THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt as to any aspect of this document or as to the action to be taken, you should consult a licensed securities dealer, or other registered institution in securities, a bank manager, solicitor, professional accountant, or other professional adviser.

If you have sold or transferred all your shares in PCCW Limited, you should at once hand this document and the accompanying forms of proxy to the purchaser or the transferee or to the licensed securities dealer or registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this document, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

==> picture [199 x 31] intentionally omitted <==

Pacific Century Regional Developments Limited

Developments Limited China Network Communications (incorporated in the Republic of Singapore Group Corporation with limited liability) (established in the People’s Republic of Company Registration No. 196300381N

(established in the People’s Republic of China)

China Netcom Corporation Starvest Limited (BVI) Limited (incorporated in the Cayman Islands (incorporated in the British Virgin Islands with limited liability) with limited liability)

==> picture [86 x 41] intentionally omitted <==

PCCW Limited 電訊盈科有限公司

(incorporated in Hong Kong with limited liability) (Stock Code: 0008)

PROPOSED PRIVATISATION OF PCCW BY THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

Financial Adviser to PCCW

Financial Adviser to PCRD and Starvest Financial Adviser to CNC and Netcom BVI

==> picture [78 x 32] intentionally omitted <==

Independent Financial Adviser to the Independent Board Committee of PCCW

A letter from the Board is set out on pages 4 to 11 of this document. An Explanatory Statement regarding the Scheme is set out on pages 43 to 76 of this document. A letter from the Independent Board Committee containing its recommendations to the Independent Shareholders in relation to the Scheme and to the Optionholders in relation to the Option Offer is set out on pages 12 to 13 of this document. A letter from Rothschild, the independent financial adviser to the Independent Board Committee, containing its advice to the Independent Board Committee in relation to the Scheme is set out on pages 14 to 42 of this document.

The action to be taken by the Independent Shareholders is set out on pages 74 to 75 of this document. The action to be taken by the ADS Holders is set out on page 67 of this document.

The action to be taken by the Optionholders is set out on page 75 of this document.

Notices convening the Court Meeting and the EGM to be held in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008 are set out on pages 257 to 261 of this document. Whether or not you are able to attend the Court Meeting and/or the EGM or any adjournment thereof, you are strongly urged to complete and sign the enclosed pink form of proxy in respect of the Court Meeting and the enclosed white form of proxy in respect of the EGM, in accordance with the instructions printed on them, and to lodge them with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong as soon as possible but in any event not later than the respective times and dates as stated under the paragraph headed “Action to be taken” set out on page 74 of this document. In the case of the pink form of proxy in respect of the Court Meeting, it may also be returned by facsimile at number (852) 2962 5926 (marked for the attention of “the Company Secretary”) up to the time of the Court Meeting or it may be handed to the chairman of the Court Meeting at the Court Meeting if it is not so lodged.

If you are an ADS Holder, you are urged to complete and return the Voting Instruction Card to instruct the Depositary, in accordance with the terms of the Deposit Agreement, to vote the Shares underlying your ADSs. Alternatively, you may exchange your ADSs for Shares in accordance with the terms of the Deposit Agreement (for which you will incur cancellation fees, taxes and other charges). If you become a Scheme Shareholder prior to Monday, 22 December, 2008, you may attend the Court Meeting and the EGM and/or complete and return the forms of proxy as described above.

In the event of any inconsistency, the English language text of this document shall prevail over the Chinese language text.

6 December, 2008

	Page
IMPORTANT NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	iii
EXPECTED TIMETABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . . .	12
LETTER FROM ROTHSCHILD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
EXPLANATORY STATEMENT
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	43
Summary of the Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	43
Conditions of the Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	44
Scheme of arrangement under Section 166 of the Companies Ordinance and
the Court Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51
Additional requirements imposed by Rule 2.10 of the Takeovers Code . . . . . . . . . . . . . .	51
Binding effect of the Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	52
Shareholdings of the Joint Offerors and the Excluded Group . . . . . . . . . . . . . . . . . . . . .	52
New Shares to be issued to the Joint Offerors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	52
Effects of the Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	53
Comparisons of value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	56
Financial advisers to the Joint Offerors and confirmation of financial resources . . . . . . .	58
Consortium Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	58
Information on the PCCW Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	60
Information on Starvest and PCRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	61
Information on Netcom BVI and CNC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	62
Intention of PCRD and CNC with regard to PCCW . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	62
Reasons for and benefits of the Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	63
Share certificates, dealings and listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	65
Registration and payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	66
Information for the ADS Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Court Meeting and EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Yue Shun Irrevocable Undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	69
Demand for poll at the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	70
Option Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	70

— i —

	Page
Provisions which apply under the Share Option Schemes to Options
which are not tendered for cancellation under the Option Offer . . . . . . . . . . . . . . . . . .	71
US and Other Overseas Shareholders and Optionholders of PCCW . . . . . . . . . . . . . . . . .	73
Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	74
Takeovers Code “Chain Principle” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	74
Action to be taken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	74
Costs of the Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76
APPENDIX I — FINANCIAL INFORMATION OF THE PCCW GROUP . . . . . . . . . .	77
APPENDIX II — PROPERTY VALUATIONS OF THE PCCW GROUP . . . . . . . . . . . .	191
PART A — Property valuation by CBRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	191
PART B — Property valuation by Savills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	201
APPENDIX III — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	208
APPENDIX IV — DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	239
SCHEME OF ARRANGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	249
NOTICE OF COURT MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	257
NOTICE OF EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	259

— ii —

IMPORTANT NOTICE

DEFINITIONS

Capitalised terms used in this document have the meanings set out in the “Definitions” section in Appendix IV.

ACTION TO BE TAKEN

Action to be taken by Scheme Shareholders

If you are a Scheme Shareholder, whether or not you are able to attend the Court Meeting and/or the EGM, you are strongly urged to complete and sign the enclosed pink form of proxy in respect of the Court Meeting or any adjournment thereof, and the enclosed white form of proxy in respect of the EGM, in accordance with the instructions printed on them, and to lodge them with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong. In order to be valid, the pink form of proxy for use at the Court Meeting should be lodged not later than 10:00 a.m. on 28 December, 2008 and the white form of proxy for use at the EGM should be lodged not later than 10:30 a.m. on 28 December, 2008. In the case of the pink form of proxy in respect of the Court Meeting, it may also be returned by facsimile at number (852) 2962 5926 (marked for the attention of “the Company Secretary”) up to the time of the Court Meeting or it may be handed to the chairman of the Court Meeting at the Court Meeting if it is not so lodged.

The completion and return of a form of proxy for the Court Meeting or the EGM will not preclude you from attending and voting in person at the relevant meeting. In such event, the returned form of proxy will be deemed to have been revoked.

Action to be taken by ADS Holders

If you are an ADS Holder, you cannot vote at the Court Meeting or the EGM directly but may instruct the Depositary to vote the Shares underlying your ADSs in accordance with the terms of the Deposit Agreement. A Voting Instruction Card is enclosed for this purpose, and you are strongly urged to complete, sign and return it to the Depositary so that the Depositary receives it no later than 10:00 a.m. (New York time) on Friday, 19 December, 2008. If you do not return the Voting Instruction Card by this time, the Shares underlying your ADSs will not be voted at the Court Meeting or the EGM. If you hold ADSs indirectly, you must rely on the procedures of the bank, broker or financial institution in which such ADSs are held.

If you are an ADS Holder and wish to attend the Court Meeting and the EGM (whether in person or by proxy), you must elect to become a Shareholder by surrendering your ADSs and withdrawing the Shares represented by your ADSs in accordance with the terms of the Deposit Agreement so that you become a registered Shareholder prior to 4:30 p.m. (Hong Kong time) on Monday, 22 December, 2008. However, you must pay a cancellation fee of up to US$0.05 (equivalent to approximately HK$0.39) per ADS and may incur taxes and governmental charges payable in connection with such surrender and withdrawal. In order to surrender your ADSs and withdraw the underlying Shares, you should contact your broker or custodian to make the necessary arrangements, or otherwise you may contact the Depositary at +1 877-248-4237.

— iii —

IMPORTANT NOTICE

Action to be taken by Optionholders

If you are an Optionholder, and you wish to accept the Option Offer, you are strongly urged to complete and return the signed Option Offer Form together with the relevant certificate(s) or other document evidencing the grant of the Options to you, and any documents of title or entitlement (and/or any satisfactory indemnity or indemnities required in respect thereof), for the aggregate number of outstanding Options in respect of which you wish to accept the Option Offer by 4:00 p.m. on Thursday, 29 January, 2009 or such later date and time as may be notified to you by the Joint Offerors. The completed and signed Option Offer Form and accompanying documents must be delivered to PCCW at its registered office at 39th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong, marked for the attention of “the Company Secretary”.

EXERCISE YOUR RIGHT TO VOTE

If you are a Scheme Shareholder, we strongly encourage you to exercise your right to vote or give instructions to the relevant registered owner to vote at the Court Meeting and at the EGM. If you keep or think you may keep any Shares in a share lending programme, we urge you to recall any outstanding Shares on borrow to avoid market participants using borrowed stock to vote against the Proposal, which potentially could have a negative impact on the value of your Shares.

If you are acting as a registered owner, you should inform any ultimate beneficial Shareholders about the importance of exercising their vote.

If you are in any doubt as to the action to be taken, you are encouraged to consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

NOTICE TO US SHAREHOLDERS

The Proposal is being made for the shares of PCCW, a company incorporated in Hong Kong, the shares of which are listed on the Stock Exchange, and is proposed to be implemented by way of a scheme of arrangement under the Companies Ordinance. A transaction effected by means of a scheme of arrangement is neither subject to the proxy solicitation nor the tender offer rules under the United States Securities Exchange Act of 1934, as amended. The Proposal will be subject to requirements, rules and practices in Hong Kong which are different from the requirements of the US proxy solicitation rules and tender offer rules. The financial information included in this document has been prepared in accordance with Hong Kong Financial Reporting Standards and thus may not be comparable to financial information of US companies or companies whose financial statements are prepared in accordance with generally accepted accounting principles in the United States. In addition, the settlement procedure with respect to the Proposal will comply with the rules of the Takeovers Code and the Companies Ordinance, which differ from US domestic settlement procedures in certain material respects, particularly with regard to the date of payment of consideration.

— iv —

IMPORTANT NOTICE

It may be difficult for US holders of Scheme Shares (or US holders of ADSs representing Scheme Shares) to enforce their rights and any claim arising out of the US federal securities laws, since the Joint Offerors and PCCW are located in a non-US jurisdiction, some or all of their officers and directors may be residents of non-US jurisdictions, and substantially all of the assets of the Joint Offerors and PCCW, and their respective officers and directors, may be located outside the United States. US holders of Scheme Shares (and US holders of ADSs representing Scheme Shares) may not be able to sue a non-US company or its officers or directors in a non-US court for violations of the US securities laws. Further, it may be difficult to compel a non-US company and its affiliates, or an officer or director who is not a citizen or resident of the United States, to subject themselves to a US court’s judgment.

Neither the US Securities and Exchange Commission nor any other US federal or state securities commission or regulatory authority has approved or disapproved or passed upon the accuracy or adequacy of this document. Any representation to the contrary is a criminal offence in the United States.

— v —

EXPECTED TIMETABLE

Hong Kong time

(unless otherwise stated)

Latest time for receipt by the Depositary of completed Voting Instruction Cards (as defined below) from ADS Holders (Notes 1 and 2) . . . . . . . . . . . . . . . . . . . . . . . . .10:00 a.m. (New York time) on Friday, 19 December, 2008

Latest time for lodging transfers of Shares to qualify for attending and voting at the Court Meeting and the EGM . . . . . . . . . . . . . . . . . . . . . . . . .4:30 p.m. on Monday, 22 December, 2008

Register of members closed for determination of entitlements
of Independent Shareholders to attend and vote
at the Court Meeting and of Shareholders to
attend and vote at the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tuesday, 23 December, 2008 to
Tuesday, 30 December, 2008
(both days inclusive)
Latest time for lodging forms of proxy in respect
of the Court Meeting (Note 3). . . . . . . . . . . . . . . . . . .10:00 a.m. on Sunday, 28 December, 2008
Latest time for lodging forms of proxy in respect
of the EGM (Note 3). . . . . . . . . . . . . . . . . . . . . . . . . .10:30 a.m. on Sunday, 28 December, 2008
Suspension of dealings in the Shares . . . . . . . . . . . . . . . .9:30 a.m. on Tuesday, 30 December, 2008
Court Meeting (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . .10:00 a.m. on Tuesday, 30 December, 2008
EGM (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10:30 a.m. on Tuesday, 30 December, 2008
(or as soon thereafter as the Court Meeting
shall have been concluded or adjourned)
Announcement of the results of the Court Meeting
and the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .no later than 7:00 p.m. on
Tuesday, 30 December, 2008
Resumption of dealings in the Shares . . . . . . . . . . . . .9:30 a.m. on Wednesday, 31 December, 2008
Latest time for dealings in the Shares . . . . . . . . . . . . . . . . . .4:00 p.m. on Monday, 5 January, 2009
High Court hearing of the summons for directions
in respect of the capital reduction (Note 5) . . . . . . . . . . . . . . . . . . . . . .Tuesday, 6 January, 2009

— 1 —

EXPECTED TIMETABLE

Hong Kong time

(unless otherwise stated)

Latest time for lodging transfers of Shares to

qualify for entitlements under the Scheme . . . . . . . . . . . .4:30 p.m. on Thursday, 8 January, 2009

under the Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 9 January, 2009 to Tuesday, 13 January, 2009 (both days inclusive)

High Court hearing of the petition to sanction

the Scheme (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tuesday, 13 January, 2009

Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 13 January, 2009

Announcement of (i) the result of the High Court

hearing of the petition to sanction the Scheme, (ii) the Effective Date and (iii) the withdrawal of the listing of the Shares on the Stock Exchange . . . . . . . . . . . . . . . . no later than 11:00 p.m. on Tuesday, 13 January, 2009

Effective Date (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Wednesday, 14 January, 2009

Withdrawal of the listing of the Shares on the

Stock Exchange becomes effective . . . . . . . . . . . . . . . 9:30 a.m. on Wednesday, 14 January, 2009

Cheques for cash entitlements under the Scheme

to be despatched . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . on or before Friday, 23 January, 2009

Latest time for lodging the Option Offer Form

by the Optionholders (Note 7) . . . . . . . . . . . . . . . . . . . .4:00 p.m. on Thursday, 29 January, 2009

Cheques for cash entitlements to the Optionholders

to be despatched . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .on or before Friday, 6 February, 2009

Notes:

Voting instruction cards in respect of ADSs (“Voting Instruction Card(s)”) to be used by ADS Holders should be returned to the Depositary in accordance with the instructions on the Voting Instruction Card as soon as possible and in any event by no later than 10:00 a.m. (New York time) on Friday, 19 December, 2008. If an ADS Holder does not return the Voting Instruction Card by this time, the Shares underlying his or her ADSs will not be voted at the Court Meeting or the EGM.
ADS Holders who wish to surrender their ADSs, withdraw the underlying Shares and become registered holders of the Shares should contact their brokers or custodians to make the necessary arrangements or they may contact the Depositary at +1 877-248-4237.

— 2 —

EXPECTED TIMETABLE

Forms of proxy should be lodged, by hand or by post, with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, as soon as possible and in any event no later than the times and dates stated above. In the case of the pink form of proxy in respect of the Court Meeting, it may also be returned by facsimile at number (852) 2962 5926 (marked for the attention of “the Company Secretary”) up to the time of the Court Meeting or it may be handed to the chairman of the Court Meeting at the Court Meeting if it is not so lodged. In order to be valid, the pink form of proxy for the Court Meeting and the white form of proxy for the EGM must be lodged not later than the times and dates stated above. Completion and return of a form of proxy for the Court Meeting or the EGM will not preclude the Shareholder from attending the relevant meetings and voting in person. In such event, the returned form of proxy will be deemed to have been revoked.
The Court Meeting and the EGM will both be held in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008 at 10:00 a.m. and 10:30 a.m. (or as soon thereafter as the Court Meeting shall have been concluded or adjourned), respectively. Please see the notice of the Court Meeting set out on pages 257 to 258 and the notice of the EGM set out on pages 259 to 261 of this document for details.
The High Court hearings of the petition to sanction the Scheme and of the summons for directions in respect of the capital reduction will be held at the High Court Building, 38 Queensway, Hong Kong.
The Scheme shall become effective upon all the Conditions being fulfilled and/or otherwise waived (as the case may be).
Option Offer Forms, duly completed in accordance with the instructions on them, must be lodged with PCCW at its registered office, 39th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong marked for the attention of the Company Secretary, so as to reach PCCW no later than 4:00 p.m. on Thursday, 29 January, 2009 or such later date and time as may be notified through press announcement, failing which the Optionholder will not receive any consideration under the Option Offer.

All references to times and dates in this document are references to Hong Kong times and dates, unless otherwise stated.

Shareholders, ADS Holders and Optionsholders should note that the above expected timetable, which is dependent on all Conditions being fulfilled and/or otherwise waived (as the case may be) and the availability of the dates for the High Court to hear the proceedings for the sanction of the Scheme, is subject to change. Further announcements will be made in the event of a material change to the expected timetable.

— 3 —

LETTER FROM THE BOARD

==> picture [86 x 41] intentionally omitted <==

PCCW Limited 電訊盈科有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 0008)

Executive Directors: Mr. Li Tzar Kai, Richard (Chairman) Mr. Alexander Anthony Arena (Group Managing Director) Mr. Peter Anthony Allen Mr. Chung Cho Yee, Mico Mr. Lee Chi Hong, Robert

Registered office: 39th Floor, PCCW Tower TaiKoo Place 979 King’s Road Quarry Bay Hong Kong

Non-Executive Directors: Sir David Ford, KBE, LVO Mr. Lu Yimin Mr. Zuo Xunsheng (Deputy Chairman) Mr. Li Fushen

Independent Non-Executive Directors:

Professor Chang Hsin-kang, FREng, GBS, JP Dr. The Hon. Sir David Li Kwok Po, GBM, GBS, OBE, JP Sir Roger Lobo, CBE, LLD, JP Mr. Aman Mehta The Hon. Raymond George Hardenbergh Seitz

6 December, 2008

To the Shareholders, the ADS Holders and the Optionholders

Dear Sir or Madam,

PROPOSED PRIVATISATION OF PCCW BY

THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

INTRODUCTION

On 4 November, 2008, the Joint Offerors, PCCW, PCRD and CNC jointly announced that, on 3 November, 2008, the Joint Offerors had requested the Board to put forward the Proposal to the Scheme

— 4 —

LETTER FROM THE BOARD

Shareholders regarding a proposed privatisation of PCCW by way of the Scheme. The Scheme involves the cancellation of all the Scheme Shares, as a result of which it is intended that Starvest and the Excluded Group will hold approximately 66.71% and Netcom BVI (and/or CNC) will hold approximately 33.29% of the issued share capital of PCCW, on the basis of 3,540,779,586 Scheme Shares to be cancelled, assuming that there are no changes to the shareholding structure of PCCW and no Options are exercised on or prior to the Effective Date. Having reviewed the Proposal, the Board resolved to put the Proposal forward to the Scheme Shareholders. Those directors of PCCW who have a conflict of interest (as a result of their being common directors of PCCW on the one hand and PCRD, Starvest, Netcom BVI or CNC on the other hand) and members of the Independent Board Committee abstained from voting in relation to that resolution.

PCCW has appointed UBS as its financial adviser in connection with the Proposal.

An independent board committee of PCCW, comprising Professor Chang Hsin-kang, FREng, GBS, JP, Dr. The Hon. Sir David Li Kwok Po, GBM, GBS, OBE, JP, Sir Roger Lobo, CBE, LLD, JP, Mr. Aman Mehta and The Hon. Raymond George Hardenbergh Seitz (being all the independent non-executive Directors), has been established to advise the Independent Shareholders in connection with the Proposal. In relation to the remaining non-executive directors of PCCW who are not serving on the Independent Board Committee, Mr. Lu Yimin, Mr. Zuo Xunsheng and Mr. Li Fushen are officers or employees of CNC or its subsidiaries and Sir David Ford serves as a director of a private company controlled by Richard Li. CNC and Richard Li are parties acting in concert with the Joint Offerors and, accordingly, PCCW considers that those non-executive directors do not have the necessary degree of independence required in order to serve on the Independent Board Committee established to advise the Independent Shareholders in connection with the Proposal. Rothschild has been appointed as the independent financial adviser to advise the Independent Board Committee in connection with the Proposal. The appointment of Rothschild as the independent financial adviser has been approved by the members of the Independent Board Committee.

The purpose of this document is to provide you with further information regarding the Proposal and to give you notices of the Court Meeting and the EGM. Your attention is also drawn to:

(i) the letter from the Independent Board Committee set out on pages 12 to 13 of this document;
(ii) the letter from Rothschild to the Independent Board Committee set out on pages 14 to 42 of this document;
(iii) the Explanatory Statement set out on pages 43 to 76 of this document; and
(iv) the Scheme set out on pages 249 to 256 of this document.

— 5 —

LETTER FROM THE BOARD

SUMMARY OF THE PROPOSAL

Scheme Shares

The Scheme provides that the Scheme Shares be cancelled in exchange for the payment to each Scheme Shareholder of:

for each Scheme Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$4.20 in cash

As at the Latest Practicable Date, there were 6,772,294,654 Shares in issue and the Scheme Shareholders were interested in 3,540,779,586 Shares (representing approximately 52.28% of the issued share capital of PCCW as at the Latest Practicable Date), and the Joint Offerors and the Excluded Group were interested in 3,231,515,068 Shares (representing approximately 47.72% of the issued share capital of PCCW as at the Latest Practicable Date).

The Shares owned by the Joint Offerors and the Excluded Group will not form part of the Scheme Shares and, as such, will not be voted at the Court Meeting. Further, only Independent Shareholders may vote at the Court Meeting. Accordingly, any Scheme Shares held by the Starvest Concert Parties, the Excluded Group, the Joint Offerors, and any other persons acting in concert with any of the Joint Offerors, will not be voted at the Court Meeting.

ADSs

If the Proposal becomes effective, the Shares underlying each ADS will be cancelled on the Effective Date and the ADS Holders will receive the US$ equivalent (at the then prevailing market rate of exchange) of HK$42.00 per ADS (10:1 rate) from the Depositary (less any fees and expenses of the Depositary in connection with the currency conversion and cancellation of the ADSs). ADS Holders may incur related taxes and government charges. As at the Latest Practicable Date, there were 2,292,859 ADSs in respect of 22,928,590 Shares with each ADS representing 10 Shares.

The Option Offer

The Joint Offerors are also making the Option Offer to all Optionholders, conditional upon the Scheme becoming effective, to cancel the Options. Normally, the amount of cash offered to cancel an Option is calculated by deducting the exercise price per Share payable on exercise of an Option from the Cancellation Price per Scheme Share payable under the Scheme (i.e. the “see-through” price). However, as the exercise prices for all outstanding Options are above the Cancellation Price, the Option Payment offered by the Joint Offerors for the cancellation of the Options is a nominal amount.

As at the Latest Practicable Date, there were 138,342,090 Options outstanding.

Terms of the Proposal

The detailed terms of the Proposal are set out in the Explanatory Statement on pages 43 to 76 of this document and, in the case of the Option Offer, also in the Option Offer Form.

— 6 —

LETTER FROM THE BOARD

The attention of ADS Holders is drawn, in particular, to the section headed “Information for the ADS Holders” in the Explanatory Statement on page 67 of this document.

The attention of Optionholders is drawn, in particular, to the sections headed “Option Offer” and “Provisions which apply under the Share Option Schemes to Options which are not tendered for cancellation under the Option Offer” in the Explanatory Statement on pages 70 to 73 of this document.

COMPARISONS OF VALUE

The Cancellation Price represents:

a premium of approximately 52.73% over the closing price of HK$2.75 per Share as quoted on the Stock Exchange on the Last Trading Date;
a premium of approximately 46.85% over the average closing price of about HK$2.86 per Share based on the daily closing prices as quoted on the Stock Exchange over the 5 trading days up to and including the Last Trading Date;
a premium of approximately 6.87% over the average closing price of about HK$3.93 per Share based on the daily closing prices as quoted on the Stock Exchange over the 30 trading days up to and including the Last Trading Date;
a discount of approximately 9.48% to the average closing price of about HK$4.64 per Share based on the daily closing prices as quoted on the Stock Exchange over the 180 trading days up to and including the Last Trading Date;
a premium of approximately 18.31% over the closing price of HK$3.55 per Share as quoted on the Stock Exchange on the Latest Practicable Date;
a premium of approximately 19.32% over the average closing price of about HK$3.52 per Share based on the daily closing prices as quoted on the Stock Exchange over the 5 trading days up to and including the Latest Practicable Date;
a premium of approximately 25.00% over the average closing price of about HK$3.36 per Share based on the daily closing prices as quoted on the Stock Exchange over the 30 trading days up to and including the Latest Practicable Date;
a discount of approximately 7.28% over the average closing price of about HK$4.53 per Share based on the daily closing prices as quoted on the Stock Exchange over the 180 trading days up to and including the Latest Practicable Date;
a premium of approximately 1,726.09% to the audited consolidated net asset value attributable to Shareholders per Share of about HK$0.23 as at 31 December, 2007; and

— 7 —

LETTER FROM THE BOARD

a premium of approximately 1,455.56% to the unaudited consolidated net asset value attributable to Shareholders per Share of about HK$0.27 as at 30 June, 2008.

The Cancellation Price payable for each Scheme Share pursuant to the Scheme was determined based on the prices of the Shares traded on the Stock Exchange over various periods and premiums/discounts offered by the Cancellation Price over such market prices.

CONDITIONS OF THE PROPOSAL

The Proposal is conditional upon the fulfilment or waiver, as applicable, of the Conditions set out in the section headed “Conditions of the Proposal” in the Explanatory Statement on pages 44 to 51 of this document.

When the Conditions are fulfilled or, where applicable, waived, the Scheme will become effective and binding on the Joint Offerors, PCCW and all the Scheme Shareholders and the Option Offer will become unconditional. The Scheme will lapse if it does not become effective on or before 23 April, 2009 or such later date as the Joint Offerors and PCCW may agree and the High Court may allow. PCCW, PCRD, CNC and the Joint Offerors will jointly apply to the Executive for a waiver from compliance with Rule 15.7 of the Takeovers Code in relation to the Scheme.

Shareholders, holders of other securities and/or potential investors should be aware that the implementation of the Proposal is subject to the Conditions being fulfilled or waived, as applicable, and thus may or may not become effective. Shareholders, holders of other securities and potential investors are advised to exercise caution when dealing in the Shares or other securities of PCCW.

REASONS FOR AND BENEFITS OF THE PROPOSAL

Your attention is drawn to the section headed “Reasons for and benefits of the Proposal” in the Explanatory Statement on pages 63 to 65 of this document.

INTENTION OF PCRD AND CNC WITH REGARD TO PCCW

Please refer to the section headed “Intention of PCRD and CNC with regard to PCCW” in the Explanatory Statement on page 62 of this document.

INFORMATION ON THE PCCW GROUP AND THE JOINT OFFERORS

Your attention is drawn to the sections headed “Information on the PCCW Group”, “Information on Starvest and PCRD” and “Information on Netcom BVI and CNC” in the Explanatory Statement on pages 60 to 62 of this document. Your attention is also drawn to the “Financial Information of the PCCW Group” in Appendix I to this document and the “Property Valuations of the PCCW Group” in Appendix II to this document.

— 8 —

LETTER FROM THE BOARD

COURT MEETING AND EGM

In accordance with the direction of the High Court, the Court Meeting has been convened to be held on Tuesday, 30 December, 2008, for the purpose of considering and, if thought fit, passing a resolution to approve the Scheme (with or without modifications). The Scheme is subject to approval by the Independent Shareholders at the Court Meeting in the manner referred to in paragraph (a) of the section headed “Conditions of the Proposal” in the Explanatory Statement on page 45 of this document. Only Independent Shareholders may vote at the Court Meeting. The Shares owned by the Joint Offerors and the Excluded Group do not form part of the Scheme Shares and will not be voted at the Court Meeting. In addition, any Scheme Shares held by the Starvest Concert Parties and any other persons acting in concert with any of the Joint Offerors will not be voted at the Court Meeting, because those persons are not Independent Shareholders.

Immediately following the Court Meeting, the EGM will be held for the purpose of considering and, if thought fit, passing a special resolution to approve and give effect to the reduction of the issued share capital of PCCW by cancelling and extinguishing the Scheme Shares and, immediately thereafter, applying the reserve created as a result of the aforesaid cancellation of the Scheme Shares to pay up in full and issue to Starvest and Netcom BVI (and/or CNC) such number of New Shares as is equal to the number of Scheme Shares cancelled. The special resolution will be passed provided that it is approved by a majority of not less than three-fourths of the votes cast by the Shareholders present and voting, in person or by proxy, at the EGM. All Shareholders will be entitled to attend and vote on such special resolution at the EGM.

Notice of the Court Meeting is set out on pages 257 to 258 of this document. The Court Meeting will be held at 10:00 a.m. on Tuesday, 30 December, 2008 in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong.

Notice of the EGM is set out on pages 259 to 261 of this document. The EGM will be held at 10:30 a.m. (or as soon thereafter as the Court Meeting shall have been concluded or adjourned) on Tuesday, 30 December, 2008 in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong.

YUE SHUN IRREVOCABLE UNDERTAKING

Yue Shun is a Scheme Shareholder and has given the Irrevocable Undertaking to Starvest and PCCW that it will not vote at the Court Meeting. The Irrevocable Undertaking was given in respect of Yue Shun’s 36,726,857 Shares (representing approximately 0.54% of the issued share capital of PCCW as at the Latest Practicable Date). Yue Shun has also undertaken to vote in favour of any resolutions to be proposed at the EGM (or at any adjourned meeting) to reduce the share capital in PCCW (being the resolution referred to in Condition (b), set out in the section headed “Conditions of the Proposal” in the Explanatory Statement on page 45 of this document). The Irrevocable Undertaking provides that, without the prior written consent of Starvest, Yue Shun will not acquire or dispose of any Shares. The Irrevocable Undertaking will remain valid until the Scheme lapses or becomes effective.

— 9 —

LETTER FROM THE BOARD

CONFIRMATIONS TO PCRD WITH RESPECT TO THE EXTRAORDINARY GENERAL MEETING OF PCRD

The Proposal is conditional upon, among other things, the shareholders of PCRD approving, at an extraordinary general meeting of such shareholders convened for the purpose (or at any adjournment thereof), such resolutions as may be necessary to implement the Proposal (see Condition (e) set out in the section headed “Conditions of the Proposal” in the Explanatory Statement on page 45 of this document).

The Singapore Exchange has confirmed that each of Borsington, Anglang and PCG Cayman can vote their PCRD Shares in favour of the resolution to implement the Proposal to be proposed at the extraordinary general meeting of shareholders of PCRD (or at any adjournment thereof) expected to be held on or around Monday, 29 December, 2008 in order to satisfy Condition (e) set out in the section headed “Conditions of the Proposal” in the Explanatory Statement on page 45 of this document and PCGH has confirmed to PCRD that each of Borsington, Anglang and PCG Cayman will vote their PCRD Shares in favour of that resolution. Borsington, Anglang and PCG Cayman will only vote their PCRD Shares in favour of that resolution. Borsington, Anglang and PCG Cayman do not hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of PCCW.

Following discussions with the Singapore Exchange, Hopestar will abstain from voting its PCRD Shares in relation to the resolution to implement the Proposal to be proposed at the extraordinary general meeting of shareholders of PCRD (or at any adjournment thereof) to be held as aforesaid. Hopestar will not vote its PCRD Shares at that extraordinary general meeting of PCRD. Hopestar does not hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of PCCW.

EXPLANATORY STATEMENT

Please refer to the Explanatory Statement for detailed information in relation to the terms of the Proposal and a detailed explanation of the effects of the Proposal.

RECOMMENDATIONS OF THE INDEPENDENT BOARD COMMITTEE

Your attention is also drawn to the recommendations of the Independent Board Committee in respect of the Scheme and the Option Offer, set out in the letter from the Independent Board Committee on pages 12 to 13 of this document.

ADVICE OF ROTHSCHILD

Please also refer to the advice of Rothschild, set out in the letter from Rothschild to the Independent Board Committee on pages 14 to 42 of this document.

— 10 —

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

You are urged to read carefully:

(i) the letters from the Independent Board Committee and from Rothschild set out on pages 12 to 13 and pages 14 to 42 of this document, respectively;
(ii) the Explanatory Statement set out on pages 43 to 76 of this document;
(iii) the Appendices to this document, including the Scheme set out on pages 77 to 256 of this document;
(iv) the notice of the Court Meeting set out on pages 257 to 258 of this document; and
(v) the notice of the EGM set out on pages 259 to 261 of this document.

Yours faithfully, For and on behalf of the Board of PCCW Limited Sir David Ford, KBE, LVO Non-Executive Director

— 11 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [86 x 41] intentionally omitted <==

PCCW Limited 電訊盈科有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 0008)

6 December, 2008

To the Independent Shareholders, ADS Holders and the Optionholders

Dear Sir or Madam,

PROPOSED PRIVATISATION OF PCCW BY

THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

We refer to the document dated 6 December, 2008 jointly issued by PCCW and the Joint Offerors, in relation to the Proposal (the “Scheme Document”), of which this letter forms part. Terms defined in the Scheme Document shall have the same meanings as in this letter unless the context otherwise requires.

On 4 November, 2008, the Joint Offerors, PCCW, PCRD and CNC jointly announced that, on 3 November, 2008, the Joint Offerors had requested the Board to put forward the Proposal to the Scheme Shareholders regarding the proposed privatisation of PCCW by way of a scheme of arrangement under Section 166 of the Companies Ordinance. The Joint Offerors, PCCW, PCRD and CNC also announced that, pursuant to Rule 13 of the Takeovers Code, the Joint Offerors would make an appropriate cash offer to the Optionholders to cancel their Options. The Option Offer is conditional on the Scheme becoming effective.

Details of the Proposal are set out in the “Letter from the Board” on pages 4 to 11 of, and the Explanatory Statement on pages 43 to 76 of, the Scheme Document.

We have been appointed as members of the Independent Board Committee to give a recommendation to the Independent Shareholders in respect of the Scheme and to the Optionholders in respect of the Option Offer. Rothschild has been appointed as the independent financial adviser to

— 12 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

advise the Independent Board Committee in connection with the Scheme and the Option Offer. Details of the advice from Rothschild and the principal factors Rothschild has taken into consideration in arriving at its recommendations are set out in the “Letter from Rothschild” on pages 14 to 42 of the Scheme Document.

We also wish to draw the attention of the Independent Shareholders, the ADS Holders and the Optionholders to the additional information set out in the appendices to the Scheme Document.

Recommendations

Our Committee formally met on three occassions with the independent financial adviser, Rothschild, where we reviewed the terms of the Proposal and the analysis prepared by Rothschild. We have concluded that the terms of the Proposal are fair and reasonable so far as the Independent Shareholders are concerned.

Accordingly, we recommend that the Independent Shareholders vote in favour of the resolution to approve the Scheme at the Court Meeting and vote in favour of the special resolution to approve and give effect to the Scheme at the EGM.

