A. History and Development of the Company

Our Restructuring and Initial Public Offering

We were incorporated under the laws of China on September 10, 2002 as a joint stock company with limited liability. As part of our initial restructuring, China Telecom Group’s telecommunications operations in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province, together with the related assets and liabilities, were transferred to us. In consideration of the net assets related to the telecommunications operations transferred to us, which had a carrying amount of RMB97,485 million as of December 31, 2001, we issued 68,317,270,803 of our shares to China Telecom Group. Immediately prior to our initial public offering, China Telecom Group transferred to Guangdong Rising Assets Management Co., Ltd., Jiangsu Guoxin Investment Group Co., Ltd. and Zhejiang Financial Development Company 8.37%, 1.43% and 3.19%, respectively, of our outstanding shares. Under the relevant share transfer agreements, each of Guangdong Rising Assets Management Co., Ltd., Jiangsu Guoxin Investment Group Co., Ltd. and Zhejiang Financial Development Company agreed not to sell, transfer or pledge any of our shares it obtained under the share transfer agreement during the three-year period after November 15, 2002, and following the expiry of the three-year period after November 15, 2002, not to sell or transfer more than 20% of our shares it obtained under the share transfer agreement during any six-month period for two years.

Following our restructuring, China Telecom Group continues to be the holder of the licenses required for operating our telecommunications business. In accordance with the approval of the Ministry of Industry and information (and prior to April 2008, the former Ministry of Information Industry), we derive our exclusive rights to operate our business from our status as a subsidiary controlled by China Telecom Group, and China Telecom Group must hold and maintain all licenses received from the Ministry of Industry and Information (and prior to April 2008, the former Ministry of Information Industry) in connection with our business for our benefit. The government currently does not charge license fees for the telecommunications licenses held by China Telecom Group.

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In 2002, we successfully completed our initial public offering of H shares and raised approximately RMB10,659 million in aggregate net proceeds for us. Upon completion of our initial public offering, our shares became listed on the Hong Kong Stock Exchange and ADSs representing our H shares are listed and traded on the New York Stock Exchange, or NYSE.

Under a non-competition agreement between us and China Telecom Group, China Telecom Group has undertaken to us, for so long as our shares are listed on the Hong Kong Stock Exchange or another exchange, and China Telecom Group holds over 30% of our issued share capital or is regarded as our controlling shareholder under the Listing Rules, China Telecom Group will not at any time, directly or indirectly, provide basic telecommunications services or specified value-added telecommunications services in our service regions that may compete with us.

Our Acquisitions in 2003 and in 2004

On December 31, 2003, we acquired from China Telecom Group the entire equity interests in each of Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited and certain network management and research and development facilities (collectively, the “First Acquisition”).

The purchase price of the First Acquisition amounted to RMB46 billion. Of the purchase price, we paid an initial consideration of RMB11 billion in cash upon the completion of the acquisition. The remaining RMB35 billion is payable on December 31, 2013. We may prepay all or, from time to time, a part of the deferred consideration at any time without penalty. We will pay interest to China Telecom Group at semi-annual intervals on the actual amount of the deferred consideration remaining outstanding at an annual rate of 5.184% for the first five years after December 31, 2003. This rate will be adjusted on the fifth anniversary of the completion of the acquisition on December 31, 2003 based on the then current Renminbi lending rate of the Chinese commercial banks for loans with tenure of more than five years. In 2007, we paid China Telecom Group approximately RMB778 million interest on the deferred consideration for our acquisition in 2003. We repaid RMB10 billion of the deferred consideration to China Telecom Group in each of October 2005 and April 2006. No payment of deferred consideration was made in 2007.

In connection with this acquisition and for the purpose of paying consideration to People’s Government of Fujian province for acquiring the rural telecommunication assets in Fujian province, China Telecom Group agreed to transfer 969,317,182 of its shares in our Company to Fujian State-Owned Assets Investment Holdings Co., Ltd., a state-owned enterprise owned by the provincial government of the Fujian province to hold such transferred shares.

On December 31, 2003, our Company, together with our wholly owned subsidiary, Shanghai Telecom Company Limited, acquired from China Telecom Group the entire equity interest in China Telecom Group Yellow Pages Information Company Ltd.

On June 30, 2004, we acquired from China Telecom Group its entire equity interests in each of Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (collectively, the “Second Acquisition”).

The purchase price of the Second Acquisition amounted to RMB27.8 billion. Of the purchase price, we paid an initial consideration of RMB8.34 billion in cash upon the completion of the acquisition. The remaining RMB19.46 billion is payable on June 30, 2014. We may prepay all or, from time to time, a part of the deferred consideration at any time without penalty. On June 30, 2004, we repaid RMB4.31 billion using the net proceeds from the issuance of new H shares in May 2004. From June 30, 2004, we will pay interest to China Telecom Group at semi-annual intervals on the actual amount of deferred consideration remaining outstanding at an

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annual rate of 5.184% for the first five years after June 30, 2004. This rate will be adjusted on June 30, 2009 based on the then current Renminbi lending rate of the Chinese commercial banks for loans of similar amount and tenure, less a 10% discount. In 2007, we paid China Telecom Group approximately RMB785 million interest on the deferred consideration for such acquisition.

Our Global Offering in 2004

In May 2004, we issued 4,466,693,018 H shares and 8,514,888 ADSs, each representing 100 H shares, at prices of HK$2.30 per H share and US$29.49 per ADS, respectively, by way of a global offering to Hong Kong and overseas investors. We raised net proceeds of RMB12,702 million from this issuance of new H shares and ADSs. On June 30, 2004, we used RMB12,650 million of the net proceeds from this issuance to make a cash payment for the Second Acquisition, including RMB8,340 million as the initial consideration and RMB4,310 million as part of the deferred consideration. As part of the global offering, 531,818,182 existing domestic shares of RMB1.00 each owned by China Telecom Group and our other domestic shareholders were converted into H shares and sold to Hong Kong and overseas investors.

Our Acquisitions in 2007

We entered into an Equity Purchase Agreement with China Telecom Group on June 15, 2007, pursuant to which China Telecom Group agreed to transfer, and cause its wholly owned subsidiary China Huaxin Post and Telecommunications Development Center to transfer to us, 100% equity interest in each of China Telecom (Hong Kong) International Company Limited, China Telecom System Integration Co., Ltd. and China Telecom (Americas) Corporation (formerly known as “China Telecom (USA) Corporation”), (collectively, the “Third Acquisition”), for a total consideration of RMB1.408 billion in cash.

We obtained all necessary regulatory approvals of the transactions under the Equity Purchase Agreement from relevant governmental authorities including Ministry of Commerce and State-owned Assets Supervision and Administrative Commission of the State Council. The Third Acquisition was completed on June 30, 2007 and the consideration was fully paid in cash in July 2007 from our internal resources. As we and the three acquired companies are under the common control of China Telecom Group, the Third Acquisition has been reflected in the accompanying consolidated financial statements as a combination of entities under common control in a manner similar to a pooling-of-interests.

China Telecom (Hong Kong) International Company Limited is a company incorporated under the laws of Hong Kong Special Administrative Region on February 25, 2000. It operates in the Asia Pacific region and its principal business is engaging in ChinaNet transit, international IP-VPN, international private leased circuits, cross-border transit connection and Internet data centre service in Asia. The target customers are Chinese companies that require telecommunications services in the Asia Pacific region and Asia-based companies and telecommunication operators doing business in China.

China Telecom System Integration Co., Ltd. is a company incorporated under the laws of the PRC on September 13, 2001. It operates in China and the principal business is provision of system integration services, outsourcing services, development of software application as well as consultancy services in China. Its target customers primarily comprise telecommunication operators that require IT support, and companies and government agencies that require integration and outsourcing services.

China Telecom (Americas) Corporation is a company incorporated under the laws of Delaware, USA on November 22, 2001. It operates in North and South America. The principal business is engaging in ChinaNet transit, voice wholesale, international IP-VPN, international private leased circuits, cross-border transit connection and internet data center services. Its target customers comprise multinational corporations and Chinese companies with overseas businesses requiring telecommunications connections between Asia and the Americas.

