign Investment Company Considerations,” below. Dividends may be taxed at the lower applicable capital gains rate provided that (1) the ADS or ordinary shares, as applicable, are readily tradable on an established securities market in the United States, (2) the Company is not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Since our ADSs are listed on the Nasdaq Global Select Market, they are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States.

In the event that dividends from the Company are subject to withholding by the PRC, a U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on the shares or ADSs. A U.S. Holder who does not elect to claim a foreign tax credit for foreign income tax withheld, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes. Dividends will constitute foreign source income for United States foreign tax credit purposes.

Taxation of Disposition of Shares or ADSs

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale or exchange of a share or ADS in an amount equal to the difference between the amount realized (in U.S. dollars) for the share or ADS and your tax basis (in U.S. dollars) in the share or ADS. The gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if you have held the share or ADS for more than one year. Long-term capital gains of non-corporate U.S. Holders currently are eligible for reduced rates of taxation. The deductibility of a capital loss may be subject to limitations. Any gain or loss that you recognize generally will be treated as United States source gain or loss for United States foreign tax credit purposes.

Passive Foreign Investment Company

A foreign corporation will be classified as a PFIC for any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable “look-through rules,” either (i) at least 75 percent of its gross income is “passive income” or (ii) at least 50 percent of the average value of its assets is attributable to assets which produce passive income or are held for the production of passive income.

For this purpose, cash and investment securities are categorized as passive assets and our company’s unbooked intangibles are taken into account. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.

We do not believe that we should be classified as a PFIC for United States federal income tax purposes and do not expect to become a PFIC in the future. However, the determination of whether we will be classified as a PFIC is made annually and may involve facts that are not within our control. In particular, the fair market value of the Company’s assets may be determined in large part by the market price of the shares, which is likely to fluctuate. In addition, the composition of the Company’s income and assets will be affected by how, and how quickly, the Company spends any cash that is raised. Thus, no assurance can be provided that the Company would not be classified as a PFIC for the 2009 taxable year and for any future taxable year. Furthermore, while we believe our valuation approach is reasonable, it is possible that the IRS could challenge our valuation, which could result in the Company being classified as a PFIC for the 2008 or 2009 taxable year.

If the Company is classified as a PFIC for any taxable year during which a U.S. Holder owns shares or ADSs, the U.S. Holder, absent certain elections (including a mark-to-market election), will generally be subject to adverse rules (regardless of whether the Company continues to be classified as a PFIC) with respect to (i) any “excess distributions” (generally, any distributions received by the U.S. Holder on the shares or ADSs in a taxable year that are greater than 125 percent of the average annual distributions received by the U.S. Holder in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the shares or ADSs) and (ii) any gain realized on the sale or other disposition of shares or ADSs.

Under these adverse rules (a) the excess distribution or gain will be allocated rateably over the U.S. Holder’s holding period, (b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which the Company is classified as a PFIC will be taxed as ordinary income, and (c) the amount allocated to each of the other taxable years during which the Company was classified as a PFIC will be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year and an interest charge will be imposed with respect to the resulting tax attributable to each such other taxable year.

Alternatively, a U.S. Holder may be eligible to make a mark-to-market election. A U.S. Holder that makes a mark-to-market election must include in ordinary income, rather than capital gain, for each year an amount equal to the excess, if any, of the fair market value of the shares or ADSs, as applicable, at the close of the taxable year over the U.S. Holder’s adjusted basis in the shares or ADSs. Additional complex rules apply and the election cannot be revoked without the consent of the IRS unless the shares or ADSs cease to be marketable.

U.S. Holders should consult their tax advisors regarding the potential application of the PFIC regime, including eligibility for and the manner and advisability of making a mark-to-market election.

Information Reporting and Backup Withholding

The proceeds of a sale or other disposition, as well as dividends paid with respect to shares or ADSs by a United States payor (including any payments received from a U.S. financial intermediary), generally will be reported to the IRS and to the U.S. Holder as required under applicable regulations. Backup withholding tax may apply to these payments if the U.S. Holder fails to timely provide an accurate taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. Certain U.S. Holders (including, among others, corporations) are not subject to the information reporting or backup withholding tax requirements described herein. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding tax and the procedure for obtaining an exemption.

DIVIDENDS AND PAYING AGENTS

Not applicable.

STATEMENT BY EXPERTS

Not applicable.

DOCUMENTS ON DISPLAY

You can read and copy documents referred to in this annual report that have been filed with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a website at http://www.sec.gov that contains reports and other information that we have filed electronically with the SEC.

SUBSIDIARY INFORMATION

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 5. Operating and Financial Review and Prospects—Market Risk and Risk Management.”

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS

None.

USE OF PROCEEDS

The following “Use of Proceeds” information relates to the registration statement on Form F-1 (File No. 333-132381) (the “IPO Registration Statement”) for our initial public offering, including an offering of 5,000,000 ADSs by us for an aggregate offering price of US$90 million and an offering of 1,250,000 ADSs by our selling shareholders for an aggregate offering price of US$22,500,000. The IPO Registration Statement was declared effective by the SEC on March 29, 2006. Our initial public offering was terminated after all of the registered securities were sold.

Bear Stearns & Co. Inc., Piper Jaffray & Co. and WR Hambrecht + Co., LLC were the underwriters for our initial public offering.

We received net proceeds of approximately US$83.7 million from our initial public offering, after deducting approximately US$7.2 million for underwriting discounts and commissions, and approximately US$2.5 million for other expenses. None of the payments were direct or indirect payments to our directors, officers, general partners of our associates, persons owning 10% or more of any class of our shares, or any of our affiliates.

We have used the net proceeds from our initial public offering for (i) research and development on RF technology and our new product offerings, (ii) expansion of and further penetration by our sales and marketing distribution network, (iii) construction of new research and production facilities in Hi-Tech Park, Nanshan District, Shenzhen, and (iv) other general corporate purposes.

ITEM 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2008, the end of the period covered by this annual report, our management performed, under the supervision and with the participation of our chief executive officer and chief financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31, 2008, our disclosure controls and procedures were not effective because of the material weaknesses described below under “—Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm .”

We performed additional analyses and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with U.S. GAAP. Accordingly, our management believes that the consolidated financial statements included in this annual report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our management has completed its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008, and has concluded that our internal control over financial reporting as of December 31, 2008 was not effective. In performing our assessment of internal control over financial reporting, management is using the criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.

Our management has identified certain control deficiencies which represent material weaknesses based on the criteria described in Internal Control — Integrated Framework issued by the COSO. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We have identified the following material weaknesses during our assessment of our internal control over financial reporting as of December 31, 2008:

•

Ineffective controls over monitoring of receipts in advance

We record advanced payments received from our customers as receipts in advance before revenue is recognized. The receipts in advance balance is reversed when criteria for revenue recognition are met. Our control over monitoring and keeping track of the receipts in advance balance were not effective. Under certain circumstances when we were recognizing revenue, we recorded additional accounts receivable instead of offseting the related receipts in advance that had been recorded upon receipt of payment from our customers. This has led to an overstatement of receipts in advance balance and accounts receivable balance as of the balance sheet date in our unaudited financial records. During the course of the audit of our consolidated financial statements, corrective adjustments were recorded to offset certain receipts in advance balances against the related accounts receivable balances. These adjustments are reflected in our audited consolidated financial statements for the year ended December 31, 2008.

•

Inadequate level of review of long-aged bank reconciling items

Our controls over the procedures for reconciling our cash balances in banks to our own records were not effective. Specifically, certain unreconciled items had not been followed up and resolved in a timely manner, and as a result, certain adjustments to reconcile our cash and cash balances were wrongly recorded in our unaudited financial records due to a lack of supporting information. During the course of the audit of our consolidated financial statements, corrective adjustments were recorded to reconcile our cash and bank balances as of December 31, 2008. These adjustments are reflected in our audited consolidated financial statements for the year ended December 31, 2008.

•

Insufficient competent accounting personnel in applying U.S. GAAP in the financial reporting process

We do not have sufficient competent accounting personnel who are proficient in applying U.S. GAAP in the financial reporting process to ensure our financial statements are prepared in a timely manner.

Our management has also identified certain significant deficiencies for the internal controls over financial reporting. These significant deficiencies have been reported to our audit committee.

Remediation Plan

We have set up a project team, led by our internal audit manager, to implement remedial plans for the foregoing material weaknesses as follows:

•

Formalize the procedure to monitor and keep track of receipts in advance balance to ensure it is properly reversed when the relevant revenue is recognized.

•

Strengthen the review procedures on the bank reconciliation process to ensure outstanding bank reconciling items are resolved in a timely manner.

•

Recruit more competent accounting personnel who are proficient in applying U.S. GAAP in the financial reporting process to assure our financial statements are prepared in a timely manner.

The aforementioned remedial plans and results were presented to the audit committee. The management, including the chief executive officer and chief financial officer, has approved the remedial course of action to address the material weaknesses. Such plan may also be modified or expanded if additional material weaknesses are identified by management or our independent registered public accounting firm.

An attestation report of our independent registered public accountants on the effectiveness of our internal controls over financial reporting is also included in this annual report on page F-2.

Changes in Internal Control over Financial Reporting

The discussion above under “Remediation Plan” includes descriptions of the material planned or actual changes to the company’s internal control over financial reporting in the year ended December 31, 2008 and subsequent to December 31, 2008 that materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Kin Kwong Mak qualifies as an audit committee financial expert in accordance with the terms of Item 16.A of Form 20-F. For Mr. Mak’s biographical information, see “Item 6. Directors, Senior Management and Employees—Directors and Senior Management.”

ITEM 16B. CODE OF ETHICS

We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, and other designated members of senior management of our company. We have filed this code of ethics as an exhibit to this annual report.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants for 2007 and 2008:


	Audit Fees		Audit-Related Fees		Tax Fees		Other Fees
	(in millions of RMB)
2007		3.2		—		—		—
2008		5.2		—		—		—

Before our principal accountants may be engaged by our company or our subsidiaries to render audit or non-audit services, the engagement was approved by our audit committee as required by applicable rules and regulations of the U.S. Securities and Exchange Commission.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

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


							Total Number of		Approximate
			Average				ADSs Purchased		Dollar Value of ADSs
	Total Number of		Price		Average		as Part of Publicly		that May Yet Be
	American Depositary		Paid		Price Paid		Announced Plans		Purchased Under
Period	Shares Purchased(1)		Per ADS		Per ADS(2)		or Programs		the Programs
			US$		RMB				US$
January 1 through January 31, 2008		—		—		—		—		—
February 1 through February 29, 2008		—		—		—		—		—
March 1 through March 31, 2008		—		—		—		—		—
April 1 through April 30, 2008		—		—		—		—		—
May 1 through May 31, 2008		19,879		4.9920		34.8067		457,319		4,292,762
June 1 through June 30, 2008		139,645		4.8767		33.6458		596,964		3,611,755
July 1 through July 31, 2008		—		—		—		—		—
August 1 through August 31, 2008		126,800		3.6142		34.8067		723,764		3,153,474
September 1 through September 30, 2008		12,757		3.9327		33.6458		736,521		3,103,305
October1 through October 31, 2008		—		—		—		—		—
November 1 through November 30, 2008		115,278		0.9312		6.3583		851,799		2,995,958
December 1 through December 31, 2008		69,050		0.9605		6.5832		920,849		2,292,635

Total		920,849		5.5062		38.2554		920,849


(1)		Our company’s ADS to ordinary share ratio is one ADS for every 25 ordinary shares.