We also recommend that the ADS Holders instruct the Depositary to vote the Scheme Shares held on their behalf in favour of the resolution to approve the Scheme at the Court Meeting and the special resolution to approve and give effect to the Scheme at the EGM.

In respect of the Option Offer, having considered the terms of the Option Offer and the advice from Rothschild, we consider that the terms of the Option Offer are also fair and reasonable so far as the Optionholders are concerned as the Options are considered out-of-the-money based on both the Cancellation Price and recent market prices. We recommend that Optionholders accept the Option Offer.

Yours faithfully,

Independent Board Committee

Professor Chang Hsin-kang, Dr. The Hon. Sir David Li Kwok Po, FREng, GBS, JP GBM, GBS, OBE, JP Independent Non-Executive Director Independent Non-Executive Director Sir Roger Lobo, CBE, LLD, JP Mr. Aman Mehta Independent Non-Executive Director Independent Non-Executive Director

The Hon. Raymond George Hardenbergh Seitz

Independent Non-Executive Director

— 13 —

LETTER FROM ROTHSCHILD

6 December, 2008

To the Independent Board Committee of PCCW Limited

Dear Sirs,

PROPOSED PRIVATISATION OF PCCW

BY

THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

We refer to our engagement to advise the Independent Board Committee with respect to the Proposal and the Scheme, details of which are contained in the scheme document jointly issued by PCCW and the Joint Offerors dated 6 December, 2008 (the “Scheme Document”) of which this letter forms a part. Rothschild has been appointed as the independent financial adviser to advise the Independent Board Committee as to (i) whether or not the terms of the Proposal and the Scheme are fair and reasonable so far as the Independent Shareholders are concerned, (ii) whether or not the terms of the Option Offer are fair and reasonable so far as the Optionholders are concerned; and to advise the Independent Board Committee (a) as to how the Independent Shareholders should be advised to vote on the Scheme at the Court Meeting and the EGM, and (b) as to how the ADS Holders should be advised to direct the Depositary to vote on the Scheme Shares held on their behalf at the Court Meeting and the EGM.

The terms used in this letter shall have the same meanings as defined in the Scheme Document unless the context otherwise requires.

In accordance with Rule 2.1 of the Takeovers Code, the Board has established the Independent Board Committee comprising all of the independent non-executive Directors, namely Professor Chang Hsin-kang, FREng, GBS, JP, Dr. The Hon. Sir David Li Kwok Po, GBM, GBS, OBE, JP, Sir Roger Lobo, CBE, LLD, JP, Mr. Aman Mehta and The Hon. Raymond George Hardenbergh Seitz, for the purpose of advising the Independent Shareholders, the ADS Holders, and the Optionholders in respect of the Proposal and the Option Offer. Other than members of the Independent Board Committee, none of the executive directors or non-executive directors of PCCW is considered independent for the purpose of giving any advice or recommendation to the Independent Shareholders, the ADS Holders, and the

N M Rothschild & Sons (Hong Kong) Limited Telephone +852 2525 5333 16th Floor, Alexandra House Facsimile +852 2868 1728 18 Chater Road, Central Hong Kong SAR

— 14 —

LETTER FROM ROTHSCHILD

Optionholders in relation to the Proposal and the Option Offer, respectively. In relation to the remaining non-executive Directors who are not serving on the Independent Board Committee, Mr. Lu Yimin, Mr. Zuo Xunsheng and Mr. Li Fushen are officers or employees of CNC or its subsidiaries and Sir David Ford serves as a director of a private company controlled by Richard Li, being a party acting in concert with the Joint Offerors, accordingly, they do not have the necessary degree of independence required in order to serve on the Independent Board Committee.

In formulating our recommendation, we have relied on the information and facts supplied to us by PCCW and have assumed that any information and representations made to us are true, accurate and complete in all respects as at the date hereof and that they may be relied upon. We have also assumed that all information, representations and opinions contained or referred to in the Scheme Document are complete in all respects, fair and reasonable and, accordingly, we have relied on them.

We have been advised by the Directors that no material facts have been omitted and we are not aware of any facts or circumstances which would render the information provided and the representations made to us untrue, inaccurate or misleading. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. The Directors (in respect of the information on the PCCW Group only), the directors of PCRD (in respect of information other than that in relation to the PCCW Group and the Netcom Group), the directors of Starvest (in respect of information other than that in relation to the PCCW Group and the Netcom Group), the directors of CNC (in respect of information other than that in relation to the PCCW Group and the PCRD Group), and the directors of Netcom BVI (in respect of information other than that in relation to the PCCW Group and the PCRD Group) have all declared in a responsibility statement set out in “General information” in Appendix III to the Scheme Document that they jointly and severally accept full responsibility for the accuracy of the information contained in the Scheme Document and confirm, having made all reasonable enquiries, that, to the best of their knowledge, opinions expressed in the Scheme Document by PCCW (in respect of the PCCW Group), in relation to PCRD and Starvest (other than opinions expressed by the PCCW Group and the Netcom Group), in relation to CNC and Netcom BVI (other than opinions expressed by the PCCW Group and the PCRD Group) have been arrived at after due and careful consideration and there are no other facts (in relation to the PCCW Directors, facts relating only to the PCCW Group) not contained in the Scheme Document, the omission of which would make any statement in the Scheme Document misleading. We believe that we have reviewed sufficient information to reach an informed view in order to provide a reasonable basis for our advice. We have not, however, conducted any independent in-depth investigation into the business and affairs of the PCCW Group.

We have not considered the tax consequences on the Independent Shareholders, the ADS Holders and the Optionholders of their acceptances or non-acceptances of the Proposal since these are particular to their own individual circumstances. In particular, holders of the Shares, the ADSs and the Options who are residents outside of Hong Kong, or subject to overseas taxes or Hong Kong taxation on securities dealing should consider their own tax position with regard to the Proposal and the Option Offer and, if in any doubt, should consult their own professional advisers.

— 15 —

LETTER FROM ROTHSCHILD

TERMS OF THE PROPOSAL

The Joint Offerors had, on 3 November, 2008, requested the Board to put forward the Proposal to the Scheme Shareholders. The terms of the Proposal are set out in the “Letter from the Board” and the Explanatory Statement in the Scheme Document. In summary, the Proposal involves the following principal steps:

Scheme Shares

The Joint Offerors propose a cash payment of HK$4.20 for each Scheme Share in exchange for the cancellation of all Scheme Shares.

If the Proposal becomes effective, the Shares underlying each ADS will be cancelled on the Effective Date and the ADS Holders will receive the US$ equivalent (at the prevailing market rate of exchange) of HK$42.00 from the Depositary for each ADS (less any fees and expenses of the Depositary in connection with the currency conversion and cancellation of the ADSs). ADS Holders may incur related taxes and government charges.

Options

Conditional upon the Scheme becoming effective, the Joint Offerors will make the Option Offer to all Optionholders to cancel their Options in exchange for cash, being an amount equal to HK$0.01 for each 10,000 underlying Option Shares.

The Proposal will be implemented by way of a scheme of arrangement under Section 166 of the Companies Ordinance, subject to the fulfillment or waiver (as applicable) of the Conditions as further described in the Explanatory Statement in the Scheme Document on or before 23 April, 2009 (or such later date as the Joint Offerors and PCCW may agree and the High Court may allow), otherwise the Proposal will lapse. Assuming that the Conditions are fulfilled (or, as applicable, waived in whole or in part), it is expected that the Scheme will become effective on or before 14 January, 2009.

Following the Effective Date and the withdrawal of listing of the Shares on the Stock Exchange, Starvest and the Excluded Group would collectively hold approximately 66.71% of the issued share capital of PCCW and Netcom BVI (and/or CNC) would hold approximately 33.29% of the issued share capital of PCCW (assuming no changes to the shareholding structure and no Options are exercised on or prior to the Effective Date).

— 16 —

LETTER FROM ROTHSCHILD

PRINCIPAL FACTORS AND REASONS

In arriving at our opinion, we have taken into consideration the following principal factors and reasons:

1. Background

PCCW is a leading telecommunications provider in Hong Kong with approximately 66% share of the residential line market and 68% share of the business line market as at 31 December, 2007.

As stated in the paragraph headed “Reasons for and benefits of the Proposal” in the Explanatory Statement, the price of the Shares fell by approximately 42.3% whilst the market (as represented by the Hang Seng Index (“HSI”)) fell by approximately 15.7% during the one-month period prior to the Last Trading Date. During the period from the peak of the HSI at 31,638 on 30 October, 2007 to the Last Trading Date, the HSI fell by approximately 48.4% and the price of the Shares fell by approximately 45.2%.

As illustrated in Chart 1 below where we have compared the Share price performance against the HSI and the Hang Seng Composite Industry Index — Telecommunications (“HSTI”) during the period from 1 January, 2005 and up to and including the Latest Practicable Date, the Shares have significantly underperformed the HSI and HSTI during the period. The overall stock market in Hong Kong (as represented by the HSI) and the telecommunications sector (as represented by the HSTI, of which PCCW is a member, although it should be noted that the HSTI is dominated in terms of weight by listed Chinese telecommunications operators) experienced significant growth in the period from 1 January, 2005 to 30 October, 2007 before subsequently declining to reach the current level. Therefore, on a general basis, the relatively stable price performance of the Shares suggests an investment in PCCW would have achieved lower capital growth than the average capital growth of investments in companies included in the HSI and the HSTI.

Chart 1 Performance of the Shares versus major indices in Hong Kong

==> picture [417 x 203] intentionally omitted <==

----- Start of picture text -----

26.00
22.00
18.00
14.00
10.00
6.00
2.00
Jan-05 Jun-05 Nov-05 Apr-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Latest
Practicable
Date
Shares HSI (rebased) HSTI (rebased)
Source: Bloomberg
Price (HK$)
----- End of picture text -----

Note: Members of the HSTI are China Mobile Limited, China Unicom Limited, China Telecom Corporation Limited, China Communications Services Corporation Limited, Hutchison Telecommunications International Limited and PCCW.

— 17 —

LETTER FROM ROTHSCHILD

It is further noted in the paragraph headed “Reasons for and benefits of the Proposal” in the Explanatory Statement that given the unsatisfactory price performance and the low trading liquidity of the Shares, “the Proposal provides Scheme Shareholders with an opportunity to realise their investment in PCCW for cash during sustained uncertain market conditions, and at a significant premium to the market price prevailing on the Last Trading Date. The Joint Offerors are committed to the Proposal which, if it becomes effective, offers cash in an uncertain market and provides an opportunity for Scheme Shareholders to redeploy capital invested in PCCW into other investment opportunities that they may consider more attractive in the current market environment.”

The significant downturn in the global economy and the threat of a deep and sustained recession in Hong Kong and many other world markets may cause equities to underperform other forms of securities over the near-term. The global equity markets have been volatile and on a downward trend, and the world’s major stock market indices have experienced double-digit declines for the period from 14 October, 2007 to the Last Trading Date (“One-Year Period”), for instance:

Table 2 Performance of major indices during the One-Year Period

	Performance during the
Major indices	One-Year Period
Shanghai Stock Exchange Composite Index	(65.6%)
Nikkei-225 Stock Average Index	(45.6%)
Straits Times Index	(45.6%)
HSI	(44.8%)
FTSE 100 Index	(35.9%)
NASDAQ Composite Index	(33.7%)
Dow Jones Industrial Average Index	(32.9%)
KOSPI Index	(36.7%)

Source: Bloomberg

On 14 November, 2008, the Government of Hong Kong released key economic indicators for the third quarter of 2008, which heightens the uncertainty surrounding the duration and impact of an economic downturn in Hong Kong: in the third quarter of 2008, Hong Kong’s gross domestic product (“GDP”) contracted 0.5% on a seasonally adjusted quarter-to-quarter comparison, following a 1.4% contraction in the second quarter, suggesting Hong Kong has entered a technical recession. On the same day, the Government Economist commented that the economy in the rest of 2008 is likely to be subdued; economic growth for the whole year is forecast at 3% to 3.5%, revised down from the earlier forecast of 4% to 5%.

— 18 —

LETTER FROM ROTHSCHILD

In view of the relatively low trading liquidity and persistently weak performance of the Shares, PCRD believes that access to the equity capital markets does not provide PCCW with an attractive fund raising avenue, and that the costs and management resources associated with the maintenance of PCCW’s listing status are not warranted. In this respect, we note that PCCW has not raised any funds from the equity capital markets since the issue of 1,343,571,766 new Shares to Netcom BVI, which was completed on 1 April, 2005.

2. Financial performance of PCCW

PCCW is a leading telecommunications provider in Hong Kong. As the provider of Hong Kong’s first quadruple-play experience, PCCW offers a range of innovative media content and services across four platforms: fixed-line telephony, broadband Internet services, TV and mobile telephony. In addition, PCCW provides technical services to other network operators, manages wholesale traffic and handles large-scale IT outsourcing projects for public and private sector organisations. PCPD, a 61.53% owned subsidiary of PCCW, is principally engaged in the development and management of premium property and infrastructure projects, as well as investment in premium-grade buildings, in the Asia-Pacific region.

(i) Historical financial performance

The following is a summary of the consolidated income statements of the PCCW Group for the three years ended 31 December, 2007 and the six months ended 30 June, 2008.

— 19 —

LETTER FROM ROTHSCHILD

Table 3 Summary of consolidated income statement

				For the six
				months ended
	For	the year ended	31 December,	30 June,
	2005	2006	2007	2008
	(HK$ million)	(HK$ million)	(HK$ million)	(HK$ million)
	(Restated)	(Restated)
Turnover	22,499	25,637	23,715	11,372
Growth rate	(2.2%)	13.9%	(7.5%)	(2.0%)
Cost of sales	(10,752)	(12,973)	(10,538)	(4,942)
General and administrative expenses	(7,767)	(8,904)	(9,144)	(4,744)
Other gains/(losses), net	626	42	(3)	16
Losses on property, plant and equipment	(52)	(11)	(7)	—
Interest income	533	732	429	74
Finance costs	(2,234)	(2,008)	(1,658)	(664)
Share of results of associates and jointly
controlled companies	121	37	13	(7)
Impairment losses on interests in
associates and jointly controlled
companies	(4)	—	—	—
Profit before income tax	2,970	2,552	2,807	1,105
Income tax	(1,103)	(920)	(970)	(417)
Profit for the year/period	1,867	1,632	1,837	688
Growth rate	18.5%	(12.6%)	12.6%	(36.0%)
Margin	8.3%	6.4%	7.7%	6.0%
Attributable to:
Equity holders of PCCW	1,595	1,252	1,503	656
Minority interests	272	380	334	32
Earnings per Share
Basic (HK$)	0.2497	0.1859	0.2221	0.0968
Diluted (HK$)	0.2492	0.1854	0.2218	0.0967
Dividend per Share (HK$)	0.185	0.185	0.200	0.070

Source: Annual reports of PCCW for the two years ended 31 December, 2007 and interim report of PCCW for the six months ended 30 June, 2008. Certain comparative figures have been restated to conform with the presentation in 2007.

— 20 —

LETTER FROM ROTHSCHILD

Revenue

Revenue of the PCCW Group increased from approximately HK$22,499 million for the year ended 31 December, 2005 to approximately HK$25,637 million for the year ended 31 December, 2006, and then decreased to approximately HK$23,715 million for the year ended 31 December, 2007. For the six months ended 30 June, 2008, revenue decreased by approximately 2.0% to approximately HK$11,372 million when compared to the same period in 2007.

Table 4 Revenue breakdown

				For the six	For the six
				months	ended
	For the	year ended 31	December,	30 June,
	2005	2006	2007		2008
	(HK$ million)	(HK$ million)	(HK$ million)	(HK$ million)
	(Restated)	(Restated)
Telecommunications Services	15,048	15,374	16,636		8,551
TV & Content	696	1,002	1,703		1,039
Mobile	598	1,236	1,468		857
PCCW Solutions	1,579	1,652	1,795		900
Other businesses	346	328	249		43
Eliminations	(895)	(1,218)	(1,270)		(636)
Core revenue (excluding PCPD)	17,372	18,374	20,581	10,754
Growth rate	1.2%	5.8%	12.0%		13.1%
PCPD	5,127	7,263	3,134		618
Growth rate	(12.1%)	41.7%	(56.8%)	(70.6%)
Consolidated revenue	22,499	25,637	23,715	11,372

Source: Annual report of PCCW for the year ended 31 December, 2007 and interim report of PCCW for the six months ended 30 June, 2008. Certain comparative figures have been restated to conform with the presentation in 2007.

Revenue of the PCCW Group excluding the revenue of PCPD (“Core Revenue”) has undergone an accelerated growth from approximately HK$17,372 million for the year ended 31 December, 2005 to approximately HK$20,581 million for the year ended 31 December, 2007, predominantly driven by double digit growths in the TV & Content and Mobile segments. The trend continued for the six months ended 30 June, 2008, with Core Revenue growing to approximately HK$10,754 million, representing an increase of approximately 13.1% as compared with the same period in 2007. Telecommunications services (“TSS”) segment remains the major contributor to Core Revenue (before eliminations), with a share of approximately 82.4%, 78.5% and 76.1% for the years ended 31 December, 2005, 2006 and 2007, respectively, and approximately 75.1% for the six months ended 30 June, 2008. The fluctuation in revenue of the PCCW Group over the three years ended 31 December, 2007 was in a large part attributable to PCPD, the revenue of which was highly dependent on the status of real estate projects under development and proceeds recognised from completed projects.

— 21 —

LETTER FROM ROTHSCHILD

Earnings before interest, tax, depreciation and amortisation (“EBITDA[1] ”) and margin

EBITDA of the PCCW Group amounted to approximately HK$6,650 million, HK$6,827 million and HK$7,296 million for the years ended 31 December, 2005, 2006 and 2007, respectively, and approximately HK$3,436 million for the six months ended 30 June, 2008. EBITDA margins were approximately 29.6%, 26.6% and 30.8% for the years ended 31 December, 2005, 2006 and 2007, respectively, and approximately 30.2% for the six months ended 30 June, 2008.

Table 5 EBITDA breakdown

				For the six
				months ended
	For the	year ended 31	December,	30 June,
	2005	2006	2007	2008
	(HK$ million)	(HK$ million)	(HK$ million)	(HK$ million)
	(Restated)	(Restated)
Telecommunications Services	6,993	7,003	7,435	3,549
TV & Content	(267)	(311)	(157)	(40)
Mobile	25	(186)	—	108
PCCW Solutions	47	151	150	82
Other businesses	(825)	(786)	(922)	(335)
Core EBITDA (excluding PCPD)	5,973	5,871	6,506	3,364
Growth rate	2.8%	(1.7%)	10.8%	9.6%
PCPD	677	956	790	72
Growth rate	(10.6%)	41.2%	(17.4%)	(86.7%)
Consolidated EBITDA	6,650	6,827	7,296	3,436

1 EBITDA represents earnings before interest income, finance costs, income tax, depreciation of property, plant and equipment, amortisation of land lease premium and intangible assets, gain/loss on disposal of property, plant and equipment, investment properties and interests in leasehold land, net other gains/losses, losses on property, plant and equipment, restructuring costs, impairment losses on interests in jointly controlled companies and associates and the Group’s share of results of jointly controlled companies and associates. While EBITDA is commonly used in the telecommunications industry worldwide as an indicator of operating performance, leverage and liquidity, it is not presented as a measure of operating performance in accordance with the Hong Kong Financial Reporting Standards and should not be considered as representing net cash flows from operating activities.

— 22 —

LETTER FROM ROTHSCHILD

EBITDA of the PCCW Group excluding the EBITDA of PCPD (“Core EBITDA”) decreased from approximately HK$5,973 million for the year ended 31 December, 2005 to approximately HK$5,871 million for the year ended 31 December, 2006, primarily due to EBITDA losses in the TV & Content and Mobile segments. For the year ended 31 December, 2007, Core EBITDA has increased by approximately 10.8% to approximately HK$6,506 million, due to break even of the Mobile unit at EBITDA level and reduction in losses in the TV & Content business. The trend has continued into the six months ended 30 June, 2008, with approximately 9.6% increase to approximately HK$3,364 million compared to the same period in 2007.

Profit for the year/period and margin

Profit of the PCCW Group decreased approximately 12.6% from approximately HK$1,867 million for the year ended 31 December, 2005 to approximately HK$1,632 million for the year ended 31 December, 2006. The fall was primarily due to a higher depreciation and amortisation charge in 2006, which reflected the impact of a full year of Mobile operations and a significant decrease in net other gains which more than offset the growth in consolidated EBITDA. Profit increased by approximately 12.6% to approximately HK$1,837 million for the year ended 31 December, 2007, primarily driven by a strong growth in Core EBITDA and a decrease in finance costs owing to the repayment of bonds and guaranteed notes.

Indebtedness

Gross debts[2] of the PCCW Group were approximately HK$29,165 million, HK$28,977 million, and HK$25,774 million as at 31 December, 2005, 2006 and 2007, respectively, and approximately HK$27,373 million as at 30 June, 2008. The reduction in gross debt in 2007 was due to the repayment of guaranteed convertible bonds and guaranteed notes. As a result, the gearing ratio (calculated by dividing gross debt by total assets) was reduced from approximately 58.6% as at 31 December, 2006 to approximately 50.2% as at 31 December, 2007. The gearing ratio was approximately 52.2% as at 30 June, 2008.

(ii) Future prospects of PCCW

We note from the paragraph headed “Intention of PCRD and CNC with regard to PCCW” in the Explanatory Statement that it is the intention of both PCRD and CNC for the PCCW Group to maintain its existing business upon the successful privatisation of PCCW.

The Hong Kong telephony and media markets are relatively mature by global standards, evident from the household fixed-line penetration rate of approximately 100.6% and mobile penetration rate of approximately 160.8% in August 2008 (source: Office of the Telecommunications Authority of Hong Kong). Market growth is expected to be driven primarily by an increase in overall spending by existing services consumers on new or premium services, such as digital and interactive media across new platforms: the third generation of mobile phone standards and technology (“3G”) has quickly taken up market share since launching in Hong Kong in 2005, with subscribers reaching 2.0 million in 2007, representing an increase of approximately 50.5% from the previous year; potential also lies

2 Gross debt refers to the principal amount of short-term borrowings and long-term liabilities.

— 23 —

LETTER FROM ROTHSCHILD

in the pay TV segment where the cable and IPTV subscriber base in Hong Kong grew approximately 10.3% year-on-year to approximately 1.5 million in 2007. PCCW’s now TV, currently the largest pay TV service provider in Hong Kong, has pricing leverage based on its extensive collection of channels and content, as well as the interactive features it offers.

An increase in spending on non-essential goods by individuals and households may be challenging in a low economic growth environment. As such, Shareholders may be concerned about PCCW’s growth prospects in the near-term.

3. Cancellation Price analysis

We have used a number of commonly used methodologies to analyse the Cancellation Price, namely (i) the “comparable companies analysis”, (ii) the “sum-of-the-parts analysis”, (iii) the “public trading analysis”, and (iv) the “comparable transactions analysis”.

(i) Comparable companies analysis

We have reviewed the trading multiples of the companies comparable to PCCW (the “Comparable Companies”). Since the PCCW Group is mainly engaged in fixed-line operations in Hong Kong, with more than 70% of its total revenue for the year ended 31 December, 2007 derived from its fixed-line operations, the TSS business segment, the Comparable Companies we have chosen are quoted, regional, fixed-line operators with a significant proportion of their total revenue generated from fixed-line operations (based on their latest published annual financial statements as at the Latest Practicable Date) in mature geography with a mobile penetration rate of at least 90% and a broadband penetration rate of at least 50%. In selecting the Comparable Companies, we have also taken into account the PCCW Group’s quadruple-play capability (via its fixed-line, broadband Internet, TV and mobile platforms) as a supplementary consideration.

In addition, we have also reviewed telecommunications companies listed in Hong Kong, in particular the six members of the HSTI, with a significant proportion of their total revenue generated from fixed-line operations (based on their latest published annual financial statements as at the Latest Practicable Date), with positive net income (based on their latest published financial statements as at the Latest Practicable Date).

The companies we have selected based on the above criteria are Belgacom SA de droit public/NV van publiek recht (“Belgacom”), BT Group plc (“BT”), China Telecom Corporation Limited (“China Telecom”), China Unicom (Hong Kong) Limited (“China Unicom”, formerly known as China Unicom Limited) which has just completed the merger with China Netcom Group Corporation (Hong Kong) Limited (“China Netcom”) on 15 October, 2008), Chunghwa Telecom Co., Ltd. (“Chunghwa Telecom”), Elisa Oyj (“Elisa”), KT Corporation (“KT Corporation”), LG Dacom Corporation (“LG Dacom”), SK Broadband, Inc. (“SK Broadband”, formerly known as hanarotelecom incorporated), StarHub Ltd (“StarHub”), Swisscom Ltd (“Swisscom”) and Telstra Corporation Limited (“Telstra”). To the best of our knowledge, this list is a fair representation of companies comparable to PCCW.

— 24 —

LETTER FROM ROTHSCHILD

We have compared the enterprise value[3] (“EV”)/EBITDA and price-earnings ratio (“PER”) multiples (being the most commonly used multiples in the telecommunications sector) of the PCCW Group and the Comparable Companies based on average closing prices for the One-Year Period and the closing prices as at the Latest Practicable Date. Our analysis is set forth in the following table.

Table 6 Trading multiples of Comparable Companies

Company	Listing	Market capitalisation based on One-Year Period	Based on One-Year Period average share prices	Based on One-Year Period average share prices	Market capitalisation as at Latest	Based on share prices as at the Latest Practicable Date	Based on share prices as at the Latest Practicable Date
		average	EV/		Practicable	EV/
		share prices	EBITDA1	PER1	Date	EBITDA1	PER1
		(HK$			(HK$
		million)	(Times)	(Times)	million)	(Times)	(Times)
Belgacom	Belgium	100,392	5.8	10.6	100,891	5.8	10.6
BT	United	215,301	5.1	9.7	131,406	3.8	5.9
	Kingdom
China Telecom	Hong Kong	413,471	5.1	16.2	239,560	3.3	9.4
China Unicom2	Hong Kong	374,652	4.8	20.4	212,955	2.9	11.6
Chunghwa Telecom	Taiwan	135,284	4.7	11.8	113,735	3.8	9.9
Elisa	Finland	26,956	7.4	12.8	18,872	5.7	9.0
KT Corporation	Korea	68,260	3.8	11.3	47,332	3.1	7.8
LG Dacom	Korea	8,981	2.9	12.5	7,691	2.3	10.7
SK Broadband	Korea	11,520	4.9	n.m.	6,485	3.3	n.m.
Starhub	Singapore	25,232	8.9	14.8	17,262	6.5	10.1
Swisscom	Switzerland	129,544	7.0	9.4	121,329	6.8	8.8
Telstra	Australia	283,756	6.8	15.2	258,886	6.3	13.9
Simple average
(Mean)			5.6	13.1		4.5	9.8
Median			5.1	12.5		3.8	9.9
The PCCW Group
under the Proposal					28,444	7.5	18.8

Sources: Bloomberg and the latest published financial statements of the respective companies

Notes:

EBITDA and net profit as per the latest published annual financial statements of the relevant comparable company available on the Latest Practicable Date. Net profit is adjusted to exclude exceptional items and goodwill amortisation. In respect of the PCCW Group, the net profit for the year ended 31 December, 2007 has been adjusted to exclude the other losses of approximately HK$3 million and losses on property, plant and equipment of approximately HK$7 million which are considered to be non-recurring.

3 Enterprise value is defined as the equity value plus net debt and minority interests less interests in joint ventures and associates. Equity value is the market capitalisation.

— 25 —

LETTER FROM ROTHSCHILD

The EBITDA and net profit of China Unicom are extracted from the proforma consolidated financial statements of the enlarged China Unicom as at 31 December, 2007 set out in the scheme document for the proposed merger of China Unicom Limited and China Netcom dated 15 August, 2008 and fixed-line operations of China Netcom pre-merger.
Since PCCW is interested in approximately 61.53% equity interest in PCPD, we have (for illustrative purpose only) adjusted the EV/EBITDA and PER multiples of the PCCW Group under the Proposal to exclude the contribution from PCPD. The EV/EBITDA multiple and PER of the PCCW Group under the Proposal excluding PCPD are approximately 7.9 times and 24.0 times respectively.
Multiples of more than 100 times are denoted as non-meaningful (“n.m.”).
Exchange rates into HK$ as at the Latest Practicable Date were used.

As illustrated in Table 6 above, the Cancellation Price represents an EV/EBITDA multiple of approximately 7.5 times the EBITDA of PCCW for the year ended 31 December, 2007. This represents a premium of approximately 66.7% and 97.4%, respectively, over the mean EV/EBITDA multiple of approximately 4.5 times and median EV/EBITDA multiple of approximately 3.8 times of the Comparable Companies as at the Latest Practicable Date. It also represents a premium of approximately 33.9% and 47.1%, respectively, over the mean EV/EBITDA multiple of approximately 5.6 times and median EV/EBITDA multiple of approximately 5.1 times of the Comparable Companies based on the One-Year Period average closing price. The PER implied by the Cancellation Price of approximately 18.8 times the net profit of the PCCW Group for the year ended 31 December, 2007 is at a premium of approximately 91.8% and 89.9%, respectively, over the mean and median PER of the Comparable Companies as at the Latest Practicable Date; and approximately 43.5% and 50.4%, respectively, over the mean and median PER of the Comparable Companies based on the One-Year Period average closing price.

(ii) Sum-of-the-parts analysis

As stated in the paragraph headed “Reasons for and benefits of the Proposal” in the Explanatory Statement, out of the four proposals received by PCCW in regards to the HKTGH Sale, the highest proposals capable of being made binding indicated a willingness to pay a consideration in a range of approximately US$650 million (equivalent to approximately HK$5,070 million) to US$765 million (equivalent to approximately HK$5,967 million) for the 45% of the equity of HKTGH. These proposals implied an enterprise value of HKTGH in the range of approximately US$6.5 billion (equivalent to approximately HK$50.7 billion) to US$6.75 billion (equivalent to approximately HK$52.65 billion) (inclusive of debt of US$5,050 million, equivalent to approximately HK$39,390 million). Given that some of the proposals were considered incomplete while the others were embedded with high degrees of conditionality, PCCW believed that a final binding offer could not be assured or achieved within a reasonable time period and the HKTGH Sale process was discontinued.

We believe it is appropriate to make a comparison of the Cancellation Price with the per Share value implied by the highest proposals received in the HKTGH Sale, since the proposals received represented market-tested prices and were the result of a vigorous process involving in-depth due diligence and valuation exercises undertaken by the potential buyers. As such, we have conducted a sum-of-the-parts analysis, which values components of a company on a standalone basis, to derive a range of per Share value implied by the highest proposals received. However, while we believe such a comparison is appropriate, Independent Shareholders are reminded that the proposals from the HKTGH Sale were received on 11 October, 2008. The fact that the HKTGH Sale was discontinued does therefore reduce the relevance of these proposals to serve as a benchmark for comparison with the Cancellation Price.

— 26 —

LETTER FROM ROTHSCHILD

In our analysis, we assume the enterprise value of the PCCW Group comprises three parts:

(a) PCCW’s interest in HKTGH, being the enterprise value for 100% of HKTGH implied by the highest proposals received in the HKTGH Sale, in the range of approximately HK$50.7 billion to HK$52.65 billion (inclusive of debt of approximately HK$39.4 billion), as stated above. In considering the change of ownership in the sale of up to a 45% equity interest in HKTGH from PCCW, it is noted that some corporate governance rights were attached to that equity interest, and therefore, the interest may not be considered as a pure minority equity interest;
(b) PCCW’s interests in PCPD, being:
the adjusted net tangible asset value (“Adjusted NTAV”) attributable to the 61.53% equity interest in PCPD of approximately HK$3.2 billion. The Adjusted NTAV of PCPD is the net asset value of PCPD as at 30 June, 2008 as adjusted by deducting goodwill (being an intangible item) as at 30 June, 2008, convertible notes reserve as at 30 June, 2008, PCPD company level adjustments in the nature of liabilities arising from the corporate support functions, and downward adjustment from the net deficit arising from the revaluation of the PCPD Group’s interests in properties (as set out in the paragraph headed “Information on the PCCW Group” in the Explanatory Statement), in the aggregate amount of approximately HK$2.8 billion; and
the tranche B convertible note issued by PCPD to a wholly-owned subsidiary of PCCW with a book value of approximately HK$2.1 billion as at 30 June, 2008; and
(c) PCCW company level downward adjustments of approximately HK$5.7 billion in the nature of liabilities arising from costs of the HKTGH Restructuring, the corporate support functions and miscellaneous representations and warranties contained in the proposals received in the HKTGH Sale.

The enterprise value[4] of the PCCW Group implied by the highest proposals received in the HKTGH Sale based on the sum-of-the-parts analysis is in the range of approximately HK$50.2 billion to HK$52.2 billion. By deducting net debt[5] (adjusted by excluding cash held by the PCPD Group) of approximately HK$26.0 billion as at 30 September, 2008, the implied equity value of the PCCW Group is in the range of approximately HK$24.2 billion to HK$26.1 billion or in the range of approximately HK$3.57 to HK$3.86 per Share based on 6,772,294,654 Shares in issue as at the Latest Practicable Date. The Cancellation Price represents a premium of approximately 8.8% and 17.6% over the per Share value range implied by the highest proposals received in the HKTGH Sale, respectively. (Note: There may be a slight variation in the numbers and percentages due to rounding.)

4 Enterprise value (in this case already taken into account various company level adjustments) is calculated as the equity value plus net debt.

5 Net debt is defined as the total of short-term borrowings and long-term borrowings minus freely fungible cash of PCCW and cash held by the PCPD Group, as set out in the paragraph headed “Information on the PCCW Group” in the Explanatory Statement.

— 27 —

LETTER FROM ROTHSCHILD

(iii) Public trading analysis

Relative price performances

We have reviewed the price performance of the Shares relative to the Comparable Companies, the HSI and the HSTI.

Table 7 Price performance of the Shares relative to the Comparable Companies, the HSI and the HSTI

		price as at
		the Last	Price performance relative
		Trading	to the average		closings
	Currency	Date	10-day1	30-day1	90-day1	180-day1
The Proposal2	HK$	4.20	39.8%	6.8%	(7.6%)	(9.4%)
PCCW	HK$	2.75	(8.5%)	(30.1%)	(39.5%)	(40.7%)
Belgacom	Euro	26.50	(2.9%)	(2.3%)	(1.6%)	(7.2%)
BT	Pound sterling	1.42	(7.7%)	(13.8%)	(22.9%)	(30.8%)
China Telecom	HK$	3.10	2.9%	(7.7%)	(22.7%)	(34.8%)
China Unicom	HK$	11.14	4.8%	(2.3%)	(19.6%)	(28.4%)
Chunghwa Telecom	New Taiwan	57.60	(5.8%)	(7.9%)	(8.3%)	(8.2%)
	dollar
Elisa	Euro	12.41	(1.3%)	(7.9%)	(9.4%)	(17.9%)
KT Corporation	Won	38,500.00	(4.9%)	(7.8%)	(10.5%)	(15.0%)
LG Dacom	Won	20,800.00	(1.6%)	(0.6%)	9.0%	11.0%
SK Broadband	Won	4,930.00	(11.6%)	(22.6%)	(31.0%)	(42.4%)
Starhub	Singapore	1.98	(12.9%)	(21.2%)	(25.9%)	(30.1%)
	dollar
Swisscom	Swiss franc	314.50	(5.7%)	(9.2%)	(8.3%)	(12.1%)
Telstra	Australian dollar 4.09		(3.4%)	(3.3%)	(5.6%)	(8.1%)
Simple average (Mean)			(4.2%)	(8.9%)	(13.1%)	(18.7%)
Median			(4.1%)	(7.9%)	(10.0%)	(16.5%)
HSI		16,312.16	(3.9%)	(13.3%)	(22.9%)	(27.9%)
HSTI		1,607.20	1.7%	(5.8%)	(21.6%)	(30.7%)

Source: Bloomberg

Notes:

Day refers to trading day. The price performance relative to the respective average closings over the 10, 30, 90 and 180 trading days up to and including the Last Trading Date is presented in the analysis above.
Share price as at the Last Trading Date for the Proposal refers to the Cancellation Price. Analysis of Cancellation Price relative to the average closing prices of the Share for the respective period is shown in the line.