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We expect that the acquisition of the three companies will help us to expand our service areas in certain countries in Asia Pacific region and South and North America, and extend our telecommunication business including leased line and other related services overseas. We also expect to exploit technological advantages and increase economies of scale benefits through acquisition of the three companies by reducing operational costs, consolidating business resources, improving network and services system.

In connection with our restructuring and acquisitions, we entered into various arrangements with China Telecom Group and a number of its provincial subsidiaries relating to the mutual provision of ongoing telecommunications and other services. These agreements include agreements for trademark licensing, centralized services, interconnection arrangements, optic fiber leasing, property leasing, IT services, comprehensive services and other services. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” for a more detailed description of these arrangements.

Our Corporate Organization Restructuring in 2008

On January 10, 2008, we entered into merger agreements with certain of our wholly owned subsidiaries, including Shanghai Telecom Company Limited, Guangdong Telecom Company Limited, Jiangsu Telecom Company Limited, Zhejiang Telecom Company Limited, Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited, Sichuan Telecom Company Limited, Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited, or, collectively, the Merged Subsidiaries. Pursuant to these merger agreements, our Company will merge with the Merged Subsidiaries by way of absorption. As a result, the Merged Subsidiaries will be dissolved and all of their assets, businesses, liabilities, rights and obligations will be assumed by us. These merger agreements were approved by our shareholders in an extraordinary general meeting on February 25, 2008 and the mergers with all the Merged Subsidiaries had been completed by the end of March 2008. These mergers represent an internal reorganization which has no significant impact on our consolidated financial condition and results of operations.

The mergers with the Merged Subsidiaries are for the purpose of improving our existing organization structure by managing our businesses through branches instead of subsidiaries. Upon completion of the restructuring, our provincial branches will take over the responsibilities of managing and operating the business in these provinces. We expect that the resulting organization structure and management system will enhance the integration and allocation of our internal resources and further improve our management standard and overall efficiency.

Our Acquisition of Beijing Telecom in 2008

On March 31, 2008, we entered into an Acquisition Agreement with China Telecom Group, pursuant to which we agree to acquire, and China Telecom Group agrees to sell, the entire equity interest in China Telecom Group Beijing Corporation, or Beijing Telecom, for a total consideration of RMB5.557 billion in cash.

The Acquisition Agreement was approved by our shareholders in the extraordinary general meeting held on May 30, 2008 and it will become effective upon obtaining the relevant governmental and regulatory authorities including the State-owned Assets Supervision and Administration Commission of the State Council, or SASAC. We propose to enter into a merger agreement with Beijing Telecom upon completion of the acquisition, pursuant to which Beijing Telecom will be dissolved and all of their assets, businesses, liabilities, rights and obligations will be assumed by us.

We expect the acquisition of Beijing Telecom to present an opportunity for us to provide better services to major corporate customers, enhance our market position and competitiveness, enjoy benefits from the increased demand for telecommunications services during the 2008 Olympic Games period and realize operating synergies.

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Beijing Telecom is a limited liability company incorporated under the laws of the PRC on July 16, 2002 and wholly owned by China Telecom Group. The principal business of Beijing Telecom is provision of telecommunications and information services, local fixed network services, domestic and international long distance services, broadband services, managed data services, leased line services and integrated information services in the Beijing municipality.

Industry Restructuring and Our Proposed Acquisition in 2008

On May 24, 2008, the Ministry of Industry and Information, the National Development and Reform Commission and the Ministry of Finance issued a joint announcement relating to the further reform of the telecommunications industry in China. According to the joint announcement, the principal objectives of the reform include, among others: (i) supporting the formation of three telecommunications services providers, each with nationwide network resources, comparable scale and standing, full-service capabilities and competitive strength, in order to help optimize the allocation of telecommunications resources and foster market competition; (ii) promoting homegrown innovation by telecommunications services providers; and (iii) enhancing the service capabilities and quality of, and the regulatory framework governing, the telecommunications industry. To achieve these objectives, the three ministries are encouraging the following restructuring transactions: (a) the acquisition by our Company of the CDMA network (including both assets and subscriber base) currently owned by China Unicom; (b) the acquisition by China Telecom Group of the basic telecommunications services business currently operated by China Satellite Communications Corporation, or China Satellite; (c) the merger between China Unicom and China Netcom Group; and (d) the acquisition of China Railway by China Mobile. The detailed implementation plans relating to these restructuring transactions are expected to be formulated by the relevant parties involved, subject to, in each case, agreement on terms among the relevant parties and approvals by applicable Chinese government authorities, and carried out, as applicable, in accordance with customary practices in the domestic and international capital markets. In addition, according to the joint announcement, three 3G licenses are expected to be granted to telecommunications services providers in China after the completion of the restructuring transactions described above, although the timing, as well as the manner, of such issuances of 3G licenses is uncertain. Furthermore, to maintain a balanced development of the telecommunications industry, the Chinese government will adopt asymmetrical regulatory measures, as necessary, over a period of time following the completion of the above restructuring transactions. However, it is uncertain what asymmetrical regulatory measures will be adopted by the Chinese government and what impact these measures may have. The Chinese government also seeks to promote the integration of telecommunications services and networks of different services providers. In addition, the Chinese government will encourage software development, content application and other information integrated information services.

Our Proposed Acquisition of the CDMA Business from Unicom

On June 2, 2008, we, Unicom and CUCL entered into a framework agreement, or the CDMA Business Framework Agreement, pursuant to which, we will acquire from CUCL the entire CDMA telecommunications business, or the CDMA Business, owned and operated by CUCL as of the date of completing the proposed acquisition and related assets and liabilities. Unicom is a company incorporated in Hong Kong whose shares are listed in the Hong Kong Stock Exchange and whose American depositary shares are listed on the New York Stock Exchange.

The consideration of the proposed acquisition pursuant to the CDMA Business Framework Agreement, or the Proposed CDMA Acquisition, is RMB43.8 billion, or the Preliminary Consideration. The final consideration, or the Final Consideration, will be determined in accordance with the following mechanism:

Final Consideration = Preliminary Consideration * A

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A shall be determined as follows:

(i) if R1/R2 plus 0.02 is equal to or more than 1, then A shall equal to 1; and

(ii) if R1/R2 plus 0.02 is less than 1, then A shall equal to R1/R2 plus 0.02.

Where

(i) R1 is the CDMA service revenue, or the CDMA Service Revenue, which is defined as the revenue generated by Unicom in the course of operating its CDMA telecommunications business minus the total revenue from the sale of telecommunication products, for the six months ended June 30, 2008 set forth in the 2008 interim report of Unicom; and

(ii) R2 is the CDMA Service Revenue for the six months ended June 30, 2007 set forth in the 2007 interim report of Unicom.

The Final Consideration will be paid in three installments in cash. The first installment, which is 70% of the Final Consideration, will be paid by us on the completion date, or the Completion Date, which will be a day falling within three days after all the conditions precedent to the Proposed CDMA Acquisition have been satisfied or waived. The second installment, which is 20% of the Final Consideration, will be paid by us within three days after the date of substantial completion of the transfer of the CDMA Business from CUCL to our Company. The final installment, which is the remaining 10% of the Final Consideration, will be paid before March 31, 2009.

Pursuant to the CDMA Business Framework Agreement, CUCL will also transfer to us certain number of employees, which will be determined based upon the total number of employees who had employment agreements with CUCL as of December 31, 2007, multiplied by a percentage, the numerator of which is the CDMA Service Revenue for 2007 and the denominator of which is the total service revenue of Unicom for the same period. In determining the number of employees to be transferred from CUCL to our Company, we expect that employees whose responsibilities are directly related to the CDMA Business will be transferred to us. In addition, other employees whose responsibilities are to support the development and general management of the CDMA Business will also be transferred from CUCL to us, and the number of these employees will be determined by a separate agreement to be entered into by CUCL and us taking into consideration the differences in the businesses of the two companies in southern and northern China. We and CUCL agreed to finalize the list of employees to be transferred to us as soon as possible after the execution of the CDMA Business Framework Agreement. In addition, we expect to enter into separate agreements with CUCL to specify details of the arrangement with respect to the services, if any, to be provided to us by employees of third parties who are seconded to CUCL.