(2)		The conversion from United States dollars into Renminbi (RMB) is based on the noon buying rates adopted by our company for the reporting of our periodic results as follows:


		Exchange rate
Period	Period ended	US$ to RMB
May 1 through May 31, 2008	May 31, 2008		6.9725
June 1 through June 30, 2008	June 30, 2008		6.8993
August 1 through August 31, 2008	August 31, 2008		6.8462
September 1 through September 30, 2008	September 30, 2008		6.8307
November 1 through November 30, 2008	November 30, 2008		6.8281
December 1 through December 31, 2008	December 31, 2008		6.8539

(3)

On September 21, 2007, we announced a share repurchase program authorized by our board of directors. Under the terms of the approved share repurchase program, we may repurchase up to US$8.0 million worth of our issued and outstanding ADSs from time to time in open-market transactions on Nasdaq. The share repurchase program does not have an expiration date and may be modified or discontinued at any time by our board of directors.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Nasdaq Listing Rule 5615(a)(3) permits foreign private issuers like our company to follow “home country practice” in certain corporate governance matters.

Nasdaq Listing Rules 5605(d)(1)(B) and (2)(B) and 5605(e)(1)(B) generally require the compensation committees and nominating committees of listed companies to be comprised solely of independent directors as defined in Rule 5605(a)(2). We follow home country practice with respect to the composition of our compensation committee and corporate governance and nominating committee which differs from the Nasdaq Listing Rules. See Item 6. “Directors, Senior Management and Employees — Board of Directors.”

In addition, Nasdaq Listing Rule 5605(b)(1) generally requires that a majority of the board of directors of listed companies must be comprised of independent directors as defined in Rule 5605(a)(2). There are, however, no specific requirements under Cayman Islands law on the composition of our board of directors. We follow home country practice with respect to the composition of our board of directors and have seven directors, three of which, namely Cuiming Shi, Xiaohu You and Kin Kwong Mak, are independent directors as defined in Rule 5605(a)(2).

Other than the above, we have followed and intend to continue to follow the applicable corporate governance standards under Nasdaq Listing Rules.

In accordance with Nasdaq Listing Rule 5250(d)(1), we will post this annual report on Form 20-F on our company website www.grentech.com.cn. In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.

ITEM 18. FINANCIAL STATEMENTS

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

ITEM 19. EXHIBITS


Exhibit
No.		Description of Exhibit
	1.1	Amended and restated memorandum and articles of association of the Registrant (1)

	2.1	Form of share certificate (1)

	2.2	Form of deposit agreement, including form of American Depositary Receipt (2)

	4.1	Contract for grant of land use right of Shenzhen Municipality (3)

	4.2	Translation of share transfer agreement for Lake Communication Limited by and between Shenzhen GrenTech Company Limited and Zhuang Haifan dated December 17, 2008 and related disposition of liabilities agreement

	4.3	Share option scheme (4)

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
China GrenTech Corporation Limited:

We have audited the accompanying consolidated balance sheets of China GrenTech Corporation Limited and subsidiaries as of December 31, 2007 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China GrenTech Corporation Limited and subsidiaries as of December 31, 2007 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements as of and for the year ended December 31, 2008, have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, such consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in Note 2(b) to the consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China GrenTech Corporation Limited’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 30, 2009 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.


/s/ KPMG KPMG

Hong Kong, China
June 30, 2009

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
China GrenTech Corporation Limited:

We have audited China GrenTech Corporation Limited’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). China GrenTech Corporation Limited’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to (1) controls over monitoring of receipts in advance; (2) review of long-aged bank reconciling items; and (3) competent accounting personnel in applying U.S. GAAP in the financial reporting process, have been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008, of the Company and its subsidiaries. These aforementioned material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated June 30, 2009, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, China GrenTech Corporation Limited has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We do not express an opinion or any other form of assurance on management’s statements referring to remedial actions taken or planned to be taken after December 31, 2008 relative to the aforementioned material weaknesses in internal control over financial reporting.


/s/ KPMG KPMG

Hong Kong, China
June 30, 2009

F-2

China GrenTech Corporation Limited and subsidiaries

Consolidated Balance Sheets

as of December 31, 2007 and 2008

(RMB and US$ expressed in thousands)


	Note		2007			2008			2008
			RMB			RMB			US$

Assets
Current assets
Cash and cash equivalents				316,778			293,353			42,998
Pledged time deposits		3		259,786			122,368			17,936
Accounts receivable, net		4		925,838			728,260			106,744
Inventories		5		542,094			520,619			76,309
Prepaid expenses and other current assets				54,184			97,668			14,316
Deferred tax assets		6		7,826			17,137			2,512
Deferred tax charges				1,185			261			38

Total current assets				2,107,691			1,779,666			260,853
Property, plant and equipment, net		7		225,069			412,259			60,426
Construction in progress		7		134,637			2,816			413
Lease prepayments, net		8		89,683			82,124			12,037
Investment securities		9		7,944			—			—
Intangible assets, net		10		37			1,815			266
Goodwill		11		38,247			—			—
Prepayment for fixed assets				4,486			9,080			1,331
Long-term accounts receivable		4		389,505			551,210			80,793

Total assets				2,997,299			2,838,970			416,119


Liabilities
Current liabilities
Short-term bank loans		14		456,050			480,207			70,386
Current portion of long term bank loan		15		—			20,000			2,931
Accounts payable				329,220			370,965			54,374
Bills payable				85,216			110,599			16,211
Accrued expenses and other payables		12		340,765			247,484			36,274
Income tax payable				37,830			37,362			5,476

Total current liabilities				1,249,081			1,266,617			185,652
Long-term bank loan		15		150,000			130,000			19,055
Deferred tax liabilities		6		5,938			4,752			697

Total liabilities				1,405,019			1,401,369			205,404

Commitments and contingencies		28
Minority interests				5,763			4,354			638

Shareholders’ equity
Ordinary shares US$0.00002 par value; 2,500,000,000 shares authorized, 625,000,000 issued as of December 31, 2007 and 2008 respectively; 614,064,000 and 601,978,775 outstanding as of December 31, 2007 and 2008 respectively		17		103			103			15
Contributed surplus				853,476			856,670			125,565
Statutory reserves				146,077			142,158			20,837
Retained earnings				613,308			470,860			69,016
Treasury stock at cost, 10,936,000 shares and 23,021,225 shares as of December 31, 2007 and 2008 respectively				(26,447	)		(36,544	)		(5,356	)

Total shareholders’ equity				1,586,517			1,433,247			210,077

Total liabilities and shareholders’ equity				2,997,299			2,838,970			416,119

See accompanying notes to the consolidated financial statements.

F-3

China GrenTech Corporation Limited and subsidiaries

Consolidated Statements of Operations

for the years ended December 31, 2006, 2007 and 2008

(RMB and US$ expressed in thousands, except share and per share data)


	Note		2006			2007			2008			2008
			RMB			RMB			RMB			US$

Revenues		21		832,795			979,302			984,657			144,325
Cost of revenues				(437,040	)		(611,436	)		(751,367	)		(110,131	)

Gross profit				395,755			367,866			233,290			34,194

Operating expenses:
Research and development costs				(47,671	)		(56,525	)		(70,232	)		(10,294	)
Sales and distribution expenses				(112,948	)		(126,816	)		(138,524	)		(20,304	)
General and administrative expenses				(55,944	)		(68,498	)		(127,028	)		(18,618	)
Impairment of goodwill		11		—			—			(27,589	)		(4,044	)

Total operating expenses				(216,563	)		(251,839	)		(363,373	)		(53,260	)

Operating income / (loss)				179,192			116,027			(130,083	)		(19,066	)
Other income/(expense)
Interest income				19,186			22,313			31,257			4,581
Interest expense				(28,026	)		(35,347	)		(54,844	)		(8,039	)
Investment income				238			318			4,873			714
Foreign currency exchange loss				(9,875	)		(18,791	)		(10,418	)		(1,527	)
Grant income				7,670			7,355			15,209			2,229

Total other expense				(10,807	)		(24,152	)		(13,923	)		(2,042	)

Income/(loss) before income tax expense and minority interests				168,385			91,875			(144,006	)		(21,108	)
Income tax expense		6		(18,277	)		(10,321	)		(3,157	)		(463	)

Income/(loss) before minority interests				150,108			81,554			(147,163	)		(21,571	)
Minority interests				(1,267	)		982			796			117

Net income/(loss)				148,841			82,536			(146,367	)		(21,454	)
Dividends, accretion to redemption value and of foreign currency rate movements on mandatorily redeemable convertible preference shares		16		(549	)		—			—			—

Net income/(loss) available to ordinary shareholders				148,292			82,536			(146,367	)		(21,454	)


Net income/(loss) per share available to ordinary shareholders:
— Basic		23		0.25			0.13			(0.24	)		(0.04	)

— Diluted		23		0.25			0.13			(0.24	)		(0.04	)


Weighted average number of ordinary shares:
— Basic		23		584,580,799			624,624,852			610,158,841			610,158,841

— Diluted		23		593,150,684			624,624,852			610,158,841			610,158,841

See accompanying notes to the consolidated financial statements.

F-4

China GrenTech Corporation Limited and subsidiaries

Consolidated Statements of Shareholder’s Equity

for the years ended December 31, 2006, 2007 and 2008

(RMB and US$ expressed in thousand, except share data)


			Ordinary shares																Total
			Number of					Contributed		Statutory			Retained			Treasury			shareholders’
	Note		shares			Amount		surplus		reserves			earnings			stock			equity
						RMB		RMB		RMB			RMB			RMB			RMB

Balance as of January 1, 2006				466,365,500			77		158,534		117,092			231,017			—			506,720

Net income				—			—		—		—			148,841			—			148,841
Interest on long-term debt paid by shareholders				—			—		—		—			8,345			—			8,345
Appropriation to statutory reserves				—			—		—		15,311			(15,311	)		—			—
Dividends declared on ordinary shares		17		—			—		—		—			(7,609	)		—			(7,609	)
Dividends declared on mandatorily redeemable convertible preference shares		16		—			—		—		—			(548	)		—			(548	)
Accretion to redemption value on mandatorily redeemable convertible preference shares		16		—			—		—		—			(360	)		—			(360	)
Effect of foreign currency rate movement on mandatorily redeemable convertible preference shares														359						359
Issue of new shares, net of related		17		125,000,000			20		649,002		—						—			649,022
offering costs of RMB 71,534 Conversion of mandatorily redeemable convertible preference shares		16		33,634,500			6		45,940		—			—			—			45,946
Extinguishment of obligations in respect of long-term debt and related interest payable				—			—		—		—			179,712			—			179,712

Balance as of December 31, 2006				625,000,000			103		853,476		132,403			544,446			—			1,530,428


Net income				—			—		—		—			82,536			—			82,536
Share repurchased during the year				(10,936,000	)												(26,447	)		(26,447	)
Appropriation to statutory reserves				—			—		—		13,674			(13,674	)		—			—


Balance as of December 31, 2007				614,064,000			103		853,476		146,077			613,308			(26,447	)		1,586,517


Net loss				—			—		—		—			(146,367	)		—			(146,367	)
Share repurchased during the year				(12,085,225	)		—		—		—			—			(10,097	)		(10,097	)
Share-based compensation, net of nil tax		20		—			—		3,194		—			—			—			3,194
Appropriation to statutory reserves				—			—		—		2,511			(2,511	)		—			—
Derecognized on disposal of subsidiaries				—			—		—		(6,430	)		6,430			—			—


Balance as of December 31, 2008				601,978,775			103		856,670		142,158			470,860			(36,544	)		1,433,247


Balance as of December 31, 2008 —US$			—				15		125,565		20,837			69,016			(5,356	)		210,077

See accompanying notes to the consolidated financial statements.