— 28 —

LETTER FROM ROTHSCHILD

As shown in Table 7 above, the Shares underperformed the mean and median of the Comparable Companies, the HSI and the HSTI relative to the respective average closings over the 10, 30, 90 and 180 trading days up to and including the Last Trading Date when compared with the closing price as at the Last Trading Date. In contrast, the Cancellation Price represents a premium of approximately 39.8% and 6.8% over the average closing prices of the Shares over the 10 and 30 trading days up to and including the Last Trading Day while the mean of the Comparable Companies was at a discount of approximately 4.2% and 8.9% and the HSI was at a discount of approximately 3.9% and 13.3% to the average closings over the 10 and 30 trading days up to and including the Last Trading Date; the HSTI was at a premium of approximately 1.7% over and a discount of approximately 5.8% to the average closings over the 10 and 30 trading days up to and including the Last Trading Date. A comparison of the Cancellation Price with the median of the Comparable Companies produces similar results to that with the mean of the Comparable Companies.

Whilst the Cancellation Price represents a discount of approximately 7.6% and 9.4% to the respective average closing prices of the Shares over the 90 and 180 trading days up to and including the Last Trading Date, these discounts are smaller than the discounts of the mean of the Comparable Companies of approximately 13.1% and 18.7%, the HSI of approximately 22.9% and 27.9% and the HSTI of approximately 21.6% and 30.7% to the respective average closings over the 90 and 180 trading days up to and including the Last Trading Date. Therefore, it may be considered that there exists a relative premium when compared to the mean of the Comparable Companies and the market indices, in that the discount represented by the Cancellation Price is far less than that of the mean of the Comparable Companies and the market indices over the same period.

Therefore, the Proposal allows the Scheme Shareholders to divest their holding in the Shares at a smaller discount to historical trading prices than ordinary shareholders in other Comparable Companies, and the opportunity to reduce potential losses over recent months may be attractive to the Scheme Shareholders.

— 29 —

LETTER FROM ROTHSCHILD

Price performance over the Three-Year Period

Chart 8 below illustrates the daily closing prices of the Shares and the ADSs for the period from 14 October, 2005 up to and including the Last Trading Date (“Three-Year Period”), and up to and including the Latest Practicable Date.

Chart 8 Daily closing prices of the Shares and the ADSs

==> picture [408 x 172] intentionally omitted <==

----- Start of picture text -----

6.00
High: HK$5.75
5.00 Three-Year Period
average: HK$4.83
Cancellation Price:
4.00
HK$4.20
3.00
Low: HK$2.75
2.00
Oct-05 Mar-06 Sep-06 Feb-07 Aug-07 Jan-08 Jun-08 Latest
Practicable
Shares ADSs Date
Price (HK$)
----- End of picture text -----

Source: Bloomberg

Note: Each ADS represents 10 Shares. The closing prices of the ADSs as shown in Chart 8 above have been divided by 10 to derive the closing prices on a per Share basis and converted from US$ into HK$ by using an exchange rate of HK$7.80 for every US$1.

Since the transacted prices of the ADSs (as illustrated by Chart 8 above) do not differ significantly from the Shares, we are of the view that the prices of the ADS are fully represented by those of the Shares, and vice versa. As such, we have not conducted separate analyses on the ADSs.

— 30 —

LETTER FROM ROTHSCHILD

During the Three-Year Period, the Shares traded within a range of HK$2.75 per Share (on the Last Trading Date) and HK$5.75 per Share (on 22 June, 2006). The Shares had consistently closed above the Cancellation Price during the period from 14 October, 2005 up to and including 16 September, 2008 and within a narrow range of approximately HK$4.33 per Share and approximately HK$5.75 per Share. We believe the stable price performance relative to the overall market performance during such period could be due to a combination of:

(a) Relatively stable business and financial performance of the PCCW Group over the Three-Year Period. The PCCW Group has managed to maintain stable market share in the TSS segment and achieved growth in the TV & Content and Mobile segments. However, existing high penetration rate of the Hong Kong fixed-line and mobile markets, combined with uncertainty surrounding the global economic downturn, renders it challenging for the PCCW Group to replicate historical growth;
(b) the anticipation of expansion into China following a subscription of Shares by CNC which was completed on 1 April, 2005, may have led investors to anticipate growth which has not been realised;
(c) two potential sales to interested parties in mid 2006. On 19 June, 2006 and 21 June, 2006, PCCW announced that it had received non binding expressions of interest for its telecommunications and media related assets from Macquarie Bank Limited and TPG Newbridge, which triggered an approximately 19.8% increase in the price of the Shares from HK$4.80 per Share on 19 June, 2006 to HK$5.75 per Share on 22 June, 2008. However, the sale was discontinued as the parties were unable to develop firm proposals which would lead to binding contracts. On 10 July, 2006, PCCW announced that PCRD had entered into a conditional sale and purchase agreement with a consortium led by Mr. Francis Leung to purchase up to 1,526,773,301 Shares (equivalent to 22.66% of the issued share capital of PCCW at the time of the announcement) at HK$6.00 per Share. The proposed sale was rejected by PCRD’s independent shareholders on 30 November, 2006 and the price of the Shares dropped approximately 5.0% to HK$4.80 per Share on 1 December, 2006, returning to the level before the potential sales were announced;
(d) anticipation of a special dividend after completion of the sale of up to a 45% equity interest in HKTGH. On 29 May, 2008, PCCW announced the HKTGH Restructuring and the HKTGH Sale and the Share price increased approximately 9.4% to HK$5.10 per Share on the date of the announcement. In an announcement on 12 September, 2008, PCCW stated that higher priority for the payment of dividends from HKTGH would be given to the potential buyer and that PCCW intended to maintain its own dividend for shareholders at the current level in absolute terms. The price of the Shares dropped approximately 7.8% to HK$4.40 per Share on the following trading day upon market speculation that the HKTGH Sale may run into difficulty and further to HK$2.75 per Share on the Last Trading Date upon the announcement of the discontinuation of the HKTGH Sale on 12 October, 2008; and

— 31 —

LETTER FROM ROTHSCHILD

(e) a low trading liquidity of the Shares. The average monthly trading volume of the Shares for the period from 1 November, 2007 to 31 October, 2008 was approximately 5.2% of the total issued share capital of PCCW, significantly lower than the mean of the Comparable Companies at approximately 10.3% (please refer to the sub-paragraph headed “Historical trading volume” below).

A comparison of the historical prices of the Shares is set out in the paragraph headed “Comparisons of value” in the Explanatory Statement. It should be noted that, whilst the Cancellation Price represents a discount to the long-term historical Share price, the long-term historical Share price may have been affected positively by a market expectation that certain corporate actions would occur (as listed in points (b) to (d) above) which have not in practice materialised. In our view, these catalysts which did not in practice materialise coupled with low trading liquidity of the Shares (as discussed in the sub-paragraph headed “Historical trading volume” below) reduce the relevance of the price performance of the Shares over the Three-Year Period in serving as a key factor in determining the appropriateness of the Cancellation Price.

Price performance over the One-Month Period

Chart 9 below shows the price performance of the Shares for the period from 16 September, 2008 up to and including the Last Trading Date (“One-Month Period”), and up to and including the Latest Practicable Date.

Chart 9 Daily closing prices of the Shares over the One-Month Period

==> picture [408 x 188] intentionally omitted <==

----- Start of picture text -----

4.50
H igh: HK$4.40
C ancellation Price:
4.00 H K$4.20
3.50
O ne-Month Period
average: HK$3.32
3.00
L ow: HK$2.75
2.50
16-Sep-08 29-Sep-08 12-Oct-08 25-Oct-08 7-Nov-08 20-Nov-08 Latest
Practicable
Date
Price (HK$)
----- End of picture text -----

Source: Bloomberg

— 32 —

LETTER FROM ROTHSCHILD

As illustrated in Chart 9 above, the Shares consistently closed below the Cancellation Price during the One-Month Period. The highest and lowest closing prices of the Shares were HK$4.40 per Share (16 September, 2008) and HK$2.75 per Share (the Last Trading Date), respectively. The Cancellation Price of HK$4.20 per Share represents a premium of approximately 26.5% over the One-Month Period average closing price of approximately HK$3.32 per Share.

The Shares traded below the Cancellation Price during the period from 17 September, 2008 up to and including the Last Trading Date, and dropped by approximately 28.9% during this period to close at HK$2.75 per Share on the Last Trading Date. We believe the steep decline in the price of the Shares during this period could have been triggered by rumours regarding the viability of closure of the HKTGH Sales in addition to the overall decline in stock markets globally on the back of the global financial crisis and a simultaneous slowdown of many economies worldwide.

Beyond the Last Trading Date, trading of the Shares was suspended between the period from 14 October, 2008 to 4 November, 2008 pending the release of the Announcement, and the HSI dropped further by approximately 14.5% during the relevant period. The Shares closed at HK$3.55 per Share on the Latest Practicable Date.

— 33 —

LETTER FROM ROTHSCHILD

Historical trading volume

The table below sets out the trading volume of the Shares per month, the monthly trading volume as a percentage of the issued share capital of PCCW and the monthly trading volume as a percentage of the Shares held by the public for the period from 1 November, 2007 to 31 October, 2008, being the 12 full calendar months prior to the Announcement.

Table 10 Liquidity analysis of the Shares

		Monthly
		trading volume	Monthly
		of the Shares as	trading volume
	Monthly	a percentage of	of the Shares as
	trading volume	total issued	a percentage of
	of the Shares	share capital of	public float of
	(million Shares)	PCCW	PCCW
2007
November	365.2	5.4%	10.3%
December	261.6	3.9%	7.4%
2008
January	332.3	4.9%	9.4%
February	135.7	2.0%	3.8%
March	542.4	8.0%	15.3%
April	341.8	5.0%	9.7%
May	461.3	6.8%	13.0%
June	483.2	7.1%	13.6%
July	330.2	4.9%	9.3%
August	269.9	4.0%	7.6%
September	465.7	6.9%	13.2%
October	245.2	3.6%	6.9%
November (for reference only)	588.9	8.7%	16.6%
Average monthly trading volume
(1 November, 2007 to 31 October,
2008)	352.9	5.2%	10.0%

Source: Bloomberg

As illustrated in Table 10 above, we note that the monthly trading volume of the Shares ranged from approximately 135.7 million Shares to approximately 542.4 million Shares for the period from 1 November, 2007 to 31 October, 2008. The trading volume of the Shares increased substantially to approximately 542.4 million Shares in March, 2008 following the release of the full financial year results for the year ended 31 December, 2007; and was also high in May 2008 and June 2008, possibly due to the HKTGH Restructuring. Speculation in September 2008 that the HKTGH Sale may run into difficulty triggered another increase in trading volume to approximately 465.7 million Shares in that month. The average monthly trading volume of the Shares for the period from 1 November, 2007 to 31 October, 2008 was approximately 352.9 million Shares, representing approximately 5.2% of the

— 34 —

LETTER FROM ROTHSCHILD

total issued share capital of PCCW, or approximately 10.0% of the public float of PCCW. The low trading liquidity of the Shares could make any on-market disposals, which are substantial in volume, difficult as there is insufficient turnover of the Shares to absorb high volume sales and therefore high volume disposals are likely to have a significant adverse impact on the price of the Shares.

We also note that the trading volume of the Shares has increased since the date of the Announcement, which in our opinion was mainly caused by the announcement of the Proposal. However, based on the trading volume of the Shares in the 12 calendar months prior to the Announcement as shown above, if the Proposal is not approved by the Independent Shareholders or does not become effective, the trading volume of the Shares may not remain at the current levels.

In addition to the above analysis, we have compared the trading volume of the PCCW Shares with the Comparable Companies. A comparison of the average monthly trading volume for the period from 1 November, 2007 to 31 October, 2008 is set out in the table below:

Table 11 Liquidity analysis of the Shares relative to the Comparable Companies

	Average monthly trading
	volume of the shares as a
	percentage of total issued
	shares outstanding1
	from 1 November, 2007
Company	to 31 October, 2008
Belgacom	7.0%
BT	11.4%
China Telecom	5.1%
Chunghwa Telecom	6.7%
Elisa	17.7%
KT Corporation	7.9%
LG Dacom	18.3%
SK Broadband	21.5%
Starhub	2.3%
Swisscom	7.5%
Telstra	7.4%
Simple average (Mean)	10.3%
PCCW	5.2%

Sources: Bloomberg and the latest published financial reports of the respective companies

Notes:

For the purpose of this letter the numbers of total issued shares outstanding was based on the latest published financial reports of the respective companies.
China Unicom was excluded in the above analysis since it has just recently completed the merger with China Netcom on 15 October, 2008 and has limited trading volume record for the purpose of our analysis.

— 35 —

LETTER FROM ROTHSCHILD

As noted in Table 11 above, the trading volume of the Shares as a percentage of the total issued share capital of PCCW is at the lower end of the range of the Comparable Companies and is lower than the mean of the Comparable Companies.

(iv) Comparable transactions analysis

We have reviewed privatisation proposals in Hong Kong and selected several comparable transactions (“Comparable Transactions”) based on the following criteria: (a) successful privatisation or an acquisition of a remaining equity interest in a Hong Kong listed company primarily engaged in the provision of telecommunications services; (b) consideration is paid in cash; and (c) announced and completed between 1 January, 2005, and the Last Trading Date. Our analysis is summarised in the following table.

Table 12 Recent privatisation of telecommunications companies in Hong Kong

			Market
			capitalisation based on	Cancel-	Premium/Discount to average share price
			cancellation	lation
Company	Date announced	Method	price	price	1-day1	10- day1	30- day1	90- day1 180- day1
			(HK$ million)	(HK$)	(%)	(%)	(%)	(%)	(%)
Hutchison Global Communications	3 May, 2005	Scheme	4,488	0.65	36.8%	44.0%	43.8%	45.3%	43.2%
Holdings Limited
China Resources Peoples	20 October, 2005	Cash offer	3,384	4.55	2.8%	3.7%	26.7%	51.4%	61.2%
Telephone Company Limited
SUNDAY Communications	3 October, 2006	Very substantial	1,944	0.65	22.6%	20.4%	21.5%	20.8%	16.3%
Limited		disposal
Simple average (Mean)					20.8%	22.7%	30.7%	39.2%	40.2%
Median					22.6%	20.4%	26.7%	45.3%	43.2%
PCCW under the Proposal	4 November, 2008	Scheme	28,444	4.20	52.7%	40.0%	6.9%	(7.7%)	(9.5%)

Sources: Circulars of respective companies and Bloomberg

Note:

Day refers to trading day. The cancellation price is compared with the average closing prices over the 10, 30, 90 and 180 trading days up to and including the last trading date (as disclosed in the circulars of respective companies).

The premium implied by the Cancellation Price of approximately 52.7% over the Share price on the Last Trading Date and approximately 40.0% over the average historical Share price over the 10 trading days up to and including the Last Trading Date are higher than the corresponding mean and

— 36 —

LETTER FROM ROTHSCHILD

median premia offered by the Comparable Transactions. The premium or discount implied by the Cancellation Price over the average historical Share price over the 30, 90 and 180 trading days up to and including the Last Trading Date are lower than the premia offered by the mean and median of the Comparable Transactions. The average historical share price over 180 trading days up to and including the last trading date eliminates short-term volatility in share prices to a large extent and is generally considered to be a more superior benchmark than the short periods, for the purpose of comparing premia offered by cancellation prices.

For similar reasons to those given above in relation to the public trading analysis and given that the benchmarks provided by the Comparable Transactions need to be assessed on their own commercial and financial merits and depend on specific factors such as prevailing market conditions, financial and business performance of the target company and general economic and business risks, we consider that the comparable transaction analysis merely serves as a general indication of pricing benchmarks in the telecommunications services sectors in Hong Kong. Also, the fact that Comparable Transactions were implemented during a more stable environment to that in which the Proposal has been made, in our view, renders them less directly comparable to the current transaction for the purposes of our analysis.

As at the Latest Practicable Date, the Joint Offerors and the Excluded Group were interested in 3,231,515,068 Shares representing approximately 47.72% of the issued share capital of PCCW. There is no indication the Joint Offerors and the Excluded Group have any intention of selling their interest in PCCW. Accordingly, it is unlikely that Independent Shareholders will receive another offer or proposal from a third party without the support of the Joint Offerors and the Excluded Group. In addition, in the event that the Proposal is not approved by the Independent Shareholders and lapses, neither the Joint Offerors and the Excluded Group nor its concert parties under the Proposal may, under the Takeovers Code, announce another offer for the Shares within 12 months from the date on which the Proposal lapses, except with the consent of the Executive.

In light of the various analyses of the Cancellation Price set out above, we consider the Cancellation Price to offer a reasonable premium in comparison with the Comparable Companies, proposals received for the HKTGH Sale, historical trading prices, and the Comparable Transactions.

4. The Consortium Agreement

— 37 —

LETTER FROM ROTHSCHILD

the date on which the finance parties under the Starvest Facility Agreement are entitled, upon the occurrence of certain events, to exercise certain rights under the Starvest Facility Agreement) and PCCW will pay interest on such deferred sums at a rate of LIBOR plus 1.5% per annum.

The Joint Offerors’ financing structure is a common structure for take-private transactions, as undertaken by private equity firms. The cash distribution to the Post-Scheme Shareholders should not affect our analyses of the Cancellation Price since the cash distribution will be funded through part of the HKT Loan Facilities which will correspondingly reduce the value of the equity held by the Post-Scheme Shareholders with the enterprise value of PCCW being constant.

Independent Shareholders should note that the Post-Scheme Shareholders will be bearing the risks of an investment in a highly-geared company after the Effective Date and dividend distribution as the net debt of the PCCW Group is expected to increase substantially with the drawdowns of the HKT Loan Facilities, the full repayment of the Existing Facilities and the dividend distribution pursuant to Condition h(iii) under the paragraph headed “Conditions of the Proposal” in the Explanatory Statement.

Independent Shareholders should also note that the proposal to pay a special dividend to the Post-Scheme Shareholders after the Effective Date is specific to the Scheme becoming effective; if the Scheme does not become effective then the special dividend proposal lapses and PCCW stated that there is no proposal or intention to declare or pay a special dividend.

5. ADSs

The consideration for the ADS Proposal is the US$ equivalent (at the then prevailing market rate of exchange) of HK$42.00 per ADS (less any fees and expenses of the Depositary in connection with the currency conversion and cancellation of the ADSs). Chart 8 above shows the daily closing prices of the ADSs for the Three-Year Period.

6. The Option Offer

Pursuant to the Option Offer, which is conditional upon the Scheme becoming effective, the Joint Offerors will cancel each existing Option in exchange for cash, being an amount equal to HK$0.01 for each 10,000 underlying Option Shares. Normally, the amount of cash offered to cancel an Option is calculated by deducting the exercise price per Option Share payable on exercise of an Option from the Cancellation Price per Scheme Share payable under the Scheme (i.e. the “see-through price”). However, as the exercise prices for all outstanding Options are above the Cancellation Price, the Option Payment offered by the Joint Offerors for the cancellation of the Options is a nominal amount. Please refer to the paragraph headed “Option Offer” in the Explanatory Statement for further details.

— 38 —

LETTER FROM ROTHSCHILD

SUMMARY

Having considered the analysis above and the principal factors and reasons behind the Proposal, we conclude that the main benefit of the Proposal is to provide the Scheme Shareholders with an opportunity to divest their holding of the Shares in exchange for cash in the current poor market environment. In addition, PCRD believes that, in view of the relatively low trading liquidity and persistently weak performance of the Shares, access to the equity capital markets does not provide PCCW with an attractive fund raising avenue, and that the costs and management resources associated with the maintenance of PCCW’s listing status are not warranted. It is against this background that the Scheme Shareholders must decide whether or not to vote in favour of the Scheme at the EGM.

Cancellation Price analysis

We have set out above in this letter a number of commonly used methodologies to analyse the Cancellation Price. In the current circumstances, we are of the view that the “comparable companies analysis”, the “sum-of-the-parts analysis” and the “public trading analysis” are the most appropriate methodologies for the purpose of providing our opinion in respect of the Cancellation Price whilst the “comparable transactions analysis” merely serves as a general indication of pricing benchmark in the telecommunication services sectors in Hong Kong (for the reasons discussed above):

(i) Comparable companies analysis

Notwithstanding that the Share price has generally underperformed the Comparable Companies, the HSI and the HSTI, the EV/EBITDA multiple and PER implied by the Cancellation Price are at a premium over the mean and median EV/EBITDA multiple and PER of the Comparable Companies as at the Latest Practicable Date:

The EV/EBITDA multiple implied by the Cancellation Price of approximately 7.5 times the EBITDA of PCCW for the year ended 31 December, 2007 is at a premium of approximately 66.7% and 33.9% over the mean EV/EBITDA multiple of the Comparable Companies as at the Latest Practicable Date and the One-Year Period average closing price, respectively;
the PER implied by the Cancellation Price of approximately 18.8 times the net profit of PCCW for the year ended 31 December, 2007 is also at a premium of approximately 91.8% and 43.5% over the mean PER of the Comparable Companies as at the Latest Practicable Date and the One-Year Period average closing price, respectively; and
a comparison of the Cancellation Price with the median of the Comparable Companies produces similar results to that with the mean of the Comparable Companies.

— 39 —

LETTER FROM ROTHSCHILD

(ii) Sum-of-the-parts analysis

The Cancellation Price represents a premium of approximately between 8.8% and 17.6% over the per Share value implied by the highest proposals received for the 45% equity interest in HKTGH during the HKTGH Sale process. We believe it is appropriate to make this comparison for the analysis of the Cancellation Price as the proposals received as part of the HKTGH Sale represented market-tested prices and were the result of a vigorous process involving in-depth due diligence and valuation exercises undertaken by the potential buyers. However, while we believe such a comparison is appropriate, Independent Shareholders are reminded that the proposals from the HKTGH Sale were received on 11 October, 2008. The fact that the HKTGH Sale was discontinued does therefore reduce the relevance of these proposals to serve as a benchmark for comparison with the Cancellation Price. In considering the change of ownership in the sale of up to a 45% equity interest in HKTGH from PCCW, it is noted that some corporate governance rights were attached to that equity interest, and therefore, the interest may not be considered as a pure minority equity interest.

(iii) Public trading analysis

It should be noted that, whilst the Cancellation Price represents a discount to the long-term historical Share price, the long-term historical Share price has arguably been elevated and maintained by a market expectation that corporate actions would occur which have not in practice materialised. These include the expectation of an expansion into China which has been rumoured since 2005; two potential sale opportunities which were aborted in 2006; the potential HKTGH Sale in 2008 and the expectation of the payment of a special dividend as a result of the HKTGH Sale which was subsequently discontinued.

In our view, these expectations of corporate actions (none of which have materialised to date) coupled with low trading liquidity of the Shares (as discussed in the paragraph headed “Historical trading volume” above) reduce the relevance of the price performance of the Shares over the Three-Year Period in serving as a key factor in determining the appropriateness of the Cancellation Price.

However, recognising the importance of the historical Share price to the analysis of the Cancellation Price, we observe the following:

the Shares underperformed the mean and median of the Comparable Companies, the HSI and the HSTI relative to the respective average closings over the 10, 30, 90 and 180 trading days up to and including the Last Trading Date when compared with the closing prices as at the Last Trading Date;
in contrast, the Cancellation Price represents a premium of approximately 39.8% and 6.8% over the average closing prices of the Shares over the 10 and 30 trading days up to and including the Last Trading Day while the mean of the Comparable Companies was at a discount of approximately 4.2% and 8.9% and the HSI was at a discount of approximately

— 40 —

LETTER FROM ROTHSCHILD

3.9% and 13.3% to the average closings over the 10 and 30 trading days up to and including the Last Trading Date; the HSTI was at a premium of approximately 1.7% over and a discount of approximately 5.8% to the average closings over the 10 and 30 trading days up to and including the Last Trading Date;

whilst the Cancellation Price represents a discount of approximately 7.6% and 9.4% to the respective average closing prices of the Shares over the 90 and 180 trading days up to and including the Last Trading Date, these discounts are smaller than the discounts of the mean of the Comparable Companies of approximately 13.1% and 18.7%, the HSI of approximately 22.9% and 27.9% and the HSTI of approximately 21.6% and 30.7% to the respective average closings over the 90 and 180 trading days up to and including the Last Trading Date. Therefore, it may be considered that there exists a relative premium when compared to the mean of the Comparable Companies and the market indices, in that the discount represented by the Cancellation Price is far less than that of the mean of the Comparable Companies and the market indices over the same period;
the Proposal allows the Scheme Shareholders to divest their holding in the Shares at a smaller discount to historical trading prices than ordinary shareholders in other Comparable Companies and, as such, the opportunity to reduce potential losses over recent months may be attractive to the Scheme Shareholders; and
it is not certain that, if the Proposal was to be rejected or did not become effective, the Share price would rise above the Cancellation Price, reach their historical trading levels or remain at the current level within a given timeframe.

(iv) Comparable transactions analysis

For similar reasons to those as set out in the public trading analysis above and given that the benchmarks provided by the Comparable Transactions need to be assessed on their own commercial and financial merits and depend on specific factors such as prevailing market conditions, financial and business performance of the target company and general economic and business risks, we consider that the comparable transaction analysis merely serves as a general indication of pricing benchmark in the telecommunications services sectors in Hong Kong. Also, the Comparable Transactions were implemented during a more stable environment to that in which the Proposal has been made which, in our view, renders them less directly comparable to the current transaction for the purposes of our analysis.

— 41 —

LETTER FROM ROTHSCHILD

addition, in the event that the Proposal is not approved by the Independent Shareholders and lapses, neither the Joint Offerors and the Excluded Group nor its concert parties under the Proposal may, under the Takeovers Code, announce another offer for the Shares within 12 months from the date on which the Proposal lapses, except with the consent of the Executive.

RECOMMENDATIONS

Having considered the above principal factors and reasons, we consider the terms of the Proposal to be fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolution to approve the Scheme at the Court Meeting, as well as to recommend the Independent Shareholders to vote in favour of the special resolution to approve and give effect to the Scheme at the EGM.

With reference to our opinion that the terms of the Proposal are fair and reasonable, we advise the Independent Board Committee to recommend the ADS Holders to instruct the Depositary to vote the Scheme Shares held on their behalf in favour of the resolution to approve the Scheme at the Court Meeting and the special resolution to approve and give effect of the Scheme at the EGM.

In respect of the Option Offer, we consider that the terms of the Option Offer are also fair and reasonable so far as the Optionholders are concerned as the Options are considered out-of-the-money based on both the Cancellation Price and recent market prices. We advise the Independent Board Committee to recommend the Optionholders to accept the Option Offer.

In making this recommendation, we note that Independent Shareholders are at liberty to vote according to their personal preference and circumstances and they should consult their own professional advisers for professional advice. Independent Shareholders who are confident of the future prospects of the PCCW Group and/or wish to continue to retain an exposure in the PCCW Group or who are not attracted by the capital value of the Cancellation Price as compared with the historical trading performance or their respective investment costs of the Shares may wish to vote against the resolution in relation to the Proposal.

Those Scheme Shareholders who are concerned that the Proposal may not become effective and that the Share price may fall back to lower levels existing prior to the Last Trading Date may consider disposing of their Shares in the open market before the Court Meeting, particularly if the market price of the Shares trades close to or above the Cancellation Price.

Yours very truly, For and on behalf of

N M Rothschild & Sons (Hong Kong) Limited

Kelvin Chau Catherine Yien Managing Director Director

— 42 —

EXPLANATORY STATEMENT

This explanatory statement constitutes the statement required under Section 166A of the Companies Ordinance. SCHEME OF ARRANGEMENT TO CANCEL ALL THE SCHEME SHARES

IN CONSIDERATION OF THE JOINT OFFERORS AGREEING TO PAY THE CANCELLATION PRICE OF HK$4.20 FOR EACH SCHEME SHARE

INTRODUCTION

On 3 November, 2008, the Joint Offerors requested the Board to put forward the Proposal to the Scheme Shareholders regarding a proposed privatisation of PCCW by way of the Scheme involving the cancellation of all the Scheme Shares, as a result of which it is intended that Starvest and the Excluded Group will hold approximately 66.71% and Netcom BVI (and/or CNC) will hold approximately 33.29% of the issued share capital of PCCW, on the basis of 3,540,779,586 Scheme Shares to be cancelled, assuming that there are no changes to the shareholding structure of PCCW and no Options are exercised on or prior to the Effective Date. Following the Effective Date, the listing of the Shares will be withdrawn from the Stock Exchange.

The purpose of this Explanatory Statement is to explain the terms and effects of the Scheme and to provide the Scheme Shareholders with other relevant information in relation to the Scheme, and in particular, to state any material interests of the Directors, whether as directors or as members or as creditors of PCCW or otherwise, and the effect thereon of the Scheme, insofar as it is different from the effect on the like interests of other persons.

The particular attention of the Shareholders is drawn to the following sections of this document: (i) the letter from the Board set out on pages 4 to 11 of this document; (ii) the letter from the Independent Board Committee in connection with the Scheme and the Option Offer set out on pages 12 to 13 of this document; (iii) the letter from Rothschild set out on pages 14 to 42 of this document; and (iv) the Scheme set out on pages 249 to 256 of this document.

SUMMARY OF THE PROPOSAL

The Scheme

The Scheme is to be implemented by way of a scheme of arrangement under Section 166 of the Companies Ordinance. The Scheme provides that the Scheme Shares be cancelled in exchange for the payment to each Scheme Shareholder of HK$4.20 in cash for each Scheme Share.

Scheme Shares

As at the Latest Practicable Date, there were 6,772,294,654 Shares in issue, of which the Scheme Shareholders were interested in 3,540,779,586 Shares (representing approximately 52.28% of the issued share capital of PCCW as at the Latest Practicable Date) and the Joint Offerors and the Excluded Group were interested in 3,231,515,068 Shares (representing approximately 47.72% of the

— 43 —

EXPLANATORY STATEMENT

issued share capital of PCCW as at the Latest Practicable Date). The Shares owned by the Joint Offerors and the Excluded Group will not form part of the Scheme Shares and, as such, will not be voted at the Court Meeting. Further, only Independent Shareholders may vote at the Court Meeting. Accordingly, any Scheme Shares held by the Starvest Concert Parties, the Excluded Group, the Joint Offerors and any other persons acting in concert with any of the Joint Offerors, will not be voted at the Court Meeting.

ADSs

If the Scheme becomes effective, the Shares underlying each ADS will be cancelled on the Effective Date and the ADS Holders will receive the US$ equivalent (at the then prevailing market rate of exchange) of HK$42.00 per ADS (10:1 rate) from the Depositary (less any fees and expenses of the Depositary in connection with the currency conversion and cancellation of the ADSs). ADS Holders may incur related taxes and government charges. As at the Latest Practicable Date, there were 2,292,859 ADSs, in respect of 22,928,590 Shares. The attention of the ADS Holders is drawn to the section headed “Information for the ADS Holders” in the Explanatory Statement on page 67 of this document.

Options

Pursuant to Rule 13 of the Takeovers Code, the Joint Offerors are required to make an appropriate cash offer to the Optionholders to cancel their Options. In this regard, the Joint Offerors are also making the Option Offer to all Optionholders, conditional upon the Scheme becoming effective, to cancel the Options. Normally, the amount of cash offered to cancel an Option is calculated by deducting the exercise price per Share payable on exercise of an Option from the Cancellation Price per Scheme Share payable under the Scheme (i.e. the “see-through” price). However, as the exercise prices for all outstanding Options are above the Cancellation Price, the Option Payment offered by the Joint Offerors for the cancellation of the Options is nominal.

The Option Offer is made subject to and conditional upon the Conditions being fulfilled (or, to the extent permitted under this document, waived) and the Scheme becoming effective. Any acceptance by the Optionholders of the Option Offer will only result in a binding agreement for the cancellation of their Options if the Conditions are fulfilled (or, to the extent permitted under this document, waived) and the Scheme becomes effective. The attention of the Optionholders is drawn to the sections headed “Option Offer” and “Provisions which apply under the Share Option Schemes to Options which are not tendered for cancellation under the Option Offer” in the Explanatory Statement on pages 70 to 73 of this document.

As at the Latest Practicable Date, apart from the Options and ADSs there were no outstanding options, warrants, derivatives or convertible securities issued by PCCW.

CONDITIONS OF THE PROPOSAL

The Proposal is conditional upon the fulfilment or waiver, as applicable, of the Conditions as described below in this section. All Conditions will have to be fulfilled or waived, as applicable, on or before 23 April, 2009 (or such later date as the Joint Offerors and PCCW may agree and the High Court may allow), otherwise the Proposal will lapse.