Related Transactions

Proposed Acquisition of the CDMA Network by China Telecom Group. We have been notified by China Telecom Group that China Telecom Group has agreed to acquire, and China Unicom and Unicom New Horizon Corporation Limited, or Unicom New Horizon, a wholly-owned subsidiary of China Unicom, have agreed to sell, the CDMA cellular telecommunications network constructed by Unicom New Horizon, or the CDMA Network, for a consideration of RMB66.2 billion, or the Proposed CDMA Network Acquisition. It is expected that the Proposed CDMA Network Acquisition will take place at the same time as the Proposed CDMA Acquisition.

Lease of Capacity on the CDMA Network by our Company from China Telecom Group. We expect to enter into a lease agreement with China Telecom Group, or the CDMA Network Lease Agreement, pursuant to which, we will lease the capacity on the CDMA Network from China Telecom Group at or around the time the detailed transaction agreements in respect of the Proposed CDMA Acquisition are entered into. China Telecom Group has indicated to us that it will discuss and negotiate with us the terms of the CDMA Network Lease Agreement with reference to the principles and framework set forth in the CDMA network lease agreement entered into by CUCL and certain other affiliates of China Unicom, or the Unicom CDMA Network Lease.

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Conditions for the Completion of the Proposed CDMA Acquisition

The CDMA Business Framework Agreement does not contain all the necessary details in respect of the Proposed CDMA Acquisition. We expect to enter into additional transaction agreements that will set forth detailed terms of the Proposed CMDA Acquisition.

Completion of the Proposed CDMA Acquisition will be conditional upon satisfaction or waiver of the following:

We, Unicom and CUCL will use reasonable endeavors to procure the satisfaction or waiver of the above conditions as soon as practicable before September 30, 2008. If the conditions are not satisfied or waived before December 31, 2008 or before any other date as agreed upon among the parties, the CDMA Business Framework Agreement will be terminated automatically.

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Organizational Structure

Set out below is our corporate structure as of June 18, 2008:

In addition, our Company has a branch in each of Shanghai municipality, Guangdong province, Jiangsu province, Zhejiang province, Anhui province, Fujian province, Jiangxi province, Guangxi Zhuang autonomous region, Chongqing municipality, Sichuan province, Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui autonomous region and Xinjiang Uygur autonomous region in China following our corporate organization restructuring in 2008. See “—Our Corporate Organization Restructuring in 2008” included elsewhere under this Item.

We entered into an Acquisition Agreement with China Telecom Group to acquire its entire equity interest in Beijing Telecom on March 31, 2008. We are currently in the process of obtaining approvals for the acquisition from the relevant governmental and regulatory authorities, upon completion of which process Beijing Telecom will become our subsidiary. We also propose to enter into a merger agreement with Beijing Telecom upon completion of the acquisition, pursuant to which Beijing Telecom will be dissolved. See “—Our Acquisition of Beijing Telecom in 2008” included elsewhere under this Item.

Issuance and Proposed Issuance of Commercial Paper in 2008

On April 22, 2008, we issued three-year medium-term notes in an aggregate principal amount of RMB10 billion with an annual interest rate of 5.30%. The notes were placed through a centralized book-building and allocation process in the PRC inter-bank debenture market at par value.

At the annual general meeting held on May 30, 2008, our shareholders approved the proposal for our Company to issue debentures. Pursuant to the resolutions passed at the annual general meeting, we may issue debentures denominated in local or foreign currencies, in one or more tranches, including, but not limited to, short-term commercial paper, company bonds, corporate debts and asset securitization products and asset-backed notes, from the date of the annual general meeting until the date on which the annual general meeting of the Company for the year ended 2008 is held, with a maximum outstanding repayment amount of RMB60 billion.

Our Company does not have any definitive plan to issue any debentures at this time.

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General Information

Our principal executive offices are located at 31 Jinrong Street, Xicheng District, Beijing, China 100032 and our telephone number is (+86-10) 6642-8166. Our website address is www.chinatelecom-h.com. The information on our web site is not a part of this annual report. We have appointed CT Corporation System at 111 Eighth Avenue, New York, New York 10011 as our agent for service of process in the United States.

B. Business Overview

We are the leading provider of wireline telecommunications services in Shanghai municipality, Guangdong province, Jiangsu province, Zhejiang province, Anhui province, Fujian province, Jiangxi province, Guangxi Zhuang autonomous region, Chongqing municipality, Sichuan province, Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui autonomous region and Xinjiang Uygur autonomous region in China. On March 31, 2008, we entered into an Acquisition Agreement with China Telecom Group to acquire the entire equity interest in its wholly owned subsidiary, Beijing Telecom, for the purpose of further expanding our services in Beijing. Our scope of business includes:

(1) operating a variety of domestic wireline telecommunications networks and facilities (including wireless local loops);

(2) providing voice, data, image, multimedia telecommunications and information services based on the wireline networks;

(3) providing international services and conducting accounts settlement with overseas operators in accordance with state regulations; and

(4) providing telecommunications and information-related system integration, advertising, technological development, technical services, information consulting, and conducting design, manufacture, sales and installation of telecommunications equipment.

In 2007, we continued to implement our business strategy of transformation from a traditional voice services provider to a modern integrated information services provider. Our business continued to grow in 2007 and we have gradually shifted our operational focus from voice services such as local and long distance services to non-voice services, including our Internet access and value-added services. Our non-voice services have become an important driver for our revenue growth.

Our total operating revenue increased from RMB175,616 million in 2006 to RMB178,656 million, or by approximately 1.7%, in 2007. Revenue from our non-voice services, including Internet access services, value-added and integrated information application services and leased line and other services increased while revenue from our voice services, including local telephone services, long distance telephone services and interconnections services decreased. The increase in revenue from our non-voice services in 2007 is the result of our continued efforts in implementing business transformation strategy by shifting our operation focus from voice services to non-voice services, which offset the decrease in revenue from our voice services in the same period.

With the introduction of new technology and the launch of various new services by the telecommunications service providers, the market competition among telecommunications service providers has intensified. In order to respond to such intensified competition, we will continue to focus on transforming from a traditional basic network operator into a modern integrated information services provider and explore new growth areas to assure the sustainable growth of our Company.

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Our operating revenue depends largely on the size of our customer base, usage volume and the level and structure of our tariffs. The following table shows our selected operating data as of the dates and for the periods indicated.

The number of our local access lines in service decreased by approximately 1.2% from 223.0 million in 2006 to 220.3 million in 2007 primarily due to the increasing substitution of wireline telephone services by mobile telephone services. The total usage of our local telephone services decreased by approximately 4.1% from 438.2 billion pulses in 2006 to 420.3 billion pulses in 2007. Subscribers for our broadband access services grew from 28.3 million as of December 31, 2006 to 35.7 million as of December 31, 2007. We experienced significant growth in value-added services in 2007. The number of subscribers to our caller ID services was 146.7 million in 2007. The number of subscribers to Color Ring Tone services was 63.2 million as of December 31, 2007 and increased by approximately 72.2% compared to 2006. The usage volume of our short message services, or SMS, was 23.3 billion messages in 2007. We expect our broadband services and value-added services to continue to be key drivers of our growth in the future.

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The following table sets forth a breakdown of our operating revenue for 2005, 2006 and 2007:

Wireline Telephone Services

Our telephone services consist of local telephone, domestic long distance, international, Hong Kong, Macau and Taiwan long distance and interconnection.

Wireline telephone services are our main services, generating 64.1% (including upfront connection fees) of our total operating revenue in 2007, compared to 71.7% (including upfront connection fees) in 2006. Revenue generated by these services decreased by approximately 9.0% from 125,882 million in 2006 to RMB114,606 million in 2007 due to the increasing substitution of wireline telephone services by mobile telephone services and the diversification of the means of communication. We expect that our wireline telephone services will continue to provide a significant revenue source to our overall business.