F-5

China GrenTech Corporation Limited and subsidiaries

Consolidated Statements of Cash Flows

for the years ended December 31, 2006, 2007 and 2008
(RMB and US$ expressed in thousands)


	Note		2006			2007			2008			2008
			RMB			RMB			RMB			US$

Cash flow from operating activities
Net income/(loss)				148,841			82,536			(146,367	)		(21,454	)
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Loss on disposal of property, plant and equipment				1,297			308			390			57
Depreciation of property, plant and equipment		22		22,050			29,004			32,327			4,738
Impairment of goodwill		11		—			—			27,589			4,044
Amortization of lease prepayments and intangible assets				330			1,216			3,356			492
Interest expense on Exchangeable Bonds				3,340			—			—			—
Minority interests				1,267			(982	)		(796	)		(117	)
Allowance for doubtful accounts		4		2,030			16,177			57,574			8,439
Deferred tax expense (benefit)				2,836			(5,141	)		(9,451	)		(1,385	)
Deferred tax charges				(1,820	)		3,596			(261	)		(38	)
Foreign currency exchange loss				8,428			18,791			10,418			1,527
Share-based compensation		20		—			—			3,194			468
Net gain from disposal of interests in subsidiaries		19		—			—			(4,556	)		(668	)
Changes in operating assets and liabilities, net of effects of acquisition of a subsidiary:
Accounts receivable				(319,493	)		(380,865	)		(132,065	)		(19,357	)
Inventories				(64,270	)		(104,373	)		13,442			1,970
Prepaid expenses and other current assets				(1,360	)		1,061			(64,186	)		(9,408	)
Accounts payable				6,853			142,652			205,605			30,136
Bills payable				49,509			6,640			36,470			5,346
Accrued expenses and other payables				19,888			66,370			(38,012	)		(5,571	)
Income tax payable				7,416			2,782			10,385			1,522
Amounts due to related parties				(1,920	)		—			—			—


Net cash (used in)/ provided by operating activities				(114,778	)		(120,228	)		5,056			741


Cash flow from investing activities
Purchase of property, plant and equipment				(71,639	)		(193,117	)		(100,138	)		(14,678	)
Purchase of land use rights				(9,188	)		(75,890	)		—			—
Decrease/(increase) in pledged time deposits				(162,368	)		(31,359	)		132,695			19,450
Acquisition of interests in subsidiary, net of cash acquire				—			5,842			—			—
Disposal of interests in subsidiary, net of cash dispose				—			—			(4,479	)		(656	)
Proceeds from sale of property, plant and equipment				45			87			35			5

Net cash (used in)/ provided by investing activities				(243,150	)		(294,437	)		28,113			4,121



Cash flow from financing activities
Repurchase of registered capital interests				—			(26,447	)		(10,097	)		(1,480	)
Net proceeds from issue of new shares				649,022			—			—			—
Principal payments of short-term bank loans				(342,104	)		(612,050	)		(930,550	)		(136,394	)
Proceeds from short-term bank loans				517,540			882,050			937,450			137,406
(Payment for)/proceeds from collection of sold accounts													—
receivable on behalf of financial institutions, net				(54,321	)		58,862			(48,888	)		(7,166	)
Dividends paid to minority interest holders				—			(3,800	)		—			—
Dividends paid to ordinary shareholders				(61,623	)		(25,996	)		—			—

Net cash provided by/(used in) financing activities				708,514			272,619			(52,085	)		(7,634	)

Effect of foreign currency exchange rate change on cash				(11,771	)		(8,599	)		(4,509	)		(661	)

Net increase/(decrease) in cash and cash equivalents				338,815			(150,645	)		(23,425	)		(3,433	)
Cash and cash equivalents:
At beginning of year				128,608			467,423			316,778			46,431

At end of year				467,423			316,778			293,353			42,998

F-6

China GrenTech Corporation Limited and subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2006, 2007 and 2008

(expressed in RMB and US$)

(1)

Principal Activities, Basis of Presentation and Organization

Principal Activities

China GrenTech Corporation Limited (the ''Company’’, formerly known as Powercom Holdings Limited) and its subsidiaries (hereinafter, collectively referred to as the “Group”) are principally engaged in the manufacture and sale of wireless coverage products and services in the People’s Republic of China (the “PRC”). The Group derives substantially all of its revenues from China United Telecommunications Corporation and its affiliates (the “China Unicom Group”), China Mobile Communications Corporation and its affiliates (the “China Mobile Group”) and China Telecom Corporation Limited and its affiliates (the “China Telecom Group”). At December 31, 2008, the China Unicom Group, the China Mobile Group and the China Telecom Group were the only three licensed wireless communication operators in the PRC (Note 27).

Basis of Presentation and Organization

The Company was incorporated in the Cayman Islands and was established on December 3, 2003, as part of the reorganization of Shenzhen GrenTech Company Limited (“Shenzhen GrenTech”, formerly known as Shenzhen Powercom Company Limited) and its subsidiaries (the ''Reorganization’’) in preparation of its initial public offering of securities (“IPO”). Shenzhen GrenTech was established in the PRC in July 1999 as a domestic limited liability company with registered capital of RMB10,000,000. The registered capital was subsequently increased to RMB112,000,000 in 2000. As of December 31, 2008, Shenzhen GrenTech’s principal subsidiaries consist of i) Shenzhen Lingxian Technology Company Limited (''Shenzhen Lingxian’’), a 99% owned domestic limited liability company; ii) Shenzhen Radio Frequency Communication Company Limited (“RF Communication”), 100% owned domestic limited liability company and; iii) Shenzhen GrenTech RF Technology Limited (“RF Technology), an 100% owned domestic limited liability company; iv) Shenzhen Kaige Technology Company Limited (“Kaige”), an 100% owned domestic limited liability company; v) Shenzhen Kaixuan Technology Company Limited (“Kaixuan”), a domestic limited liability company wholly owned by Kaige. During the year, the Group disposed of its entire equity interest in Quanzhou Lake Communication Company Limited (“Lake Communication”) and Quanzhou Lake Microwave Company Limited (“Lake Microwave”) (Note 19).

F-8

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(1)

Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

In connection with the Reorganization in December 2003, the shareholders of Shenzhen GrenTech, through a series of related transactions, including the issuance of Exchangeable Bonds (Note 15) to third party investors for proceeds of US$20,700,000, transferred their entire equity interests in Shenzhen GrenTech to the Company in exchange for 466,365,500 ordinary shares of the Company (Note 17). As the Reorganization was completed for the sole purpose of establishing the legal structure of the Company in preparation for the initial public offering of securities of GrenTech, and as the shareholders’ proportionate equity interests in the Company upon consummation of the Reorganization were identical to their proportionate equity interests in Shenzhen GrenTech just prior the consummation of the Reorganisation, the accompanying consolidated financial statements have been prepared as a reorganisation of business under common control in a manner similar to a pooling-of-interest. Accordingly, the assets and liabilities transferred to the Company have been stated at the historical carrying amounts of Shenzhen GrenTech.

GrenTech just prior to the consummation of the Reorganization, the accompanying consolidated financial statements have been prepared as a reorganization of businesses under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities transferred to the Company have been stated at the historical carrying amounts of Shenzhen GrenTech.

On April 4, 2006, the Company completed its initial public offering and sold 5,000,000 ADSs, representing 125,000,000 new ordinary shares, at an initial public offering price of US$18.00 per ADS. The Company received net proceeds, after deduction of the related offering costs, in the amount of RMB649,022,000 (approximately US$83,164,000).

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”).

This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises limited by shares as established by the Ministry of Finance of the PRC (''PRC GAAP’’), the accounting standards used in the country of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.

F-9

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices

(a)

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.

(b)

Foreign Currency Transactions

The Company and its subsidiaries’ functional and reporting currency is the RMB.

Transactions denominated in currencies other than Renminbi (“RMB”) are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into using the applicable exchange rates quoted by the PBOC at the balance sheet dates. The RMB resulting exchange differences are recorded as other income or expenses in the consolidated statements of operations.

Commencing from July 21, 2005, the PRC government moved the RMB into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The exchange rate of the U.S. dollar against the RMB was adjusted from approximately RMB8.28 per U.S. dollar on July 20, 2005 to RMB8.11 per U.S. dollar on July 21, 2005. The exchange rate has continued to rise in a steady manner since the initial adjustment.

For the convenience of the readers, the 2008 RMB amounts included in the accompanying consolidated financial statements have been translated into United States dollars at the rate of US$1.00 = RMB6.8225, being the noon buy rate for U.S. dollars in effect on December 31, 2008 in the City of New York for cable transfer in Renminbi per U.S. dollar as certified for custom purposes by the Federal Reserve Bank. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on December 31, 2008, or at any other date.

F-10

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(b)

Foreign Currency Transactions (continued)

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.

As a result of the decline of the exchange rate of the U.S. dollar against RMB, the carrying value of the mandatorily redeemable convertible preference shares, which were denominated in U.S. dollars, was reduced by RMB359,000 (US$46,000) for the period from January 1, 2006 to April 3, 2006 (being the date of conversion into ordinary shares). The effects of the foreign currency rate movements on the mandatorily redeemable convertible preference shares were reflected as adjustments to shareholders’ equity in 2006.

(c)

Use of Estimates

The preparation of the consolidated financial statements in accordance with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates and assumptions including those related to the recoverability of the carrying amount of property, plant and equipment, impairment of intangibles assets including goodwill, valuation allowances for accounts receivable, realizable values for inventories, accrued warranty costs and revenue recognition. Changes in facts and circumstances may result in revised estimates.

F-11

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(e)

Accounts Receivable

Accounts receivable are stated at the historical carrying amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Provisions for doubtful accounts are charged to general and administrative expenses.

Outstanding account balances are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The Company’s off-balance-sheet credit exposure consists primarily of receivables sold to financial institutions that are subject to limited recourse (Note 3).

(f)

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Cost of work in progress and finished goods comprises direct materials, direct production cost and an allocated proportion of production overheads based on normal capacity.

Deferred installation costs related to wireless coverage products delivered and installed for which the related completion and/or inspection certificates have not been issued are capitalized as inventory. The deferred installation costs are charged to cost of revenues in the same period that the revenue attributable to the installation service is recognized.

F-13

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(g)

Property, Plant and Equipment

Property, plant, and equipment are stated at cost less accumulated depreciation and impairment. Depreciation of property, plant and equipment is calculated based on the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets as follows:


	Years
Buildings		20–56
Equipment and machinery		5–10
Motor vehicles		10
Office equipment and computer software		5

Interest expense and other direct costs incurred related to the construction of property, plant and equipment are capitalized. The capitalization of expenses as part of the costs of a qualifying asset commences when expenditures for the asset have been made, activities that are necessary to get the asset ready for its intended use are in progress and costs are being incurred. The capitalization period ends when the asset is substantially complete and ready for its intended use.

No deprecation is provided in respect of construction in progress.

(h)

Lease Prepayments

Lease prepayments represent the cost of land use rights in the PRC. Land use rights are carried at cost and amortized on a straight-line basis over the period of rights of 50~70 years.

F-14

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(i)

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations”. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Other intangible assets with determinable useful lives are amortized based on the straight-line method. Intangible assets with determinable useful lives consist of registered patents that are amortized on a straight-line basis over the estimated useful life of 2-10 years.