— 44 —

EXPLANATORY STATEMENT

The Proposal will become effective and binding on PCCW and all Scheme Shareholders subject to the fulfilment or waiver (as applicable) of the following Conditions:

(a) the approval of the Scheme (by way of poll) by a majority in number of the Scheme Shareholders representing not less than three-fourths in value of the Scheme Shares held by the Scheme Shareholders, present and voting either in person or by proxy at the Court Meeting, provided that:
(i) the Scheme is approved (by way of poll) by Independent Shareholders holding at least 75% of the votes attaching to the Scheme Shares held by Independent Shareholders that are voted either in person or by proxy at the Court Meeting; and
(ii) the number of votes cast (by way of poll) against the resolution to approve the Scheme at the Court Meeting is not more than 10% of the votes attaching to all the Scheme Shares held by the Independent Shareholders;
(b) the passing of a special resolution by a majority of not less than three-fourths of the votes cast by the Shareholders present and voting, in person or by proxy, at the EGM, to approve and give effect to the reduction of the issued share capital of PCCW by cancelling and extinguishing the Scheme Shares and, immediately thereafter, applying the reserve created as a result of the aforesaid cancellation of the Scheme Shares to pay up in full and issue to Starvest and Netcom BVI (and/or CNC) such number of New Shares as is equal to the number of Scheme Shares cancelled;
(c) the High Court’s sanction of the Scheme (with or without modifications) and the confirmation of the reduction of the issued share capital of PCCW involved in the Scheme by the High Court under Sections 166 and 60, respectively, of the Companies Ordinance;
(d) compliance with the procedural requirements of Sections 166 and 61 of the Companies Ordinance in relation to the Scheme and the reduction of the issued share capital of PCCW respectively;
(e) the shareholders of PCRD approving, at an extraordinary general meeting of such shareholders convened for that purpose (or at any adjournment thereof), such resolutions as may be necessary to implement the Proposal;
(f) the Singapore Exchange’s approval of the Scheme (with or without modifications) having been obtained where necessary and such approval not having been withdrawn or revoked as at the Effective Date;
(g) the approvals of the Proposal by the Relevant Authorities in the PRC having been obtained by CNC and/or Netcom BVI;

— 45 —

EXPLANATORY STATEMENT

(h) the drawdown by HKT of the total amount available under the HKT Loan Facilities having occurred and all amounts having been applied such that:
(i) all indebtedness under the Existing Facilities has been repaid and discharged in full;
(ii) an amount of not less than HK$7,020 million has been lawfully transferred to PCCW; and
(iii) as a result of (ii), not less than HK$12,675 million is standing to the credit of a designated account held by PCCW and is available for distribution to the Post-Scheme Shareholders;
(i) no event having occurred and being continuing under the HKT Loan Facilities which:
(i) would result in any amounts owing under such agreement being or becoming repayable (or capable of being declared repayable) immediately or earlier than their stated maturity date or repayment date; or
(ii) has resulted in all amounts under such agreement being declared repayable immediately;
(j) there being no provision of any agreement, arrangement, licence, permit or other instrument to which any member of the PCCW Group is a party or by or to which any such member or any of its assets may be bound, entitled or subject, which as a consequence of the Proposal or the Scheme would result in (in each case to an extent which is material in the context of the PCCW Group as a whole and in the context of the Proposal):
(i) any monies borrowed by or any other indebtedness (actual or contingent) of any member of the PCCW Group being or becoming repayable (or capable of being declared repayable) immediately or earlier than their or its stated maturity date or repayment date;
(ii) any such agreement, arrangement, licence, permit or instrument (or the rights, liabilities, obligations or interests of any member of the PCCW Group thereunder) being terminated or adversely modified (or any material obligation or liability arising or any material action being taken thereunder); or
(iii) the creation or enforcement of any mortgage, charge or other security interest over the whole or any part of the business, property or assets of any member of the PCCW Group or any such security (whenever arising) becoming enforceable,

and no event having occurred which, under any provision of any agreement, arrangement, licence, permit or other instrument to which any member of the PCCW Group is a party or by which any such member or all or any of its assets may be bound, entitled or subject, would result in any of the events or circumstances as are referred to in sub-paragraphs (i) to (iii) of this paragraph (j) (in each case to an extent which is material in the context of the PCCW Group as a whole and in the context of the Proposal);

— 46 —

EXPLANATORY STATEMENT

(k) except in so far as such event forms part of the Proposal, the Scheme or the HKTGH Restructuring or save as publicly disclosed prior to the date of the Announcement, since 30 June, 2008 no member of the PCCW Group having (in each case to an extent which is material in the context of the PCCW Group as a whole and in the context of the Proposal):
(i) save as between PCCW and wholly-owned subsidiaries of PCCW (“intra-PCCW Group transactions”) or pursuant to the Share Option Schemes or the Share Award Schemes, issued or authorised the issue of additional shares of any class or redeemed, purchased or reduced (or announced any intention to do so) or made any other change to any part of its share capital;
(ii) save for intra-PCCW Group transactions or pursuant to the Share Option Schemes or the Share Award Schemes, issued or agreed to issue (or authorised or agreed to authorise) securities convertible into shares of any class or rights, warrants or options to subscribe for, or acquire, any such shares or convertible securities;
(iii) other than lawfully to another member of the PCCW Group (or, in the case of PCCW or PCPD, its shareholders as a class), recommended, declared, paid or made (or proposed to recommend, declare, pay or make) any bonus, dividend or other distribution (whether payable in cash or otherwise);
(iv) save for intra-PCCW Group transactions, implemented, effected or authorised (or announced its intention to implement, effect or authorise) any merger, demerger, reconstruction, amalgamation, scheme, commitment or acquisition or disposal of assets or shares (or the equivalent thereof) in any undertaking or undertakings;
(v) save for intra-PCCW Group transactions and other than in the ordinary course of business, disposed of (or transferred, mortgaged or created any security interest over) any asset (or any right, title or interest in any asset) that is material in the context of the PCCW Group taken as a whole (or authorised, proposed or announced any intention to do so);
(vi) save for intra-PCCW Group transactions or pursuant to the HKT Loan Facilities, made or authorised any material increase to its levels of financial indebtedness (whether by way of loan, bond or other debt or credit facility or instrument);
(vii) (other than in respect of a member which is dormant and was solvent at the relevant time) taken any corporate action or had any legal proceedings started or threatened against it for its winding-up (voluntary or otherwise), dissolution or reorganisation or for the appointment of a receiver, administrative receiver, administrator, trustee or similar officer of all or any material part of its assets or revenues (or any analogous proceedings in any jurisdiction or had any such person, or analogous person in any jurisdiction, appointed);

— 47 —

EXPLANATORY STATEMENT

(viii) been unable or admitted in writing that it is unable to pay its debts or having stopped or suspended (or threatened to stop or suspend) payment of its debts generally (or ceased or threatened to cease carrying on all or a substantial part of its business) or waived, compromised or settled any claim otherwise than in the ordinary course of business;
(ix) purchased, redeemed or repaid (or announced any proposal to purchase, redeem or repay) any of its own shares or other securities (or reduced or, save with respect to the matters mentioned in sub-paragraph (i) of this paragraph (k), made any other change to any part of its share capital);
(l) all Authorisations (if any) in connection with the Proposal from or with (as the case may be) the Relevant Authorities in the PRC, Hong Kong and/or any other relevant jurisdictions having been made and, if applicable, any waiting periods having expired or terminated (in each case where such Authorisation is material in the context of the PCCW Group as a whole and in the context of the Proposal);
(m) all Authorisations (if any) remaining in full force and effect without variation, and all necessary statutory or regulatory obligations in all relevant jurisdictions having been complied with and no requirement having been imposed by any Relevant Authorities which is not expressly provided for (or is in addition to requirements expressly provided for) in relevant laws, rules, regulations or codes in connection with the Proposal or any matters, documents (including circulars) or things relating thereto, in each aforesaid case up to and at the time when the Scheme becomes effective (in each case where such Authorisation is material in the context of the PCCW Group as a whole and in the context of the Proposal);
(n) no government, governmental, quasi-governmental, statutory or regulatory body, court or agency in any jurisdiction having taken or instituted any action, proceeding, suit, investigation or enquiry (or enacted, made or proposed, and there not continuing to be outstanding, any statute, regulation, demand or order) that would make the Proposal or the Scheme void, unenforceable or illegal (or which would impose any material and adverse conditions or obligations with respect to the Proposal or the Scheme);
(o) all necessary consents (other than any that may be required from any member of the PCRD Group) which may be required under any existing contractual obligations of PCCW and/or its subsidiaries being obtained and remaining in full force and effect without modification (in each case where the failure to obtain such consent is material in the context of the PCCW Group as a whole and in the context of the Proposal); and
(p) since 30 June, 2008:
(i) there having been no adverse change in the business, assets, financial or trading positions, profits or prospects of any member of the PCCW Group (to an extent which is material in the context of the PCCW Group taken as a whole and in the context of the Proposal); and

— 48 —

EXPLANATORY STATEMENT

(ii) there not having been instituted or remaining outstanding any litigation, arbitration proceedings, prosecution or other legal proceedings to which any member of the PCCW Group is a party (whether as plaintiff, defendant or otherwise) and no such proceedings having been threatened in writing against any such member (and no investigation by any government or quasi-governmental, supranational, regulatory or investigative body or court against or in respect of any such member or the business carried on by any such member having been threatened in writing, announced, instituted or remaining outstanding by, against or in respect of any such member), in each case which is material and adverse in the context of the PCCW Group taken as a whole and in the context of the Proposal.

The Joint Offerors reserve the right to waive all or any of the above Conditions, either in whole or in respect of any particular matter, except for Conditions (a) to (g). Such waiver must be made by both of the Joint Offerors. Starvest may not waive, amend, declare or treat as satisfied (except to the extent satisfied in accordance with its terms) any of the Conditions if such waiver would be prejudicial to the lenders under the Starvest Facility Agreement (unless the agent under such facility has given its consent or to the extent required by the Takeovers Code, the Executive or the High Court).

PCCW shall use its reasonable endeavours to ensure that Conditions (h), (j), (k) and (p) are fulfilled, and PCRD and CNC will not take any action to prevent Conditions (h), (j), (k) and (p) from being fulfilled.

In relation to Condition (h), the HKT Loan Facilities provide that drawdown by HKT under the HKT Loan Facilities is conditional on HKT having delivered a number of documents to the agent for the lenders. Those documents include a certificate to be given by HKTGH and HKT, to the effect that, subject to the payment of consideration by HKT which is to be funded from part of the proceeds of the HKT Loan Facilities, all of the other conditions to completion of the HKTGH Restructuring have been satisfied and, as a consequence, completion of the HKTGH Restructuring occurred immediately following the first drawdown under the HKT Loan Facilities.

For this purpose, completion of the HKTGH Restructuring is taken to mean that the relevant HKTGH group companies own (and/or hold the economic benefit or beneficial interest and control in (pursuant to legally enforceable agreements) the assets forming part of) the core telecommunications services, media and IT solutions businesses of the PCCW Group. Completion of the HKTGH Restructuring on that basis occurred on 28 November, 2008 and the certificate in that regard required to be given by HKTGH and HKT to the agent for the lenders under the HKT Loan Facilities has been delivered. In addition, all other documents specified in the HKT Loan Facilities as documentary conditions precedent to drawdown under the HKT Loan Facilities (principally comprising board resolutions, legal opinions and other certificates and similar documents) have been delivered to the agent for the lenders. Accordingly, all documentary conditions precedent to drawdown under the HKT Loan Facilities have been fulfilled.

The terms of the HKTGH Restructuring provide for the cash component of the consideration payable for the acquisition by HKT of the business and assets of PCCW-HKT Telephone Limited (“ HKTC ”), a wholly-owned subsidiary of PCCW, to be paid in three instalments. An amount of HK$9,500 million was payable by no later than 28 November, 2008 (and has been paid); an amount

— 49 —

EXPLANATORY STATEMENT

of HK$7,100 million is payable by no later than 10 December, 2008; and an amount of HK$7,200 million is payable by no later than 2 January, 2009. The cash component of the consideration payable by HKT for the acquisition of the business and assets of HKTC is to be funded from amounts drawn down under the HKT Loan Facilities.

As referred to above, an amount of HK$9,500 million has been drawn down by HKT under the HKT Loan Facilities for the payment of the first instalment of the cash component of the consideration for the acquisition of HKTC’s business and assets. HKTC, in turn applied the cash together with internal resources to repay in full the amount outstanding under the HK$10,150 million Bayerische Landesbank facility entered into on 3 October, 2006, which was one of the Existing Facilities.

The only remaining material conditions to further drawdowns under the HKT Loan Facilities are that each of the repeating representations and warranties given by the obligors under the HKT Loan Facilities are true and accurate in all material respects on the date of the relevant drawdown notice and the proposed drawdown date, that no event of default is continuing and would result from the proposed drawdown and no material adverse change has occurred since the date of the HKT Loan Facilities. A material adverse change for this purpose means an event or circumstance which constitutes an adverse change in the business, assets, financial condition or trading position of the HKTGH group (taken as a whole) of such significance that, in the reasonable opinion of the majority lenders, it would reasonably be expected to affect the ability of the obligors under the HKT Loan Facilities to perform fully and punctually their payment obligations under the HKT Loan Facilities.

It is expected that an amount sufficient to pay the second instalment of the cash component of the consideration payable to HKTC will be drawn down no later than 10 December, 2008 and that the remaining amount of the HKT Loan Facilities will be drawn down no later than 2 January, 2009. It is intended that the entire amount of HK$23,800 million available under the HKT Loan Facilities will have been drawn down by no later than 2 January, 2009. It is expected that substantially all of the net consideration received by HKTC will be transferred to PCCW by way of a series of dividends and repayments of intra group loans, thereby enabling PCCW to repay the amount outstanding in respect of the HK$6,450 million Bayerische Landesbank facility entered into on 18 July, 2006 (which is the remaining outstanding Existing Facility) and resulting in paragraph (i) of Condition (h) being fulfilled. The transfer of the net consideration to PCCW is expected to result in an incremental increase in PCCW’s cash of not less than HK$7,020 million, after PCCW has repaid the HK$6,450 million Bayerische Landesbank revolving loan facility in full, thereby resulting in paragraph (ii) of Condition (h) being fulfilled. As at 30 September, 2008, PCCW had freely fungible cash (being cash held by certain principal PCCW Group companies but excluding the PCPD Group cash of not less than HK$1,757 million and the 2008 interim dividend declared by PCCW of HK$474 million) of not less than HK$6,008 million which, when aggregated with the amount standing to the credit of PCCW, is expected to result in paragraph (iii) of Condition (h) being fulfilled.

The Joint Offerors may not invoke Conditions (f), (g), (l) and (m) unless any of the Authorisations referred to in those Conditions are obtained subject to conditions imposed by the Relevant Authorities and any of those conditions cannot reasonably be satisfied by the Joint Offerors or is otherwise unduly burdensome or onerous to any of the Joint Offerors or any person acting in concert with any of the Joint Offerors.

— 50 —

EXPLANATORY STATEMENT

Assuming that the Conditions are fulfilled (or, as applicable, waived in whole or in part), it is expected that the Scheme will become effective on or before 14 January, 2009. Further announcements will be made in the event of a material change to the expected Effective Date of the Scheme.

An announcement will be made by PCCW and the Joint Offerors if the Scheme lapses.

PCCW, PCRD, CNC and the Joint Offerors will jointly apply to the Executive for a waiver from compliance with Rule 15.7 of the Takeovers Code in relation to the Scheme.

Shareholders, holders of other securities and/or potential investors should be aware that implementation of the Proposal is subject to the Conditions being fulfilled or waived, as applicable, and thus the Proposal may or may not become effective. Shareholders, holders of other securities and potential investors are advised to exercise caution when dealing in the Shares or other securities of PCCW.

SCHEME OF ARRANGEMENT UNDER SECTION 166 OF THE COMPANIES ORDINANCE AND THE COURT MEETING

According to Section 166 of the Companies Ordinance, where an arrangement is proposed between a company and its members or any class of them, the High Court may, on the application of the company or any member of the company, order a meeting of the members of the company or class of members, as the case may be, to be summoned in such manner as the High Court directs.

It is expressly provided in Section 166 of the Companies Ordinance that if a majority in number representing three-fourths in nominal value of the members or class of members, as the case may be, present and voting either in person or by proxy at the meeting or meetings, as the case may be, summoned as directed by the High Court as aforesaid, agree to any arrangement, the arrangement shall, if sanctioned by the High Court, be binding on all members or the class of members, as the case may be, and also on the company.

ADDITIONAL REQUIREMENTS IMPOSED BY RULE 2.10 OF THE TAKEOVERS CODE

In addition to satisfying any requirements under the Companies Ordinance, as summarised above, Rule 2.10 of the Takeovers Code requires that the Scheme may only be implemented if:

(a) the Scheme is approved by at least 75% of the votes attaching to the disinterested Shares (namely, the Shares held by the Independent Shareholders) that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested Shares (namely, the Independent Shareholders); and
(b) the number of votes cast against the resolution to approve the Scheme at such meeting is not more than 10% of the votes attaching to all disinterested Shares (namely, the Shares held by the Independent Shareholders).

— 51 —

EXPLANATORY STATEMENT

BINDING EFFECT OF THE SCHEME

Notwithstanding the fact that there may be a dissenting minority, if the Scheme is approved at the Court Meeting in accordance with the requirements of Section 166 of the Companies Ordinance and Rule 2.10 of the Takeovers Code, as described above, and is sanctioned by the High Court and the other Conditions are either fulfilled or (to the extent permitted) waived, then the Scheme will become binding on PCCW and all the Scheme Shareholders.

If the Scheme becomes effective:

(1) all the Scheme Shares will be cancelled, whereupon the issued share capital of PCCW shall be reduced from approximately HK$1,693 million to approximately HK$808 million (assuming that there are no changes to its shareholding structure and no Options are exercised on or prior to the Effective Date) and all Share certificates representing holdings of those Scheme Shares cancelled shall cease to have effect as documents of title;
(2) the authorised share capital of PCCW will then be increased by the creation of a number of New Shares equal to the number of Scheme Shares cancelled;
(3) on the Effective Date, the credit which will arise in PCCW’s books of account as a result of the said reduction of capital will be applied in paying up in full at par the number of New Shares created (equal to the number of Scheme Shares cancelled) and such New Shares will be allotted and issued, credited as fully paid, to Starvest and Netcom BVI (and/or CNC); and
(4) the Joint Offerors will pay the Cancellation Price of HK$4.20 per Scheme Share to the Scheme Shareholders for each Scheme Share held by them prior to the cancellation of the Scheme Shares.

SHAREHOLDINGS OF THE JOINT OFFERORS AND THE EXCLUDED GROUP

As at the Latest Practicable Date, the Joint Offerors and the Excluded Group were interested in 3,231,515,068 Shares (representing approximately 47.72% of the issued share capital of PCCW as at the Latest Practicable Date). Of those Shares, Starvest and the Excluded Group held 1,887,943,302 Shares (representing approximately 27.88% of the issued share capital of PCCW as at the Latest Practicable Date) and Netcom BVI held 1,343,571,766 Shares (representing approximately 19.84% of the issued share capital of PCCW as at the Latest Practicable Date). Netcom BVI may transfer all or part of its Shares to CNC as approved by the applicable Relevant Authorities in the PRC at any time between the date of the Consortium Agreement and 15 days after the Effective Date.

NEW SHARES TO BE ISSUED TO THE JOINT OFFERORS

As contemplated by the Consortium Agreement, which is described below in this Explanatory Statement, the Scheme provides that the New Shares to be issued by PCCW following the cancellation of the Scheme Shares, to increase the issued share capital of PCCW to the amount immediately before the cancellation of the Scheme Shares, will be issued in the ratio of 74.27:25.73 to Starvest and Netcom BVI (and/or CNC) respectively, which corresponds to 2,629,736,999 New Shares to be issued to Starvest and 911,042,587 New Shares to be issued to Netcom BVI (and/or CNC), on the basis of 3,540,779,586 Scheme Shares to be cancelled (assuming there are no changes to the shareholding

— 52 —

EXPLANATORY STATEMENT

structure of PCCW and no Options are exercised) on or prior to the Effective Date. Netcom BVI may direct (in its absolute discretion) PCCW to issue such number of New Shares, to which Netcom BVI is entitled, to CNC. It is anticipated that any decision to be taken by Netcom BVI in relation to such a direction would be made during the period between the date of the Court Meeting and the date of issuance of the New Shares.

Accordingly, following the Effective Date, the cancellation of the Scheme Shares, issue of the New Shares and withdrawal of listing of the Shares on the Stock Exchange, Starvest and the Excluded Group would collectively own approximately 66.71% of the issued share capital of PCCW and Netcom BVI (and/or CNC) would own approximately 33.29% of the issued share capital of PCCW, assuming there are no changes to the shareholding structure of PCCW and no Options are exercised on or prior to the Effective Date.

EFFECTS OF THE SCHEME

Shareholding structure

The chart below shows a simplified shareholding structure of PCCW and PCRD as at the Latest Practicable Date:

==> picture [453 x 337] intentionally omitted <==

----- Start of picture text -----

PCGH PCD [(1)] Eisner [(1)] CNC Public
100% 100% 100%
Pacific Century
Borsington
International CNG
Limited
0.49%
100%
100%
Hopestar [(1)] PCG Cayman Netcom
BVI
100%
0.91%
Public Anglang 1.51% 3.19% 0.5% 19.84% 52.28%
23.34% 37.5% 37.76%
22.68%
PCRD PCCW
100%
Starvest Public 61.53% 100%
38.47%
PCPD HKTGH
100%
HKT
----- End of picture text -----

(1) Hopestar, PCD and Eisner are companies wholly-owned by Richard Li.

— 53 —

EXPLANATORY STATEMENT

The table below sets out the shareholding structure of PCCW as at the Latest Practicable Date and immediately following implementation of the Scheme (assuming there are no other changes to PCCW’s shareholding structure and no Options are exercised on or prior to the Effective Date):

			Immediately following	Immediately following
	As at the		implementation
Shareholders	Latest Practicable	Date	of the Scheme
	Number of Shares	%	Number of Shares	%
Post-Scheme Shareholders
Starvest(1)	0	0	2,629,736,999	38.83
PCRD	1,535,711,301	22.68	1,535,711,301	22.68
Netcom BVI(1)	1,343,571,766	19.84	2,254,614,353	33.29
PCGH	102,122,177	1.51	102,122,177	1.51
PCD(2)	216,362,824	3.19	216,362,824	3.19
Eisner(2)	33,747,000	0.50	33,747,000	0.50
*Sub-total*	3,231,515,068	47.72	6,772,294,654	100.00
Scheme Shareholders and
Starvest Concert Parties(3)
Yue Shun	36,726,857	0.542	0	0
Alexander Anthony Arena	760,200_(6)_	0.011	0	0
Peter Anthony Allen	253,200	0.004	0	0
Francis Yuen Tin Fan	1,420,000	0.021	0	0
Tom Yee Lat Shing	2,520	0.000	0	0
HSBC(4)(5)	27,410,084	0.405	0	0
RBS(4)(7)	5,000	0.000	0	0
Other Scheme Shareholders	3,474,201,725	51.300	0	0
*Sub-total*	3,540,779,586	52.28	0	0
Total	6,772,294,654	100.00	6,772,294,654	100.00

(1) Pursuant to the Consortium Agreement, the New Shares will be issued in the ratio of 74.27:25.73 to Starvest and Netcom BVI (and/or CNC) respectively (which corresponds to 2,629,736,999 New Shares to Starvest and 911,042,587 New Shares to Netcom BVI (and/or CNC) on the basis of 3,540,779,586 Scheme Shares to be cancelled, assuming that there are no changes to PCCW’s shareholding structure and no Options are exercised on or prior to the Effective Date). Netcom BVI may direct (in its absolute discretion) PCCW to issue such number of New Shares, to which Netcom BVI is entitled, to CNC.

(2) PCD and Eisner are companies wholly-owned by Richard Li. PCD and Eisner are parties acting in concert with Starvest and will not participate in the Scheme. The Shares held by PCD and Eisner will, therefore, not form part of the Scheme Shares.

— 54 —

EXPLANATORY STATEMENT

(3) Yue Shun holds 36,726,857 Shares (representing approximately 0.54% of the issued share capital of PCCW as at the Latest Practicable Date) and is a Scheme Shareholder. Yue Shun is a wholly-owned subsidiary of Hutchison Whampoa Limited and is presumed to be acting in concert with Starvest in accordance with class 8 of the definition of “acting in concert” in the Takeovers Code. On that basis, Yue Shun is not treated as an Independent Shareholder and Yue Shun has given the Irrevocable Undertaking that it will not vote at the Court Meeting.

The following directors of PCRD hold Shares and each of them is presumed to be acting in concert with Starvest in accordance with class 2 of the definition of “acting in concert” in the Takeovers Code: Mr. Alexander Anthony Arena holds 760,200 Shares (including 200 underlying Shares in the form of 20 ADSs); Mr. Peter Anthony Allen holds 253,200 Shares; Mr. Francis Yuen Tin Fan holds 1,420,000 Shares; and Mr. Tom Yee Lat Shing holds 2,520 Shares. Mr. Alexander Anthony Arena also holds 15,800,000 Options and Mr. Peter Anthony Allen also holds 4,629,200 Options. Mr. Alexander Anthony Arena is also a director of PCCW and Mr. Peter Anthony Allen is also a director of Starvest and PCCW. Each of those directors is a Scheme Shareholder but is not treated as an Independent Shareholder and will not vote at the Court Meeting. Ms. Winnie King Yan Siu Morrison is a director of Starvest and holds 7,200,000 Options. Except for those 7,200,000 Options, Ms. Winnie King Yan Siu Morrison does not hold any Shares or other relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of PCCW. Ms. Winnie King Yan Siu Morrison is presumed to be acting in concert with Starvest in accordance with class 2 of the definition of “acting in concert” in the Takeovers Code.

(4) HSBC and persons controlling, controlled by or under the same control as HSBC, other than persons holding the status of exempt fund manager (“ HSBC Group ”), are presumed to be acting in concert with Starvest in accordance with class 5 of the definition of “acting in concert” in the Takeovers Code. RBS and persons controlling, controlled by or under the same control as RBS, other than persons holding the status of exempt fund manager, are presumed to be acting in concert with Netcom BVI in accordance with class 5 of the definition of “acting in concert” in the Takeovers Code.
(5) As at the Latest Practical Date, 27,410,084 Shares (out of which 10,961,800 Shares were proprietarily held and 16,448,284 Shares were under discretionary management authority) were proprietarily held by and/or under the discretionary management authority of the HSBC Group and 8,222 units of derivatives relating to 794,627 Shares were also proprietarily held by a member of the HSBC Group.
(6) Includes 200 underlying Shares held in the form of 20 ADSs.
(7) As at the Latest Practicable Date, RBS had a long position of 10,000 Shares and a short position of 5,000 Shares in PCCW.

Material interests of Directors and effects of the Scheme on such interests

Details of the interests of the Directors in Shares, and Directors’ rights to acquire Shares, as at the Latest Practicable Date are set out on pages 211 to 215 of this document. PCD and Eisner, which respectively held 216,362,824 Shares and 33,747,000 Shares as at the Latest Practicable Date, are companies wholly owned by Richard Li. PCGH held 102,122,177 Shares as at the Latest Practicable Date. Richard Li is the founder of certain trusts which wholly own PCGH. PCGH, through certain wholly-owned subsidiaries (Anglang, PCG Cayman, Pacific Century International Limited and Borsington) held an aggregate 75.74% interest in PCRD as at the Latest Practicable Date and PCRD held 1,535,711,301 Shares as at the Latest Practicable Date. Starvest is a wholly-owned subsidiary of PCRD. The Shares held by PCRD, PCGH, PCD and Eisner are not Scheme Shares and will not be cancelled under the Scheme. Under the Consortium Agreement described on pages 58 to 60 of this document, New Shares will be issued to Starvest and Netcom BVI (and/or CNC) if the Scheme becomes effective and Starvest, Netcom BVI (and/or CNC), PCRD, PCGH, PCD and Eisner would be

— 55 —

EXPLANATORY STATEMENT

entitled to receive the special dividend required to be paid to the Post-Scheme Shareholders under the Consortium Agreement, as described on page 58 of this document. The Shares in which the other Directors are interested, set out on pages 211 to 212 of this document are Scheme Shares and will be cancelled if the Scheme becomes effective. The Options held by the Directors, disclosed on pages 213 to 215 of this document, will be treated in the same way as the Options held by other Optionholders.

COMPARISONS OF VALUE

The Cancellation Price represents:

a premium of approximately 52.73% over the closing price of HK$2.75 per Share as quoted on the Stock Exchange on the Last Trading Date;
a premium of approximately 46.85% over the average closing price of about HK$2.86 per Share based on the daily closing prices as quoted on the Stock Exchange over the 5 trading days up to and including the Last Trading Date;
a premium of approximately 6.87% over the average closing price of about HK$3.93 per Share based on the daily closing prices as quoted on the Stock Exchange over the 30 trading days up to and including the Last Trading Date;
a discount of approximately 9.48% to the average closing price of about HK$4.64 per Share based on the daily closing prices as quoted on the Stock Exchange over the 180 trading days up to and including the Last Trading Date;
a premium of approximately 18.31% over the closing price of HK$3.55 per Share as quoted on the Stock Exchange on the Latest Practicable Date;
a premium of approximately 19.32% over the average closing price of about HK$3.52 per Share based on the daily closing prices as quoted on the Stock Exchange over the 5 trading days up to and including the Latest Practicable Date;
a premium of approximately 25.00% over the average closing price of about HK$3.36 per Share based on the daily closing prices as quoted on the Stock Exchange over the 30 trading days up to and including the Latest Practicable Date;
a discount of approximately 7.28% over the average closing price of about HK$4.53 per Share based on the daily closing prices as quoted on the Stock Exchange over the 180 trading days up to and including the Latest Practicable Date;
a premium of approximately 1,726.09% to the audited consolidated net asset value attributable to Shareholders per Share of about HK$0.23 as at 31 December, 2007; and
a premium of approximately 1,455.56% to the unaudited consolidated net asset value attributable to Shareholders per Share of about HK$0.27 as at 30 June, 2008.

— 56 —

EXPLANATORY STATEMENT

During the Relevant Period, the highest closing price of the Shares as quoted on the Stock Exchange was HK$5.16 each on 18 August, 2008, and the lowest closing price of the Shares as quoted on the Stock Exchange was HK$2.75 each on 13 October, 2008.

At the Cancellation Price, the Proposal values the entire issued share capital of PCCW at approximately HK$28,444 million. The amount payable for the underlying Shares represented by the outstanding ADSs as at the Latest Practicable Date is approximately HK$96 million.

Starvest will pay 74.27% and Netcom BVI will pay 25.73% of the cash consideration payable under the Scheme and the Option Offer.

Assuming none of the Options are exercised before the Effective Date and that there are no other changes to the shareholding structure of PCCW, the amount of cash consideration required to effect the Scheme will be approximately HK$14,871 million, of which approximately HK$11,045 million will be paid by Starvest and approximately HK$3,826 million will be paid by Netcom BVI and the cash consideration payable under the Option Offer to cancel all the Options will be approximately HK$138 (of which approximately HK$103 will be paid by Starvest and approximately HK$35 will be paid by Netcom BVI).

Assuming all the Options are exercised before the Effective Date and that there are no other changes to the shareholding structure of PCCW, the amount of cash consideration required to effect the Scheme will be approximately HK$15,452 million, of which approximately HK$11,476 million will be paid by Starvest and approximately HK$3,976 million will be paid by Netcom BVI.

On the basis of the Cancellation Price, the table below illustrates the change in capital value for the Scheme Shareholders, assuming that the Scheme is implemented:

	On the Last	On the Latest
	Trading Date	Practicable Date
	HK$	HK$
Consideration receivable (per 1,000 Shares)
under the Scheme	4,200	4,200
Value of 1,000 Shares (Note)	2,750	3,550
This represents an increase of approximately	52.73%	18.31%

Note: Based on the closing price of the Shares as quoted on the Stock Exchange on the respective dates.

A summary of the closing prices of the Shares on the Stock Exchange (i) on the last trading day of each of the six calendar months preceding the date of the Rule 3.2 Announcement; (ii) on the Last Trading Date; and (iii) on the Latest Practicable Date is set out in Appendix III to this document.

— 57 —

EXPLANATORY STATEMENT

FINANCIAL ADVISERS TO THE JOINT OFFERORS AND CONFIRMATION OF FINANCIAL RESOURCES

HSBC has been appointed as the financial adviser to PCRD and Starvest, and RBS has been appointed as the financial adviser to CNC and Netcom BVI, in connection with the Proposal.

HSBC is satisfied that sufficient financial resources are available to Starvest for the payment of its 74.27% proportion of the cash consideration payable under the Scheme and the Option Offer. RBS is satisfied that sufficient financial resources are available to Netcom BVI for the payment of its 25.73% proportion of the cash consideration payable under the Scheme and the Option Offer.

Starvest has entered into the Starvest Facility Agreement with HSBC to fund the payment of Starvest’s proportion of the cash consideration payable under the Scheme and the Option Offer. That loan facility will be used by Starvest for payment of the cash consideration payable to Scheme Shareholders and Optionholders pursuant to its obligations under the Scheme and the Option Offer respectively, and the costs and expenses incurred in connection therewith. It is intended that Starvest will use the dividends to be distributed by PCCW to Starvest and the Excluded Group after the Scheme becomes effective (as described in the section headed “Consortium Agreement” in the Explanatory Statement below) to pay (or prepay before their maturity) the amounts outstanding under that loan facility.

Netcom BVI will fund the payment of its proportion of the cash consideration under the Scheme and the Option Offer by using funds drawn down under the Netcom Facility and its internal cash resources. Netcom BVI has drawn down under the Netcom Facility and the funds drawn down, together with funds from Netcom BVI’s internal cash resources, have been transferred to and deposited in a Hong Kong dollar deposit account with The Royal Bank of Scotland plc, Hong Kong Branch (the “ RBS Account ”). The funds in the RBS Account will be used to fund the payment of Netcom BVI’s proportion of the cash consideration payable under the Scheme and the Option Offer.

CONSORTIUM AGREEMENT

PCRD, Starvest, CNC and Netcom BVI have entered into the Consortium Agreement pursuant to which the parties have agreed that the New Shares, if the Scheme becomes effective, will be issued in the ratio of 74.27:25.73 to Starvest and Netcom BVI (and/or CNC) respectively.

All decisions relating to the Proposal will be made jointly by the Joint Offerors.

PCRD, Starvest, CNC and Netcom BVI have agreed to procure that PCCW will, within 20 days after the Effective Date, declare a special dividend in cash to the Post-Scheme Shareholders of an aggregate amount of between HK$16,964 million and HK$17,565 million, of which an amount of not more than HK$4,289 million will be deferred by PCCW for such period as PCCW may determine (but in any event, not more than 12 months after the date on which the dividend is declared or, if earlier, the date on which the finance parties under the Starvest Facility Agreement are entitled, upon the occurrence of certain events, to exercise certain rights under the Starvest Facility Agreement) and PCCW will pay interest on such deferred sums at a rate of LIBOR plus 1.5% per annum.

— 58 —

EXPLANATORY STATEMENT

Pursuant to the Consortium Agreement, if either of the Joint Offerors is required to assume any obligations of the other, it will (subject to the Takeovers Code and the requirements of the Executive) have the right to increase the ratio of the issue of New Shares in its favour as it considers appropriate to the extent of the amount paid in respect of assuming the obligations of the other party and the other party will indemnify it in full against any claims and liabilities incurred.

Save for: (i) the security granted in connection with the Starvest Facility Agreement in respect of the Shares held by Starvest and the Excluded Group; (ii) any security which may be granted in connection with the Netcom Facility in respect of the Shares held by Netcom BVI and/or CNC; and (iii) the transfer of Shares by Netcom BVI to CNC, each party to the Consortium Agreement has also agreed that it will not, prior to the Effective Date, dispose of or create any third party interest in all or any of its Shares (nor will it accept any other offer in respect of such Shares, nor will it acquire or subscribe for any Shares). Requisite consents were obtained to permit the acquisitions of Shares by PCRD disclosed on page 219 under the heading “6.1 Dealings in Shares by PCRD and PCGH during the Relevant Period” in Appendix III to this document.

Each of PCGH, PCD and Eisner are not parties to the Consortium Agreement, but they each have given an undertaking to CNC and Netcom BVI on terms similar to those given by PCRD and Starvest under the Consortium Agreement. PCCW is not a party to the Consortium Agreement but PCRD has agreed, if the Scheme becomes effective, to procure PCCW to enter into a deed of conformity on the Effective Date to comply with the provisions of the Consortium Agreement.