Local Telephone Services

Our local telephone services provide the largest revenue source for our wireline telephone services. In 2007, revenue from local telephone services decreased by approximately 9.8% from RMB78,074 million in 2006 to RMB70,424 million in 2007 as a consequence of the continuing decrease in the difference between tariffs for mobile services and for wireline telephone services and intensified mobile substitution for wireline telephone subscribers and local voice usage. To further the development of our local telephone services, we have adopted initiatives to differentiate our subscribers and services plans, offered “voice + Internet access” plans to enhance customer loyalty, developed value-added services such as Color Ring Tone and Best Tone to add more value to the wireline telephone services, and promoted services such as Super Cordless and Smart Cordless that combine the services provided by wireline and the Personal Handyphone System, or PHS. In addition, we focused our efforts to optimize the coverage of our wireless local access network for the regions that have the most customers to improve our service quality.

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In 2007, the total number of wireline telephone subscribers recorded a negative growth for the first time. Such decrease was attributable to the reduction in domestic mobile tariffs and the popularization of mobile voice communication. Our local telephone subscribers numbered 220.3 million at the end of 2007, which represents a decrease of 2.7 million, or approximately 1.2% from 2006. As of the end of 2007, wireless local access service subscribers numbered 58.0 million, which represents a decrease of 4.7 million, or approximately 7.5%, from 2006. Public telephone service subscribers reached 15.7 million as of the end of 2007, which represents a slight increase of 0.2 million, or approximately 1.3%, from 2006.

Access lines. The following table sets forth selected information regarding our local telephone subscribers as of the dates indicated:

Service usage. The following table sets forth certain usage information regarding our local telephone services for the periods indicated:

Local voice usage was 406.3 billion pulses in 2007, a decrease of approximately 3.9% from 2006. As customers of our dial-up Internet services continued to shift to our broadband Internet services, dial-up Internet usage, including dial-up usage of customers of other Internet service providers, decreased by 10.8% from 15.7 billion pulses in 2006 to 14.0 billion pulses in 2007. Tariffs for dial-up Internet access were much lower than the usage fees for voice services.

Tariffs. For our local telephone services, we charge a fixed monthly fee and usage fees based on call usage in terms of pulses. The tariffs are regulated by the Chinese government. The local call usage fees are either intra-district or inter-district, depending upon whether a call is within a single service district or between service districts. See “—Regulatory and Related Matters—Tariff Setting” included elsewhere under this Item. In addition, we also charge installation fees for installing telephone for our subscribers. We charge the installation fee based on the actual cost of the installation.

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The following table sets forth the tariffs we charge for local telephone services for the periods indicated:

Domestic Long Distance Services

In order to stabilize our revenue in the increasingly competitive market environment for our long distance services market, we have responded to market changes by adopting flexible operating strategies such as differentiating our customers and offering service plans that meet the needs of different subscribers in the market.

In 2007, revenue from domestic long distance services was RMB24,127 million, representing a decrease of approximately 5.4% from 2006. Total revenue from our domestic long distance services represented approximately 13.5% of our total operating revenue in 2007, compared to approximately 14.5% in 2006.

Service usage. The following table shows the total minutes of domestic long distance calls carried through our long distance network for the periods indicated:

Total domestic long distance usage was 98,251 million minutes in 2007, representing an annual growth rate of approximately 2.8% from 2006.

Tariffs. Currently, all domestic long distance services using public switched telephone networks are charged at the unified rate of RMB0.07 per six seconds, with a discount rate of up to 40% applicable to calls made during off-peak hours, which are from 12:00 am to 7:00 am every day.

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The following table sets forth the tariffs for our domestic long distance telephone services which are based on state tariff rates:

International, Hong Kong, Macau and Taiwan Long Distance Services

In 2007, competition in international and Hong Kong, Macau and Taiwan long distance telephone services further intensified. Diversion of customers to service based on technologies such as Instant Message and IP telephony had increased. Revenue from our international, Hong Kong, Macau and Taiwan long distance services amounted to RMB2,882 million in 2007, representing a decrease of approximately 10.6% from 2006. Our international, Hong Kong, Macau and Taiwan long distance telephone services contributed approximately 1.6% to our total operating revenue in 2007, compared to approximately 1.8% in 2006.

In order to maintain our revenue from international, Hong Kong, Macau and Taiwan long distance telephone services, we launched a number of service discounts plans to address various needs of different customer segments. In 2007, we focused our marketing and advertising effort to promote the public awareness of the tariff discount plans for our international, Hong Kong, Macau and Taiwan long distance telephone services.

Service usage. The following table sets forth certain information related to the usage of our international, Hong Kong, Macau and Taiwan long distance services, including usage of international, Hong Kong, Macau and Taiwan long distance services by mobile subscribers, for the periods indicated:

Usage in 2007 was 1,588 million minutes, representing a decrease of approximately 0.8% from 2006.

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Tariffs. The following table sets forth our international, Hong Kong, Macau and Taiwan long distance tariffs for the years indicated:

We offer international, Hong Kong, Macau and Taiwan long distance services through the international gateways of China Telecom Group. China Telecom Group negotiates bilateral settlement arrangements and rates based on the international settlement standards in the telecommunications industry, and we follow those settlement arrangements and rates.

Interconnection

Revenue from interconnection decreased by approximately 1.5% from RMB14,095 million in 2006 to RMB13,879 million in 2007, representing approximately 7.8% of our total operating revenue in 2007. As the number of mobile subscribers continued to grow, the volume of inbound local calls reached 135,447 million minutes in 2007, representing an increase of approximately 8.8% from 2006.

Under relevant regulations, we are exempt from any interconnection payment for outbound local traffic to mobile operators. See “—Regulatory and Related Matters—Interconnection” for tariff details.

We have interconnection arrangements with other telecommunications operators, including China Telecom Group, China Netcom Group, China Mobile and China Unicom. All interconnection and settlement arrangements among public wireline telephone, mobile, and Internet networks in China are governed by the Telecommunications Regulations and the rules on interconnection arrangements and settlement promulgated by the former Ministry of Information Industry. See “—Regulatory and Related Matters—Interconnection” included elsewhere under this Item.

China Telecom Group entered into interconnection agreements with other telecommunications service providers in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province, prior to our incorporation in 2002, with other telecommunications service providers in Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and Sichuan Province, prior to our acquisition in 2003 and with other telecommunications service providers in Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province,

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Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region prior to our acquisition in 2004. These agreements provide for interconnection settlement with respect to local calls and domestic and international, Hong Kong, Macau and Taiwan long distance calls involving our networks. In connection with our initial public offering in 2002 and the acquisitions in 2003 and 2004, China Telecom Group has assigned to us, and we have assumed, its rights and obligations under these agreements in relation to our service regions. We also entered into an interconnection agreement with China Telecom Group. The economic terms and the settlement procedures under that agreement are in accordance with the standards set forth in the interconnection rules and regulations, which are described in more detail under “—Regulatory and Related Matters—Interconnection” included elsewhere under this item. See also “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ongoing Related Party Transactions between Us and China Telecom Group—Interconnection Agreement”.

Internet Access and Value-added Services

In addition to basic local and long distance voice services, we offer Internet access and value-added services. In 2007, these services continued to grow rapidly and were an important revenue growth driver. Revenue from our Internet access and value-added services increased by 33.3% from RMB37,927 million in 2006 to RMB50,571 million in 2007, representing 28.3% of our operating revenue.

Internet Access Services

In 2007, revenue from Internet access services became increasingly important in our revenue structure. In 2007, our broadband subscribers increased by 26.1% from 28.3 million to 35.7 million. We also focused on segmentation of the broadband subscribers and differentiation of our broadband products to provide various services in terms of quality, application contents and prices to different customer groups. We also optimized our network in order to provide high-end subscribers with broadband products that offer more applications and better quality.