F-15

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(j)

Investment Securities

Investments in equity securities of privately held companies where the Company’s level of ownership is such that it cannot exercise significant influence over the investee (i.e. voting common stock ownership of less than 20%) are stated at cost, adjusted for declines in fair value that are considered other than temporary. Fair value of the investments is estimated based on market value appraisals or other valuation techniques. In determining whether impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes, but is not limited to, the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, and forecasted performance, cash flows and the net assets of the investee. Any impairment is charged to earnings and a new cost basis for the investment is established.

(k)

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment, and intangible assets with determinable useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is measured by the asset’s discounted cash flows or market value, if readily determinable.

F-16

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(l)

Revenue Recognition

The Company derives revenues principally from the provision and sale of wireless coverage products and services, and sale of RF parts and components. Revenue is recognized when the risk and rewards are transferred, delivery has occurred or the services have been rendered, persuasive evidence of any arrangement exists, the price to the buyer is fixed or determinable and collectibility is reasonably assured. These criteria as they apply to the provision and sale of wireless coverage products and services, and the sale of standalone wireless coverage products and RF-based parts and components and RF-based wireless communication system products are as follows:

Wireless coverage products and services

A wireless coverage products and services contract consists of two revenue-generating activities, or deliverables, which are the sale of wireless coverage products and the provision of installation services. Pursuant to Emerging Issues Task Force Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables”, the equipment sale and installation services are accounted for as separate units of accounting for the following reasons: i) the equipment has standalone value as it can and has been sold separately by the Company; ii) objective and reliable evidence of the fair value for the installation services exists as evidenced by the amount charged by independent third parties; and iii) there are no refund rights in these arrangements. As objective and reliable evidence of fair value exists for both the equipment and installation services, the appropriate revenue recognition convention is separately applied to each of the two deliverables.

F-17

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(l)

Revenue Recognition (continued)

Revenue is allocated to each deliverable based on their relative fair values, such as the sales price for the deliverable when it is sold on a stand-alone basis or based on third-party pricing for a similar deliverable. Revenue attributable to the sale of the wireless coverage products element is recognized when i) the buyer has executed and signed a sales and purchase contract, which specifies the price, payment terms, and the wireless coverage products and installation services to be delivered and provided; ii) the wireless coverage products have been delivered to the buyer’s premises; iii) the risk and rewards of ownership and title of the delivered wireless coverage products have been transferred to the buyer; iv) the buyer has issued a completion certificate, which indicates the buyer’s acceptance of the functionality, specifications, and performance of the delivered wireless coverage products; and v) the Company has an enforceable legal right to receive the contractually specified amount in cash attributable to the delivered wireless coverage products and such right is not contingent upon the Company providing the remaining installation services or the buyer’s acceptance of the installation services.

A portion of the installation service deliverable is rendered concurrently with the delivery of wireless coverage products. As the amount of the wireless coverage products and service contract consideration is not contractually due and customer acceptance is not deemed to occur until the issuance of a completion certificate. Revenue for the wireless coverage products deliverable is not recognized until the issuance of the completion certificate.

Revenue attributable to the installation service element of the contract is not recognized until i) the services have been rendered; ii) the buyer has issued a preliminary inspection certificate, which indicates the buyer’s acceptance of the installation services provided; iii) the Company has an enforceable legal right to receive the contractually specified amount in cash attributable to the installation service element of the contract and such right is not contingent upon the buyer’s issuance of a final inspection certificate; and iv) the Company’s remaining obligation relating to the buyer’s final acceptance of the installation services is considered inconsequential or perfunctory.

F-18

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(l)

Revenue Recognition (continued)

Pursuant to the terms of the Company’s contracts, the customers are generally required to pay i) a range of 30% to 60% of the contract sum either upon signing of the sales and purchase contract or the issuance of the completion certificate, ii) a range of 30% to 60% of the contract sum upon issuance of the preliminary inspection certificate, iii) a range of 10% to 30% of the contract sum upon the issuance of the final inspection certificate and iv) a range of zero to 10% of the contract sum upon the expiration of the warranty period. The Company has allowed its customers to pay the contract sum in installments as a standard business practice. Sales of wireless coverage products and services are made under these payment terms and, provided that the above criteria for revenue recognition are met, are recognized as revenue due to: i) the Company’s history of successfully collecting amounts due under the original payment terms without making significant concessions on payments; and ii) the Company’s enforceable legal right to receive the contractually specified amount in cash attributable to the element of the contract that has been delivered, and the Company’s intent to enforce this right, when considered necessary.

The portion of the contract sum recognized as revenue in excess of the amounts received under the contract payment terms is recorded in accounts receivable in the accompanying consolidated balance sheets. The portion of the amounts received under the contract payment terms in excess of the revenue recognized is recorded as deferred income and included in accrued expenses and other payables in the accompanying consolidated balance sheets. Amounts due under the contract terms beyond one year are reclassified as long term accounts receivable and are discounted at the prevailing borrowing rate announced by the People’s Bank of China.

Provisions for estimated settlement discounts provided to customers are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for estimated settlement discounts, which is based on historical settlement data and current expectation, is the Company’s best estimate of the amount of discounts to be provided to customers to encourage prompt payment.

F-19

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(l)

Revenue Recognition (continued)

For most wireless coverage products and services contracts, the Company provides free repairs and replacement for defective parts for a duration of 12 months to 36 months after the issuance of the final inspection certificate. The Company records a provision for estimated future costs to be incurred during the warranty period in the same period that revenue is recognized. Allowances for warranties are recorded as cost of revenues and are established on an individual basis. The estimates reflect historic trends of warranty costs adjusted for specific conditions that may arise and the number of contracts under warranty at each financial year-end.

Certain of the Company’s wireless coverage products and service contracts contain penalty clauses in which a penalty is levied on the party responsible for the delay in the execution of the contract. In addition, under certain circumstances, certain contracts may be terminated should the Company fail to provide products or installation services within a specified timeframe. In the event of termination, the Company would be entitled to recover a portion of the contract consideration billable pursuant to its legally enforceable right under PRC law.

Standalone wireless coverage products and RF-based parts and components

The Company recognizes revenues from the sale of stand-alone WCP equipment and RF parts and components when the risk and rewards of ownership and title to the products have been transferred to the buyer, which coincides with delivery and acceptance of the products by the buyer.

Revenue is stated net of value added taxes (“VAT”), sales tax and surcharge, sales returns, trade discounts and allowances. In the PRC, VAT of 17% on invoice amount is collected in respect of the sales of goods on behalf of the tax authorities. The VAT collected is not revenue of the Company; instead the amount is recorded as a liability on the balance sheet until such VAT is paid to the tax authorities.

(m)

Cost of Revenues

Cost of revenues consists primarily of material costs, payroll compensation, installation costs, depreciation, estimated warranty, rentals and related expenses, which are directly attributable to the production of products and rendering of services. Write-down of inventory to lower of cost or market is also recorded in cost of revenues.

F-20

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(n)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the consolidated statements of operations in the period that includes the enactment date.

On January 1, 2007, the Group adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgement occurs. The Group has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of operations.

(o)

Advertising and Research and Development Costs

Advertising and research and development costs are expensed as incurred. Advertising costs included in sales and distribution expenses amounted to RMB955,000, RMB35,000 and RMB49,000 (US$7,000) for the years ended December 31, 2006, 2007 and 2008, respectively. Research and development costs consist primarily of the remuneration of research and development staff, depreciation and maintenance expenses of research and development equipment, material costs and rental expenses for premises used for research and development.

F-21

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(p)

Freight Costs

The Company records freight costs related to the transporting of the raw materials to the Company’s warehouse in inventory and cost of revenues and all other outbound freight costs in sales and distribution expenses. For the years ended December 31, 2006, 2007, and 2008, freight costs included in cost of revenues were RMB2,608,000, RMB3,691,000 and RMB4,026,000 (US$590,000), respectively, and RMB3,731,000, RMB3,790,000 and RMB5,284,000 (US$774,000) were included in sales and distribution expenses, respectively.

(q)

Bills Payable

Bills payable represent bills issued by financial institutions to the Company’s vendors. The Company’s vendors receive payments from the financial institutions direct upon maturity of the bills and the Company is obliged to repay the face value of the bills to the financial institutions. Interest is charged at the prevailing bank borrowing rate on the outstanding balances of the bills paid by the financial institution and is recorded as interest expense when incurred.

(r) Government Grants

Receipts of government grants to encourage research and development activities which are unconditional and non-refundable are recognized as grant income in the accompanying consolidated statements of income upon receipt.

(s)

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

F-22

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(t)

Income/(loss) per Share

In accordance with SFAS No.128, Computation of Earnings per Share, basic net income /(loss) per share available to ordinary shareholders is computed by dividing net income/(loss) available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income/(loss) per share available to ordinary shareholders is calculated by dividing net income/(loss) available to ordinary shareholders by the weighted average number of ordinary and dilutive potential ordinary shares outstanding during the period. Dilutive potential ordinary shares consist of shares issuable pursuant to mandatorily redeemable convertible preference shares, and are determined using the as-converted method.

(u)

Share-Based Payment

A share option scheme was established on August 25, 2005 (the “2005 Scheme”) which allows the Company to grant options to its employees to acquire ordinary shares of the Company. The Company has adopted SFAS No. 123R “Share-Based Payment”, which requires that share based payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding addition to paid-in capital. Under this method, compensation cost related to employee share options or similar equity instruments is measured based on the fair value of the award at the date of grant and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period, if any. In March 14 and December 23, 2008, the Company granted an aggregate of 38,000,000 share options under the 2005 Scheme to certain directors and employees of the Group (Note 20).

(v)

Segment Reporting

The Company uses the management approach in determining operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions, allocating resources and assessing performance. Based on this assessment, the Company has determined it has only one operating segment which is the manufacture and sale of communication products in the PRC.

F-23

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(v)

Segment Reporting (continued)

In view of the fact that the Company operates and manages its business solely in the PRC and all of its customers are located in the PRC, no geographical segment information is presented.

(w)

Fair value measurements

On January 1, 2008, the Group adopted the provisions SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a framework for measuring fair value and expands disclosures about fair value measurements (Note 26). FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157,” delays the effective date of Statement 157 until fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Effective January 1, 2009, the Group will be required to apply the provisions of SFAS No. 157 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Group is in the process of evaluating the impact, if any, of applying these provisions on its consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,” (“FSP FAS 157-3”) which was effective immediately. FSP FAS 157-3 clarifies the application of SFAS No. 157 in cases where the market for a financial instrument is not active and provides an example to illustrate key considerations in determining fair value in those circumstances. The Group has considered the guidance provided by FSP FAS 157-3 in its determination of estimated fair values during 2008.

In April 2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” which further clarifies the principles established by SFAS No. 157. The guidance is effective for the periods ending after June 15, 2009 with early adoption permitted for the periods ending after March 15, 2009. The Company is assessing the impact, if any, and will not elect to early adopt FSP SFAS 157-4.

F-24

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(x)

Recently Issued Accounting Standards

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of SFAS No. 115

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including on Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the balance sheet, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. The Group adopted SFAS No. 159 on January 1, 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. The Group has determined not to adopt the fair value option under SFAS No. 159.

SFAS No. 141 (R), Business Combinations

F-25

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(x)

Recently Issued Accounting Standards (continued)

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. This statement is effective for fiscal years beginning on or after December 15, 2008, including prospective accounting for any noncontrolling interests that arose before the effective date. Except for the classification of minority interests as a component of equity, management does not expect the initial adoption of SFAS No. 160 will have a material impact on the Group’s consolidated financial statements.