Pursuant to the Consortium Agreement, the parties agree that, upon the Effective Date: (i) certain matters such as the issue of new Shares, the disposal of material assets and certain related party transactions will require the prior written consent of the Post-Scheme Shareholders holding in aggregate not less than 90% of the issued share capital of PCCW; (ii) Netcom BVI will have a right of first offer in respect of Shares held by Starvest and any member of the Excluded Group if any such party wishes to transfer any of its Shares (other than a transfer by any of them to its wholly-owned subsidiary or due to enforcement of the rights of the lenders under the Starvest Facility Agreement) and in respect of the shareholding in the material companies within the PCCW Group; (iii) PCRD will have a reciprocal right of first offer in respect of the Shares held by Netcom BVI and CNC, other than on the enforcement of the rights of the lenders under the Netcom Facility or in respect of the transfer of Shares by Netcom BVI and/or CNC to any subsidiary of CNC (of which at least 75% of the issued voting share capital is beneficially owned by CNC); and (iv) the Board will comprise of five directors to be appointed by PCRD and/or Starvest and three directors to be appointed by Netcom BVI or CNC.

The proposal to pay a special dividend contemplated by the Consortium Agreement to be paid to the Post-Scheme Shareholders after the Effective Date is specific to the Scheme becoming effective.

PCCW expects to have funds available to pay the special dividend from a combination of cash on hand and amounts lawfully transferred to PCCW following the drawdown in full by HKT under the HKT Loan Facilities and repayment in full of the Existing Facilities.

If the Scheme does not become effective then the special dividend proposal lapses and there is no proposal or intention to declare or pay a special dividend.

— 59 —

EXPLANATORY STATEMENT

The principal amount of borrowings of the PCCW Group is expected to increase by approximately 22% from approximately HK$32,200 million as at 30 September, 2008 to approximately HK$39,400 million following drawdown in full under the HKT Loan Facilities and repayment in full of the Existing Facilities. After the Effective Date and payment of the special dividend, the Post-Scheme Shareholders would bear the risks of an investment in a company with substantial borrowings.

In relation to regular dividends, should the Proposal not become effective, although the Board would still wish to maintain its policy of paying dividends at previous levels, it may not be able to do so given that PCCW does not have the benefit of the proceeds of sale from the HKTGH Sale as it was discontinued and, in addition, PCCW has assumed a considerable debt burden. The Board will review its dividend policy from time to time and will take into account prevailing market conditions, the servicing of its continuing debt burden and available business and investment opportunities in telecommunications, media and technology. Therefore, there can be no assurance that dividends will continue to be paid at previous levels should the Proposal not become effective.

INFORMATION ON THE PCCW GROUP

PCCW is a leading telecommunications provider in Hong Kong. As the provider of Hong Kong’s first quadruple-play experience, PCCW offers a range of innovative media content and services across four platforms: fixed-line, broadband internet, TV and mobile. In addition, PCCW meets the sophisticated needs of the international business community, while supporting network operators with cutting-edge technical services and handling large-scale IT outsourcing projects for public and private sector organisations.

A summary of the audited consolidated financial results of the PCCW Group for each of the two years ended 31 December, 2006 and 31 December, 2007, and the unaudited consolidated financial results of the PCCW Group for the six months ended 30 June, 2008 (announced on 21 August, 2008), is set out below:

					(Unaudited)
	(Audited)				For the six
	For the	year ended			months ended
	31 December,	31	December,		30 June,
	2006			2007	2008
	HK$’million	HK$’million			HK$’million
Turnover	25,637		23,715		11,372
Profit before taxation	2,552			2,807	1,105
Profit after taxation	1,632			1,837	688
Profit attributable to equity holders of PCCW	1,252			1,503	656
Basic earnings per Share	HK18.59 cents	HK22.21		cents	HK9.68 cents

— 60 —

EXPLANATORY STATEMENT

The audited consolidated net assets attributable to Shareholders as at 31 December, 2006 and 31 December, 2007 were approximately HK$430 million and HK$1,552 million respectively, and the unaudited consolidated net assets attributable to Shareholders as at 30 June, 2008 were approximately HK$1,833 million.

The net asset values per Share were HK$0.06 and HK$0.23 as at 31 December, 2006 and 2007, respectively and HK$0.27 as at 30 June, 2008.

The gross debt of the PCCW Group (calculated as the total of short-term borrowings and long-term borrowings) as at 30 September, 2008 was approximately HK$32,049 million. The net debt of the PCCW Group (calculated as gross debt minus freely fungible cash of PCCW and cash held by the PCPD Group) as at 30 September, 2008 was approximately HK$24,284 million.

The PCCW Group has significant interests in real estate through its 61.53% owned property development subsidiary group, the PCPD Group. The PCPD Group’s property interests (including land and buildings, investment properties, properties held for/under development and properties for sale) were valued by Savills, as at 31 October, 2008. The net property revaluation deficit of approximately HK$793 million is arrived at by deducting the combined carrying value of property interests in the unaudited consolidated financial information of the PCPD Group for the six months ended 30 June, 2008 from the aggregate value of such property interests as at 31 October, 2008 as assessed by Savills.

INFORMATION ON STARVEST AND PCRD

Starvest

Starvest is a wholly-owned subsidiary of PCRD and was incorporated on 26 September, 2008 under the laws of the Cayman Islands. Starvest is a special purpose vehicle set up for the purpose of implementing the Proposal.

PCRD

PCRD was incorporated on 25 October, 1963 in the Republic of Singapore with limited liability. Its shares are listed on the Official List of the Singapore Exchange. PCRD is a subsidiary of PCGH and is based in Singapore. PCRD is an investment holding company with investments overseas. Through PCRD’s shareholdings in PCCW, it has interests in telecommunications and information technology, offering local and international telecommunications, and information technology services.

— 61 —

EXPLANATORY STATEMENT

INFORMATION ON NETCOM BVI AND CNC

Netcom BVI

Netcom BVI is a company incorporated in the British Virgin Islands and is an indirect wholly-owned subsidiary of CNC. Netcom BVI is a special purpose vehicle of CNC and is a substantial shareholder of PCCW. As at the Latest Practicable Date, Netcom BVI held 1,343,571,766 Shares (representing approximately 19.84% of the issued share capital of PCCW as at the Latest Practicable Date).

CNC

CNC is a leading telecommunications company in the PRC. CNC, via its subsidiaries, holds approximately 30% of the issued share capital in China Unicom. China Unicom is primarily engaged in the provision of wireless, fixed-line, broadband, data and related value-added services in the PRC.

Effect of Unicom-CNC Merger

China United Telecommunications Corporation (中國聯合通信有限公司) and CNC have agreed to undertake a merger (“ Unicom-CNC Merger ”) which, subject to obtaining all necessary PRC approvals, is expected to become effective in early January 2009 and the successor entity (“ Merger Successor ”) will thereafter (in accordance with the Consortium Agreement) assume all rights and obligations of CNC, including but not limited to CNC’s rights and obligations under the Consortium Agreement and the Proposal and all references to CNC contained in this document and all other documents relating to the Proposal shall be deemed to be references to the Merger Successor.

INTENTION OF PCRD AND CNC WITH REGARD TO PCCW

It is the intention of both PCRD and CNC for the PCCW Group to maintain its existing business upon the successful privatisation of PCCW. Save for the special dividend proposed to be declared after the Effective Date as described in the section headed “Consortium Agreement” above, PCRD and CNC have no plan to introduce any material changes to the business and/or assets of the PCCW Group, to redeploy its fixed assets or to discontinue the employment of the employees of the PCCW Group as a result of the Proposal. On the other hand, PCRD and CNC will assess any opportunity that may arise from time to time involving the business and/or assets of the PCCW Group (including a possible listing of any of its telecommunications services, media and IT solutions businesses).

The Board notes that PCRD and CNC have stated their intention to maintain the existing business of the PCCW Group upon the successful privatisation of PCCW and that, save for the special dividend proposed to be declared after the Effective Date as described in the section headed “Consortium Agreement” above, they have no plan to introduce any material changes to the business and/or assets of the PCCW Group, to redeploy its fixed assets or to discontinue the employment of the employees of the PCCW Group as a result of the Proposal. The Board welcomes the stated intentions of PCRD and CNC in that regard in respect of the PCCW Group and its employees.

— 62 —

EXPLANATORY STATEMENT

REASONS FOR AND BENEFITS OF THE PROPOSAL

For the Scheme Shareholders

Over the one month period prior to the Last Trading Date, the price of the Shares fell by approximately 42.3% and the market, as represented by the Hang Seng Index, fell by approximately 15.7%. During the period from the peak of the Hang Seng Index at 31,638 on 30 October, 2007 to the Last Trading Date, the Hang Seng Index fell by approximately 48.4% and the price of the Shares fell by approximately 45.2%.

The Proposal provides Scheme Shareholders with an opportunity to realise their investment in PCCW for cash during sustained uncertain market conditions, and at a significant premium to the market price prevailing on the Last Trading Date.

The Joint Offerors are committed to the Proposal which, if it becomes effective, offers cash in an uncertain market and provides an opportunity for Scheme Shareholders to redeploy capital invested in PCCW into other investment opportunities that they may consider more attractive in the current market environment.

During the two year period immediately before the Last Trading Date, the Hang Seng Index’s peak represented an increase of more than 75.9% from the beginning of the period, whilst the Shares reached a high of only HK$5.23 on 17 November, 2006 representing an increase of only 10.8% from the beginning of the period. The average daily trading volume of Shares during that period was approximately 18.5 million Shares per day, representing only some 0.52% of the issued Shares excluding those held by the Joint Offerors and the Excluded Group. PCCW was removed from the Hang Seng Index on 10 June, 2008.

Trading performance of Shares relative to the Hang Seng Index over the two year period immediately before the Last Trading Date

==> picture [388 x 174] intentionally omitted <==

----- Start of picture text -----

Share price rebased to 100
190
170
150
130
110
90
70
50
Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
PCCW Hang Seng Index
----- End of picture text -----

Source: Factset

— 63 —

EXPLANATORY STATEMENT

The Joint Offerors consider that if the Scheme does not proceed, there is a possibility that the Shares will trade at lower prices than they have since the Proposal was announced, also bearing in mind the sustained uncertain market conditions. The last closing price of the Shares before the Proposal was announced was HK$2.75.

PCCW announced on 29 May, 2008 the commencement of a process for:

(a) the reorganisation of its telecommunications services, media and IT solutions businesses under a newly incorporated holding company, HKTGH (the “ HKTGH Restructuring ”); and
(b) the invitation of proposals from investors for the acquisition of up to a 45% equity interest in HKTGH from PCCW (the “ HKTGH Sale ”).

On 18 September, 2008, PCCW announced that HKT was in the final stage of arranging a HK$23.8 billion loan as part of the reorganisation and re-leveraging of HKTGH and the HKTGH Sale. This loan, being the HKT Loan Facilities, was signed on 29 September, 2008.

In relation to the HKTGH Sale process, PCCW announced on 12 October, 2008 that it had received substantial interest in HKTGH and formal proposals from several bidders; however, the recent market downturn had significantly impacted the offers received and the Board, having carefully considered those proposals, had unanimously decided to discontinue the auction process.

A total of four formal proposals valuing 45% of the equity of HKTGH in a range of approximately US$400 million (equivalent to approximately HK$3,120 million) to US$765 million (equivalent to approximately HK$5,967 million) were received. The Cancellation Price reflects an improvement on the implied value proposed by these bidders.

Some of the proposals were incomplete and, therefore, incapable of immediate acceptance. Of the proposals which were sufficiently advanced and potentially capable of development into a complete and binding offer all were, however, subject to a number of conditions and other requirements which varied from bid to bid but ranged across the availability of debt financing, the terms of the acquisition documentation and governance arrangements.

Of the proposals received, the highest proposals which were potentially capable of being made binding indicated a willingness to pay a consideration in the range of approximately US$650 million (equivalent to approximately HK$5,070 million) to US$765 million (equivalent to approximately HK$5,967 million) for 45% of the equity of HKTGH. These proposals, therefore, implied that these bidders valued HKTGH (inclusive of debt of US$5,050 million (equivalent to approximately HK$39,390 million)) in the range of approximately US$6.5 billion (equivalent to approximately HK$50.7 billion) to US$6.75 billion (equivalent to approximately HK$52.65 billion). However, PCCW believed that a final binding offer could not be assured or achieved within a reasonable time period given:

(a) the high degrees of conditionality of the proposals received;

— 64 —

EXPLANATORY STATEMENT

(b) the adverse financing environment and equity market environment at the time; and
(c) concerns about a potential global economic slowdown and its effect on earnings.

After considering the proposals carefully and taking into account the views of PCCW’s financial adviser, UBS, and the independent financial adviser to the independent non-executive directors of PCCW, Rothschild, the Board unanimously concluded that the proposals were not sufficiently attractive and approved the discontinuation of the HKTGH Sale process.

For PCRD and its shareholders

Given the relatively low liquidity and persistently weak performance of the Shares, PCRD believes that access to the equity capital markets does not provide PCCW with an attractive fund raising avenue, and that the costs and management resources associated with the maintenance of PCCW’s listing status are not warranted.

The directors of PCRD also note that, since the disposal of its interests in Pacific Century Insurance Holdings Limited in May 2007, PCRD’s interest in PCCW has represented the great majority of its assets. However, during this period, PCRD’s shares have consistently underperformed those of PCCW reflecting, in the view of PCRD’s directors, a holding company discount, the reduction of which PCRD’s directors consider will be facilitated through PCRD re-assuming its position as the controlling shareholder of PCCW and through the enhanced visibility on its investment that would come through consolidating PCCW’s results with those of PCRD.

SHARE CERTIFICATES, DEALINGS AND LISTING

Upon the Scheme becoming effective, all Scheme Shares will be cancelled. Share certificates for the Shares held by the Scheme Shareholders will thereafter cease to have effect as documents of, or evidence of, title as from the Effective Date. PCCW will apply to the Stock Exchange for the withdrawal of the listing of the Shares on the Stock Exchange. The Scheme Shareholders will be notified by way of an announcement of the exact date on which the Scheme and the withdrawal of the listing of the Shares on the Stock Exchange will become effective. The Scheme will lapse if it does not become effective on or before 23 April, 2009 (or such later date as the Joint Offerors and PCCW may agree and the High Court may allow).

The listing of the Shares on the Stock Exchange will not be withdrawn if the Proposal is not approved or lapses.

— 65 —

EXPLANATORY STATEMENT

REGISTRATION AND PAYMENT

Upon the Scheme becoming effective, payment of the consideration for the Scheme Shares will be made to the Scheme Shareholders whose names appear on the Register on the Record Date. On the basis that the Scheme becomes effective on or about 14 January, 2009, cheques for payment of the consideration payable under the Scheme are expected to be despatched on or about 23 January, 2009. In the absence of any specific instructions to the contrary received in writing by Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, cheques will be sent to the persons entitled thereto at their respective registered addresses or, in the case of joint holders, to the registered address of that joint holder whose name stands first in the Register in respect of the joint holding. All such cheques will be sent at the risk of the person(s) entitled thereto and none of PCCW, the Joint Offerors or their respective financial advisers will be responsible for any loss or delay in despatch.

On or after the day being six calendar months after the posting of such cheques, the Joint Offerors shall have the right to cancel or countermand payment of any such cheque which has not been cashed or has been returned uncashed, and shall place all monies represented thereby in a deposit account in PCCW’s name with a licensed bank in Hong Kong selected by PCCW.

PCCW shall hold such monies until the expiry of six years from the Effective Date and shall, prior to such date, make payments thereout of the sums, together with any interest accrued thereon, to persons who satisfy PCCW that they are respectively entitled thereto and that the cheques of which they are payees have not been cashed. On the expiry of six years from the Effective Date, the Joint Offerors shall be released from any further obligation to make any payments under the Scheme and PCCW shall thereafter transfer to the Joint Offerors the balance (if any) of the sums then standing to the credit of the deposit account in its name, including any accrued interest subject, if applicable, to the deduction of any interest or withholding or other tax or any other deduction required by law and subject to the deduction of any expenses. Any such payment to Starvest and Netcom BVI will be made in the ratio of 74.27:25.73 respectively.

The latest time for lodging transfers of Shares to qualify for entitlements under the Scheme is 4:30 p.m. on 8 January, 2009. The Scheme Shareholders should ensure that their Shares are registered or lodged for registration in their names or in the name(s) of their nominees at or with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, before that time.

Settlement of the cash entitlements to which any Scheme Shareholder is entitled under the Scheme will be implemented in full in accordance with the terms of the Scheme without regard to any lien, right of set-off, counterclaim or other analogous right to which PCCW or the Joint Offerors may otherwise be, or claim to be, entitled against such Scheme Shareholder.

— 66 —

EXPLANATORY STATEMENT

INFORMATION FOR THE ADS HOLDERS

ADS Holders cannot vote at the Court Meeting or the EGM directly but may instruct the Depositary to vote the Shares underlying their ADSs in accordance with the terms of the Deposit Agreement. A Voting Instruction Card is enclosed for this purpose, and must be completed, signed and returned to the Depositary so that the Depositary receives it no later than 10:00 a.m. (New York time) on Friday, 19 December, 2008. If an ADS Holder does not return the Voting Instruction Card by this time, the Shares underlying his or her ADSs will not be voted at the Court Meeting or the EGM. Persons holding ADSs indirectly must rely on the procedures of the bank, broker or financial institution in which such ADSs are held.

If they wish to attend the Court Meeting and the EGM (whether in person or by proxy), ADS Holders must elect to become holders of Shares by surrendering their ADSs and withdrawing the Shares represented by their ADSs in accordance with the terms of the Deposit Agreement so that they become registered holders of the Shares prior to 4:30 p.m. (Hong Kong time) on Monday, 22 December, 2008. Such ADS Holders must pay a cancellation fee of up to US$0.05 (equivalent to approximately HK$0.39) per ADS and may incur taxes and governmental charges payable in connection with such surrender and withdrawal. In order to surrender their ADSs and withdraw the underlying Shares, ADS Holders should contact their brokers or custodians to make the necessary arrangements or otherwise they may contact the Depositary at +1 877-248-4237.

Upon the Scheme becoming effective, ADSs will represent the right to receive the cash consideration paid for the Shares and thereafter, the Depositary (as the registered holder of the Shares underlying the ADSs) will receive an amount in Hong Kong dollars equal to the amount payable in respect of all Shares held by the Depositary. Upon receipt, the Depositary will convert such funds into US$ at the then prevailing market rate of exchange. Upon surrender of their ADSs in accordance with the terms of the Deposit Agreement, ADS Holders will receive their pro-rata portion of the consideration from the Depositary, less a cancellation fee of up to US$0.05 (equivalent to approximately HK$0.39) per ADS and any other expenses of the Depositary in connection with the currency conversion. ADS Holders may also incur related taxes and governmental charges. It is expected that, if the Scheme becomes effective, the Depositary, at the direction of PCCW, will terminate the Deposit Agreement by sending notice of such termination to the registered holders of ADSs then outstanding at least 30 days prior to the date fixed in such notice for termination.

COURT MEETING AND EGM

In accordance with the direction of the High Court, the Court Meeting will be convened for the purpose of considering and, if thought fit, passing an appropriate resolution to approve the Scheme (with or without modifications). Insofar as the sanction of the Scheme by the High Court is concerned, such a resolution will be passed if a majority in number representing three-fourths in value of the Shares held by the Scheme Shareholders present and voting either in person or by proxy at the Court Meeting vote in favour of the Scheme. However, the Scheme will only be considered to have been approved under the Takeovers Code: if (i) the Scheme is approved by at least 75% of the votes attaching to the Shares of the Independent Shareholders that are cast either in person or by proxy at

— 67 —

EXPLANATORY STATEMENT

the Court Meeting; and (ii) the number of votes cast against the resolution at the Court Meeting is not more than 10% of all the Shares held by all of the Independent Shareholders. Based on 3,474,201,725 Shares held by the Independent Shareholders as at the Latest Practicable Date, 10% of such Shares amounts to approximately 347,420,173 Shares.

In addition to the resolution required to sanction the Scheme at the Court Meeting, the Scheme also involves a reduction of issued share capital as one of its terms. Under the Companies Ordinance and the articles of association of PCCW, the reduction of issued share capital is required to be approved by a special resolution of Shareholders. Such special resolution will be proposed at the EGM, which will be convened to be held immediately following the Court Meeting for the purpose of considering and, if thought fit, passing the special resolution to approve the reduction of issued share capital and the cancellation of the Scheme Shares and to approve and give effect to the Scheme. The special resolution will be passed provided that it is approved by a majority of not less than three-fourths of the votes cast by the Shareholders present and voting, in person or by proxy, at the EGM. All Shareholders will be entitled to attend and vote at the EGM.

As at the Latest Practicable Date, the Scheme Shareholders were interested in 3,540,779,586 Shares (representing approximately 52.28% of the issued share capital of PCCW as at the Latest Practicable Date), and the Joint Offerors and the Excluded Group were interested in 3,231,515,068 Shares (representing approximately 47.72% of the issued share capital of PCCW as at the Latest Practicable Date). The Shares owned by the Joint Offerors and the Excluded Group will not form part of the Scheme Shares and, as such, will not be voted at the Court Meeting. Further, only Independent Shareholders may vote at the Court Meeting. In view of the interests of the Joint Offerors in the Proposal, any holders of Scheme Shares who are acting in concert with the Joint Offerors are not entitled to and will not vote at the Court Meeting. Accordingly, any Scheme Shares held by the Starvest Concert Parties, the Excluded Group, the Joint Offerors and any other persons acting in concert with any of the Joint Offerors will not be voted at the Court Meeting.

Shareholders are urged to have their names entered in the Register as soon as possible for, among others, the following reasons:

(a) to enable Shareholders (being Scheme Shareholders) to attend the Court Meeting, required under Section 166 of the Companies Ordinance, in the capacity as members of PCCW or to be represented by proxies to be appointed by them;
(b) to enable PCCW to properly classify members of PCCW for the purposes of Section 166 of the Companies Ordinance; and
(c) to enable PCCW and the Joint Offerors to make arrangements to effect payments by way of the delivery of cheques to the most appropriate person when the Scheme becomes effective. All deliveries of cheques required for making payment in respect of the Scheme Shares as aforesaid shall be effected by posting the same in pre-paid envelopes addressed to the persons respectively entitled thereto at their respective addresses as appearing in the Register at the close of business on the Record Date.

— 68 —

EXPLANATORY STATEMENT

No person shall be recognised by PCCW as holding any Shares upon any trust. Any beneficial owner of Shares (the “ Beneficial Owner ”) whose Shares are registered in the name of a nominee, trustee, depository or any other authorised custodian or third party (the “ Registered Owner ”) should contact such Registered Owner to give instructions to and/or to make arrangements with such Registered Owner as to the manner in which the Shares beneficially owned by the Beneficial Owner should be voted at the Court Meeting and/or the EGM. A Beneficial Owner who wishes to attend the Court Meeting and/or the EGM personally should contact the Registered Owner directly to make the appropriate arrangements with the Registered Owner to enable the Beneficial Owner to attend and vote at the Court Meeting and/or the EGM and for such purpose the Registered Owner may appoint the Beneficial Owner as its proxy. The appointment of a proxy by the Registered Owner at the Court Meeting and/or the EGM shall be in accordance with all relevant provisions in the articles of association of PCCW. In the case of the appointment of a proxy by the Registered Owner, the relevant forms of proxy shall be completed and signed by the Registered Owner and shall be lodged in the manner and before the latest time for lodging the relevant forms of proxy as more particularly set out in this document.

Any Beneficial Owner whose Shares are deposited in Central Clearing and Settlement System (“ CCASS ”) and registered under the name of HKSCC Nominees Limited must, unless such Beneficial Owner is a person admitted to participate in CCASS as an investor participant (the “ Investor Participant ”), contact their broker, custodian, nominee or other relevant person who is, or has in turn deposited such Shares with, a CCASS participant (the “ Other CCASS Participant ”) regarding voting instructions to be given to such persons if they wish to vote in respect of the Scheme. The procedure for voting in respect of the Scheme by Investor Participants and the Other CCASS Participants with respect to Shares registered under the name of HKSCC Nominees Limited shall be in accordance with the “General Rules of CCASS” and the “CCASS Operational Procedures”.

Notice of the EGM is set out on pages 259 to 261 of this document. The EGM will be held on Tuesday, 30 December, 2008 in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong at 10:30 a.m. or immediately after the conclusion or adjournment of the Court Meeting, whichever is the later.

YUE SHUN IRREVOCABLE UNDERTAKING

Yue Shun is a Scheme Shareholder and has given the Irrevocable Undertaking to Starvest and PCCW that it will not vote at the Court Meeting. The Irrevocable Undertaking was given in respect of Yue Shun’s 36,726,857 Shares (representing approximately 0.54% of the issued share capital of PCCW as at the Latest Practicable Date). Yue Shun has also undertaken to vote in favour of any resolutions to be proposed at the EGM (or at any adjourned meeting) to reduce the share capital in PCCW. The Irrevocable Undertaking provides that, without the prior written consent of Starvest, Yue Shun will not acquire or dispose of any Shares. The Irrevocable Undertaking will remain valid until the Scheme lapses or becomes effective.

— 69 —

EXPLANATORY STATEMENT

DEMAND FOR POLL AT THE EGM

In accordance with Article 73 of PCCW’s articles of association, a resolution put to the vote of a general meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands) demanded by:

(a) the Chairman; or
(b) at least three (3) members present in person or by proxy for the time being entitled to vote at the meeting; or
(c) any member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or
(d) any member or members present in person or by proxy and holding Shares in PCCW conferring a right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the Shares conferring that right.

In accordance with Article 74 of PCCW’s articles of association, if a poll is demanded as aforesaid, it shall be taken in such manner (including the use of ballot or voting papers or tickets) and at such time and place, not being more than thirty days from the date of the meeting or adjourned meeting at which the poll was demanded, as the Chairman directs.

As noted above, the special resolution to be proposed at the EGM will, in any event, be taken on a poll. The resolution to be proposed at the Court Meeting will also be taken on a poll.

OPTION OFFER

The Joint Offerors are making the Option Offer to all Optionholders. The Option Offer is made conditional upon the Scheme becoming effective. The Joint Offerors are making the Option Offer to cancel each existing Option in exchange for cash, being an amount equal to HK$0.01 for each 10,000 underlying Option Shares. Normally, the amount of cash offered to cancel an Option is calculated by deducting the exercise price per Option Share payable on exercise of an Option from the Cancellation Price per Scheme Share payable under the Scheme (i.e. the “see-through” price). However, as the exercise prices for all outstanding Options are above the Cancellation Price, the Option Payment offered by the Joint Offerors for the cancellation of the Options is a nominal amount.

After the Scheme becomes effective, the Joint Offerors will pay the Option Payment to Optionholders who have not exercised their Options and have accepted the Option Offer in respect of their Options by returning a duly completed and executed Option Offer Form in accordance with the instructions contained in the section headed “Action to be taken” on pages 74 to 75 of this document

— 70 —

EXPLANATORY STATEMENT

and in the Option Offer Form. If Optionholders do not lodge their duly completed and executed Option Offer Forms on or before 4:00 p.m. on Thursday, 29 January, 2009 or such later date and time as may be notified to the Optionholders by the Joint Offerors, they will not receive the Option Payment.

As at the Latest Practicable Date, there were 138,342,090 Options outstanding.

On the basis that the Scheme becomes effective on or about Wednesday, 14 January, 2009, cheques for payment of the Option Payments under the Option Offer are expected to be despatched on or before Friday, 6 February, 2009.

Settlement of the Option Payment to which any Optionholder accepting the Option Offer is entitled will be implemented in full in accordance with the terms of the Option Offer without regard to any lien, right of set off, counterclaim or other analogous right to which PCCW or the Joint Offerors may otherwise be, or claim to be, entitled against such Optionholder.

PROVISIONS WHICH APPLY UNDER THE SHARE OPTION SCHEMES TO OPTIONS WHICH ARE NOT TENDERED FOR CANCELLATION UNDER THE OPTION OFFER

If the Scheme becomes effective, the following provisions will apply to any Options which are not tendered for cancellation under the Option Offer.

1994 Share Option Scheme

In relation to Options granted under the 1994 Share Option Scheme, the following provisions will apply in respect of any outstanding Options which are not tendered for cancellation under the Option Offer.

Pursuant to paragraph 7(C)(iii) of the 1994 Share Option Scheme, if a general offer is made to all shareholders of PCCW (or all shareholders other than the offeror and/or any person acting in concert with the offeror) and such offer becomes or is declared unconditional during the option period of an Option granted under the 1994 Share Option Scheme, the grantee of an Option (or his/her personal representatives) shall be entitled to exercise the Option in full (to the extent not already exercised) at any time within one month after the date on which the offer becomes or is declared unconditional.

Accordingly, if the Scheme becomes effective, holders of Options granted under the 1994 Share Option Scheme will be entitled to exercise their Options in full (to the extent not already exercised) at any time within one month after the Effective Date.

However, under paragraph 15 of the 1994 Share Option Scheme, the Board is entitled in its discretion at any time and from time to time to cancel any Option granted under the 1994 Share Option Scheme, either in whole or in part, after notice of exercise thereof has been given by the Optionholder, but before PCCW has issued and allotted any Option Shares pursuant to the exercise of that Option, by giving notice in writing to the Optionholder stating that such Option is thereby cancelled. If any Option is cancelled under paragraph 15 of the 1994 Share Option Scheme, the Optionholder is entitled

— 71 —

EXPLANATORY STATEMENT

to receive from PCCW a refund of the aggregate exercise price paid on exercise of the Option together with an additional payment in cash to compensate the Optionholder for such cancellation. Paragraph 15 provides that the additional payment in cash is calculated by multiplying the number of Option Shares that would have been issued on exercise of the Option had it not been cancelled by the average closing price of the Shares on the Stock Exchange for the five days on which the Stock Exchange is open for business last preceding the date on which PCCW receives notice of exercise of the Option and then deducting the exercise price of the Option. Paragraph 15 of the 1994 Share Option Scheme also provides that if the calculation results in a negative figure, the compensation payable by PCCW to the Optionholder for the cancellation of the relevant Option shall be deemed to be zero.

In this case, if any Options granted under the 1994 Share Option Scheme which have not been tendered for cancellation under the Option Offer are exercised at any time later than four Business Days prior to the Record Date, PCCW will exercise its rights under paragraph 15 of the 1994 Share Option Scheme to cancel any such Option in its entirety, after notice of exercise of such Option has been given by the Optionholder but before PCCW has issued and allotted any Option Shares pursuant to that exercise, by giving notice in writing to the Optionholder stating that the Option is thereby cancelled and paying the cancellation payment calculated in accordance with the 1994 Share Option Scheme, which is expected to be zero.

At the end of such period of one month after the Effective Date, all outstanding Options granted under the 1994 Share Option Scheme which remain outstanding will lapse automatically, to the extent not already exercised, pursuant to the provisions of paragraph 8 of the 1994 Share Option Scheme.

2004 Share Option Scheme

In relation to Options granted under the 2004 Share Option Scheme, the following provisions will apply to any such Options which are not tendered for cancellation under the Option Offer.

Paragraph 7(B)(iv) of the 2004 Share Option Scheme provides that if a general offer by way of scheme of arrangement is made to all shareholders of PCCW and is approved at the requisite meetings in the manner prescribed by the Companies Ordinance and the Takeovers Code, PCCW shall forthwith give notice thereof to the holders of Options granted under the 2004 Share Option Scheme and those Optionholders may at any time thereafter (but before such time as shall be specified by PCCW) exercise their Options in full or to the extent specified by PCCW.

Paragraph 7 of the 2004 Share Option Scheme provides that PCCW may, in its discretion, notwithstanding the terms of the Options granted under the 2004 Share Option Scheme, at the same time as it gives the notice provided for under paragraph 7(B)(iv) also give notification to an Optionholder that his or her Option may be exercised at any time within such period as shall be specified by PCCW and/or to the extent (not being less than the extent to which it could then exercised in accordance with its terms) specified by PCCW.

Paragraph 8 of the 2004 Share Option Scheme then provides that Options granted under the 2004 Share Option Scheme shall lapse automatically (to the extent not already exercised) on the expiry of any of the periods referred to in paragraph 7(B) of the 2004 Share Option Scheme.

— 72 —

EXPLANATORY STATEMENT

Accordingly, if the Scheme is approved by the requisite majority of Independent Shareholders at the Court Meeting, PCCW will send a notice to all holders of Options granted under the 2004 Share Option Scheme, pursuant to the provisions of paragraph 7(B) of the 2004 Share Option Scheme. That notice will permit the relevant Optionholders to exercise their outstanding Options granted under the 2004 Share Option Scheme, in full, by sending an exercise notice to PCCW accompanied by a remittance for the full amount of the exercise price, to be received by PCCW no later than four Business Days prior to the Record Date. PCCW’s notice to holders of Options granted under the 2004 Share Option Scheme will further provide, as permitted by paragraph 7 of the 2004 Share Option Scheme, that to the extent that Options granted under the 2004 Share Option Scheme are not exercised within the period ending four Business Days prior to the Record Date, all unexercised Options granted under the 2004 Share Option Scheme will lapse and cease to be exercisable with effect from the expiry of that period, subject to the Scheme becoming effective.

Optionholders who wish to exercise their Options and participate in the Scheme

As a result of the provisions described above, Optionholders who wish to exercise their Options and participate in the Scheme shall exercise their Options no later than four Business Days prior to the Record Date. If any Options are exercised after the Latest Practicable Date but not later than four Business Days prior to the Record Date, and Option Shares are issued pursuant to such exercise prior to the Record Date, such Option Shares shall constitute Scheme Shares and shall be eligible to participate in the Scheme.

If the Scheme does not become effective

If the Scheme is not sanctioned by the High Court or does not become effective for any other reason, all unexercised Options granted under both Share Option Schemes will remain unaffected and will be exercisable during the relevant exercise periods in accordance with the terms of the relevant Share Option Scheme and the terms of grant of the relevant Options.

US AND OTHER OVERSEAS SHAREHOLDERS AND OPTIONHOLDERS OF PCCW

This document has been prepared for the purpose of complying with the laws of Hong Kong, and the information disclosed herein may not be the same as that which would have been disclosed if this document had been prepared in accordance with the laws of any other jurisdiction.

This document does not constitute an offer or invitation to sell, purchase, subscribe for or issue any securities or the solicitation of an offer to buy or subscribe for securities pursuant to the document or otherwise in any jurisdiction in which such offer, invitation or solicitation is unlawful.

The distribution of this document, and the making of the Proposal, to persons not resident in Hong Kong may be subject to the laws and regulations of the relevant jurisdictions. Such persons should inform themselves about and observe any applicable legal, tax and regulatory requirements. It is the responsibility of any overseas Scheme Shareholders and Optionholders wishing to accept the

— 73 —

EXPLANATORY STATEMENT

Proposal to satisfy themselves as to the full observance of the laws and regulations of the relevant jurisdiction in connection therewith, including the obtaining of any governmental, exchange control or other consents which may be required, and the compliance with other necessary formalities and the payment of any issue, transfer or other taxes due in such jurisdiction.

TAXATION

As the Scheme does not involve the sale and purchase of Hong Kong stock, no stamp duty will be payable pursuant to the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong) on the cancellation of the Scheme Shares upon the Scheme becoming effective.