The following table sets forth selected information regarding our broadband access services for the periods indicated:

Value-added Services

Our value-added services comprise primarily wireline value-added services, Internet value-added services and integrated information value-added services.

Caller ID services, short messaging services, telephone information services and “Color Ring Tone” services are wireline value-added services. “Color Ring Tone” refers to a service where subscribers can customize the answer ring tone heard by the caller from a wide selection of songs, melodies, sound effects or voice recordings to replace the monotonous ring connecting tone. SMS usage volume was 23.3 billion messages and there were 63.2 million subscribers for the “Color Ring Tone” service in 2007.

Internet value-added services include “ChinaVNet” services, IPTV, Internet through TV services, collaborative communication services and music gateway services. “ChinaVNet” services refer to products and applications, such as music, video, software and recharge of online game cards, provided through broadband access and operated on a nationwide basis.

“Best Tone” services, “BizNavigator” services and IT services and applications are our integrated information value-added services. “Best Tone” service is an integrated information enquiries service. It provides our customers with phone number storage, enquiry and call transfer services, as well as various information

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needed in daily life. In 2007, we launched a nationwide campaign for the promotion of our “Best Tone BizTravel” services, which comprise a series of services in relation to ticket booking and hotel reservation, making it an attractive product of the “Best Tone” services. In 2007, we continued to promote “BizNavigator” and “One Home” as our major customer brands and improved the recognition of such brands among our customers. The “BizNavigator” and “One Home” targets government and corporate customers and middle-to-high-end household customers, respectively, and provide tailored application solutions to satisfy the different information and IT needs of such customers. Customers of “BizNavigator” and “One Home” reached 1.88 million and 10.54 million in 2007, respectively.

Tariffs. Internet and value-added services are classified as “market-based” for purpose of tariff determination by relevant regulatory authorities. We determine tariffs for our Internet and value-added services according to market conditions. See “—Regulatory and Related Matters—Tariff Setting” included elsewhere under this Item.

Managed Data

In 2007, revenue from managed data decreased by approximately 2.2% from RMB3,080 million in 2006 to RMB3,013 million in 2007, representing approximately 1.7% of our total operating revenue in 2007.

Our managed data services include Digital Data Network, or DDN, frame relay, or FR, and Asynchronous Transfer Mode, or ATM, services. In 2007, we continued to focus on government, financial and large enterprise customers. Our marketing efforts focused on providing global one-stop shop, tailored services and comprehensive solutions to these customers. Our customers can enjoy a full range of consulting, trouble-shooting, billing and collection, and technical support services by contacting any designated account manager in our Company.

We offer managed data services as part of our total telecommunications solutions to large enterprise customers, including government agencies, large corporations and institutions. Many of these customers choose FR and ATM services to form virtual private networks, or VPNs, and link their local area networks at different locations. We also collaborate with a number of international telecommunications service providers to build global communications networks for multinational corporations.

Tariffs. We determine most of the tariffs for our data services within a price range set by the Chinese government. We generally charge a fee for installation and testing for our data services and a fixed monthly fee. We offer various promotion discounts for our customers who wish to upgrade to higher bandwidth services. These promotion discounts have stimulated demand for our managed data services in recent years.

The following table sets forth the monthly fees for DDN services at the bandwidth of 64Kbps and 2Mbps for the years indicated:

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The following tables set forth the monthly fees in 2005, 2006 and 2007 for FR and ATM services, which include monthly fees for port access and permanent virtual circuits, or PVCs:

Leased Line and Other Services

In 2007, revenue from leased line services and other services increased by approximately 19.9% from RMB8,727 million in 2006 to RMB10,466 million in 2007, representing 5.9% of our total operating revenue in 2007.

Leased Line Services

The following table sets forth the total amounts of bandwidth of our leased line service as of the end of the year indicated:

Tariffs. The leased line tariff rates are set by the Chinese government based on bandwidth and whether the leased line is local or long distance. Leased line providers are permitted to charge monthly fees for leased lines on a discount basis and leased line tariffs have generally decreased in recent years. We provide different discounts to our customers on a case by case basis. See “—Regulatory and Related Matters—Tariff Setting” included elsewhere under this Item.

The following table sets forth the tariffs for 2Mbps and 155Mbps digital circuits for the years indicated as set by the Chinese government:

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Other Services

Our other services primarily include sales, repairs and maintenance of customer-end equipment and construction of telecommunications network and infrastructure for customers.

Marketing, Distribution and Customer Services

Marketing Initiatives

We market all of our telecommunications services under the “China Telecom” brand name, which is one of the best known brand names in China. We have devoted substantial efforts in advertisements to promote recognition of and loyalty to our products and services. In order to respond to migration of our subscribers to mobile services and motivate our customers to continue to use our services, we have also packaged certain of our local and long distance services, differentiated price for one or more products and combined certain products into one integrated service plan to targeted customers to address their telecommunications needs.

For example, we offer certain of our products and services as a package under the brand name “BizNavigator” and “One Home”, respectively. In 2007, we continued to promote “BizNavigator” as our brand targeting government and corporate customers and “One Home” as our brand targeting household customers. We have introduced three editions of “BizNavigator”, namely, Communication Edition, Information Edition and Industry Edition, each offering a different combination of our products and services to meet the different demands of our customers. The marketing of these major brand names have improved their recognition among our customers and have helped to change the public image of our Company from a traditional wireline operator to an integrated information services provider.

In addition, rural areas have become one of our major target markets due to the increasing demand for telecommunication services in these areas. We have enhanced our product and service offerings in the rural market and increased our customer base by introducing “Info Farm” in rural areas in 2007. “Info Farm” is an integrated service brand, under which we offer to customers services such as those relating to voice, broadband and distance education.

Furthermore, we have adopted various marketing approaches and initiatives, such as customer experience, short messaging services, telesales, packaged sales and joint promotion with our business partners such as Internet portal companies and software development companies, to promote our products and services, in particular our value-added services.

Sales, Distribution and Customer Services

In 2007, we continued to implement our dedicated service system, standardize and expand our business outlets, strengthen and promote our customer service hotlines, and improve our online customer services. By gradually integrating the dedicated service channel, electronic-based service channel, business outlet service channel and the agency service channel, we aim to provide our customers with more effective and efficient services.

Dedicated service channel. We have implemented a dedicated service channel comprising customer managers specifically assigned to market our services to large enterprises, communities and rural areas. We designed and customized products based on the various needs of our customers, and promote these products through our dedicated customer managers. We conduct periodic performance reviews and evaluations of the performance of these dedicated customer managers based on several factors, including revenue growth, customer satisfaction, business promotion and customer retention.

Electronic-based service channel. We provide customer services through our customer service hotlines with the access number of “10000” and online service centers. Our customer service hotlines handle service inquiries, service applications, customers’ complaints and promote our products and services. Our online service centers provide all the customers with service inquiry, service application and other services. We maintain and enhance our communications with our customers through the electronic-based service channel.

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Business outlet channel. Through our own business outlets as well as agents and business outlets set up with third parties, we provide our customers with better service experience, promote our corporate image and new products.

Agency service channel. We have established guidelines to supervise and cooperate with our agencies and distributors and develop our business, expand our customer base and provide better customer services.

Network System

We have been able to realize significant economies of scale as a result of the extensive coverage and scale of our network. Our network employs a variety of advanced technologies and suitable architecture and can be efficiently migrated to the next generation of network technology. Our network system is managed and operated by our experienced network management and maintenance teams and offers flexible functionality and reliable operation. It supports a comprehensive range of end-to-end wireline telecommunications services and enables customized products to be delivered for a variety of telecommunications needs. Our networks and services are supported by our strong research and development capabilities. We have formulated viable plans in light of future advances in technology to migrate our network system smoothly to the next generation of network technology in order to protect our existing investments.

Network Architecture

Our network system consists of local access networks, transport networks, core networks, service platform and support networks.