F-26

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(2)

Summary of Significant Accounting Policies and Practices (continued)

(x)

Recently Issued Accounting Standards (continued)

FASB Staff Position, No. FAS 142-3, Determination of the Useful Life of an Intangible Asset

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” and requires enhanced disclosures relating to: (a) the entity’s accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset; (b) in the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit), by major intangible asset class; and (c) for an entity that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term of a recognized intangible asset for each period for which a statement of financial position is presented, by major intangible asset class. FSP FAS 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Group is currently evaluating the impact that FSP FAS 142-3 will have on the consolidated financial statements.

(3)

Pledged Time Deposits

Pledged time deposits at December 31, 2007 and 2008 consist of the following:


	2007		2008		2008
	RMB’000		RMB’000		US$’000

Pledged deposits with financial institutions for security on:
- accounts receivable sold (Note (a))		51,499		30,361		4,450
- bills payable (Note (b))		62,396		37,007		5,424
- short-term bank loans (Note (b))		145,891		55,000		8,062

		259,786		122,368		17,936

F-27

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(3)

Pledged Time Deposits (continued)

(a)

In its ordinary course of business, the Company entered into certain one-year agreements with independent financial institutions to sell, on an ongoing basis, accounts receivable up to a specified amount (which totalled RMB300 million as of December 31, 2007 and 2008). Accounts receivable are sold at a discount, which is adjusted based upon the timing of collection by the financial institutions. Under the terms of certain of these agreements, a portion of the sold receivables are subject to certain limited recourse provisions pursuant to which the Company is required to deposit 10% to 20% of the sale proceeds into a restricted bank account as security in the event of default of payment by the paying accounts receivable customer. The cash in the restricted bank account is released to the Company upon full payment by the customer and is released on a proportionate basis to the extent that the collections fall short of the amount of accounts receivable sold. The Company did not experience any significant losses under these recourse provisions during the three-year period ended December 31, 2008. The Company surrendered control over the accounts receivable transferred to the financial institutions. Accordingly, pursuant to the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, accounts receivable of RMB117,664,000, RMB200,440,000 and RMB202,178,000 (USD 29,634,000) were derecognized from the balance sheet on their respective dates of the transfer during 2006, 2007 and 2008, respectively. The Company received proceeds from the sale of the accounts receivable of RMB108,998,000, RMB192,687,000 and RMB188,422,000 (US$27,652,000), respectively, for the years ended December 31, 2006, 2007 and 2008, and recorded a discount from the sale of accounts receivable of RMB8,666,000, RMB7,753,000 and RMB13,521,000 (US$1,982,000), respectively, which was included in interest expense for the years ended December 31, 2006, 2007 and 2008. Discount on the sale of accounts receivable is recorded as interest expense in the period during which it occurs.

As of December 31, 2007 and 2008, accounts receivable sold to financial institutions yet to be settled by the Company’s customers amounted to RMB179,176,000 and RMB292,202,000 (US$42,829,000), respectively.

Pursuant to the sales agreements with the financial institutions, the Company is responsible for servicing the accounts receivable sold until the expiration of the sales agreements. The service obligations primarily comprise of serving notice to customers and collecting the cash on behalf of the financial institutions and remitting the cash to the financial institutions by a specified time. No servicing obligation was recorded at the date of sale as the amount was considered to be immaterial. As of December 31, 2007 and 2008, an amount of RMB76,623,000 and RMB27,735,000 (US$4,065,000), respectively, had been collected by the Company pending transfer to the financial institutions, and are included in accrued expenses and other payables in the accompanying consolidated balance sheets.

F-28

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(3)

Pledged Time Deposits (continued)

(b)

The Company entered into several financing facilities for bills and short-term loans with banks during the years presented. Under the terms of the arrangements, cash deposits ranging from 20% to 100% of the respective financing facilities amount were pledged to the banks. The pledged deposits will be released upon the termination or expiry of these facilities.

(4)

Accounts Receivable, net

Accounts receivable at December 31, 2007 and 2008 consist of the following:


	2007			2008			2008
	RMB’000			RMB’000			US$’000

Accounts receivable net of allowances for estimated settlement discounts of RMB10,657 and RMB24,425 respectively as of December 31, 2007 and 2008		1,317,868			1,249,250			183,107
Less: Allowance for doubtful accounts		(22,354	)		(25,323	)		(3,712	)

		1,295,514			1,223,927			179,395
Long term accounts receivable, net		(389,505	)		(551,210	)		(80,793	)

		906,009			672,717			98,602
Bills receivable		19,829			55,543			8,142

		925,838			728,260			106,744

An analysis of the settlement discounts account for 2006, 2007 and 2008 is as follows:


	2006			2007			2008		2008
	RMB’000			RMB’000			RMB’000		US$’000

Balance at beginning of year		20,057			14,982			10,657		1,562
(Reversal)/provided during the year		(5,075	)		(4,325	)		13,768		2,019

Balance at end of year		14,982			10,657			24,425		3,581

F-29

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(4)

Accounts Receivable, net (continued)

Provision for settlement discounts as at the balance sheet date represents the Company’s best estimate of the amount of discounts to be provided to customers to encourage prompt payment. For the year ended December 31, 2007 and 2008, none of settlement discount was utilized.

Long term accounts receivable, net were stated after the deduction of unearned interest of RMB28,384,000 and RMB45,183,000 (US$ 6,623,000) respectively as of December 31, 2007 and 2008.

Pursuant to the terms of the Company’s contracts to provide wireless coverage products and services (Note 2 (l)), amounts due beyond one-year are reclassified as long-term accounts receivable in the accompanying consolidated balance sheets, being discounted at the applicable discount rate at the time of sale. For the years ended December 31, 2007 and 2008, the weighted average discount rates were 6.82% and 6.85% per annum respectively.

An analysis of the allowance for doubtful accounts for 2006, 2007 and 2008 is as follows:


	2006		2007		2008			2008
	RMB’000		RMB’000		RMB’000			US$’000

Balance at beginning of year		4,147		6,177		22,354			3,277
Derecognized on disposal of subsidaries		—		—		(11,017	)		(1,616	)
Charge to statements of operations		2,030		16,177		57,574			8,439
Written off during the year		—		—		(43,588	)		(6,388	)

Balance at end of year		6,177		22,354		25,323			3,712

Accounts receivable balances written off during the year ended December 31, 2008 were related to aged receivables due from certain non-operator customers. Management believes these customers have encountered financial difficulties caused adverse market conditions experienced in the current year.

F-30

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(5)

Inventories

Inventories at December 31, 2007and 2008 consist of the following:


	2007		2008		2008
	RMB’000		RMB’000		US$’000

Raw materials		137,722		163,589		23,978
Work-in-progress		14,014		15,539		2,278
Finished goods		390,358		341,491		50,053

		542,094		520,619		76,309

Included in finished goods are i) wireless coverage products delivered to customers’ sites which have not been accepted by the customers through the issuance of completion certificates; and ii) deferred installation costs related to wireless coverage products delivered and installed for which the related completion and/or inspection certificates have not been issued at the respective year end dates. As at December 31, 2007 and 2008, deferred installation costs amounted to RMB43,334,000 and RMB54,215,000 (US$7,947,000) respectively.

Inventories were written down by RMB Nil, RMB Nil and RMB 41,952,000 (US$6,149,000) and charged to cost of revenue during 2006, 2007 and 2008 respectively. The write down of inventory during the year ended December 31, 2008 was mainly related to obsolete inventories that are no longer suitable for future network construction, due to rapid advancement in wireless coverage technology and the rollout of large scale 3G network constructions.

(6)

Income Tax Expense

Cayman Islands and British Virgin Islands Taxes

Under the current laws of the Cayman Islands and British Virgin Islands, the Company and GrenTech BVI Limited are not subject to tax on income or capital gains. In addition, upon payments of dividends by the Company and GrenTech BVI Limited, no Cayman Islands or British Virgin Islands withholding tax will be imposed.

F-31

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(6)

Income Tax Expense (continued)

PRC Tax

Prior to January 1, 2008, the PRC’s statutory income tax rate was 33%. However, Shenzhen GrenTech, Shenzhen Lingxian, Kaige, Kaixuan and RF Technology were established in the Shenzhen Special Economic Zone and were entitled to the preferential income tax rate of 15%. Furthermore, Shenzhen GrenTech and Shenzhen Lingxian were granted an additional 50% relief from the preferential income tax rate of 15% and were subject to a reduced income tax rate of 7.5% for 2006 and 2007. In addition, as a foreign investment enterprise (“FIE”) established in the coastal open economic area, Lake Microwave was subject to income tax at a rate of 27% for 2006 and 2007.

On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”), which unified the income tax rate to 25% for all enterprises. The new tax law was effective as of January 1, 2008. The new tax law also provides a 5-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws and regulations. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively. Further, entities that qualified as “Advance and New Technology Enterprise” (“ANTE”) under the new tax law are entitled to a preferential income tax rate of 15%. However, the recognition criteria and procedures for ANTE under the new tax law were not issued until April 2008. As of December 31, 2008, Shenzhen GrenTech had not completed all the procedures required under the new tax law that would entitle it to the ANTE preferential tax rate of 15%. Based on the above, the transitional tax rates of 18%, 20%, 22%, 24% and 25% are applied in measuring income tax effects of Shenzhen GrenTech, Shenzhen Lingxian, Kaige and Kaixuan for 2008, 2009, 2010, 2011 and 2012 onwards, respectively, where applicable. RF Communication and RF Technology were established after March 16, 2007 and therefore are subject to income tax at 25% beginning on January 1, 2008. In addition, Lake Microwave and Lake Communication were subject to income tax at 25% for 2008 and were disposed by the Group during December 2008 (Note 19).

In March 2009, Shenzhen GrenTech obtained the ANTE certificate entitling it to the preferential income tax rate of 15% under the new tax law retroactively from January 1, 2008 to December 31, 2010. Accordingly, in March 2009, Shenzhen GrenTech remeasured its income tax liability for 2008 and its deferred tax assets that are expected to be recovered in 2009 and 2010 using the preferential income tax rate of 15%. The tax effect resulting from this remeasurement is a reduction of Shenzhen GrenTech’s deferred tax assets by approximately RMB4,070,000 (US$597,000).