Scheme Shareholders and Optionholders are recommended to consult their own professional advisers if they are in any doubt as to the taxation implications of accepting the Proposal, and, in particular, whether the receipt of the Cancellation Price or the Option Payment would make such Scheme Shareholders or Optionholders liable to tax in Hong Kong or in other jurisdictions.

TAKEOVERS CODE “CHAIN PRINCIPLE”

As at the Latest Practicable Date, PCCW held approximately 61.53% of the issued share capital of PCPD. Such holding by PCCW in PCPD is not significant in terms of both companies’ respective assets and profits in accordance with Note 8 to Rule 26.1 of the Takeovers Code. The Executive has been consulted and the Proposal will not give rise to any general offer obligation in respect of the shares of PCPD under the “chain principle” referred to in Note 8 to Rule 26.1 of the Takeovers Code.

ACTION TO BE TAKEN

Shareholders

A pink form of proxy for use at the Court Meeting and a white form of proxy for use at the EGM are enclosed with this document.

Whether or not you are able to attend the Court Meeting and/or the EGM, you are strongly urged to complete and sign the enclosed pink form of proxy in respect of the Court Meeting, and the enclosed white form of proxy in respect of the EGM, in accordance with the instructions printed thereon, and to lodge them with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong. In order to be valid, the pink form of proxy for use at the Court Meeting should be lodged not later than 10:00 a.m. on Sunday, 28 December, 2008 and the white form of proxy for use at the EGM should be lodged not later than 10:30 a.m. on Sunday, 28 December, 2008 for the purpose of the EGM to be convened on Tuesday, 30 December, 2008. In the case of the pink form of proxy in respect of the Court Meeting, it may also be returned by facsimile at number (852) 2962 5926 (marked for the attention of “the Company Secretary”) up to the time of the Court Meeting or it may be handed to the chairman of the Court Meeting at the Court Meeting if it is not so lodged. The completion and return of a form of proxy for the Court Meeting or the EGM will not preclude you from attending and voting in person at the relevant meeting. In such event, the returned form of proxy will be deemed to have been revoked.

— 74 —

EXPLANATORY STATEMENT

An announcement will be made by PCCW in relation to the results of the Court Meeting and the EGM. In addition, an announcement will be made on the results of the hearing of the petition to sanction the Scheme by the High Court and, if the Scheme is sanctioned, the last date of dealings in the Shares on the Stock Exchange, the Record Date, the Effective Date and the date of the withdrawal of the listing of the Shares on the Stock Exchange.

If you do not appoint a proxy and you do not attend and vote at the Court Meeting, you will still be bound by the outcome of such Court Meeting. You are therefore strongly urged to attend and vote at the Court Meeting in person or by proxy.

For the purpose of determining the entitlements of Shareholders to attend and vote at the Court Meeting and the EGM, the Register will be closed from Tuesday, 23 December, 2008 to Tuesday, 30 December, 2008 (both days inclusive) and during such period, no transfer of Shares will be effected. In order to qualify to vote at the Court Meeting and the EGM, all transfers accompanied by the relevant Share certificates must be lodged with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, not later than 4:30 p.m. on Monday, 22 December, 2008.

Optionholders

An Option Offer Form is enclosed with this document. Any Optionholders who wish to accept the Option Offer must complete and return the duly completed and executed Option Offer Form together with the relevant certificate(s) or other document evidencing the grant of the Options to him or her, and any documents of title or entitlement (and/or any satisfactory indemnity or indemnities required in respect thereof), for the aggregate number of outstanding Options in respect of which the Optionholder wishes to accept the Option Offer by 4:00 p.m. on Thursday, 29 January, 2009 or such later date and time as may be notified to the Optionholders by the Joint Offerors. The completed and executed Option Offer Form and accompanying documents must be delivered to PCCW at its registered office at 39th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong, marked “Joint Offerors’ Option Offer” for the attention of the Company Secretary, so as to reach PCCW no later than 4:00 p.m. on Thursday, 29 January, 2009 or such later date and time as may be notified to the Optionholders by the Joint Offerors. No acknowledgement of receipt of any Option Offer Form or other document evidencing the grant of the Options or other documents of title or entitlement (and/or any satisfactory indemnity or indemnities required in respect thereof) will be given. The consideration payable for the Option Offer is the Option Payment. If any Optionholder who does not lodge the duly completed and executed Option Offer Form at or before 4:00 p.m. on Thursday, 29 January, 2009 or such later date and time as may be notified to the Optionholders by the Joint Offerors, they will not receive the Option Payment. The Option Offer is made conditional upon the Scheme becoming effective. The Optionholders should also note the instructions printed on the Option Offer Form.

Optionholders should be aware that, as described in the section above headed “Provisions which apply under the Share Option Schemes to Options which are not tendered for cancellation under the Option Offer”, after the Scheme becomes effective, the Options will no longer be convertible into Shares and will lapse.

— 75 —

EXPLANATORY STATEMENT

COSTS OF THE SCHEME

In the event that the Scheme becomes effective, the costs of the Scheme will be borne by PCCW. The costs of the Scheme and of its implementation are expected to amount to approximately HK$25 million. These primarily consist of fees for financial advisers, legal advisers, accounting, printing and other related charges.

In the event that the Scheme is either not recommended by the Independent Board Committee or is not recommended as fair and reasonable by Rothschild to the Independent Board Committee and is not approved at the relevant Shareholders’ meetings, all the expenses incurred by PCCW in connection with the Scheme shall be borne by the Joint Offerors.

RECOMMENDATIONS

Your attention is drawn to the following:

(i) the paragraph headed “Recommendations of the Independent Board Committee” in the “Letter from the Board” on page 10 of this document;
(ii) the letter from the Independent Board Committee on pages 12 to 13 of this document; and
(iii) the letter from Rothschild to the Independent Board Committee on pages 14 to 42 of this document.

ADDITIONAL INFORMATION

Additional information is set out in the Appendices to, and elsewhere in, this document, all of which form part of this Explanatory Statement.

It is emphasised that none of PCRD, CNC, Starvest, Netcom BVI, HSBC, RBS, PCCW, UBS, Rothschild or any of their respective directors, officers or associates or any other person involved in the Proposal accepts responsibility for any taxation effects on, or liabilities of, any persons as a result of their acceptance or rejection of the Proposal.

— 76 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

I. THREE-YEAR FINANCIAL SUMMARY

Set out below is the financial information of the PCCW Group for each of the three years ended 31 December, 2005, 2006 and 2007 and the six months ended 30 June, 2008, which are extracted from the audited consolidated financial statements of the PCCW Group for the years then ended and the unaudited condensed consolidated interim financial information of the PCCW Group for the six months ended 30 June, 2008. The auditor’s reports in respect of the PCCW Group’s audited consolidated financial statements for each of the three years ended 31 December, 2005, 2006 and 2007 did not contain any qualifications.

Six months ended 30 June, 2008 HK$ million (Unaudited) 11,372	Six months ended 30 June, 2008 HK$ million (Unaudited) 11,372	Six months ended 30 June, 2008 HK$ million (Unaudited) 11,372
688	1,837	1,632
656 32	1,503 334	1,252 380
688	1,837	1,632
474 N/A	440 915	438 811
474	1,355	1,249
7 HK cents	20 HK cents	18.5 HK cents
9.68 HK cents	22.21 HK cents	18.59 HK cents
9.67 HK cents	22.18 HK cents	18.54 HK cents

Note: There are no extraordinary or exceptional items.

— 77 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

II. AUDITED FINANCIAL INFORMATION

Set out below is the full text of the audited consolidated financial statements of the PCCW Group for the year ended 31 December, 2007 extracted from the annual report of PCCW for the year ended 31 December, 2007.

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December, 2007

In HK$ million (except for earnings per share) Note(s) Turnover 5 & 6 Cost of sales General and administrative expenses Other (losses)/gains, net 7 Losses on property, plant and equipment 8 Interest income Finance costs 10 Share of results of associates Share of results of jointly controlled companies Profit before taxation 9 Income tax 12(a) Profit for the year 6(a) Attributable to: Equity holders of the Company Minority interests Profit for the year Dividends payable to equity holders of the Company attributable to the year: 14(a) Interim dividend declared and paid during the year Final dividend proposed after the balance sheet date Earnings per share 15 Basic Diluted	2007 23,715 (10,538) (9,144) (3) (7) 429 (1,658) 25 (12) 2,807 (970) 1,837 1,503 334 1,837 440 915 1,355 22.21 cents 22.18 cents	2006 (Note 45) 25,637 (12,973) (8,904) 42 (11) 732 (2,008) 37 — 2,552 (920) 1,632 1,252 380 1,632 438 811 1,249 18.59 cents 18.54 cents

— 78 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December, 2007

In HK$ million 2007 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2007 430 2,469 Translation exchange differences 33 240 120 Available-for-sale financial assets: - changes in fair value 33 25 — - transfer to income statement on disposal 33 (95) — - transfer to income statement on impairment 33 7 — Cash flow hedges: - effective portion of changes in fair value 33 631 — - transfer from equity to income statement 33 (69) — Net income recognized directly in equity 739 120 Profit for the year 1,503 334 Total recognized income and expense for the year 2,242 454 Exercise of employee share options 125 — Employee share-based compensation 33 8 — Movements in equity arising from capital transactions 133 — Dividend paid in respect of the previous year 14(b)&33 (813) — Dividend declared and paid in respect of the current year 14(a)&33 (440) — Dividends paid to minority shareholders of a subsidiary — (65) Increase in minority interests arising from decrease in holding in a subsidiary — 13 Decrease in minority interests arising from the disposal of subsidiaries — (72) (1,253) (124) At 31 December, 2007 1,552 2,799	In HK$ million 2007 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2007 430 2,469 Translation exchange differences 33 240 120 Available-for-sale financial assets: - changes in fair value 33 25 — - transfer to income statement on disposal 33 (95) — - transfer to income statement on impairment 33 7 — Cash flow hedges: - effective portion of changes in fair value 33 631 — - transfer from equity to income statement 33 (69) — Net income recognized directly in equity 739 120 Profit for the year 1,503 334 Total recognized income and expense for the year 2,242 454 Exercise of employee share options 125 — Employee share-based compensation 33 8 — Movements in equity arising from capital transactions 133 — Dividend paid in respect of the previous year 14(b)&33 (813) — Dividend declared and paid in respect of the current year 14(a)&33 (440) — Dividends paid to minority shareholders of a subsidiary — (65) Increase in minority interests arising from decrease in holding in a subsidiary — 13 Decrease in minority interests arising from the disposal of subsidiaries — (72) (1,253) (124) At 31 December, 2007 1,552 2,799	In HK$ million 2007 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2007 430 2,469 Translation exchange differences 33 240 120 Available-for-sale financial assets: - changes in fair value 33 25 — - transfer to income statement on disposal 33 (95) — - transfer to income statement on impairment 33 7 — Cash flow hedges: - effective portion of changes in fair value 33 631 — - transfer from equity to income statement 33 (69) — Net income recognized directly in equity 739 120 Profit for the year 1,503 334 Total recognized income and expense for the year 2,242 454 Exercise of employee share options 125 — Employee share-based compensation 33 8 — Movements in equity arising from capital transactions 133 — Dividend paid in respect of the previous year 14(b)&33 (813) — Dividend declared and paid in respect of the current year 14(a)&33 (440) — Dividends paid to minority shareholders of a subsidiary — (65) Increase in minority interests arising from decrease in holding in a subsidiary — 13 Decrease in minority interests arising from the disposal of subsidiaries — (72) (1,253) (124) At 31 December, 2007 1,552 2,799	In HK$ million 2007 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2007 430 2,469 Translation exchange differences 33 240 120 Available-for-sale financial assets: - changes in fair value 33 25 — - transfer to income statement on disposal 33 (95) — - transfer to income statement on impairment 33 7 — Cash flow hedges: - effective portion of changes in fair value 33 631 — - transfer from equity to income statement 33 (69) — Net income recognized directly in equity 739 120 Profit for the year 1,503 334 Total recognized income and expense for the year 2,242 454 Exercise of employee share options 125 — Employee share-based compensation 33 8 — Movements in equity arising from capital transactions 133 — Dividend paid in respect of the previous year 14(b)&33 (813) — Dividend declared and paid in respect of the current year 14(a)&33 (440) — Dividends paid to minority shareholders of a subsidiary — (65) Increase in minority interests arising from decrease in holding in a subsidiary — 13 Decrease in minority interests arising from the disposal of subsidiaries — (72) (1,253) (124) At 31 December, 2007 1,552 2,799
		240 25 (95) 7 631 (69)	120 — — — — —
		739 1,503 2,242 125 8 133 (813) (440) — — — (1,253) 1,552	120 334 454 — — — — — (65) 13 (72) (124) 2,799

— 79 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million 2006 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2006 610 2,122 Translation exchange differences 33 142 48 Available-for-sale financial assets: - changes in fair value 33 78 — - transfer to income statement on disposal 33 (88) — Cash flow hedges: - effective portion of changes in fair value 33 (428) — - transfer from equity to income statement 33 (19) — Net (expense)/income recognized directly in equity (315) 48 Profit for the year 1,252 380 Total recognized income and expense for the year 937 428 Exercise of employee share options 119 — Employee share-based compensation 33 47 (2) Forfeiture of lapsed shares under share award schemes 33 (13) — Purchase of shares under share award schemes 33 (24) — Movements in equity arising from capital transactions 129 (2) Dividend paid in respect of the previous year 14(b)&33 (808) — Dividend declared and paid in respect of the current year 14(a)&33 (438) — Dividends paid to minority shareholders of a subsidiary — (64) Decrease in minority interests arising from increase in holding in a subsidiary — (15) (1,246) (79) At 31 December, 2006 430 2,469	In HK$ million 2006 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2006 610 2,122 Translation exchange differences 33 142 48 Available-for-sale financial assets: - changes in fair value 33 78 — - transfer to income statement on disposal 33 (88) — Cash flow hedges: - effective portion of changes in fair value 33 (428) — - transfer from equity to income statement 33 (19) — Net (expense)/income recognized directly in equity (315) 48 Profit for the year 1,252 380 Total recognized income and expense for the year 937 428 Exercise of employee share options 119 — Employee share-based compensation 33 47 (2) Forfeiture of lapsed shares under share award schemes 33 (13) — Purchase of shares under share award schemes 33 (24) — Movements in equity arising from capital transactions 129 (2) Dividend paid in respect of the previous year 14(b)&33 (808) — Dividend declared and paid in respect of the current year 14(a)&33 (438) — Dividends paid to minority shareholders of a subsidiary — (64) Decrease in minority interests arising from increase in holding in a subsidiary — (15) (1,246) (79) At 31 December, 2006 430 2,469	In HK$ million 2006 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2006 610 2,122 Translation exchange differences 33 142 48 Available-for-sale financial assets: - changes in fair value 33 78 — - transfer to income statement on disposal 33 (88) — Cash flow hedges: - effective portion of changes in fair value 33 (428) — - transfer from equity to income statement 33 (19) — Net (expense)/income recognized directly in equity (315) 48 Profit for the year 1,252 380 Total recognized income and expense for the year 937 428 Exercise of employee share options 119 — Employee share-based compensation 33 47 (2) Forfeiture of lapsed shares under share award schemes 33 (13) — Purchase of shares under share award schemes 33 (24) — Movements in equity arising from capital transactions 129 (2) Dividend paid in respect of the previous year 14(b)&33 (808) — Dividend declared and paid in respect of the current year 14(a)&33 (438) — Dividends paid to minority shareholders of a subsidiary — (64) Decrease in minority interests arising from increase in holding in a subsidiary — (15) (1,246) (79) At 31 December, 2006 430 2,469	In HK$ million 2006 Note(s) Attributable to equity holders of the Company Minority interests At 1 January, 2006 610 2,122 Translation exchange differences 33 142 48 Available-for-sale financial assets: - changes in fair value 33 78 — - transfer to income statement on disposal 33 (88) — Cash flow hedges: - effective portion of changes in fair value 33 (428) — - transfer from equity to income statement 33 (19) — Net (expense)/income recognized directly in equity (315) 48 Profit for the year 1,252 380 Total recognized income and expense for the year 937 428 Exercise of employee share options 119 — Employee share-based compensation 33 47 (2) Forfeiture of lapsed shares under share award schemes 33 (13) — Purchase of shares under share award schemes 33 (24) — Movements in equity arising from capital transactions 129 (2) Dividend paid in respect of the previous year 14(b)&33 (808) — Dividend declared and paid in respect of the current year 14(a)&33 (438) — Dividends paid to minority shareholders of a subsidiary — (64) Decrease in minority interests arising from increase in holding in a subsidiary — (15) (1,246) (79) At 31 December, 2006 430 2,469	Total equity 2,732 190 78 (88) (428) (19) (267) 1,632 1,365 119 45 (13) (24) 127 (808) (438) (64) (15) (1,325) 2,899
		142 78 (88) (428) (19)	48 — — — —
		(315) 1,252 937 119 47 (13) (24) 129 (808) (438) — — (1,246) 430	48 380 428 — (2) — — (2) — — (64) (15) (79) 2,469

— 80 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET As at 31 December, 2007

In HK$ million Note ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 16 Investment properties 17 Interests in leasehold land 18 Properties held for/under development 19 Goodwill 20 Intangible assets 21 Interest in associates 23 Interest in jointly controlled companies 24 Held-to-maturity investments 25 Available-for-sale financial assets 25(a) Amounts due from related companies 4(d) Net lease payments receivable 36 Deferred tax assets 34(a) Other non-current assets Current assets Properties under development 19 Properties for sale Sales proceeds held in stakeholders’ accounts 26(a) Restricted cash 26(b) Prepayments, deposits and other current assets 26(c) Inventories 26(d) Amounts due from related companies 4(d) Derivative financial instruments 29 Financial assets at fair value through profit or loss 25(b) Accounts receivable, net 26(e) Tax recoverable Cash and cash equivalents 37(d)	2007 2006 (Note 45) 16,852 16,497 3,920 3,639 615 1,140 1,671 2,039 3,016 3,140 1,638 1,349 655 637 316 10 6 12 321 496 9 16 91 203 216 174 471 359 29,797 29,711 8,436 1,231 697 290 2,425 3,472 682 5,128 2,007 1,361 854 544 16 44 43 — 12 50 2,709 2,580 1 64 3,678 4,951 21,560 19,715	2007 2006 (Note 45) 16,852 16,497 3,920 3,639 615 1,140 1,671 2,039 3,016 3,140 1,638 1,349 655 637 316 10 6 12 321 496 9 16 91 203 216 174 471 359 29,797 29,711 8,436 1,231 697 290 2,425 3,472 682 5,128 2,007 1,361 854 544 16 44 43 — 12 50 2,709 2,580 1 64 3,678 4,951 21,560 19,715
		29,711
		1,231 290 3,472 5,128 1,361 544 44 — 50 2,580 64 4,951
		19,715

— 81 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million
Note
Current liabilities
Short-term borrowings
26(f)
Derivative financial instruments
29
Accounts payable
26(g)
Accruals and other payables
Amount payable to the Government under the
Cyberport Project Agreement
28
Mobile carrier licence fee liabilities
35
Amounts due to related companies
4(d)
Gross amount due to customers for contract work
26(h)
Advances from customers
Current taxation
Net current liabilities
Total assets less current liabilities
Non-current liabilities
Long-term borrowings
27
Deferred tax liabilities
34(a)
Deferred income
Defined benefit liability
31(a)(i)
Amount payable to the Government under the
Cyberport Project Agreement
28
Mobile carrier licence fee liabilities
35
Other long-term liabilities
Net assets
CAPITAL AND RESERVES
Share capital
30
Deficit
33
Equity attributable to equity holders of the Company
Minority interests
Total equity

2007
2006
(Note 45)
(10,174)
(13,995)
(13)
(555)
(1,264)
(1,022)
(4,785)
(4,989)
(5,178)
(1,914)
(67)
(58)
(539)
(886)
(7)
(7)
(3,434)
(1,437)
(684)
(794)
(26,145)
(25,657)
(4,585)
(5,942)
25,212
23,769
(15,505)
(15,438)
(2,150)
(2,179)
(719)
(1,015)
(9)
(11)
(1,741)
(1,591)
(532)
(539)
(205)
(97)
(20,861)
(20,870)
4,351
2,899
1,695
1,688
(143)
(1,258)
1,552
430
2,799
2,469
4,351
2,899

— 82 —

APPENDIX I FINANCIAL INFORMATION OF THE PCCW GROUP

COMPANY BALANCE SHEET As at 31 December, 2007 In HK$ million Note ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 16 Investments in subsidiaries 22 Other non-current assets Current assets Restricted cash 26(b) Prepayments, deposits and other current assets Amounts due from subsidiaries 22(a) Cash and cash equivalents 37(d) Current liabilities Short-term borrowings 26(f) Derivative financial instruments 29 Accruals and other payables Current taxation Net current assets Total assets less current liabilities Net assets CAPITAL AND RESERVES Share capital 30 Reserves 33 Total equity	2007 2 20,301 12 20,315 106 13 35,998 36 36,153 — — (8) (51) (59) 36,094 56,409 56,409 1,695 54,714 56,409	2006 2 20,469 20 20,491 4,301 4,145 12,371 219 21,036 (6,300) (6) (10) (51) (6,367) 14,669 35,160 35,160 1,688 33,472 35,160

— 83 —

APPENDIX I FINANCIAL INFORMATION OF THE PCCW GROUP

CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December, 2007

In HK$ million Note NET CASH GENERATED FROM OPERATING ACTIVITIES 37(a) INVESTING ACTIVITIES Proceeds from disposals of property, plant and equipment, interests in leasehold land, investment properties and other investments Purchases of property, plant and equipment Purchases of investment properties Purchases of other intangible assets Acquisition of the business of a subsidiary (net of cash and cash equivalents acquired) 37(b) Acquisition of interest in a jointly controlled company Purchases of non-controlling interest in subsidiaries Proceeds from disposal of subsidiaries (net of cash and cash equivalents disposed of) 37(c) Payments for termination of derivative financial instruments Proceeds from termination of derivative financial instruments Purchases of available-for-sale financial assets Proceeds from disposals of available-for-sale financial assets and held-to-maturity investments Purchases of financial assets at fair value through profit or loss Proceeds from disposals of financial assets at fair value through profit or loss Interest received Dividend received from associates Dividend received from investments Proceeds from termination of finance leases Prepayment for investment in a jointly controlled company Instalments received from the disposal of unconsolidated subsidiaries NET CASH USED IN INVESTING ACTIVITIES	2007 5,121 22 (3,102) (4) (796) (23) (311) — 165 (94) 72 (176) 251 — 12 191 10 — — — 10 (3,773)	2006 6,522 10 (3,175) (127) (237) — — (494) — — 18 (37) 114 (54) 155 63 46 6 56 (8) 10 (3,654)

— 84 —

APPENDIX I FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million Note FINANCING ACTIVITIES Proceeds from exercise of employee share options Purchases of shares under share award schemes Finance fees incurred for raising debts New loans raised Interest paid Repayments of loans Redemption of convertible note and bonds Dividends paid to shareholders of the Company Dividends paid to minority shareholders of a subsidiary Decrease/(Increase) in restricted cash NET CASH USED IN FINANCING ACTIVITIES NET DECREASE IN CASH AND CASH EQUIVALENTS Exchange differences CASH AND CASH EQUIVALENTS Beginning of year End of year 37(d)	2007 137 — (5) 10,278 (1,748) (6,417) (7,724) (1,253) (65) 4,178 (2,619) (1,271) (2) 4,951 3,678	2006 119 (24) (132) 20,518 (1,752) (20,707) — (1,246) (64) (4,301) (7,589) (4,721) (7) 9,679 4,951

— 85 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December, 2007

(Amount expressed in Hong Kong dollars unless otherwise stated)

1 GENERAL INFORMATION

PCCW Limited (the “Company”) was incorporated in the Hong Kong Special Administrative Region (“Hong Kong”) and its securities have been listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) since 18 October, 1994. The address of its registered office is 39th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong. The principal activities of the Company and its subsidiaries (collectively the “Group”) are the provision of local, mobile and international telecommunications services, Internet access services, interactive multimedia and pay-TV services, the sale and rental of telecommunications equipment, and the provision of computer, engineering and other technical services in Hong Kong, mainland China and elsewhere in the Asia Pacific region; investments in, and development of, systems integration and technology-related businesses; and investments in, and development of, infrastructure and properties in Hong Kong, mainland China and elsewhere in the Asia Pacific region.

2 BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES

a. Statement of compliance

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”), which is a collective term for all individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations (“Ints”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. A summary of the principal accounting policies adopted by the Group is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group. The Group has adopted the new and revised HKFRSs below, which are relevant to its operations, in the preparation of the financial statements. The adoption of these new and revised HKFRSs has not led to any significant changes in the accounting policies applied in these financial statements, and has no material effect on the Group’s results and financial position for the current or prior accounting periods reflected in these financial statements. They did however give rise to additional disclosures as stated below:

HKFRS 7 “Financial Instruments: Disclosures”, which requires disclosures on the significance of the Group’s financial instruments and the nature and extent of risks arising from those financial instruments. These disclosures are provided throughout these financial statements, in particular in note 39.
Amendment to HKAS 1 “Presentation of Financial Statements — Capital Disclosures”, which introduces additional disclosure requirements to provide information about the level of capital and the Group’s objectives, policies and processes for managing capital. These new disclosures are set out in note 38.
HK(IFRIC)-Int 8 “Scope of HKFRS 2”, which requires HKFRS 2 “Share-based Payment” to be applied to any arrangements in which some or all of the goods received cannot be specifically identified, in particular where equity instruments are issued for consideration which appears to be less than the fair value.
HK(IFRIC)-Int 9 “Reassessment of Embedded Derivatives”, which requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract, with reassessment only if there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract.

— 86 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

HK(IFRIC)-Int 10 “Interim Financial Reporting and Impairment”, which prohibits the impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date.

The Group has not adopted any new standard or interpretation that is not yet effective for the current accounting period.

b. Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December, 2007 comprise the financial statements of the Company and its subsidiaries, and the Group’s interest in associates and jointly controlled companies.

The measurement basis used in the preparation of the financial statements is historical cost basis, except that the following assets and liabilities are stated at fair value as explained in the accounting policies set out below:

investment properties (see note 2(g));
financial instruments classified as financial assets at fair value through profit or loss (see note 2(m)(i)) or available-for-sale financial assets (see note 2(m)(iii)); and
derivative financial instruments (see note 2(o)).

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustments in the next year are discussed in note 3.

c. Subsidiaries and minority interests

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of identifiable net assets acquired is recorded as goodwill (see note 2(k)).

— 87 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

Where the Group increases its interest in a subsidiary, its incremental interest gives rise to additional goodwill in the subsidiary. The goodwill is determined as the difference between the consideration given and the interest acquired in the subsidiary’s net assets and contingent liabilities at their carrying values on the Group’s consolidated balance sheet. No fair value exercise is performed because HKFRS 3 “Business Combination” allows a step-up to fair values only at the date control is gained. Where the Group decreases its interest in a subsidiary without losing control, any gain or loss on the partial disposal is recognized as “Other (losses)/gains, net” in the consolidated income statement.

Intra-group balances and transactions and any unrealized profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intra-group transactions are eliminated in the same way as unrealized gains but only to the extent that there is no evidence of impairment of the asset transferred.

Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet and statement of changes in equity within equity, separately from equity attributable to the equity holders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity holders of the Company.

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.

For subsidiaries which have accounting year ends different from the Group, the subsidiaries prepare, for the purpose of consolidation, financial statements up to and as at the same date as the Group.

In the Company’s balance sheet, investments in subsidiaries are stated at cost less impairment losses (see note 2(n)(ii)). The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

d. Associates

An associate is an entity in which the Group or the Company has significant influence, but not control or joint control, over its management, including participating in the financial and operating policy decisions.

Investments in associates are accounted for in the consolidated financial statements under the equity method and are initially recorded at cost and adjusted thereafter for the post-acquisition change in the Group’s share of the associates’ net assets. The consolidated income statement includes the Group’s share of post-acquisition, post-tax results of the associates for the year.

When the Group’s share of losses exceeds its interest in the associate, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. For this purpose, the Group’s interest in the associate is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate.

Unrealized profits and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associate, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognized immediately in the income statement.

— 88 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

In the Company’s balance sheet, investments in associates are stated at cost less impairment losses (see note 2(n)(ii)). The results of associates are accounted for by the Company on the basis of dividends received and receivable.

e. Jointly controlled companies

A jointly controlled company is an entity which operates under a contractual arrangement between the Group or the Company and other parties, where the contractual arrangement establishes that the Group or the Company and one or more of the other parties share joint control over the economic activity of the entity. The Group has made investments in jointly controlled companies in the People’s Republic of China (the “PRC”) in respect of which the partners’ profit-sharing ratios during the joint venture period and share of net assets upon the expiration of the joint venture period may not be in proportion to their equity ratios, but are as defined in the respective joint venture contracts.

Investments made by means of joint venture structures where the Group or the Company controls the composition of the board of directors or equivalent governing body and/or is in a position to exercise control over the financial and operating policies of the jointly controlled companies are accounted for as subsidiaries.

Investments in jointly controlled companies are accounted for in the consolidated financial statements under the equity method, as described in note 2(d).

In the Company’s balance sheet, investments in jointly controlled companies are stated at cost less impairment losses (see note 2(n)(ii)). The results of jointly controlled companies are accounted for by the Company on the basis of dividends received and receivable.

f. Property, plant and equipment

The following items of property, plant and equipment are stated in the balance sheet at cost less accumulated depreciation and impairment losses (see note 2(n)(ii)):

buildings held for own use which are situated on leasehold land, where the fair value of the building could be measured separately from the fair value of the leasehold land at the inception of the lease (see note 2(h)); and
other items of plant and equipment.

The cost of an item of property, plant and equipment comprises (i) its purchase price; (ii) any directly attributable costs of bringing the asset to its working condition and location for its intended use; and (iii) the initial estimate at the time of installation and during the period of use, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located.

Subsequent costs are included in the carrying amount of an item of property, plant and equipment or recognized as a separate item of property, plant and equipment, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other costs, such as repairs and maintenance and overhaul costs, are recognized in the income statement as an expense in the period in which they are incurred.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in the income statement on the date of retirement or disposal.

— 89 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

Freehold land and projects under construction are not depreciated. Depreciation on other property, plant and equipment is calculated to write off the cost of items of property, plant and equipment, less their expected residual value, if any, using the straight line method over their estimated useful lives as follows:

Land and buildings	Over the shorter of the unexpired term of land lease and the estimated
	useful lives
Exchange equipment	5 to 15 years
Transmission plant	5 to 25 years
Other plant and equipment	Over the shorter of 2 to 17 years and the term of lease

The assets’ useful lives and residual values, if any, are reviewed, and adjusted if appropriate, at each balance sheet date.

g. Investment properties

Investment properties are land and/or buildings which are owned or held under a leasehold interest (see note 2(h)) to earn rental income and/or for capital appreciation, and which are not occupied by the companies in the consolidated Group.

Investment properties are stated in the balance sheet at fair value, based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset, determined annually by independent qualified valuers. The fair value of investment properties reflects, among other things, rental income from current leases and assumptions about rental income from future leases in the light of current market conditions. Any gain or loss arising from a change in fair value or from the retirement or disposal of an investment property is recognized in the income statement. Rental income from investment properties is accounted for as described in note 2(z)(iv).

When the Group holds a property interest under an operating lease to earn rental income and/or for capital appreciation, the interest is classified and accounted for as an investment property on a property-by-property basis. Any such property interest which has been classified as an investment property is accounted for as if it were held under a finance lease (see note 2(h)), and the same accounting policies are applied to that interest as are applied to other investment properties leased under finance leases. Lease payments are accounted for as described in note 2(h).

When an item of property, plant and equipment is transferred to investment property following a change in its use, any differences between the carrying amount and the fair value of the item arising at the date of transfer is recognized directly in equity if it is a gain. Upon disposal of the item, the gain is transferred to retained earnings. Any loss arising in this manner is recognized immediately in the income statement.

If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment and its fair value at the date of reclassification becomes its cost for accounting purposes. Investment property, that is being redeveloped for continued future use as investment property, continues to be measured at fair value and is not reclassified as property, plant and equipment during the redevelopment.

Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property at fair value. Any difference between the fair value of the property at that date and its previous carrying amount is recognized in the income statement.

— 90 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

h. Leased assets

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

i. Classification of assets leased to the Group

Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, except for property held under operating leases that would otherwise meet the definition of an investment property, which is classified as an investment property on a property-by-property basis and, if classified as investment property, is accounted for as if held under a finance lease (see note 2(g)).

ii. Assets leased out under operating leases

Where the Group leases out assets under operating leases, the assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the Group’s depreciation policies, as set out in note 2(f). Impairment losses are accounted for in accordance with the accounting policy as set out in note 2(n)(ii). Revenue arising from operating leases is recognized in accordance with the Group’s revenue recognition policies, as set out in note 2(z)(iv).

iii. Operating lease charges

Where the Group has the use of assets held under operating leases, payments made under the leases are charged to the income statement in equal instalments over the accounting periods covered by the lease term. Lease incentives received are recognized in the income statement as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the income statement in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is stated in the balance sheet as “Interests in leasehold land” and is amortized to the income statement on a straight-line basis over the period of the lease term except where the property is classified as an investment property (see note 2(g)) or is held for development (see note 2(i)).

When the definite intention to develop the leasehold land is clear and action initiated, leasehold land is reclassified as properties under development and the amortization of the operating lease is capitalized in properties under development until the completion of the development.

i. Properties held for/under development

Properties held for development represents interests in land held for future development which are stated at cost less impairment losses.

Properties under development represent interests in land and buildings under construction. Properties under development for long-term retention purposes are stated at cost less impairment losses.

Properties under development for sale, for which pre-sales have commenced and pre-sale contracts were entered before 1 January, 2005 are stated at cost plus attributable profits less any foreseeable losses, sale deposits received and instalments received and receivable (see note 2(z)(iii)).

— 91 —

APPENDIX I FINANCIAL INFORMATION OF THE PCCW GROUP

Properties under development for sale where the pre-sales have not yet commenced or pre-sale contracts were entered on or after 1 January, 2005 are carried at the lower of cost and the estimated net realizable value.

Cost includes original land acquisition costs, costs of land use rights, construction expenditure incurred and other direct development costs attributable to such properties, including amortization of leasehold land and interest incurred on loans directly attributable to the development prior to the completion of construction.

Net realizable value is determined by reference to estimated sale proceeds of properties sold in the ordinary course of business less all estimated selling expenses.

Properties under development for long-term retention purpose, on completion, are transferred to property, plant and equipment or investment properties.

Properties under development for sale with the development expected to be completed within one year from the balance sheet date, which have either been pre-sold or are intended for sale, are classified under current assets.

j. Properties for sale

Completed properties for sale are classified under current assets and stated at the lower of cost and net realizable value. Cost is determined by apportionment of the total land and development costs attributable to the unsold properties. Net realizable value represents the estimated selling price less costs to be incurred in selling the properties.

k. Goodwill

Goodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled company over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.