Network Capacity and Technology

Local access networks . We own extensive local access networks in our service regions. As of December 31, 2007, our local access networks covered all cities, counties and most rural villages in our service regions. In order to optimize our network and improve utilization, in addition to expanding our broadband local access networks utilizing our existing copper line resources, we are vigorously connecting additional large office buildings, business centers and residential buildings with fiber optic access. We also developed wireless LANs in certain business areas in major cities, including hotels, airports, exhibit centers and office buildings to provide business travelers with broadband access services.

Transport network . Our transport system is based on an advanced, high-speed, large-capacity, secure and reliable fiber optic network throughout our service regions. Our fiber optic transport network is also supplemented by satellite transmissions and digital microwave links.

Wireline telephone networks . In 2007, after completing the upgrade of our wireline network by applying softswitch technology, we expanded the application of softswitch technology and optimized our telephone network system. The softswitch technology has been applied nationwide, and we have generally not constructed any new public switched telephone network, or PSTN, switchboard since then.

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Internet and managed data networks . We have developed a large-capacity, high-quality, reliable and extensive Internet and managed data network system in our service regions. Our Internet and managed data networks allow us to provide services both at the network layer, such as Internet access, managed data and VPN services, and at the application layer, such as Internet data center, content distribution and video-on-demand services.

Our data network system includes a DDN network, an FR network and an ATM network. These networks cover all cities and counties in our service regions. Our ATM network allows multi-service access and flexible bandwidth management and provides high-quality, integrated end-to-end services.

CHINANET, our Internet network, deploys mainstream advanced routers as the main network technology. Most of its backbone routes allow high-speed transmission with the use of several 10Gbps circuits.

China Telecom Next Carrying Network, or CN2, is our next generation core multi-service carrier platform and has been fully implemented. It is capable of supporting voice, managed data, and video services at the same time. It covers most of our local networks and nine overseas cities. As the carrier network within the telecommunications network, CN2 is capable of carrying softswitch network, 3G mobile network, video-on-demand service, CHINANET and other important services. In addition, as a high-quality Internet network, CN2 provides Multi-protocol Label Switch Virtual Private Network service and Internet access service.

Support networks . The operation of our wireline telephone, Internet and managed data networks depends on various support networks, including a signaling network based on a signaling technology known as Signaling System No. 7 protocol, a digital synchronous network and network management systems for various networks and services.

Equipment procurement . We purchase most of our network equipment from leading international and domestic suppliers. We purchase a variety of network equipment from domestic suppliers, such as transport equipment and local switches. We make most of our purchases through competitive tenders primarily based on product and service quality, system compatibility and price.

Purchases from our five largest suppliers of telecommunications equipment accounted for approximately 31.4% of our total amount of annual purchases for 2007. Purchases from our largest supplier of telecommunications equipment accounted for approximately 15.5% of our total amount of annual purchases for 2007.

Information Technology Systems

Our strategic goal is to establish a new comprehensive information technology platform, CTG-MBOSS, in the next three to five years along with our strategic transformation from a traditional basic network operator into a modern integrated information services provider. CTG-MBOSS will include business support systems, or BSS, to support marketing and customer services, operation support systems, or OSS, to support network operation and resource allocation, management support systems, or MSS, to support management, enterprise and data architecture, or EDA, for data management, operation analysis and decision making, and the related information organization and control systems. Adoption of the enterprise application integration, technology has allowed for interconnection among all major systems of our Company, enabling information sharing within our Company.

We have set up three phases for developing our information technology system. First, we plan to enable organized information sharing within our Company. To satisfy the operational needs of our Company, we plan to provide data upon request in a timely manner. Second, we plan to improve the operation and management efficiency, lower operation and information technology supporting cost by providing effective and organized information technology support. Third, we plan to apply for proprietary rights for our intellectual properties, train our dedicated IT supporting staff. In addition, by gaining experience through improving our own information technology system, we expect to provide third parties with more sophisticated IT services and make CTG-MBOSS a new growth driver.

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Competition

We compete with other telecommunications service providers in our wireline telephone, Internet, managed data and leased line services. All of our principal competitors are wholly or majority owned by the Chinese government. Currently, providers of basic telecommunications services must apply for a license from the Ministry of Industry and Information. Only a limited number of providers have obtained licenses to provide basic telecommunications services in China. In China, there are currently two licensed mobile telecommunications service providers, China Mobile and China Unicom, and four wireline service providers, China Netcom Group, which is expected to merge with China Unicom, China Unicom, China Railcom, which is expected to be acquired by China Mobile, and us. We face direct and indirect competition from our competitors in all of our services within our service regions.

In May 2008, in order to optimize the allocation of telecommunications resources in China and improve the competitive landscape, the Ministry of Industry and Information, the National Development and Reform Commission and the Ministry of Finance announced the policy initiative to further reform the telecommunications industry in China that encourage the formation of three telecommunications services providers, each with nationwide network resources, comparable scale and standing, full-service capabilities and competitive strength, by way of a series of restructuring transactions. These proposed restructuring transactions include the acquisition by our Company of the CDMA network (including both assets and subscriber base) currently owned by China Unicom, the merger between China Unicom and China Netcom Group, the acquisition by China Telecom Group of the basic telecommunications services business currently operated by China Satellite and the acquisition by China Mobile of China Railcom. Upon completion of the proposed restructuring transactions and formation of three telecommunications services providers encouraged by the policy initiative announced in May 2008, each of our Company, China Mobile and the entity that combines China Unicom and China Netcom Group is expected to become full-service telecommunications services providers that operate both fixed-line telecommunications networks and mobile telecommunications networks. We can not predict at this point in time the precise impact that the formation of full-service telecommunications services providers may have on our business and prospects. To the extent we are licensed to engage in mobile telecommunications services by the Chinese regulatory authorities in the future, we cannot assure you that we would be able to develop our full-service capabilities quickly enough or at all, in part due to our lack of prior experience and expertise in these other telecommunications services, to be able to effectively compete with China Mobile and the entity that combines China Unicom and China Netcom Group. This could have a material adverse effect on our competitive position, business and prospects in the telecommunications industry in China. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We face increasing competition, which may adversely affect our business growth and results of operations” and “—Regulatory and Related Matters—Licensing” included elsewhere under this Item.

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Competition in Wireline Telephone Services

Local telephone services . Mobile service substitution for our wireline telephone services has been the principal competition to our local telephone services in recent years. Currently, compared with mobile service providers, our wireline telephone services continue to offer better voice quality, higher communication consistency, reliability and lower cost, and our wireless local access services also offer mobility within limited local areas. Mobile service providers, however, have a competitive advantage by providing unrestricted mobility and roaming capability.

Until the mid-1990s, we were the sole licensed wireline local telephone services provider in our service regions. Our local telephone services currently compete with the wireline services offered by China Netcom Group, which is expected to merge with China Unicom, and China Railcom, which is expected to be acquired by China Mobile, which have been licensed to provide local telephone services in our service regions. We compete with these operators primarily on the basis of brand name, network coverage, service quality and service offerings. In addition, we have a large customer base, which allows us to compete through economies of scale and to cross-sell our services to our existing customers.

Long distance telephone services . We compete with China Unicom, China Railcom, which is expected to be acquired by China Mobile, and China Netcom Group, which is expected to merge with China Unicom, with respect to long distance telephone services using public switched telephone networks in our service regions. Mobile telecommunications services have diverted some of the traffic from our long distance telephone services. We compete with these service providers on the basis of customer base, brand name, network resources, quality of service and marketing and distribution strength. Access to our long distance services does not require the dialing of any pre-set access number or password.

China Mobile, China Netcom Group, which is expected to be merged with China Unicom, China Unicom, China Railcom, which is expected to be acquired by China Mobile, and China Satellite, whose basic telecommunications business is expected to be acquired by China Telecom Group, provide VoIP services that compete with our public switched telephone network and VoIP long distance services. We compete with these VoIP service providers on the basis of customer base, reliability, quality and coverage of networks and general service quality.

Competition in Internet Service

We compete with China Netcom Group, which is expected to merge with China Unicom, China Mobile, China Unicom and China Railcom, which is expected to be acquired by China Mobile, with respect to Internet access services on the basis of customer base, brand name, coverage of access networks and cooperation with the providers of Internet content and applications.