F-32

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(6)

Income Tax Expense (continued)

The Group’s income tax expense consists of the following:


	Current		Deferred			Total
PRC Income tax expense/(benefit)	RMB’000		RMB’000			RMB’000

Year ended December 31, 2006		17,261		1,016			18,277

Year ended December 31, 2007		11,866		(1,545	)		10,321

Year ended December 31, 2008		12,608		(9,451	)		3,157

Year ended December 31, 2008 (US$’000)		1,848		(1,385	)		463

Income tax expense reported in the consolidated statements of operations differs from the amount computed by applying the PRC income tax rate of 15% (the applicable tax rate of the Company’s principal subsidiaries) for 2006 and 2007 and 25% for 2008 for the following reasons:


	2006			2007			2008			2008
	RMB’000			RMB’000			RMB’000			US$’000
Income/(loss) before income tax expense and minority interests:
- PRC		167,717			105,567			(130,458	)		(19,122	)
- Non-PRC		668			(13,692	)		(13,548	)		(1,986	)


Income/(loss) before income tax expense and minority interests		168,385			91,875			(144,006	)		(21,108	)


Computed “expected” tax expense/(benefit)		25,258			13,781			(36,002	)		(5,277	)
Non-decuctible impairment of goodwill		—			—			4,138			607
Non-deductible entertainment expenses		4,756			4,405			4,051			594
Non-deductible cost of investment		—			—			4,963			727
Non-deductible settlement discount								1,893			277
Non-deductible share-based compensation		—			—			575			84
Non-deductible bad debts expenses		—			—			15,165			2,223
Other non-deductible expenses		705			885			506			74
Research & development bonus deduction		—			—			(4,073	)		(597	)
Non-taxable income		(36	)		(48	)		(48	)		(7	)
Tax rate differential		331			2,385			15,002			2,198
Tax holiday		(13,602	)		(11,048	)		—			—
Change in valuation allowance		865			4,526			320			47
Effect on change in enacted tax rate		—			(4,565	)		—			—
Effect on change in tax rate on deferred tax assets		—			—			(3,333	)		(487	)

Actual income tax expense		18,277			10,321			3,157			463

F-33

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(6)

Income Tax Expense (continued)

An analysis of the valuation allowance for 2006, 2007 and 2008 is as follows:


	2006		2007			2008			2008
	RMB’000		RMB’000			RMB’000			US$’000

Balance at the beginning of year		—		865			5,181			759
Charge to statement of operations		865		4,526			320			47
Effect of change in tax rate		—		(210	)		124			19
Disposal of subsidiaries (Note19)		—		—			(4,896	)		(717	)

Balance at the end of year		865		5,181			729			107

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax loss carryforwards are utilizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible or can be utilized, management believes that the deferred tax assets, net of the valuation allowance as of December 31, 2007 and 2008, are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

F-36

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(6)

Income Tax Expense (continued)

The new tax law also imposes a withholding tax at 10%, unless reduced by a tax treaty, for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC for earnings accumulated beginning on January 1, 2008 and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. The Company has not provided for income taxes on accumulated earnings, of its subsidiaries as of December 31, 2008 since these earnings are intended to be reinvested indefinitely in the overseas jurisdictions. As of December 31, 2008, the undistributed earnings that the Company intends to reinvest indefinitely, and for which no deferred tax liability was recognized, were RMB26,674,000 (US$3,910,000). As of December 31, 2008, the unrecognized deferred tax liability related to the undistributed earnings subject to withholding tax was RMB2,667,000 (US$391,000).

As of January 1, 2007, and for the years ended December 31, 2007 and 2008, the Group did not have any unrecognized tax benefits, and thus no interest and penalties related to unrecognized tax benefits were recorded. In addition, it does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations will be extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000 (US$14,657). In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Accordingly, the PRC income tax returns for the Company’s PRC subsidiaries for years beginning in 2003 are open to examination by the PRC state and local tax authorities.

F-37

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(7)

Property, Plant and Equipment, net and Construction in Progress

Property, plant and equipment consist of the following:


	2007			2008			2008
	RMB’000			RMB’000			US$’000

Buildings		35,327			258,058			37,825
Equipment and machinery		215,157			169,152			24,793
Motor vehicles		27,611			17,961			2,633
Office equipment and computer software		34,652			45,336			6,645

		312,747			490,507			71,896
Accumulated depreciation		(87,678	)		(78,248	)		(11,470	)

		225,069			412,259			60,426
Construction in progress		134,637			2,816			413

		359,706			415,075			60,839

Interest capitalization for the years ended December 31, 2006, 2007 and 2008 were RMB nil, and RMB4,802,000 and RMB11,894,000 (US$1,743,000) respectively.

(8)

Lease Prepayments, net


	2007			2008			2008
	RMB’000			RMB’000			US$’000

Prepaid land use rights		91,838			85,078			12,470
Accumulated amortization		(2,155	)		(2,954	)		(433	)

		89,683			82,124			12,037

Lease prepayment at December 31, 2008 represented the land use rights for a piece of land located in Shenzhen High-Tech Industry Park (“SHTIP”).

As of both December 31, 2007 and 2008, the prepaid land use rights were pledged to banks as collateral for bank loans of RMB150,000,000 (US$21,986,000) (Note 15).

Amortization expense for the years ended December 31, 2006, 2007 and 2008 were RMB292,000, RMB1,178,000 and RMB1,874,000 (US$275,000) respectively.

F-38

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(11)

Goodwill

An analysis of the goodwill for 2007 and 2008 is as follow:


	2007		2008			2008
	RMB’000		RMB’000			US$’000

Balance at the beginning of year		8,216		38,247			5,606
Addition (Note 18)		30,031		—			—
Disposal (Note 19)		—		(10,658	)		(1,562	)
Impairment		—		(27,589	)		(4,044	)

Balance at the end of year		38,247		—			—

All goodwill recognized is not deductible for tax purposes.

The Company has determined its goodwill of RMB27,589,000 (US$4,044,000) was fully impaired as at December 31, 2008. The Company considered that the triggering event of the impairment loss was the global economic downturn and other factors that adversely affected the Company’s market capitalization, which was used as a basis for the determination of fair value of the reporting unit used to identify and measure impairment of goodwill in accordance with the provisions of SFAS No. 142.

(12)

Accrued Expenses and Other Payables

Accrued expenses and other payables at December 31, 2007 and 2008 consist of the following:


	2007		2008		2008
	RMB’000		RMB’000		US$’000

Amounts collected on sold accounts receivable on behalf of financial institutions (Note 3)		76,623		27,735		4,065
Allowance for product warranties (Note 13)		12,328		12,395		1,817
Accruals for salaries and welfare		10,469		14,969		2,194
Receipts in advance		88,764		23,355		3,423
Value-Added Tax (“VAT”) payable		97,484		111,284		16,311
Business and other taxes payable		20,182		24,746		3,627
Staff deposits		6,938		218		32
Consideration payable for acquisition of Kaige		10,000		—		—
Construction fee payable		—		24,333		3,567
Others		17,977		8,449		1,238

		340,765		247,484		36,274

F-40

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(13)

Allowance for Product Warranties

An analysis of the allowance for product warranties for 2006, 2007 and 2008 is as follows:


	2006			2007			2008			2008
	RMB’000			RMB’000			RMB’000			US$’000

Balance at beginning of year		11,794			12,308			12,328			1,807
Amount charged to expense		8,240			10,483			8,697			1,275
Amount utilized		(7,726	)		(10,463	)		(8,630	)		(1,265	)

Balance at end of year		12,308			12,328			12,395			1,817

(14)

Short-Term Bank Loans

Short-term bank loans outstanding, which are all denominated in Renminbi, are as follows:


	2007		2008		2008
	RMB’000		RMB’000		US$’000

- Unsecured		296,050		425,000		62,294
- Secured		160,000		55,207		8,092

		456,050		480,207		70,386

During the years ended December 31, 2007 and 2008, the Company entered into various loan agreements with commercial banks with terms ranging from three months to one year to finance its working capital. The weighted average interest rate of short-term bank loans outstanding as of December 31, 2007 and 2008 were 6.27% and 6.66 % per annum, respectively.

The Company had available undrawn committed bank loan facilities and bills financing facilities amounting to RMB60,000,000 (US$8,794,000) and RMB65,230,000 (US$9,561,000) respectively as of December 31, 2008. In addition, the Company had available committed receivable selling facilities of RMB30,423,000 (US$4,459,000) as of December 31, 2008. Of the unutilized bills financing facilities and receivable selling facilities, the Company will be required to pledge with the banks time deposits not less than 20% to 40% and 10% to 20% respectively of the amount to be utilized.

F-41

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(14)

Short-Term Bank Loans (continued)

One of the short term loan agreements required the Group to maintain certain financial ratios and minimum amounts of consolidated net worth. The Group has been in compliance with these covenants throughout the term of the loan.

(15)

Long-Term Bank Loan

On May 22, 2007, Shenzhen GrenTech entered into a long term loan with China Construction Bank (“CCB”), amounting to RMB150,000,000. The loan is scheduled to be repaid by four equal annual instalment of RMB20,000,000, commencing on May 22, 2009 and a balloon payment of RMB70,000,000 on May 21, 2013. Interest is paid to CCB on a monthly basis. The loan is secured by the land use right acquired by the Group for the construction of its new headquarters in SHTIP (Note 8).

The loan bears an interest rate of the annual benchmark borrowing rate assigned by the People’s Bank of China with a 5% discount.

(16)

Mandatorily Redeemable Convertible Preference Shares

On December 30, 2003, the Company received RMB43,565,000 (US$5,300,000) from three investors — Actis China, SCPEL and JATF, in exchange for 33,634,500 mandatorily redeemable convertible preference shares. The holders of the preference shares were entitled to a fixed cumulative preference dividend of 5% per annum based on the face value of the preference shares and a special dividend as when the total dividend declared and payable to the ordinary shareholders exceeds a certain amount. In addition, upon redemption, the Company was required to pay the subscription price plus an 8% per annum compounded return less any preference dividends accrued, declared or paid up to the date of redemption. Cumulative preference dividends and accretion to redemption value were reflected as a reduction to net income to arrive at net income available to ordinary shareholders in the accompanying consolidated statements of income. In 2005 and April 2006, the directors declared a preference share dividend of RMB0.064 and RMB0.016 per share, respectively, totalling RMB2,139,000 and RMB548,000 to the holders of preference shares, respectively. In addition, accretion to redemption value RMB360,000 (US$46,000), being the difference between the 8% yield on the mandatorily redeemable convertible preference shares upon redemption and the actual dividend declared of 5%, was accrued and charged to consolidated statements of income for the years ended December 31, 2006.

In connection with the IPO and pursuant to a board resolution of the Company dated April 3, 2006, the mandatorily redeemable convertible preference shares were converted fully into 33,634,500 new ordinary shares of the Company in April 2006.

F-42

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(17)

Shareholders’ equity

Registered capital

Prior to the Reorganization, the registered capital of Shenzhen GrenTech was RMB112,000,000. Capital contribution in excess of the registered capital was credited to contributed surplus.

In October 2003, Shenzhen GrenTech repurchased a total of 28.672% equity interests from two shareholders, for total consideration of RMB66,308,000 of which RMB20,308,000 and RMB46,000,000 was paid in 2003 and 2004 respectively. Shenzhen GrenTech, through Shenzhen Lingxian, simultaneously sold 28.672% equity interests to the three existing shareholders of Shenzhen GrenTech for a total consideration of RMB66,308,000 which was fully received as of December 31, 2003. In connection with the said share transfers, the Company had unrestricted use of the excess cash proceeds from the reissuance of shares over the amounts paid through the final settlement in 2004. Since all of the risks and rewards ownership of the said shares of Shenzhen GrenTech were transferred to the three existing shareholders simultaneously with the purchase of the equity interests by Shenzhen GrenTech, the share transfers are deemed to occur at the same time for accounting purposes.

Ordinary shares

In connection with the Reorganization described in Note 1, the Company issued 932,731 ordinary shares (as adjusted for the five-hundred-for-one share split as described below) to the shareholders of Shenzhen GrenTech in exchange for the transfer of their equity interests in Shenzhen GrenTech. Accordingly, the registered capital of Shenzhen GrenTech was eliminated through a corresponding increase in the par value of ordinary shares of RMB77,000 and contributed surplus of RMB111,923,000.