Goodwill is stated in the consolidated balance sheet at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units (“CGUs”) and is tested annually for impairment (see note 2(n)(ii)). In respect of associates and jointly controlled companies, the carrying amount of goodwill is included in the carrying amount of the interest in associates and jointly controlled companies.

On disposal of a CGU or part of a CGU, an associate or a jointly controlled company during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

l. Intangible assets (other than goodwill)

i. Customer acquisition costs

Costs incurred to acquire contractual relationships with customers are capitalized if it is probable that future economic benefits will flow from the customers to the Group and such costs can be measured reliably. Capitalized customer acquisition costs are amortized on a straight-line basis over the minimum enforceable contractual periods. By the end of the minimum enforceable contractual period, fully amortized customer acquisition costs will be written off.

In the event that a customer terminates the contract prior to the end of the minimum enforceable contractual period, the unamortized customer acquisition cost will be written off immediately in the income statement.

— 92 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

ii. Mobile carrier licence

The mobile carrier licence to establish and maintain a mobile telecommunication network and to provide mobile services within specified spectrums in Hong Kong is recorded as an intangible asset. Upon the issuance of the licence, the cost thereof, which is the discounted value of the minimum annual fees payable over the period of the licence and directly attributable costs of preparing the asset for its intended use, is recorded together with the related obligations. Where the Group has the right to return a licence and expects to do so, the asset and the related obligation recorded reflect the expected period that the licence will be held. Amortization is provided on a straight-line basis over the estimated useful life of the licence.

The difference between the discounted value and the total of the minimum annual fee payments represents the effective cost of financing. Such finance cost will be charged to the income statement in the period in which it is incurred using the effective interest method.

Variable annual payments on top of the minimum annual payments, if any, are recognized in the income statement as incurred.

iii. Other intangible assets

Other intangible assets that are acquired by the Group are stated in the balance sheet at cost less accumulated amortization (where the estimated useful life is finite) and impairment losses (see note 2(n)(ii)). Expenditures on internally generated goodwill and brands are recognized as expenses in the period in which they are incurred.

Amortization of intangible assets with finite useful lives is charged to the income statement on a straight-line basis over their estimated useful lives. The following intangible assets with finite useful lives are amortized from the date they are available for use and their estimated useful lives are as follows:

Trademarks	2 to 20 years
Content licence	10 years
Wireless broadband licence	Over the term of licence
Mobile carrier licence for third generation (“3G”)	Over the term of licence, commencing from the
services (“3G licence”)	date of launch of the 3G services
Customer base	2 years

The assets’ useful lives and their amortization method are reviewed annually.

Intangible assets with indefinite useful lives are not amortized. The intangible asset and its status are reviewed annually to determine whether events and circumstances continue to support indefinite useful life. Should the useful life of an intangible asset change from indefinite to finite, the change would be accounted for prospectively from the date of change and in accordance with the policy for amortization of intangible assets with finite lives as set out above.

m. Investments in debt and equity securities

The Group and the Company classify their investments in debt and equity securities, other than investments in subsidiaries, associates and jointly controlled companies, as (i) financial assets at fair value through profit or loss, (ii) held-to-maturity investments, or (iii) available-for-sale financial assets.

— 93 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

Investments in debt and equity securities are initially recognized at fair value plus transaction costs, except as indicated otherwise below. The fair values of quoted investments is based on current bid price. For unlisted securities or financial assets without an active market, the Group established fair value by using valuation techniques which variables include only data from observable markets. The investments are subsequently accounted for based on their classification as set out below:

i. Financial assets at fair value through profit or loss

This category comprises financial assets held for trading and those designated as fair value through profit or loss at inception. A financial asset is classified as held for trading if acquired principally for the purpose of selling in the short term or if so designated by management.

Financial assets at fair value through profit or loss are classified as current assets, if they are either held for trading or are expected to be realized within 12 months from the balance sheet date. Any attributable transaction costs are recognized in the income statement as incurred. At each balance sheet date, the fair value is remeasured, with any unrealized holding gains or losses arising from the changes in fair value being recognized in the income statement in the period in which they arise. The net gain or loss recognized in the income statement does not include any interest earned or dividends on the financial assets as these are recognized in accordance with the policies set out in notes 2(z)(vi) and 2(z)(viii) respectively.

ii. Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group and/or the Company have the positive intention and ability to hold to maturity. They are included in non-current assets, except for those with maturities less than 12 months from the balance sheet date, which are classified as current assets.

Held-to-maturity investments are stated in the balance sheet at amortized cost less impairment losses (see note 2(n)(i)).

iii. Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the Group and/or the Company intend to dispose of the investment within 12 months from the balance sheet date.

At each balance sheet date, the fair value of available-for-sale financial assets is remeasured, with any unrealized holding gains or losses arising from the changes in fair value being recognized directly in the available-for-sale financial assets reserve under equity, except for impairment losses (see note 2(n)(i)) and, in the case of monetary items such as debt securities, foreign exchange gains and losses which are recognized directly in the income statement. Dividend income from these investments is recognized in the income statement in accordance with the policy set out in note 2(z)(viii) and, where these investments are interest-bearing, interest calculated using the effective interest method is recognized in the income statement in accordance with the policy set out in note 2(z)(vi). When the investments are derecognized or impaired (see note 2(n)(i)), the cumulative gain or loss previously recognized directly in the equity is recognized in the income statement.

The fair value of quoted investments is based on bid price at the balance sheet date. For unlisted securities or financial assets without an active market, the Group and/or the Company establish the fair value by using valuation techniques including the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. If none of the valuation techniques results in a reasonable estimate on the fair value, the investment is stated in the balance sheet at cost less impairment losses (see note 2(n)(i)).

— 94 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

Investments in debt and equity securities are recognized or derecognized on the date the Group and/or the Company commit to purchase or sell the investments or they expire.

n. Impairment of assets

i. Impairment of investments in debt and equity securities and other receivables

Investments in debt and equity securities (other than investments in subsidiaries, associates and jointly controlled companies: see note 2(n)(ii)) and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale financial assets are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:

significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal payments;
it becoming probable that the debtor will enter bankruptcy or other financial reorganization;
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and
a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

If any such evidence exists, any impairment loss is determined and recognized as follows:

For unquoted equity securities carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities are not reversed.
For trade and other current receivables and other financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where financial assets carried at amortized cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

— 95 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the income statement. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.

— For available-for-sale financial assets, when there is an impairment, the cumulative loss, if any, that had been recognized directly in the available-for-sale financial assets reserve under equity is removed from equity and is recognized in the income statement. The amount of the cumulative loss that is recognized in the income statement is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in the income statement.

Impairment losses recognized in the income statement in respect of equity instruments classified as available-for-sale financial assets are not reversed through the income statement. Any subsequent increase in the fair value of such assets is recognized directly in the available-for-sale financial assets reserve under equity.

Impairment losses in respect of debt instruments classified as available-for-sale financial assets are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognized. Reversals of impairment losses in such circumstances are recognized in the income statement.

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of accounts receivable, whose recovery is considered doubtful but not remote. In this case, the impairment loss for doubtful debts is recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against accounts receivable directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in the income statement.

ii. Impairment of other assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:

property, plant and equipment;
interests in leasehold land;
intangible assets;
investments in subsidiaries, associates and jointly controlled companies; and
goodwill.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.

— 96 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less cost to sell and value in use. Fair value less cost to sell is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a CGU).

Recognition of impairment losses

An impairment loss is recognized in the income statement whenever the carrying amount of an asset, or the CGU to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then, to reduce the carrying amount of the other assets in the CGU on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not allowed to be reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to the income statement in the period in which the reversals are recognized.

iii. Interim financial reporting and impairment

Under the Rules Governing the Listing of Securities on the Stock Exchange, the Group is required to prepare an interim financial report in compliance with HKAS 34 “Interim Financial Reporting”, in respect of the first six months of the financial year. At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it would at the end of the financial year (see notes 2(n)(i) and 2(n)(ii)).

Impairment losses recognized in an interim period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at cost are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognized had the impairment been assessed only at the end of the financial year to which the interim period relates.

o. Derivative financial instruments

Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value at each balance sheet date. The gain or loss on remeasurement to fair value is recognized immediately in the income statement, except where the derivatives are designated and qualify for hedge accounting, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged (see note 2(p)).

— 97 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

p. Hedging

i. Fair value hedge

Where a derivative financial instrument is designated as a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (or an identified portion of such asset, liability or firm commitment), changes in the fair value of the derivative are recorded in the income statement, together with any changes in fair value of the hedged asset or liability that are attributable to the hedged risk.

When a hedging instrument expires or is sold, terminated or exercised, or no longer meets the criteria for hedge accounting; or the Group revokes designation of the hedge relationship, the cumulative adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to the income statement over the residual period to maturity.

ii. Cash flow hedge

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognized asset or liability, or a highly probable forecast transaction or the foreign currency risk of a committed future transaction, the effective portion of changes in the fair value of the derivative is recognized directly in the hedging reserve under equity. The ineffective portion of any gain or loss is recognized immediately in the income statement.

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated cumulative gain or loss is removed from equity and recognized in the income statement in the same period or periods during which the asset acquired or liability assumed affects the income statement (such as when the interest income or expense is recognized).

For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognized in the income statement in the same period or periods during which the hedged forecast transaction affects the income statement.

When a hedging instrument expires or is sold, terminated or exercised, or no longer meets the criteria for hedge accounting; or the Group revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the associated cumulative gain or loss at that point remains in equity and is recognized in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to occur, the cumulative unrealized gain or loss recognized in equity is recognized immediately in the income statement.

q. Programme costs

The costs associated with the transmission rights for showing programmes, sports events and films on the Group’s television channels are recognized in the income statement on a straight-line basis over the period of transmission rights. Where contracts provide for sport rights for multiple seasons or competitions, the associated costs are recognized principally on a straight-line basis across the season or competition. Payments made in advance or in arrears of programme costs recognized are stated in the balance sheet as “Prepayments, deposits and other current assets” or “Accruals and other payables”, as appropriate.

— 98 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

r. Inventories

Inventories consist of trading inventories, work-in-progress and consumable inventories.

Trading inventories are carried at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Work-in-progress is stated at the lower of cost, which comprises labor, materials and overheads where appropriate, and the net realizable value.

Consumable inventories, held for use in the maintenance and expansion of the Group’s telecommunications systems, are stated at cost less provision for deterioration and obsolescence.

Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

s. Construction contracts

The accounting policy for contract revenue is set out in note 2(z)(v). When the outcome of a construction contract can be estimated reliably, contract costs are recognized as an expense by reference to the stage of completion of the contract at the balance sheet date. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. When the outcome of a construction contract cannot be estimated reliably, contract costs are recognized as an expense in the period in which they are incurred.

Construction contracts in progress at the balance sheet date are recorded in the balance sheet at the net amount of costs incurred plus recognized profits less recognized losses and estimated value of work performed, including progress billing, and are presented in the balance sheet as the “Gross amount due from customers for contract work” (as an asset) or the “Gross amount due to customers for contract work” (as a liability), as applicable. Progress billings for work performed on a contract not yet paid by customers are included in the balance sheet under “Accounts receivable, net”.

t. Trade and other receivables

Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost using the effective interest method, less allowance for impairment of doubtful debts (see note 2(n)(i)).

u. Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions (other than restricted cash), and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition, less bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management.

v. Trade and other payables

Trade and other payables are initially recognized at fair value and subsequently stated at amortized cost using the effective interest method.

— 99 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

w. Borrowings

Borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, borrowings are stated at amortized cost with any difference between the amount initially recognized, being the proceeds net of transaction costs, and the redemption value being recognized in the income statement over the period of the borrowings, using the effective interest method.

x. Convertible notes and bonds

Convertible notes and bonds that can be converted to equity share capital of the Company at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments which contain both a liability component and an equity component.

At initial recognition the liability component of the convertible notes and bonds is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option. Any excess of proceeds over the amounts initially recognized as the liability component is recognized as the equity component and included in the convertible note and bonds reserve under equity. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds.

The liability component is subsequently stated at amortized cost until extinguished on conversion or maturity of the notes and bonds, with any difference between the amount initially recognized and the redemption value being recognized in the income statement over the period of the notes and bonds using the effective interest method. The equity component is recognized in the convertible note and bonds reserve under equity until either the notes and bonds are converted or redeemed.

If the notes and bonds are converted, the respective equity component in the convertible note and bonds reserve, together with the carrying value of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the notes and bonds are redeemed, the respective equity component in the convertible note and bonds reserve is released directly to deficit.

y. Provisions and contingent liabilities

Provisions are recognized when (i) the Group or the Company has a present legal or constructive obligation arising as a result of a past event; (ii) it is probable that an outflow of economic benefits will be required to settle the obligation; and (iii) a reliable estimate can be made of the amount of the obligation. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

— 100 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

z. Revenue recognition

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized in the income statement as follows:

i. Telecommunications and other services

Telecommunications services comprise the fixed line and mobile telecommunications network services, and equipment businesses mainly in Hong Kong.

Up-front fees received for installation of equipment and activation of customer service are deferred and recognized over the estimated customer relationship period.

Other service income is recognized when services are rendered to customers.

ii. Sales of goods

Revenue from sale of goods is recognized when goods are delivered to customers which generally coincides with the time when the customer has accepted the goods and the related risks and rewards of ownership. Revenue is recorded after deduction of any trade discounts.

iii. Sales of properties

Revenue and profits arising from sales of completed properties is recognized upon execution of legally binding unconditional sales contracts upon which the beneficial interest in the property passes to the purchasers together with the significant risks and rewards of ownership.

Revenue and profits arising from the pre-completion contracts for the sale of properties under development is accounted for as follows:

for pre-completion contracts for the sale of properties under development for which legally binding unconditional sales contracts were entered into before 1 January, 2005, as permitted by the transitional provisions of HK-Int 3 “Revenue — Pre-completion Contracts for the Sale of Development Properties”, revenue and profits continue to be recognized on the percentage of construction completion basis commencing when these contracts are signed and exchanged, provided that the construction work has progressed to a stage where the ultimate realization of profit can be reasonably determined and on the basis that the total estimated profit is apportioned over the entire period of construction to reflect the progress of the development. Deposits and instalments received from purchasers are netted off from properties under development.
for pre-completion contracts for the sale of properties under development for which legally binding unconditional sales contracts were entered into on or after 1 January, 2005, as required by HK-Int 3, revenue and profits are recognized upon completion of the development and when significant risks and reward of ownership have been transferred. Deposits and instalments received from purchasers prior to this stage are included in current liabilities.

— 101 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

iv. Rental income from operating leases

Rental income receivable under operating leases is recognized in the income statement in equal instalments over the periods covered by the lease term. Lease incentives granted are recognized in the income statement as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognized as income in the accounting period in which they are earned.

v. Contract revenue

Revenue from a fixed price contract is recognized using the percentage of completion method, measured by reference to the percentage of contract costs incurred to date to estimated total contract costs for the contract.

When the outcome of a construction contract cannot be estimated reliably, revenue is recognized only to the extent that it is probable the contract costs incurred will be recoverable.

vi. Interest income

Interest income is recognized on a time-apportioned basis using the effective interest method.

vii. Commission income

Commission income is recognized when entitlement to the income is ascertained.

viii. Dividend income

Dividend income is recognized when the shareholder’s right to receive payment is established.

aa. Borrowing costs

Borrowing costs are expensed in the income statement in the period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

Discounts or premiums relating to borrowings, ancillary costs incurred in connection with arranging borrowings, to the extent that they are regarded as adjustments to interest costs, are recognized as expenses over the period of the borrowing using the effective interest method.

— 102 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

bb. Income tax

i. Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in the income statement except to the extent that they relate to items recognized directly in equity, in which case they are recognized in equity.
ii. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous year.
iii. Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

All deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.

The amount of deferred tax recognized is measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realized and the deferred tax liability is settled. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

iv. Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:
in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.

— 103 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

cc. Employee benefits

i. Short-term employee benefits

Salaries, annual bonuses, paid annual leave and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

ii. Retirement benefits

The Group operates both defined benefit and defined contribution retirement schemes (including the Mandatory Provident Fund) for its employees, the assets of which are generally held in separate trustee — administered funds. The schemes are generally funded by payments from the relevant Group companies and, in some cases, employees themselves, taking account of the recommendations of independent qualified actuaries.

The Group’s contributions to the defined contribution schemes are recognized as an expense in the income statement in the period to which the contributions relate.

The Group’s defined benefit liability recognized in the consolidated balance sheet in respect of defined benefit retirement schemes is the present value of the defined benefit obligation at the balance sheet date less the fair value of scheme assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The calculation is performed annually by independent qualified actuaries using the projected unit credit method. Under this method, the cost of providing defined benefits is charged to the income statement so as to spread the regular cost over the service lives of employees in accordance with the advice of the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates with reference to market yields at the balance sheet date based on Exchange Fund Notes, which have terms to maturity approximating the terms of the related liability.

When the benefits of the schemes are improved, the portion of the increased benefit relating to past service by employees is recognized as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. If the benefits vest immediately, the expense is recognized immediately in the income statement.

In calculating the Group’s defined benefit liability in respect of defined benefit retirement schemes, if any cumulative unrecognized actuarial gains and losses exceeds 10% of the greater of the present value of the defined benefit obligations and the fair value of the scheme assets, that portion is recognized in the income statement over the expected average remaining working lives of the participating employees. Otherwise, the actuarial gain or loss is not recognized.

iii. Share-based payments

The Group operates share option schemes where employees (and including directors) are granted options to acquire shares of the Company at specified exercise prices. The fair value of the employee services received in exchange for the grant of the options is recognized as staff costs in the income statement with a corresponding increase in an employee share-based compensation reserve under equity. The fair value of the options granted is measured at grant date using the trinomial option pricing model, taking into account the terms and conditions upon which the options were granted, and spread over the respective vesting period during which the employees become unconditionally entitled to the options. During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged or credited in the income statement for the year of the review, unless the original staff costs qualify for recognition as an asset, with a corresponding adjustment to the employee share-based compensation reserve. On vesting date, the amount recognized as staff costs is adjusted to reflect the actual number of share options that vest (with a corresponding

— 104 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

adjustment to the employee share-based compensation reserve). The equity amount is recognized in the employee share-based compensation reserve until either the share options are exercised (when it is transferred to the share premium account) or the share options expires (when it is released directly to retained profits). Share options granted before 7 November, 2002 or granted after 7 November, 2002 but vested on or before 31 December, 2004 are not expensed as they are not subject to the requirements of HKFRS 2. When the share options are exercised, the proceeds received, net of any directly attributable transaction cost, are credited to share capital (nominal value) and share premium.

The Group also grants shares of the Company to employees at nil consideration under its share award schemes, under which the awarded shares are either newly issued at par value (the “Subscription Scheme”) or are purchased from the open market (the “Purchase Scheme”). The cost of shares purchased from the open market is recognized in equity as treasury stock. The fair value of the employee services received in exchange for the grant of shares under both schemes is recognized as staff costs in the income statement with a corresponding increase in an employee share-based compensation reserve under equity. The fair value of the awarded shares is measured by the quoted market price of the shares at grant date and is charged to the income statement over the respective vesting period. During the vesting period, the number of awarded shares that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged or credited in the income statement for the year of the review, unless the original staff costs qualify for recognition as an asset, with a corresponding adjustment to the employee share-based compensation reserve. On vesting date, the amount recognized as staff costs is adjusted to reflect the actual number of awarded shares that vest (with a corresponding adjustment to the employee share-based compensation reserve) and the cost of awarded shares recognized in equity as treasury stock is transferred to the employee share-based compensation reserve. Shares awarded before 7 November, 2002 or awarded after 7 November, 2002 but vested on or before 31 December, 2004 are not expensed as they are not subject to the requirements of HKFRS 2.

Shares of the Company granted to employees of the Group by the principal shareholder of the Company are accounted for in accordance with the same policy for the awarded shares under share award schemes as described above. The fair value of the shares granted by principal shareholder is measured by the quoted market price of the shares at grant date and is charged to the income statement over the respective vesting period.

iv. Termination benefits

Termination benefits are recognized only after either an agreement is in place with the appropriate employee representatives specifying the terms of redundancy and the numbers of employees affected, or, after individual employees have been advised of the specific terms.

dd. Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognized in the income statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined. Exchange differences arising on translation of non-monetary assets and liabilities, such as financial assets at fair value through profit or loss, are reported as part of the fair value gain or loss in the income statement. Exchange differences arising on translation of non-monetary assets and liabilities, such as available-for-sale financial assets, are included in the fair value gain or loss in the available-for-sale financial assets reserve under equity.

— 105 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of transactions. Balance sheet items of foreign operations, including goodwill arising on consolidation of foreign operations acquired on or after 1 January, 2005, are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. Goodwill arising on consolidation of a foreign operation acquired before 1 January, 2005 is translated at the foreign exchange rate that applied at the date of acquisition of the foreign operation. The resulting exchange differences are recognized directly in the currency translation reserve under equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, if any, are taken to currency translation reserve under equity. On disposal of a foreign operation, the cumulative amount of the exchange differences recognized in the currency translation reserve under equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal.

ee. Related parties

For the purposes of these financial statements, a party is considered to be related to the Group if:

i. the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;
ii. the Group and the party are subject to common control;
iii. the party is an associate of the Group or a joint venture in which the Group is a venturer;
iv. the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;
v. the party is a close family member of a party referred to in (i) above or is an entity under the control, joint control or significant influence of such individuals; or
vi. the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

ff. Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements.

— 106 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses and segment performance include transactions between segments. Inter-segment pricing is based on similar terms as those available to other external parties for similar services. These transactions are eliminated upon consolidation.

Segment capital expenditure is the total cost incurred during the year to acquire segment assets (both tangible and intangible) that are expected to be used for more than one year.

Unallocated items mainly comprise financial and corporate assets and liabilities, interest-bearing loans, borrowings, tax balances, corporate and financing expenses.

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Key sources of estimation uncertainty

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Notes 20, 31(a), 32 and 39 contain information about the assumptions and their risk factors relating to goodwill impairment, defined benefit liability, fair value of share options or shares granted and financial instruments. Other key sources of estimation uncertainty are discussed below:

i. Useful lives of property, plant and equipment and intangible assets (other than goodwill)

The Group has significant property, plant and equipment and intangible assets (other than goodwill). The Group is required to estimate the useful lives of property, plant and equipment and intangible assets (other than goodwill) in order to ascertain the amount of depreciation and amortization charges for each reporting period.

The useful lives are estimated at the time of purchase of these assets after considering future technology changes, business developments and the Group’s strategies. The Group performs annual reviews to assess the appropriateness of the estimated useful lives. Such review takes into account any unexpected adverse changes in circumstances or events, including declines in projected operating results, negative industry or economic trends, rapid advancement in technology and significant downturns in the Company’s stock price. The Group extends or shortens the useful lives and/or makes impairment provisions according to the results of the review.

During the year ended 31 December, 2007, the Group performed an annual review to reassess the useful lives of certain exchange equipment, transmission plant and other plant and equipment of the Group, based on the expectations of the Group’s operational management and technological trend. The reassessment has resulted in a change in the estimated useful lives of these assets. The Group considers this to be a change in accounting estimate and has therefore accounted for the change prospectively from 1 July, 2007. As a result of this change in accounting estimate, the Group’s profit for the year and the net assets as at the year end have both been increased by HK$66 million.

— 107 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

ii. Impairment of assets (other than investments in debt and equity securities and other receivables)

At each balance sheet date, the Group reviews internal and external sources of information to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:

property, plant and equipment;
interests in leasehold land;
intangible assets;
investments in subsidiaries, associates and jointly controlled companies; and
goodwill.

The sources utilized to identify indications of impairment are often subjective in nature and the Group is required to use judgement in applying such information to its business. The Group’s interpretation of this information has a direct impact on whether an impairment assessment is performed as at any given balance sheet date. Such information is particularly significant as it relates to the Group’s telecommunications services and infrastructure businesses in Hong Kong.

If an indication of impairment is identified, such information is further subject to an exercise that requires the Group to estimate the recoverable value, representing the greater of the asset’s fair value less cost to sell or its value in use. Depending on the Group’s assessment of the overall materiality of the asset under review and complexity of deriving reasonable estimates of the recoverable value, the Group may perform such assessment utilizing internal resources or the Group may engage external advisers to counsel the Group in making this assessment. Regardless of the resources utilized, the Group is required to make many assumptions to make this assessment, including the utilization of such asset, the cash flows to be generated, appropriate market discount rates and the projected market and regulatory conditions. Changes in any of these assumptions could result in a material change to future estimates of the recoverable value of any asset.

iii. Revenue recognition

Telecommunications service revenue based on usage of the Group’s network and facilities is recognized when the services are rendered. Telecommunications revenue for services provided for fixed periods is recognized on a straight-line basis over the respective period. In addition, up-front fees received for installation of equipment and activation of customer service are deferred and recognized over the expected customer relationship period. The Group is required to exercise considerable judgement in revenue recognition particularly in the areas of customer discounts and customer disputes. Significant changes in management estimates may result in material revenue adjustments.

During the year ended 31 December, 2007, the Group re-assessed the expected customer relationship period. As a result of this re-assessment, the expected customer relationship period has been shortened. This change in accounting estimate has been accounted for prospectively from 1 July, 2007. Accordingly, the Group’s profit for the year and the net assets as at the year end have both been increased by HK$255 million.

— 108 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

The Group offers certain arrangements whereby a customer can purchase mobile handset together with a fixed period mobile service arrangement. When such multiple element arrangement exists, the amount of revenue recognized upon the sale of mobile handset is determined using the residual value method. Under such method, the Group determines the revenue from the sale of the mobile handset delivered by deducting the fair value of the service element from the total contract consideration.

iv. Amount payable to the Government under the Cyberport Project Agreement

Pursuant to an agreement dated 17 May, 2000 entered into with the Government of Hong Kong (the “Government”) in respect of the Cyberport project (the “Cyberport Project Agreement”), the Government is entitled to receive approximately 65% of the surplus cash flow earned from the Cyberport project. The amounts paid and payable to the Government are part of the Group’s costs of developing the Cyberport project.

The amount payable to the Government is a financial liability that is measured at amortized cost. Borrowing costs associated with this liability are capitalized as part of the property under development.

The estimated cost of developing the Cyberport project, including construction costs and the amounts paid and payable to the Government, is allocated to cost of properties sold on a systematic basis over the life of the project using a relative value approach. This approach considers the value of development costs attributable to phases for which revenue has been recognized to date relative to the total expected value of development costs for the development as a whole. The revision of estimates of these relative values during 2007 has resulted in the costs of properties sold recorded in the year ended 31 December, 2007 being reduced by approximately HK$388 million.

v. Deferred taxation

While deferred tax liabilities are provided in full on all taxable temporary differences, deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. In assessing the amount of deferred tax assets that need to be recognized, the Group considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Group’s estimates of projected future taxable income and benefits from available tax strategies are changed, or changes in current tax regulations are enacted that would impact the timing or extent of the Group’s ability to utilize the tax benefits of net operating loss carry-forwards in the future, adjustments to the recorded amount of net deferred tax assets and taxation expense would be made.

vi. Current tax

The Group makes a provision for current tax based on estimated income tax liabilities. The estimated income tax liabilities are primarily computed based on the tax computation as prepared by the Group. Nevertheless, from time to time, there are cases of disagreements with the tax authorities of Hong Kong and elsewhere on the tax treatment of items included in the tax computations. If the Group considers it probable that these disputes would result in additional tax payments, the most likely amount of the payment will be estimated and adjustments to the tax expenses and tax liabilities will be made accordingly.

vii. Recognition of intangible asset — Mobile carrier licence

In order to measure the intangible assets, HKAS 39 “Financial Instruments: Recognition and Measurement” is applied for recognition of the minimum annual fee and royalty payments as they constitute contractual obligations to deliver cash and, hence, should be considered as financial liabilities. To establish the fair value of the minimum annual fee and royalty payments for the right of use of the mobile carrier licence, the discount rate used is an indicative incremental borrowing rate estimated by the management. Had a different discount rate been used to determine the fair value, the Group’s results of operations and financial position could be materially different.

— 109 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

4 RELATED PARTY TRANSACTIONS

During the year, the Group had the following significant transactions with related parties:

In HK$ million	Note(s)
		2007	2006
Telecommunications service fees, rental charges, facility
management services and subcontracting charges received or
receivable from a jointly controlled company	a & c	123	135
Telecommunications service fees and systems integration charges
received or receivable from a substantial shareholder	a	60	98
Telecommunications service fees, outsourcing fees and rental
charges paid or payable to a jointly controlled company	a & c	848	660
Telecommunications service fees paid or payable to a substantial
shareholder	a	76	41
Key management compensation	b	124	112

a. These transactions were carried out after negotiations between the Group and the related parties in the ordinary course of business and on the basis of estimated market value as determined by the directors. In respect of transactions for which the price or volume has not yet been agreed with the relevant related parties, the directors have determined the relevant amounts based on their best estimation.

b. Details of key management compensation

In HK$ million Salaries and other short-term employee benefits Post-employment benefits Share-based compensation	The Group 2007 2006 106 82 4 4 14 26 124 112	The Group 2007 2006 106 82 4 4 14 26 124 112
		112

c. Details of transactions with a jointly controlled company of a subsidiary (the “JV”)

On 17 June, 2004, the Company and Telstra Corporation Limited (“Telstra”) agreed to provide the JV with a revolving working capital loan facility with each of the Company and Telstra contributing up to US$25 million (approximately HK$195 million) to this facility. During the years ended 31 December, 2007 and 2006, no draw down was made by the JV under this facility and the facility expired on 31 December, 2007 (see note 40(c)).

On 16 April, 2005, the Company agreed with Telstra and the JV on an operating model under which the JV would operate as an outsourcer of telecommunications network services for the Group and Telstra and its subsidiaries. During the year ended 31 December, 2007, the outsourcing fees paid or payable by the Group to the JV, determined on a cost plus basis, were HK$665 million (2006: HK$487 million).

— 110 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

d. Amounts due from/(to) related companies

Other than as specified in this note, notes 23 and 24 and a United States dollar denominated loan to the parent company of a substantial shareholder in the amount of US$2 million (approximately HK$16 million) (2006: US$7 million (approximately HK$57 million)) at a fixed interest rate of 4% per annum and with fixed terms of repayment up to 2010, balances with related parties are unsecured, non-interest bearing and have no fixed repayment terms.

5 TURNOVER

In HK$ million Telecommunications and other service revenues Amounts received and receivable in respect of goods sold Amounts received and receivable in respect of properties sold Amounts received and receivable from the rental of investment properties	The Group 2007 2006 18,712 16,665 1,948 1,773 2,797 6,950 258 249 23,715 25,637	The Group 2007 2006 18,712 16,665 1,948 1,773 2,797 6,950 258 249 23,715 25,637
		25,637

6 SEGMENT INFORMATION

Segment information is presented in respect of the Group’s business and geographical segments. Business segment information is chosen as the primary reporting format because this is consistent with the Group’s internal financial reporting.

a. Business segments

During the year, the Group has transferred certain operations among business segments as a result of its operational re-organization. The Group comprises the following main business segments:

Telecommunications Services (“TSS”) is the leading provider of telecommunications products and services including local telephony, broadband access services, local and international data, international direct dial, sales of equipment, technical maintenance and subcontracting services and teleservices businesses.

TV & Content includes interactive pay-TV service, Internet portal multimedia entertainment platform and the Group’s directories operations in Hong Kong and mainland China.

Mobile includes the Group’s 2G and 3G mobile telecommunications businesses.

PCCW Solutions offers Information and Communications Technologies services and solutions in Hong Kong and mainland China.

Pacific Century Premium Developments Limited (“PCPD”) covers the Group’s property portfolio in Hong Kong and mainland China including the Cyberport development in Hong Kong, and elsewhere in the Asia Pacific region.

Other Businesses include the Group’s wireless broadband business in the United Kingdom (“UK Broadband”) and all corporate support functions.

— 111 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

			TV	&				PCCW	PCCW				Other	Other
In HK$ million	TSS		Content		Mobile			Solutions			PCPD		Businesses		Elimination		Consolidated
	2007	2006	2007	2006*	2007	2006		2007	2006		2007	2006	2007	2006*	2007	2006	2007	2006
REVENUE
External revenue	16,113	14,765	1,533	988	1,468	1,236		1,294	1,128		3,069	7,195	238	325	—	—	23,715	25,637
Inter-segment revenue	523	609	170	14	—		—	501	524		65	68	11	3	(1,270)	(1,218)	—	—
Total revenue	16,636	15,374	1,703	1,002	1,468	1,236		1,795	1,652		3,134	7,263	249	328	(1,270)	(1,218)	23,715	25,637
RESULTS
Segment results	5,322	4,950	(397)	(439)	(618)	(701)		96	108		715	912	(385)	(411)	—	—	4,733	4,419
Unallocated corporate
expenses																	(710)	(628)
Interest income																	429	732
Finance costs																	(1,658)	(2,008)
Share of results of
associates and jointly
controlled companies	13	37	—	—	—		—	—		—	—	—	—	—	—	—	13	37
Profit before taxation																	2,807	2,552
Income tax																	(970)	(920)
Profit for the year																	1,837	1,632
OTHER INFORMATION
Capital expenditure
(including property,
plant and equipment,
investment properties,
interests in leasehold
land, intangible assets
and goodwill) incurred
during the year	2,301	1,963	386	247	851	1,427		110	70		44	642	170	181
Depreciation and
amortization	2,125	2,033	182	126	614		511	54	42		23	21	204	232
Impairment losses
recognized in income
statement	—	—	58	—	—		—	—		1	11	25	66	50
Significant non-cash
expenses (excluding
depreciation,
amortization and
impairment losses)	123	84	59	28	46		31	(9)		11	36	—	—	2
ASSETS
Segment assets	19,059	18,084	1,314	1,086	4,582	4,346		1,110	932		18,456	12,787	1,535	1,823	—	—	46,056	39,058
Interests in associates and
jointly controlled
companies	961	637	—	—	—		—	—		—	—	—	10	10	—	—	971	647
Unallocated corporate
assets																	4,330	9,721
Consolidated total assets																	51,357	49,426
LIABILITIES
Segment liabilities	4,660	4,847	337	242	1,188	1,216		599	589		10,374	5,196	378	473	—	—	17,536	12,563
Unallocated corporate
liabilities																	29,470	33,964
Consolidated total
liabilities																	47,006	46,527

Certain comparative figures have been restated to conform with the business segment presentation in the current year. The Group’s directories business, previously included in Other Businesses, has been reclassified to TV & Content. Certain assets previously included under TSS have been reclassified to TV & Content, Other Businesses and Unallocated Corporate.

— 112 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

b. Geographical segments

The Group’s businesses are managed on a worldwide basis, but operate in three principal economic environments. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets and capital expenditure are based on the geographical location of the assets.