Competition in Managed Data Services

We compete with China Netcom Group, which is expected to merge with China Unicom, China Railcom, which is expected to be acquired by China Mobile, and China Unicom for managed data services. We compete on the basis of end-to-end connectivity, network coverage, service quality and scale efficiency.

Competition in Leased Line Services

We compete with China Netcom Group, which is expected to merge with China Unicom, China Unicom, and China Railcom, which is expected to be acquired by China Mobile, in leased line services. We compete with them on the basis of the coverage and quality of networks, ability to provide end-to-end connectivity, quality of network management and customer services.

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Competitive Implications of China’s Accession to WTO

Since China’s accession to the WTO, foreign operators have been permitted to gradually increase their investments in the telecommunications industry in China. Like domestic service providers, foreign operators are subject to the licensing requirements of the Ministry of Industry and Information. In addition, investments by foreign operators may not exceed limits set forth in the relevant laws and regulations with respect to the amount of investment and percentage of total ownership interests that foreign operators are permitted to make in telecommunications enterprises in China. For example, the foreign ownership percentage in basic telecommunications services will be subject to a maximum limit of 49%. See “—Regulatory and Related Matters—Licensing” included elsewhere under this Item.

Foreign operators may have competitive advantages over us in terms of financial and management resources, network management and technical expertise. On the other hand, because foreign operators currently are prohibited from establishing wholly owned subsidiaries in the telecommunications industry in China, we believe that we are well positioned to establish strategic alliances with strong global operators in this respect. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We face increasing competition, which may adversely affect our business growth and results of operations”.

Trademarks

We conduct our business under the “China Telecom” brand name and logo. Currently, China Telecom Group owns certain trademarks in China, some of which have been registered with the Trademark Office of the PRC State General Administration for Industry and Commerce, or the Trademark Office, and some of which are in the process of being registered with the Trademark Office. China Telecom Group has executed a trademark license agreement with us. Under this agreement, China Telecom Group agreed to grant to us and our subsidiaries the right to use these trademarks upon the completion of the registration on a royalty-free basis until December 31, 2009, which is automatically renewable for three more years at our option. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ongoing Related Party Transactions between Us and China Telecom Group—Trademark License Agreements”.

Regulatory and Related Matters

Overview

The telecommunications industry in China is subject to extensive government regulation. A number of central government authorities have regulatory responsibilities for various aspects of the telecommunications industry. These authorities primarily include:

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In order to provide a uniform regulatory framework to encourage the orderly development of the telecommunications industry, the Chinese government is in the process of drafting a telecommunications law. We expect that, if and when the telecommunications law is adopted by the National People’s Congress or its Standing Committee, the highest state legislative body in China, it will become the basic telecommunications statute and provide a regulatory framework for the telecommunications industry in China.

Telecommunications Regulations

China’s State Council promulgated the Telecommunications Regulations, which became effective as of September 25, 2000. The Telecommunications Regulations are substantially consistent with, and are primarily intended to streamline and clarify, the then existing rules and policies for the telecommunications industry. The Telecommunication Regulations provide the primary regulatory framework for China’s telecommunications industry in the interim period prior to the adoption of the telecommunications law.

The Telecommunications Regulations are intended to develop a transparent and fair regulatory environment to encourage fair and orderly competition and development in the telecommunications industry. The Telecommunications Regulations address all key aspects of telecommunications operations, including, among others, entry into the telecommunications industry, network interconnection, telecommunications resource allocation, tariffs and service standards.

Licensing

The Telecommunications Regulations adopt the existing regulatory distinction between basic and value-added telecommunications services, which are subject to different licensing requirements. Basic telecommunications services include, among others, wireline local and domestic long distance telephone services, international telecommunications services, mobile communications services (such as 900/1800MHz GSM, 800MHz CDMA and 3G mobile communications services), satellite communications services, paging services, data communications services (such as Internet data transmission services, international data communications services), trunking services, network access services and domestic and international telecommunications facility services. Value-added telecommunications services include, among others, value-added services provided over wireline telephone networks (e.g., telephone information, call center, voice mail and video conferencing services), value-added services provided over mobile networks, value-added services provided over Internet networks (e.g., Internet data center and Internet access and content services) and value-added services provided over other data networks (e.g., computer information, e-mail and electronic data interchange services).

Providers of any basic telecommunications services as well as providers of value-added services in two or more provinces, autonomous regions and centrally administered municipalities in China must apply for licenses from the Ministry of Industry and Information. In accordance with the approval of the Ministry of Industry and Information, we derive our exclusive rights to operate our business from our status as a subsidiary controlled by China Telecom Group, which holds the licenses required for operating our telecommunications business.

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China’s State Council has promulgated the Administrative Regulations on Telecommunications Companies with Foreign Investment, which became effective on January 1, 2002. According to those regulations, enterprises with foreign investment may operate basic and value-added telecommunications services subject to the approval of the Ministry of Industry and Information and the Ministry of Commerce (formerly the Ministry of Foreign Trade and Economic Cooperation). Certain limitations have been placed on the total registered capital of, and maximum foreign shareholdings in, such enterprises.

The table below summarizes the foreign ownership and geographic restrictions for telecommunications joint ventures in China:

The Ministry of Information Industry has promulgated the Measures on Administration of Telecommunication Business Licenses, which became effective on January 1, 2002. Those regulations apply to the application for, and examination and approval of, telecommunications business licenses in China.

The Ministry of Industry and Information, the National Development and Reform Commission and the Ministry of Finance indicated in their joint announcement of the proposed restructuring initiatives relating to the telecommunications industry in China that three 3G licenses are expected to be granted to telecommunications services providers in China upon the completion of the restructuring transactions as proposed in the announcement. However, the timing, as well as the manner, of such issuance of 3G licenses is uncertain.

Tariff Setting

The levels and categorization of most of our current tariffs are subject to regulation by various government authorities, including the Ministry of Industry and Information, the National Development and Reform Commission, and, at the local level, the relevant provincial communications administrations and price bureaus. Under the Telecommunications Regulations, telecommunications tariffs are categorized into government fixed tariffs, government guidance tariffs and market based tariffs. The telecommunications providers are permitted to set tariffs for certain services provided the tariff levels are below the tariff ceilings set by the Ministry of Industry and Information and the National Development and Reform Commission.

The Chinese government retains the ultimate authority to adopt changes to tariffs. However, the Telecommunications Regulations require the government to hold public hearings before setting or changing fixed

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or guidance tariff rates, which should be attended by, among others, telecommunications operators and consumers. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Telecommunications Industry in China—Our revenues may be adversely affected by reductions in tariffs and other changes in tariff regulations mandated by the Chinese government”.

Under the Telecommunications Regulations, cost is the primary basis for tariff setting. In addition, the tariff level should also take into account social and economic development, the development of the telecommunications industry and consumers’ ability to afford the services.

The Ministry of Industry and Information has gradually liberalized the tariff level by allowing telecommunications provider to set tariffs below certain tariff ceilings and permitting them to package their products and services, which could essentially lower the actual price for certain products and services included in the package. Effective October 1, 2005, the Ministry of Industry and Information and the National Development and Reform Commission set the tariff ceiling for wireline local inter-district telephone services, domestic long distance telephone services, and international, Hong Kong, Macau and Taiwan long distance telephone services. With respect to the tariffs for domestic and international long distance telephone services, telecommunications service providers are required to file the tariffs with the Ministry of Industry and Information and the National Development and Reform Commission for record purpose, and, at the local level, the relevant provincial communications administrations and price bureaus. With respect to the tariffs for wireline local inter-district telephone services, filings of the tariffs with the relevant provincial communications administrations and price bureaus for record purpose are required. With respect to service discounts plans, filings with the Ministry of Industry and Information or, if service discounts plans are provided by the provincial subsidiaries of the telecommunications operator, with the relevant provincial communications administrations, are required. Currently, the Ministry of Industry and Information allows tariffs for VoIP, Internet access services and certain value-added services provided over wireline telephone networks to be set by service providers.