On August 25, 2005, the Company declared a five-hundred-for-one share split of the Company’s shares. The share split was effected in the form of subdividing each of the Company’s issued and unissued ordinary shares and mandatorily redeemable convertible preference shares into 500 ordinary shares and 500 redeemable convertible preference shares, respectively. The par value of the ordinary shares was adjusted from US$0.01 per share to US$0.00002 per share. All references in the accompanying consolidated financial statements and notes to the number of shares, per share amounts and par value data of the Company’s ordinary and mandatorily redeemable convertible preference shares have been restated to reflect the effect of the share split for all periods presented.

On April 3, 2006, the directors declared dividends totalling RMB7,609,000 to the holders of the Company’s ordinary shares in issue as of that date.

F-43

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(17)

Shareholders’ equity (continued)

In connection with the IPO, 125,000,000 new ordinary shares of the Company were issued to public shareholders in April 2006 (Note 1).

(18)

Acquisitions

(a)

Acquisition of the entire equity interest of Kaige and its wholly owned subsidiary, Kaixuan

On December 19, 2007, Shenzhen GrenTech entered into a sale and purchase agreement with an independent third party, Huaming Investment Holdings Limited Company Limited (“Huaming”), whereby Huaming agreed to transfer the entire equity interest in Kaige and its wholly owned subsidiary, Kaixuan to Shenzhen GrenTech for a consideration of RMB57,866,000 (US$7,933,000). The consideration was settled by RMB10,000,000 cash and the transfer of certain accounts receivable of Shenzhen GrenTech with a fair value of RMB47,866,000 as at December 25, 2007, being effective date of acquisition. With the acquisition of Kaige and Kaixuan, the Group is able to carry out installation services for wireless equipment on its own. The goodwill of RMB19,373,000 recognized is attributable to the higher efficiency and potential cost savings achieved through the vertical integration from the production to the installation services of wireless products.

The Company has accounted for the above acquisition under the purchase method. The results of operations of Kaige and Kaixuan are consolidated and included in the financial statements of the Company from December 25, 2007.

(b)

Acquisition of the additional 20% equity interest of Lake Communication

On December 19, 2007, Shenzhen GrenTech entered into a sale and purchase agreement with Mr. Zhuang Haifan (“Zhuang”), the then 20% minority shareholder of Lake Communication, whereby Zhuang sold his 20% equity interest in Lake Communication to Shenzhen GrenTech for a consideration RMB29,628,000 (US$4,062,000). The consideration would be settled by the transfer of accounts receivable of Shenzhen GrenTech with carrying value of RMB29,628,000 as at December 19, 2007, being the effective date of acquisition. Zhuang is the son of Mr. Zhuang Kunjie, who is a director and the Chief Technology Officer of China GrenTech at the date of acquisition. The Group recorded goodwill of RMB10,658,000 as a result of this acquisition.

The Company has accounted for the above acquisition of an additional equity interest under the purchase method. As a result of the acquisition of an additional 20% equity interest, Lake Communication became a wholly owned subsidiary of Shenzhen GrenTech.

F-44

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(18)

Acquisitions (continued)

The Company considers the above acquisitions in aggregate were not material to the Company’s financial position or results of operations for the periods presented.

(19)

Dispositions

Disposition of the entire equity interest in Lake Communication and Lake Microwave

On December 17, 2008, Shenzhen GrenTech entered into sale and purchase agreements with Zhuang, to dispose of the entire equity interest in Lake Communication and Lake Microwave for a consideration of RMB101,330,000 (US$14,852,000) and RMB870,000 (US$128,000) respectively.

On December 17, 2008, Shenzhen GrenTech entered into debt transfer agreement with Zhuang, and Lake Communication in which Zhuang would take up the accounts payable obligation that Shenzhen GrenTech owes to Lake Communication, amounting to RMB102,200,000 (US$14,980,000), in a way to settle the purchase consideration of Lake Communication and Lake Microwave totaling of RMB102,200,000 (US$14,980,000). In addition, Shenzhen GrenTech also agreed to waive the right to receive a dividend receivable from Lake Communication, amounting to RMB15,200,000 (US$2,228,000), which has been included in the calculation of the gain on disposal.

Effectively, the Group has disposed the equity interests in Lake Communication and Lake Microwave by transferring the net liabilities (exclude net receivable due from Shenzhen Grentech of RMB87,000,000 (US$12,752,000) of Lake Communication and Lake Microwave totaling RMB4,556,000 (US$668,000)) to Zhuang. Accordingly, the Group recorded a net gain from the disposal of Lake Communication and Lake Microwave totaling RMB4,556,000 (US$668,000). The goodwill of RMB10,658,000 recognized in the acquisition mentioned in note 18 (b) has been included in the calculation of the gain on disposal.

F-45

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(20)

Share-based compensation

Pursuant to the 2005 Scheme, on March 14, 2008, the Company granted stock options (“March 2008 options”) to executives and independent directors as well as various employees to purchase a total of 10,000,000 ordinary shares of the Company at an exercise price of US$0.21 per ordinary share. The March 2008 options will become exercisable on March 14, 2010 and expire on March 14, 2013.

On December 23, 2008, the Company granted another batch of stock options (“December 2008 options”) to several directors and employees to purchase a total of 28,000,000 ordinary shares of the Company at an exercise price of US$0.04 per ordinary share. The December 2008 options will become exercisable on December 23, 2010 and expire on December 23, 2013.

The fair value of March 2008 and December 2008 options awarded were estimated on the date of grant using the Black-Scholes option pricing model based on the following assumptions:


	March			December
	2008			2008
	options			options

Fair value of shares on grant date	US$ 0.11 per ordinary share			US$ 0.03 per ordinary share

Expected volatility		65.7	%		94.7	%
Expected dividends	Nil			Nil
Expected term (in years)		3.5			3.5
Risk-free rate		2.4	%		1.5	%

Expected volatilities are based on the historical volatility of the Company’s shares. The Company uses historical data to estimate employee termination within the valuation model. Expected dividend yields are based on historical dividends. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. Changes in these subjective input assumptions could materially affect the fair value estimates.

The weighted-average grant-date fair value of the March 2008 and December 2008 options granted were RMB6,635,000 (US$973,000) and RMB4,710,000 (US$691,000) respectively. None of the options have been vested, exercised or forfeited during 2008.

F-46

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(20)

Share-based compensation (continued)

The share-based compensation expense charged as general and administrative expenses during the year ended December 31 2008 in respect of the March 2008 options and December 2008 options were RMB3,170,000 (US$464,000) and RMB24,000 (US$4,000) respectively. These amounts are included in the contributed surplus of the Company as at December 31, 2008.

As of December 31, 2008, total unrecognized compensation cost related to unvested share options outstanding amounted to RMB8,151,000 (US$1,195,000), which is expected to be recognized over a weighted-average period of 1.7 years.

The Group’s outstanding share options have no dilutive effect to earnings per share during the year ended December 31, 2008.

(21)

Revenues

The Company derives revenues from the provision of wireless coverage products and services, which consist of the sale of wireless coverage equipment, either by standalone sales contract; or combined sales contract with the rendering of related installation services, as well as sales of RF parts and components and RF-based wireless access products. The components of revenues are as follows:


	2006		2007		2008			2008
	RMB’000		RMB’000		RMB’000			US$’000
Sale of wireless coverage products		686,826		577,971		498,928			73,130
Installation services of wireless coverage products		108,867		223,461		277,931			40,738
RF parts and components		32,027		173,545		221,566			32,476

		827,720		974,977		998,425			146,344

Write back of/(provision for) settlement discounts		5,075		4,325		(13,768	)		(2,019	)

		832,795		979,302		984,657			144,325

F-47

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(22)

Depreciation

Depreciation of property, plant and equipment is included in the following:


	2006		2007		2008		2008
	RMB’000		RMB’000		RMB’000		US$’000

Cost of revenues		14,366		18,951		16,949		2,484
Research and development costs		2,504		3,834		6,937		1,017
Sales and distribution expenses		2,104		3,361		3,462		507
General and administrative expenses		3,076		2,858		4,979		730

		22,050		29,004		32,327		4,738

(23)

Net Income/(loss) available to Ordinary Shareholders


	2006		2007		2008			2008
	RMB’000		RMB’000		RMB’000			US$’000

Net income/(loss) available to ordinary shareholders		148,292		82,536		(146,367	)		(21,454	)
Denominator for basic net income available to ordinary shareholders:
Weighted average number of ordinary shares outstanding		584,580,799		624,624,852		610,158,841			610,158,841

Basic net income/(loss) per share available to ordinary shareholders		0.25		0.13		(0.24	)		(0.04	)


Net income/(loss) available to ordinary shareholders		148,292		82,536		(146,367	)		(21,454	)
Dividend, accretion to redemption value and foreign exchange currency rate movements on mandatorily redeemable convertible preference shares		549		—		—			—

Diluted net income/(loss) available to ordinary shareholders		148,841		82,536		(146,367	)		(21,454	)
Denominator for diluted net income/(loss) available to ordinary shareholders:
Weighted average number of ordinary shares outstanding		584,580,799		624,624,852		610,158,841			610,158,841
Weighted average number of mandatorily redeemable convertible preference shares		8,569,885		—		—			—

		593,150,684		624,624,852		610,158,841			610,158,841

Diluted net income/(loss) per share available to ordinary shareholders		0.25		0.13		(0.24	)		(0.04	)

There were no dilutive ordinary shares outstanding throughout the year ended December 31, 2008.

F-48

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(24)

Related Party Transactions

The principal related party transactions during the years ended December 31, 2006, 2007and 2008 are as follows:


	2006		2007		2008		2008
	RMB’000		RMB’000		RMB’000		US$’000

Acquisition of additional 20% equity share of Lake Communication (Note 18)		—		30,000		—		—

Payment for rental (Note)		960		—		—		—

Disposition of 100% equity share of Lake Communication (Note 19)		—		—		86,130		12,624

Disposition of 80% equity share of Lake Microwave (Note 19)		—		—		870		128

Notes:

Shenzhen GrenTech leased and occupied certain premises in an office building with 1,433.35 square metres of floor area owned by Shenzhen Fang Sheng. Certain directors of the Company are also directors of Shenzhen Fang Sheng and such relationship ceased on August 16, 2006. The lease which expired on December 31, 2005, was subsequently renewed until December 31, 2006. On December 13, 2006, Shenzhen Fang Sheng merged with Kaige and renewed the rental agreement until December 31, 2007. A rental of RMB960,000 and RMB960,000 (US$140,000) was charged to expenses for 2006 and 2007 respectively.

(25)

Pension and Other Post Retirement Benefits

Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate 8% to 9% of employees’ salaries and wages to a defined contribution retirement scheme organized by the local Social Security Bureau in respect of the retirement benefits for the Company’s employees in the PRC. The total amount of contributions of RMB10,970,000, RMB11,982,000 and RMB16,844,000 (US$2,469,000) for the years ended December 31, 2006, 2007 and 2008 respectively, was charged to expenses in the accompanying consolidated statements of operations. The Company has no other obligation to make payments in respect of retirement benefits of the employees.

F-49

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(26)

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amount of financial assets, such as cash and cash equivalents, short-term accounts receivable, bills receivable, amounts due from related parties, accounts and bills payable, accruals and other payables, amounts due to related parties and other payables, approximates their fair values because of the short maturity of these instruments. The carrying amount of short-term borrowings approximates fair value determined based on the borrowing rates currently available for debt securities with similar terms and maturities. The investment securities represented unquoted equity securities of an entity established in the PRC. There is no quoted market price for such equity securities and accordingly, it is impracticable to have a reasonable estimate of the fair value.

Long term accounts receivable as of December 31, 2007 and 2008 were recorded in the accompanying consolidated balance sheet at their net present value based on a discount rate of 6.82% and 6.85% per annum respectively, which approximated the discount rate generally available for discounting similar instruments with PRC banks. The carrying amount of long term accounts receivable approximates their fair value.

The carrying amount of long-term debt approximates their fair value based on the borrowing rates currently available for debt securities with similar terms and average maturities.

(27)

Business and Credit Concentrations

All of the Company’s customers are located in the PRC. The following are customers that individually comprise 10% or more of gross revenue for the years ended December 31, 2006, 2007 and 2008:


	2006				2007				2008				2008
	RMB’000		%		RMB’000		%		RMB’000		%		US$’000

China Unicom Group		298,693		36		377,785		39		244,455		24		33,512
China Mobile Group		277,098		33		317,735		32		390,266		40		53,501
China Telecom Group		89,169		11		49,636		5		75,440		8		10,342
The Company’s RF based products customer — Customer A		10,412		1		123,076		13		58,941		6		8,080
The Company’s RF based products customer — Customer B		—		—		37,088		4		102,253		10		14,018

F-50

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(27)

Business and Credit Concentrations (continued)

At December 31, 2006, 2007 and 2008, approximately 82%, 86% and 91% of gross accounts receivable, respectively, were due from these customers. As a result, a termination in relationship in or a reduction in orders from any one of these customers would have a material impact on the Group’s results of operations and financial condition. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.

The gross accounts receivable due from major customers, China Unicom Group, China Mobile Group and China Telecom Group, and two of the Company’s RF based products customers, at December 31, 2007 and 2008, were as follows:


	2007		2008		2008
	RMB’000		RMB’000		US$’000

China Unicom Group
— Current portion		345,538		234,823		34,419
— Long-term portion		182,969		253,169		37,108

		528,507		487,992		71,527


China Mobile Group
— Current portion		229,328		223,797		32,803
— Long-term portion		149,714		228,038		33,424

		379,042		451,835		66,227


China Telecom Group
— Current portion		87,297		96,366		14,125
— Long-term portion		29,059		48,026		7,039

		116,356		144,392		21,164


The Company’s RF based products customer — Customer A
— Current portion		102,136		49,451		7,248
— Long-term portion		—		—		—

		102,136		49,451		7,248


The Company’s RF based products customer — Customer B
— Current portion		8,569		1,463		214
— Long-term portion		—		—		—

		8,569		1,463		214

		1,134,610		1,135,133		166,380

F-51

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(28)

Commitments and Contingencies

(i)

Operating lease commitments

Future minimum lease payments under non-cancelable operating leases as of December 31, 2008 are as follows:


	RMB’000		US$’000

2009		4,796		657
2010		422		58
2011		80		11
2012		30		4
2013		—		—

		5,328		730

For the years ended December 31, 2006, 2007 and 2008, total rental expenses for non-cancellable and cancellable operating leases were RMB16,385,000, RMB18,910,000 and RMB13,296,000 (US$1,949,000) respectively.

(ii)

Capital commitments

Capital commitments for future purchase of property, plant and equipment as of December 31, 2008 was RMB536,000 (US$ 79,000).

(iii)

Loan guarantees

As of December 31, 2008, Shenzhen GrenTech provided guarantees for bank loans amounting to RMB22,340,000 (US$3,274,000) and RMB12,000,000 (US$1,759,000) to Lake Communication and Lake Microwave, respectively. These guarantees were entered into in October 2006, which was prior to the disposition of the equity interest in the Lake Communication and Lake Microwave. These guarantees will expire in August 2009 and September 2009 respectively.

(iv)

Contingencies

In the ordinary course of its business, the Company provides customers with one to three years of warranty protection, under which the Company agrees to repair or replace defective installed wireless coverage products at no additional cost to the customers. The contracts generally do not contain disclaimers or limitations on product liabilities for special, consequential and incidental damages, nor does the Company typically cap the amounts the customers may recover for damages. In addition, the Company does not currently maintain any insurance for product liability or warranty claims. The failure of the Company’s installed wireless coverage products to operate properly and the potential damage from malfunction of the Company’s products could give rise to substantial liabilities under the warranties and otherwise.

F-52

China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2006, 2007 and 2008
(expressed in RMB and US$)

(29)

China GrenTech Corporation Limited (Parent Company)

In accordance with the relevant PRC regulations, the Company’s subsidiaries may pay dividends only out of their accumulated profits, if any, determined in accordance with the accounting standards and regulations prevailing in the PRC (“PRC GAAP”). In addition, the Company’s subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund the statutory general reserve until the balance of the reserve reaches 50% of their respective registered capital. The statutory general reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings, or by increasing the par value of the shares currently held by them, provided that the reserve balance after such issue is not less than 25% of the registered capital. As of December 31, 2008, the statutory general reserve already reached 50% of the registered capital of certain subsidiaries of the Company and no additional transfer is required.

Furthermore, certain subsidiaries were previously required to allocate 5% to 10% of the profit after tax, determined in accordance with PRC GAAP, to the statutory public welfare fund, which was restricted to be used for capital expenditures for staff welfare facilities owned by the Company. In accordance with the new regulations which became effective January 1, 2006, appropriation to the statutory public welfare fund is no longer required and the balance of the statutory public welfare fund of RMB40,986,000 had been transferred to the statutory general reserve on January 1, 2006.

As of December 31, 2007 and 2008, an amount of RMB146,077,000 and RMB142,158,000 (US$20,837,000) were appropriated from retained earnings and set aside for statutory general reserves respectively by the Company’s subsidiaries.

As of December 31, 2007 and 2008, the amount of restricted net assets of the Company’s subsidiaries, which may not be transferred to the Company in the forms of loans, advances or cash dividends by the subsidiaries without the consent of a third party, was approximately 9% and 9% respectively of the Company’s consolidated net assets as discussed above. In addition, the current foreign exchange control policies applicable in the PRC also restrict the transfer of assets or dividends outside the PRC.

F-53

EXHIBIT INDEX


Exhibit
No.		Description of Exhibit
	1.1	Amended and restated memorandum and articles of association of the Registrant (1)
	2.1	Form of share certificate (1)
	2.2	Form of deposit agreement, including form of American Depositary Receipt (2)
	4.1	Contract for grant of land use right of Shenzhen Municipality (3)
	4.2	Translation of share transfer agreement for Lake Communication Limited by and between Shenzhen GrenTech Company Limited and Zhuang Haifan dated December 17, 2008 and related disposition of liabilities agreement
	4.3	Share option scheme (4)
	8.1	List of subsidiaries
	11.1	Code of ethics (5)
	12.1	CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	12.2	CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	13.1	CEO and CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-132381) filed with the SEC in connection with our global offering in November 2004.

(2)		Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-132385) filed with the SEC with respect to American Depositary Shares representing our ordinary shares.

(3)		Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2007 filed with the SEC on July 15, 2008.

(4)		Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-132381) filed with the SEC in connection with our global offering in November 2004.

(5)		Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2006 filed with the SEC on May 4, 2007.


	China GrenTech Corporation Limited
	/s/ Rong Yu
	Name:	Rong Yu
	Title:	Chief Financial Officer


FORWARD-LOOKING STATEMENTS			1

SUPPLEMENTAL INFORMATION			2

PART I			3

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			3

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE			3

ITEM 3. KEY INFORMATION			3

ITEM 4. INFORMATION ON THE COMPANY			19

ITEM 4A. UNRESOLVED STAFF COMMENTS			35

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS			36

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			56

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			63

ITEM 8. FINANCIAL INFORMATION			64

ITEM 9. THE OFFER AND LISTING			65

ITEM 10. ADDITIONAL INFORMATION			66

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			70

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			70

PART II			70

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			70

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			70

ITEM 15. CONTROLS AND PROCEDURES			71

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT			72

ITEM 16B. CODE OF ETHICS			72

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES			73

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			73

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			73

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT			74

ITEM 16G. CORPORATE GOVERNANCE			74

PART III			74

ITEM 17. FINANCIAL STATEMENTS			74

ITEM 18. FINANCIAL STATEMENTS			74

ITEM 19. EXHIBITS			74

Exhibit 4.2
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1


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


Reports of Independent Registered Public Accounting Firm			F-1

Consolidated Balance Sheets as of December 31, 2007 and 2008			F-3

Consolidated Statements of Operations for the years ended December 31, 2006, 2007 and 2008			F-4

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2007 and 2008			F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008			F-6

Notes to the Consolidated Financial Statements			F-8


Seller:		Shenzhen GrenTech Company Limited (party A)
Address:		Guoren Building, Keji Central 3^rd Road, Hi-Tech Park, Nanshan District, Shenzhen
Authorized representative:		Gao YingJie
Position:		Chairman
Buyer:		Zhuang HaiFan (party B)
ID#:		320102196412081637
Address:		Room 604, 48 Xin Hua Nan Road, Quanzhou

1.		The contract cannot be carry out caused by the act of God or any party without mistake but unavoidable accident:

2.		The situation had been changed and both party A & B agree to change or terminate.

4.		During the discussion between Party A and party C on the share transfer, the payment RMB106.33 million of share transfer had inculded the bonus receivable RMB15.2 million which is owe to Party A1 from Party B1. Finally, Party A1’s bonus receivable of RMB15.2 million which is owe from Party B1 should be wavied.

5.		Party A1 owe Party B total amount of RMB106.33 million. (See Details <Receivable List>)

3.		Party A1 agree to wavied the Bonus payable of RMB15.2 million from party B1 and the bonus payable between Party A1 and B1 will be settled.

4.		Statement, Guarantee and Promises

	1.		Party A promised and guaranteed

	a)		will legally impeach and execute the terms of the liabilities transfer in the agreement and will assume all civil action independently.

	b)		The transfer of the liabilities are legal and effective.

	2.		Party B promised and guaranteed

	a)		will legally impeach and accept the terms of the liabilities transfer in the agreement and will assume all civil action independently.

	b)		Any related authorities or department had already permitted the acceptance of the liabilities transfer to Party B.

	3.		Party C promised and guaranteed


(Signature page only, no other content in this page)

Party A:
	1.	Shenzhen GrenTech Company Limited (Stamp)

		Authorized Representative (Signature):

	2.	GrenTech (BVI) Limited (Stamp)

		Authorized Representative (Signature)

Party B:
	1.	Quanzhou Lake communication Company Limited (Stamp)

		Authorized Representative (Signature)

	2.	Quanzhou Lake Microwave Company Limited (Stamp)

		Authorized Representative (Signature)

Party C:
	1.
		Mr. Zhuang HaiFan (Signature)

	2.	Lake (HK) Technology Company Limited (Stamp)

		Authorized Representative (Signature)

	1.		GrenTech (BVI) Limited, a British Virgin Islands company;

	2.		Shenzhen GrenTech Co., Ltd., a PRC company;

	3.		Shenzhen Kaige Communication Technology Co., Ltd., a PRC company;

	4.		Shenzhen Kaixuan Communication Technology Co., Ltd., a PRC company; and

	5.		Shenzhen GrenTech RF Communication Ltd., a PRC company.

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.


By: /s/ Yingjie Gao Name: Yingjie Gao
Title: Chief Executive Officer


Date: June 30, 2009

By:		/s/ Rong Yu Name: Rong Yu Title: Chief Financial Officer


By:		/s/ Yingjie Gao Name: Yingjie Gao Title: Chairman of the board of directors and Chief Executive Officer Date: June 30, 2009

By:		/s/ Rong Yu Name: Rong Yu Title: Chief Financial Officer Date: June 30, 2009