Interconnection

Under the Telecommunications Regulations and the Administrative Rules on Interconnection between the Public Telecommunications Networks promulgated by the former Ministry of Information Industry in May 2001, major telecommunications operators in China cannot refuse requests for interconnection and must enter into interconnection agreements upon request by other service providers. Interconnection agreements must be filed with the Ministry of Industry and Information. Interconnection agreements may not be terminated unilaterally without prior approval by the Ministry of Industry and Information.

The Telecommunications Regulations further provide that the technical standards and settlement methods for network interconnections be formulated by the Ministry of Industry and Information. In accordance with these regulations, China Telecom Group has entered into various interconnection agreements with other telecommunications service providers, including China Mobile, China Unicom, China Netcom Group and China Railcom.

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In October 2005, the former Ministry of Information Industry issued the Notice on Adjustment to Settlement Standards for Interconnection Fees of Wireline Local Telephone Networks, which provides for a new settlement arrangement standards for wireline local telephone operators. In January 2007, the former Ministry of Information Industry issued a second notice, which provides for a further adjustment of the settlement standards for wireline local telephone operators. The following table sets forth selected interconnection revenue sharing and settlement arrangements for local calls:

The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for public switched telephone network domestic long distance calls:

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The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for public switched telephone network international long distance calls, including calls originated from and terminated in Hong Kong, Macau and Taiwan:

The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for IP long distance calls:

Technical Standards

The Ministry of Industry and Information sets industry technical standards for telecommunications terminal and interconnection related equipment used in the public telecommunications networks. A network access license from the Ministry of Industry and Information and other relevant regulatory authorities is required for all such equipment. Most of the standards set by the Ministry of Industry and Information conform to standards recommended by the International Telecommunications Union and other international telecommunications standards organizations.

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Capital Investment

On July 16, 2004, the State Council promulgated the Decision on Reform of Investment System, or the Investment Reform Decision, which significantly modified the government approval process for major investment projects in China. The Investment Reform Decision eliminated the government approval requirements for investment projects that do not involve direct government funding unless the investment projects are in the restricted sectors specified in the annually adjusted catalogue released by the State Council. The 2004 catalogue, which was attached as an annex to the Investment Reform Decision, sets forth approval requirements for individual investment projects in restricted sectors. Within the telecommunications sector, some investment projects, such as domestic backbone transmission network, require the National Development and Reform Commission’s approval.

The Investment Reform Decision grants large enterprises more power of decision-making on investment. Where a large enterprise which has established modern corporate governance invests in any of the projects in the restricted sectors specified in the 2004 catalogue, it may apply for approval on individual project basis, or make medium and long-term development and construction plan, which, if approved by the State Council or the competent governmental authority, no specific approval is required for the projects contemplated in the plan. In this case, the enterprise is only required to go through the registration process and report to the relevant governmental authority, on a timely basis, the construction process of the project.

Telecommunications Resources

The Ministry of Industry and Information is responsible for the administration and allocation of telecommunications resources in China, including radio frequencies and telecommunications network numbers. The use of these resources by telecommunications service providers is subject to the approval of the Ministry of Industry and Information or the relevant provincial communications administrations and a usage fee payable to the Chinese government.

The former Ministry of Information Industry, the Ministry of Finance and the National Development and Reform Commission promulgated the Interim Measures on Collection of Usage Fees of Telecommunications Network Numbers, or the Interim Measures, effective January 1, 2005. The Interim Measures provide for the standards and collection of usage fees of telecommunications network numbers. In accordance with the Interim Measures, telecommunications services providers, including us, shall pay the usage fees of telecommunications network numbers. In 2007, the usage fees for the telecommunications network numbers we currently use are approximately RMB112 million.

Quality of Service

Under the Telecommunications Regulations, the Ministry of Industry and Information and the relevant provincial communications administration have the responsibility of supervising and monitoring the quality of services provided by telecommunications service providers in China. Under the Telecommunications Regulations, customers of telecommunications service providers have the right to submit complaints to the Ministry of Industry and Information and the relevant provincial communications administration or other relevant government authorities.

On March 13, 2005, the former Ministry of Information Industry promulgated the Telecommunications Services Standards. The Telecommunications Services Standards aim to protect the rights of the customers of telecommunications services and sets forth minimum quality requirements for telecommunications services provided by telecommunications operators.

The former Ministry of Information Industry promulgated the Measures on the Supervision and Administration of Quality of Service of the Public Telecommunications Networks, or the Measures on Quality of Service, effective August 1, 2005. The Measures on Quality of Service provide the supervision and administration of services of

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public telecommunications networks, including, among others, wireline local telephone networks, domestic long distance telephone networks, international telephone networks, and IP telephone networks. Under the Measures on Quality of Service, telecommunications operators are required to set up a unit which is responsible for solving the problems with respect to the public telecommunications network services.

Under the Consumer Protection Law of China, Consumers’ Associations can participate in the inspection and examination of goods and services by relevant governmental authorities; and customers can lodge their complaints with Consumers’ Associations, which can investigate the goods or services involved in the complaints, and mediate the complaints.

Universal Services

Under the Telecommunications Regulations, telecommunications service providers in China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the Chinese government, and the Ministry of Industry and Information has been given authority by the Chinese government to delineate the scope of its universal service obligations. The Ministry of Industry and Information may also select universal service providers through a tendering process. The Ministry of Industry and Information, together with other regulatory authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. The Chinese government currently uses financial resources to compensate the expenses incurred in the “Village to Village” projects before the establishment of a universal service fund. In December 2006, the Ministry of Finance issued the Provisional Rules on Usage and Administration of Telecommunications Universal Service Fund, effective December 21, 2006, which provide a compensation scheme for certain expenses incurred in the “Village to Village” projects undertaken by telecommunications service providers. Under the compensation scheme, telecommunications operators may receive compensation from the Chinese government for the “Village to Village” projects. These rules provide for the application for the compensation, the method to calculate the amount, the approval process and the distribution of the compensation. However, the compensation from the Chinese government may not be sufficient to cover all of our expenses for providing the telecommunications services under the “Village to Village” projects.

Under the Telecommunications Regulations, all Chinese telecommunications operators shall provide universal services, but the formal timetable for the establishment of the systems to implement universal services has not been set up. Once the universal service regulatory framework is finalized, we expect to perform our duties thereunder accordingly. Currently, the Chinese government implements the “Village to Village” projects which require telecommunications operators to provide telephone services in a number of remote villages in China as transitional measures prior to the official implementation of a universal service obligation framework. Accordingly, China Telecom Group has initiated “Village to Village” projects and invested in the construction of network facilities in certain remote villages of Shaanxi province, Jiangxi province and Gansu province in 2005 and 2006, and in more villages in Shaanxi province in 2007. We have been requested by China Telecom Group to operate and maintain such network facilities from 2006 onwards, and China Telecom Group will compensate us for all the related expenses. We believe the expenses for such operation and maintenance will not have a material effect on our financial condition.

State-Owned Assets Supervision

Under the PRC Company Law, Interim Measures for the Supervision and Administration of State-Owned Assets of the Enterprises, and other administrative regulations, the SASAC, among others, supervises the preservation of the value of state-owned assets, guides the reform and restructuring of state-owned enterprises, and evaluates the performances of management executives of state-owned enterprises through legal procedures. Our controlling shareholder, China Telecom Group, is a wholly state-owned enterprise and subject to the SASAC’s supervision.

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C. Organization Structure

See “—A. History and Development of the Company—Our Restructuring and Initial Public Offering” included elsewhere under this Item.

D. Property, Plants and Equipment

Properties

Executive Offices

Our principal executive offices are located in Beijing and we obtained the right to occupy and use these offices pursuant to an agreement we entered into with China Telecom Group in September 2002 and supplemental agreements on October 26, 2003, April 13, 2004, December 15, 2005, December 26, 2007 and March 31, 2008. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Ongoing Related Party Transactions between Us and China Telecom Group—Centralized Services Agreements”.

Properties