In HK$ million Hong Kong Mainland China (excluding Hong Kong) and Taiwan Others	Revenue from external customers 2007 2006 21,229 23,506 1,691 1,549 795 582 23,715 25,637	Segment 2007 36,346 6,262 3,448 46,056	assets 2006 30,875 5,883 2,300 39,058	Capital expenditure incurred during the year 2007 2006 3,614 3,686 68 761 299 140 3,981 4,587	Capital expenditure incurred during the year 2007 2006 3,614 3,686 68 761 299 140 3,981 4,587
					4,587

7 OTHER (LOSSES)/GAINS, NET

In HK$ million Net realized gains on disposals of available-for-sale financial assets Net realized and unrealized gains on financial assets at fair value through profit or loss Impairment loss on goodwill Provision for impairment of investments Write back of impairment loss on interest in an associate Provision for rental guarantee (note a) Net realized and unrealized fair value gains/(losses) on derivative financial instruments Fair value gains on investment properties Dividend income Unclaimed dividend payable by a subsidiary written back Write back of provision for loss on legal claims Net gain on cash flow hedging instruments transferred from equity Other impairment loss Others	The Group 2007 2006 79 88 8 17 (58) — (60) (40) 1 — (36) — 62 (110) 3 1 — 6 2 2 — 105 9 — (20) (25) 7 (2) (3) 42	The Group 2007 2006 79 88 8 17 (58) — (60) (40) 1 — (36) — 62 (110) 3 1 — 6 2 2 — 105 9 — (20) (25) 7 (2) (3) 42
		42

a. Under the formal property sale and purchase agreement dated 21 December, 2004 in respect of the disposal of PCCW Tower, on completion of the disposal, there is a rental guarantee pursuant to which Partner Link Investments Limited, an indirect wholly-owned subsidiary of PCPD, has undertaken to the purchaser that it would pay a guaranteed net monthly rental of approximately HK$13.3 million to the purchaser for a period of 5 years commencing from 8 February, 2005, i.e. the date following completion of the disposal of PCCW Tower. During the year, the Group recorded a net loss of approximately HK$27 million, representing the net cash outflow under the rental guarantee. In addition, the Group also made a provision of approximately HK$9 million in relation to the rental guarantee over the remaining term of the rental guarantee.

— 113 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

8 LOSSES ON PROPERTY, PLANT AND EQUIPMENT

In HK$ million Impairment losses on property, plant and equipment (note a) Write-off of projects under construction	The Group 2007 2006 5 11 2 — 7 11	The Group 2007 2006 5 11 2 — 7 11
		11

a. Due to technology and market changes in the sectors in which the Group operates, certain of the Group’s property, plant and equipment became obsolete. Accordingly, the Group recognized impairment losses of approximately HK$5 million (2006: HK$11 million) in the consolidated income statement for the year ended 31 December, 2007.

9 PROFIT BEFORE TAXATION

Profit before taxation is stated after crediting and charging the following:

a. Staff costs

In HK$ million Retirement costs for directors Retirement costs for other staff - pension income for defined benefit retirement schemes (note 31(a)(v)) - contributions to defined contribution retirement scheme Equity-settled share-based payment expenses Salaries, bonuses and other benefits	The Group 2007 2006 (Note 45) 4 4 (2) (2) 194 146 196 148 8 47 2,581 2,608 2,785 2,803	The Group 2007 2006 (Note 45) 4 4 (2) (2) 194 146 196 148 8 47 2,581 2,608 2,785 2,803
		148 47 2,608
		2,803

— 114 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

b. Other items

In HK$ million Crediting: Dividend income from - listed investments - unlisted investments Gain on disposal of property, plant and equipment Gross rental income Less: Outgoings Charging: Losses on property, plant and equipment Impairment loss for doubtful debts Provision for inventory obsolescence Depreciation of property, plant and equipment Amortization of land lease premium Amortization of intangible assets Cost of inventories sold Cost of properties sold Cost of sales, excluding inventories and properties sold Loss on disposal of property, plant and equipment Exchange losses, net Less: Cash flow hedges: transferred from equity Auditors’ remuneration Operating lease rental - equipment - other assets (including property rentals) 10 *FINANCE COSTS* In HK$ million Interest paid/payable for: Overdrafts and bank loans wholly repayable within 5 years Other loans wholly repayable within 5 years Other loans not wholly repayable within 5 years Finance charges on mobile carrier licence fee liabilities Other borrowing costs Cash flow hedges: transferred from equity Interest capitalized in property, plant and equipment	The Group 2007 2006 — 5 — 1 7 — 258 249 (18) (16) 7 11 218 106 1 5 2,795 2,776 30 28 445 232 2,188 1,932 1,932 5,987 6,418 5,054 — 25 49 43 (57) (17) 21 25 68 115 479 478 The Group 2007 2006 563 468 656 1,101 424 423 63 57 1 4 (3) (2) 1,704 2,051 (46) (43) 1,658 2,008	The Group 2007 2006 — 5 — 1 7 — 258 249 (18) (16) 7 11 218 106 1 5 2,795 2,776 30 28 445 232 2,188 1,932 1,932 5,987 6,418 5,054 — 25 49 43 (57) (17) 21 25 68 115 479 478 The Group 2007 2006 563 468 656 1,101 424 423 63 57 1 4 (3) (2) 1,704 2,051 (46) (43) 1,658 2,008
		2,051 (43)
		2,008

The capitalization rates used to determine the amount of interest eligible for capitalization for the year ranged from 5.78% to 6.41% (2006: 5.60% to 7.02%).

— 115 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

11 DIRECTORS’ AND SENIOR EXECUTIVES’ EMOLUMENTS

Details of directors’ emoluments are set out below:

a. Directors’ emoluments — cash and cash equivalents paid/payable

In HK$ million			The Group
			2007
		Salaries,
		allowances		Retirement
		and benefits		scheme
	Directors’ fees	in kind	Bonuses 1	contributions
Executive directors
Li Tzar Kai, Richard	—	—	—	—
Alexander Anthony Arena	—	16.93	8.50	1.26
Peter Anthony Allen	—	4.082	—	0.61
Chung Cho Yee, Mico	—	2.403	13.004	—
Lee Chi Hong, Robert	—	11.00	19.85	0.99
So Chak Kwong, Jack 5	—	9.28	—	0.38
Dr Fan Xingcha 6	—	2.03	—	0.14
Non-executive directors
Sir David Ford	—	2.79	0.13	0.22
Zhang Chunjiang	0.207	—	—	—
Zuo Xunsheng 8	0.109	—	—	—
Li Fushen 10	0.1011	—	—	—
Dr Tian Suning 12	0.10	—	—	—
Independent non-executive directors
Prof Chang Hsin-kang	0.20	—	—	—
Dr Fung Kwok King, Victor 13	0.08	—	—	—
Dr The Hon Sir Li Kwok Po, David	0.20	—	—	—
Sir Roger Lobo 14	0.2915	—	—	—
Aman Mehta 16	0.3117	0.43	—	—
The Hon Raymond George Hardenbergh Seitz	0.3018	0.43	—	—
	1.88	49.37	41.48	3.60

Notes:

1 Bonuses in respect of 2007, paid in 2007 and payable in 2008.
2 Excludes remuneration for duties performed for related companies.
3 Excludes remuneration for duties performed for related companies.
4 Bonus paid by a subsidiary of PCPD.
5 Resigned as executive director, Deputy Chairman and Group Managing Director with effect from 30 April, 2007.
6 Resigned as executive director with effect from 9 July, 2007.

— 116 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

7 Fee receivable as a non-executive director in 2007 was surrendered to a subsidiary of China Network Communications Group Corporation, in accordance with an arrangement between Zhang Chunjiang and China Network Communications Group Corporation, a substantial shareholder of the Company.
8 Appointed as non-executive director with effect from 9 July, 2007.
9 Fee receivable as a non-executive director in 2007 was surrendered to a subsidiary of China Network Communications Group Corporation, in accordance with an arrangement between Zuo Xunsheng and China Network Communications Group Corporation, a substantial shareholder of the Company.
10 Appointed as non-executive director with effect from 9 July, 2007.
11 Fee receivable as a non-executive director in 2007 was surrendered to a subsidiary of China Network Communications Group Corporation, in accordance with an arrangement between Li Fushen and China Network Communications Group Corporation, a substantial shareholder of the Company.
12 Resigned as non-executive director with effect from 9 July, 2007.
13 Retired as independent non-executive director upon the conclusion of the annual general meeting held on 31 May, 2007.
14 Resigned as Chairman of Audit Committee upon the conclusion of the board meeting held on 23 November, 2007.
15 Includes HK$89,722 fee as Chairman of Audit Committee.
16 Appointed as Chairman of Audit Committee upon conclusion of the board meeting held on 23 November, 2007.
17 Includes HK$100,000 fee as Chairman of Nomination Committee and HK$10,685 fee as Chairman of Audit Committee.
18 Includes HK$100,000 fee as Chairman of Remuneration Committee.

— 117 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million			The Group
			2006
		Salaries,
		allowances		Retirement
		and benefits		scheme
	Directors’ fees	in kind	Bonuses 1	contributions
Executive directors
Li Tzar Kai, Richard	—	—	—	—
Alexander Anthony Arena	—	11.48	8.83	0.81
Peter Anthony Allen	—	4.082	—	0.52
Chung Cho Yee, Mico	—	2.403	—	—
Lee Chi Hong, Robert	—	11.00	7.27	0.90
So Chak Kwong, Jack	—	16.62	—	0.84
Dr Fan Xingcha	—	6.51	—	0.58
Yuen Tin Fan, Francis 4	—	1.035	—	—
Non-executive directors
Sir David Ford	—	2.54	0.12	0.20
Zhang Chunjiang	0.206	—	—	—
Dr Tian Suning	0.20	—	—	—
Independent non-executive directors
Prof Chang Hsin-kang	0.20	—	—	—
Dr Fung Kwok King, Victor	0.20	—	—	—
Dr The Hon Sir Li Kwok Po, David	0.20	—	—	—
Sir Roger Lobo	0.307	—	—	—
Aman Mehta	0.308	0.52	—	—
The Hon Raymond George Hardenbergh Seitz	0.309	0.41	—	—
	1.90	56.59	16.22	3.85

Notes:

1 Bonuses in respect of 2006, paid in 2006 and payable in 2007.
2 Excludes remuneration for duties performed for related companies.
3 Excludes remuneration for duties performed for related companies.
4 Resigned as executive director with effect from 5 June, 2006.
5 Excludes remuneration for duties performed for related companies.
6 Fee receivable as a non-executive director in 2006 was surrendered to a subsidiary of China Network Communications Group Corporation, in accordance with an arrangement between Zhang Chunjiang and China Network Communications Group Corporation, a substantial shareholder of the Company.
7 Includes HK$100,000 fee as Chairman of Audit Committee.
8 Includes HK$100,000 fee as Chairman of Nomination Committee.
9 Includes HK$100,000 fee as Chairman of Remuneration Committee.

— 118 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

b. Directors’ emoluments — share-based compensation

					The Group	The Group
					2007
				Number of
			Number of	share options
			share options/	granted/	Number of	Number of		Share-based
		Exercise	shares	(lapsed)/	share options	share options/	Number of	compensation
		price	outstanding	shares	exercised/	shares	share	charged to	Value
		of share	at beginning	awarded/	shares	outstanding at	options	income	of shares
	Grant date	options	of year	(lapsed)	transferred	end of year	vested	statement	transferred
								(Note ii)	(Note i)
		HK$						_HK$ million _	HK$ million
Executive directors
Alexander Anthony Arena	25 July, 2003	4.3500	6,400,000	—	—	6,400,000	6,400,000	—	—
	8 February, 2005	4.4750	3,000,000	—	—	3,000,000	3,000,000	0.08	—
Peter Anthony Allen	25 July, 2003	4.3500	2,000,000	—	—	2,000,000	2,000,000	—	—
	8 February, 2005	4.4750	2,000,000	—	—	2,000,000	2,000,000	0.05	—
Chung Cho Yee, Mico	25 July, 2003	4.3500	5,695,200	—	—	5,695,200	5,695,200	—	—
	8 February, 2005	4.4750	3,000,000	—	—	3,000,000	3,000,000	0.08	—
Lee Chi Hong, Robert	25 July, 2003	4.3500	5,000,000	—	—	5,000,000	5,000,000	—	—
	8 February, 2005	4.4750	1,000,000	—	—	1,000,000	1,000,000	0.03	—
So Chak Kwong, Jack	25 July, 2003	4.3500	12,000,000	—	(12,000,000)	—	N/A	—	6.00
	8 February, 2005	4.4750	3,500,000	—	(3,500,000)	—	N/A	0.09	1.31
	15 September, 2006	4.9240	25,000,000	(25,000,000)1	—	—	N/A	—	—
	15 September, 2006	N/A	6,500,000	(2,519,109)1	(3,980,891)	—	N/A	13.12	19.23
Dr Fan Xingcha	1 September, 2005	5.2500	7,000,000	(7,000,000)2	—	—	N/A	—	—
Non-executive director
Sir David Ford	25 July, 2003	4.3500	1,000,000	—	—	1,000,000	1,000,000	—	—
	8 February, 2005	4.4750	2,000,000	—	—	2,000,000	2,000,000	0.05	—
								13.50	26.54

Note:

1 Upon the resignation as executive director with effect from 30 April, 2007, the outstanding share options and shares awarded held in the capacity of director became zero.
2 Upon the resignation as executive director with effect from 9 July, 2007, the outstanding share options held in the capacity of director became zero.

— 119 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

					The Group	The Group
					2006
				Number of
			Number of	share options
			share options/	granted/	Number of	Number of		Share-based
		Exercise	shares	(lapsed)/	share options	share options/	Number of	compensation
		price	outstanding at	shares	exercised/	shares	share	charged to	Value of
		of share	beginning of	awarded/	shares	outstanding at	options	income	shares
	Grant date	options	year	(lapsed)	transferred	end of year	vested	statement	transferred
								(Note ii)	(Note i)
		HK$						_HK$ million _	HK$ million
Executive directors
Alexander Anthony Arena	25 July, 2003	4.3500	6,400,000	—	—	6,400,000	6,400,000	1.08	—
	8 February, 2005	4.4750	3,000,000	—	—	3,000,000	1,500,000	0.89	—
Peter Anthony Allen	25 July, 2003	4.3500	2,000,000	—	—	2,000,000	2,000,000	0.33	—
	8 February, 2005	4.4750	2,000,000	—	—	2,000,000	1,000,000	0.60	—
Chung Cho Yee, Mico	25 July, 2003	4.3500	5,695,200	—	—	5,695,200	5,695,200	0.96	—
	8 February, 2005	4.4750	3,000,000	—	—	3,000,000	1,500,000	0.89	—
Lee Chi Hong, Robert	25 July, 2003	4.3500	5,000,000	—	—	5,000,000	5,000,000	0.84	—
	8 February, 2005	4.4750	1,000,000	—	—	1,000,000	500,000	0.30	—
So Chak Kwong, Jack	25 July, 2003	4.3500	12,000,000	—	—	12,000,000	12,000,000	2.02	—
	8 February, 2005	4.4750	3,500,000	—	—	3,500,000	1,750,000	1.04	—
	15 September, 2006	4.9240	—	25,000,000	—	25,000,000	—	4.25	—
	15 May, 2003	N/A	2,161,000	—	(2,161,000)	—	N/A	1.78	10.72
	15 September, 2006	N/A	—	6,500,000	—	6,500,000	N/A	6.39	—
Dr Fan Xingcha	1 September, 2005	5.2500	7,000,000	—	—	7,000,000	2,300,000	3.51	—
Yuen Tin Fan, Francis	25 July, 2003	4.3500	8,534,000	(8,534,000)1	—	—	N/A	—	—
	8 February, 2005	4.4750	3,000,000	(3,000,000)1	—	—	N/A	—	—
Non-executive director
Sir David Ford	25 July, 2003	4.3500	2,000,000	—	(1,000,000)	1,000,000	1,000,000	0.33	1.15
	8 February, 2005	4.4750	2,000,000	—	—	2,000,000	1,000,000	0.60	—
								25.81	11.87

Note:

1 Upon the resignation as executive director with effect from 5 June, 2006, the outstanding share options held in the capacity of director became zero.

i. Value of shares transferred

The value of shares transferred represents the market value of relevant shares granted to a director at the date of transfer. Had there been any exercise of share options by directors, the value of share transferred would include the market value of the relevant shares at the date of exercise less the corresponding exercise price.

— 120 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

ii. Share-based compensation charged to income statement

Share-based compensation is a trinomial option pricing model calculation of the fair value of share options, and also the estimated fair value of the Company’s shares granted as estimated at the date of grant. Share-based compensation is amortized in the income statement over the vesting period of the related share options or shares granted. These values do not represent realizable gains which are affected by a combination of a number of factors, including, performance of the Company’s share price, vesting period, timing of exercise etc. The details of these share options and awards are disclosed in notes 32(a) and 32(b) and under the section “Share Option Schemes” in the Report of the Directors.

Total directors’ emoluments for the year ended 31 December, 2007, including amortized share-based compensation, were HK$109.83 million (2006: HK$104.37 million).

c. Individuals with highest emoluments

Of the five individuals with the highest emoluments, four (2006: four) are directors of the Company whose emoluments are disclosed in notes 11(a) and 11(b). The emoluments in respect of the non-director individual in 2007 and 2006 were as follows:

In HK$ million Salaries, allowances and benefits in kind Bonuses Retirement scheme contributions Share-based compensation	The Group 2007 2006 3.30 3.46 3.50 3.24 0.26 0.36 0.01 0.49 7.07 7.55	The Group 2007 2006 3.30 3.46 3.50 3.24 0.26 0.36 0.01 0.49 7.07 7.55
		7.55

12 INCOME TAX

a. Taxation in the consolidated income statement represents:

In HK$ million Hong Kong profits tax - provision for current year - (over)/under provision in respect of prior years Overseas tax - provision for current year - under/(over) provision in respect of prior years Recovery of deferred taxation (note 34(a))	The Group 2007 2006 1,076 1,106 (55) 10 45 16 2 (28) (98) (184) 970 920	The Group 2007 2006 1,076 1,106 (55) 10 45 16 2 (28) (98) (184) 970 920
		920

Hong Kong profits tax has been provided at the rate of 17.5% (2006: 17.5%) on the estimated assessable profits for the year.

Overseas taxation has been calculated on the estimated assessable profits for the year at the rates prevailing in the respective jurisdictions.

— 121 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

On 16 March, 2007, the National People’s Congress of the PRC approved the Corporate Income Tax Law (the “new CIT Law”). The new CIT Law reduces the corporate income tax rate applicable to the Group’s operations in the PRC from 33% to 25% with effect from 1 January, 2008. Accordingly, the deferred tax liabilities for the Group’s operations in the PRC as at 31 December, 2007 is provided at the rate of 25% on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases. The effect on the change in corporate income tax rate applicable to the Group’s operations in the PRC was recognized in the income statement for the current year.

b. Reconciliation between tax expense and accounting profit at applicable tax rate:

In HK$ million Profit before taxation Notional tax on profit before taxation, calculated at applicable tax rates Income not subject to taxation Expenses not deductible for taxation purposes Tax losses not recognized Over provision in prior years, net Utilization of previously unrecognized tax losses Recognition of previously unrecognized tax losses Income not subject to taxation for associates and jointly controlled companies Reversal of deferred taxation due to change of tax rate in mainland China Tax provision of overseas operations Tax expense	The Group 2007 2006 2,807 2,552 491 447 (102) (146) 274 249 466 542 (53) (18) (23) (17) (36) (147) (2) (6) (90) — 45 16 970 920	The Group 2007 2006 2,807 2,552 491 447 (102) (146) 274 249 466 542 (53) (18) (23) (17) (36) (147) (2) (6) (90) — 45 16 970 920
		447 (146) 249 542 (18) (17) (147) (6) — 16
		920

13 PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

Profit of HK$22,382 million (2006: HK$4,292 million) attributable to equity holders of the Company was dealt with in the financial statements of the Company.

14 DIVIDENDS

a. Dividends payable to equity holders of the Company attributable to the year

In HK$ million Interim dividend declared and paid of 6.5 HK cents (2006: 6.5 HK cents) per ordinary share Final dividend proposed after the balance sheet date of 13.5 HK cents (2006: 12 HK cents) per ordinary share	2007 440 915 1,355	2006 438 811
		1,249

The final dividend proposed after the balance sheet date has not been recognized as a liability at the balance sheet

date.

— 122 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

b. Dividends payable to equity holders of the Company attributable to the previous financial year, approved and paid during the year

In HK$ million	2007	2006
Final dividend in respect of the previous financial year, approved and
paid during the year, of 12 HK cents (2006: 12 HK cents) per
ordinary share	813	808

15 EARNINGS PER SHARE

The calculations of basic and diluted earnings per share are based on the following data:

Earnings (in HK$ million) Earnings for the purpose of basic and diluted earnings per share Number of shares Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of deemed issue of shares under the Company’s share option schemes for nil consideration Effect of shares purchased from the market under the Company’s share award schemes Weighted average number of ordinary shares for the purpose of diluted earnings per share	2007 1,503 6,766,664,377 8,685,600 2,401,495 6,777,751,472	2006 1,252
		6,735,317,874 17,122,267 1,340,381
		6,753,780,522

The US$450 million 1% guaranteed convertible bonds due 2007 outstanding as at 31 December, 2006 had an anti-dilutive effect on the basic earnings per share for the year ended 31 December, 2006. The convertible bonds were fully redeemed in January 2007 (note 26f(i)).

— 123 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

16 PROPERTY, PLANT AND EQUIPMENT

In HK$ million Cost Beginning of year Additions - through acquisition of a subsidiary - others Transfers Disposals Write-off Exchange differences End of year Accumulated depreciation and impairment Beginning of year Charge for the year Impairment losses Disposals Exchange differences End of year Net book value End of year Beginning of year	The Group 2007 Land and buildings Exchange equipment Transmission plant Other plant and equipment Projects under construction 1,206 10,416 11,445 8,350 1,419 9 — — 3 — — 556 588 761 1,317 — 237 252 231 (720) (48) (113) (44) (414) (1) — — — — (2) — 4 2 10 3 1,167 11,100 12,243 8,941 2,016 142 6,057 4,395 5,745 — 47 1,149 766 833 — — 3 — 2 — (11) (112) (43) (367) — — 1 2 6 — 178 7,098 5,120 6,219 — 989 4,002 7,123 2,722 2,016 1,064 4,359 7,050 2,605 1,419	Total 32,836 12 3,222 — (620) (2) 19
		35,467
		16,339 2,795 5 (533) 9
		18,615
		16,852
		16,497

— 124 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million Cost Beginning of year Additions Transfers Disposals Exchange differences End of year Accumulated depreciation and impairment Beginning of year Charge for the year Impairment losses Disposals Exchange differences End of year Net book value End of year Beginning of year	The Group 2006 Land and buildings Exchange equipment Transmission plant Other plant and equipment Projects under construction 1,207 9,335 10,220 7,625 1,746 — 844 723 851 821 3 295 506 382 (1,184) (10) (76) (4) (520) (4) 6 18 — 12 40 1,206 10,416 11,445 8,350 1,419 99 4,992 3,663 5,367 — 49 1,121 736 870 — — 10 — 1 — (8) (68) (4) (499) — 2 2 — 6 — 142 6,057 4,395 5,745 — 1,064 4,359 7,050 2,605 1,419 1,108 4,343 6,557 2,258 1,746	Total 30,133 3,239 2 (614) 76
		32,836
		14,121 2,776 11 (579) 10
		16,339
		16,497
		16,012

No land and buildings (2006: aggregate carrying value of HK$31 million) were pledged as security for bank borrowings of the Group as at 31 December, 2007.

The carrying amount of land and buildings of the Group is analyzed as follows:

In HK$ million Held in Hong Kong On long-term lease (over 50 years) On medium-term lease (10-50 years) Held outside Hong Kong Freehold Leasehold On medium-term lease (10-50 years)	The Group 2007 2006 87 90 849 890 9 38 44 46 989 1,064	The Group 2007 2006 87 90 849 890 9 38 44 46 989 1,064
		1,064

— 125 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million	The Company
	2007
	Other plant and equipment
Cost
Beginning and end of year	5
Accumulated depreciation and impairment
Beginning and end of year	3
Net book value
End of year	2
Beginning of year	2
In HK$ million	The Company
	2006
	Other plant and equipment
Cost
Beginning and end of year	5
Accumulated depreciation and impairment
Beginning of year	2
Charge for the year	1
End of year	3
Net book value
End of year	2
Beginning of year	3

17 INVESTMENT PROPERTIES

In HK$ million Beginning of year Additions Transfers Exchange differences Fair value gains End of year	The Group 2007 2006 3,639 3,390 4 127 — (2) 274 123 3 1 3,920 3,639	The Group 2007 2006 3,639 3,390 4 127 — (2) 274 123 3 1 3,920 3,639
		3,639

Investment properties held in and outside Hong Kong were revalued as at 31 December, 2007 by independent valuers, who are a fellow of the Royal Institution of Chartered Surveyors and a member of the Hong Kong Institute of Surveyors respectively. The basis of valuation for investment properties was open market value.

In the consolidated income statements, cost of sales includes HK$18 million (2006: HK$16 million) direct operating expenses that generate rental income while HK$3 million (2006: HK$2 million) direct operating expenses relating to investment properties that were unlet.

— 126 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The carrying amount of investment properties of the Group is analyzed as follows:

In HK$ million Held in Hong Kong On medium-term lease (10-50 years) Held outside Hong Kong On long-term lease (over 50 years) On medium-term lease (10-50 years)	The Group 2007 2006 6 3 769 730 3,145 2,906 3,920 3,639	The Group 2007 2006 6 3 769 730 3,145 2,906 3,920 3,639
		3,639

The Group leases out properties under operating leases. The leases typically run for an initial period of 2 to 15 years. None of the leases include contingent rentals.

As at 31 December, 2007, the total future minimum lease payments in respect of investment properties under non-cancellable operating leases are receivable as follows:

In HK$ million Within 1 year After 1 year but within 5 years After 5 years	The Group 2007 2006 199 189 330 302 38 1 567 492	The Group 2007 2006 199 189 330 302 38 1 567 492
		492

— 127 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

18 INTERESTS IN LEASEHOLD LAND

In HK$ million Cost Beginning of year Additions Transfer to properties under development Exchange differences End of year Accumulated amortization Beginning of year Charge for the year Transfer to properties under development End of year Net book value End of year Beginning of year	The Group 2007 2006 1,326 819 — 495 (543) — 36 12 819 1,326 186 158 30 28 (12) — 204 186 615 1,140 1,140 661	The Group 2007 2006 1,326 819 — 495 (543) — 36 12 819 1,326 186 158 30 28 (12) — 204 186 615 1,140 1,140 661
		1,326
		158 28 —
		186
		1,140
		661

The carrying amount of interests in leasehold land of the Group is analyzed as follows:

In HK$ million Held in Hong Kong On long-term lease (over 50 years) On medium-term lease (10-50 years) Held outside Hong Kong On long-term lease (over 50 years) On medium-term lease (10-50 years)	The Group 2007 2006 92 93 512 533 — 502 11 12 615 1,140	The Group 2007 2006 92 93 512 533 — 502 11 12 615 1,140
		1,140

The leasehold land transferred to properties under development in 2007 was subject to amortization over the period of the lease on a straight-line basis. The amount of amortization charge of the leasehold land had been capitalized as part of the cost of properties under development. As at 31 December, 2007, the net book value of leasehold land included in properties under development was approximately HK$746 million (2006: HK$215 million).

— 128 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

19 PROPERTIES HELD FOR/UNDER DEVELOPMENT

In HK$ million Properties under development (note a) Properties held for development (note b) Less: Amounts classified as current assets Amounts classified as non-current assets	The Group 2007 2006 9,291 3,270 816 — 10,107 3,270 (8,436) (1,231) 1,671 2,039	The Group 2007 2006 9,291 3,270 816 — 10,107 3,270 (8,436) (1,231) 1,671 2,039
		3,270 (1,231)
		2,039

a. Pursuant to the Cyberport Project Agreement, the Group was granted an exclusive right and obligation to design, develop, construct and market the Cyberport project at Telegraph Bay on the Hong Kong Island. The Cyberport project consists of commercial and residential portions. The completed commercial portion was transferred to the Government at no consideration. The associated costs incurred have formed part of the development costs of the residential portion. Pre-sales of the residential portion of the Cyberport project commenced in February 2003.
b. Properties held for development represents freehold land in Japan and Thailand, which the Group intends for future development projects.

20 GOODWILL

In HK$ million Cost Beginning of year Additions Disposals Exchange differences End of year Accumulated impairment Beginning of year Impairment loss End of year Carrying amount End of year Beginning of year	The Group 2007 2006 3,140 2,661 10 479 (78) — 2 — 3,074 3,140 — — 58 — 58 — 3,016 3,140 3,140 2,661	The Group 2007 2006 3,140 2,661 10 479 (78) — 2 — 3,074 3,140 — — 58 — 58 — 3,016 3,140 3,140 2,661
		3,140
		— —
		—
		3,140
		2,661

— 129 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

Impairment tests for cash-generating units containing goodwill

Goodwill is allocated to the Group’s CGUs identified according to business segment as follows:

In HK$ million TSS PCCW Global Omnilink TV & Content PCCW Directories ChinaBig Mobile PCCW Solutions PCPD Others Taiwan Telecommunication Network Services Co., Ltd. UK Broadband Others Total	The Group 2007 2006 (Note 45) 585 585 120 120 705 705 162 162 — 58 162 220 1,939 1,939 6 6 180 168 — 78 16 16 8 8 24 102 3,016 3,140	The Group 2007 2006 (Note 45) 585 585 120 120 705 705 162 162 — 58 162 220 1,939 1,939 6 6 180 168 — 78 16 16 8 8 24 102 3,016 3,140
		705
		162 58
		220
		1,939
		6
		168
		78 16 8
		102
		3,140

The recoverable amounts of the other CGUs are determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

Key assumptions used for value-in-use calculations:

		2007
	Gross margin	Growth rate	Discount rate
PCCW Global	30.1%	4.0%	14.0%
PCCW Directories	50.6%	2.0%	10.0%
Mobile	58.4%	2.0%	15.5%
PCPD	19.9%	—	12.0%
UK Broadband	N/A	10.8%	15.0%

These assumptions have been used for the analysis of each CGU within the business segment.

— 130 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

There was no evidence of impairment arising from this review. The only circumstances where a reasonably possible change in key assumptions might have caused an impairment loss to be recognized was in respect of PCCW Global where:

a fall of 2.8% in the gross margin; or
an increase of 5.5% in the discount rate

would have caused an impairment loss to be recognized.

Management determined budgeted gross margin based on past performance and its expectations for market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the relevant CGUs.

21 INTANGIBLE ASSETS

In HK$ million Trademarks Cost Beginning of year 1,528 Additions — Write-off (10) Exchange differences — End of year 1,518 Accumulated amortization and impairment Beginning of year 491 Charge for the year (note a) 78 Write-off (10) Exchange differences — End of year 559 Net book value End of year 959 Beginning of year 1,037	Content licence Wireless broadband licences 375 112 — — — — — 2 375 114 375 77 — 22 — — — 1 375 100 — 14 — 35	The Group 2007 Mobile carrier licences Customer base Customer acquisition costs 115 65 221 76 — 657 — (65) (67) — — — 191 — 811 10 49 66 12 16 317 — (65) (67) — — — 22 — 316 169 — 495 105 16 155	Others 63 — (54) — 9 62 — (54) — 8 1 1	Total 2,479 733 (196) 2
				3,018
				1,130 445 (196) 1
				1,380
				1,638
				1,349

— 131 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million Trademarks Cost Beginning of year 1,528 Additions — Write-off — Exchange differences — End of year 1,528 Accumulated amortization and impairment Beginning of year 410 Charge for the year (note a) 81 Write-off — Exchange differences — End of year 491 Net book value End of year 1,037 Beginning of year 1,118	Content licence Wireless broadband licences 375 98 — — — — — 14 375 112 375 51 — 20 — — — 6 375 77 — 35 — 47	The Group 2006 Mobile carrier licences Customer base Customer acquisition costs 101 65 — 14 — 233 — — (12) — — — 115 65 221 — 16 — 10 33 78 — — (12) — — — 10 49 66 105 16 155 101 49 —	Others 90 — (27) — 63 79 10 (27) — 62 1 11	Total 2,257 247 (39) 14
				2,479
				931 232 (39) 6
				1,130
				1,349
				1,326

a. The amortization charge for the year is included in “General and administrative expenses” in the consolidated income statement.

22 INVESTMENTS IN SUBSIDIARIES

In HK$ million Unlisted shares, at cost Capital contribution in respect of employee share-based compensation Less: Provision for impairment in value	The Company 2007 2006 148,401 148,401 283 288 148,684 148,689 (128,383) (128,220) 20,301 20,469	The Company 2007 2006 148,401 148,401 283 288 148,684 148,689 (128,383) (128,220) 20,301 20,469
		148,689 (128,220)
		20,469

The provision for impairment in value of HK$128,383 million (2006: HK$128,220 million) relates to certain subsidiaries of the Company which hold the Group’s investments in subsidiaries, associates, jointly controlled companies, debt and equity securities.

Dividends from the PRC entities accounted for as subsidiaries will be declared based on the profits in the statutory financial statements of these PRC entities which are prepared using accounting principles generally accepted in the PRC. Such profits are different from the amounts reported under HKFRSs.

— 132 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

During the year, the Company entered into transactions with certain subsidiaries in the ordinary course of business. Details of the amounts due from and due to subsidiaries are as follows:

a. Amounts due from subsidiaries

In HK$ million Amounts due from subsidiaries Less: Provision for impairment	The Company 2007 2006 54,274 31,642 (18,276) (19,271) 35,998 12,371	The Company 2007 2006 54,274 31,642 (18,276) (19,271) 35,998 12,371
		12,371

Amounts due from subsidiaries are unsecured, non-interest bearing and repayable on demand.

As at 31 December, 2007, the Group has financed the operations of certain of its PRC entities accounted for as subsidiaries in the form of shareholder’s loans amounting to approximately US$117 million (2006: US$117 million) which have not been registered with the State Administration of Foreign Exchange. As a result, remittances in foreign currency of these amounts outside the PRC may be restricted.

As at 31 December, 2007, particulars of the principal subsidiaries of the Company are as follows:

	Place of		Nominal value of	Interest held by	Interest held by
	incorporation/		issued capital/	the	Company
Company name	operations	Principal activities	registered capital	Directly	Indirectly
PCCW-HKT Limited	Hong Kong	Investment holding	HK$6,092,100,052	—	100%
PCCW-HKT Telephone	Hong Kong	Telecommunications services	HK$2,163,783,209	—	100%
Limited1
PCCW-HKT Business	Hong Kong	Provision of business customer	HK$2	—	100%
Services Limited		premises equipment and
		ancillary business services
PCCW-HKT Network	Hong Kong	Provision of retail international	HK$3	—	100%
Services Limited		data and value-added services,
		local value-added
		telecommunications services;
		consumer premises equipment,
		business customer premises
		equipment, computer products
		and ancillary services,
		marketing and selling satellite
		master antenna television and
		related equipment and products
		and provision of maintenance
		services in relation thereto,
		manages customer loyalty
		programs “No.1 Club” and
		“Partners” for members of the
		programs
PCCW-HKT Technical	Hong Kong	Provision of technical support and	HK$500,002	—	100%
Services Limited		maintenance services

— 133 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

	Place of		Nominal value of	Nominal value of	Interest held by	Interest held by
	incorporation/		issued capital/		the	Company
Company name	operations	Principal activities	registered capital		Directly	Indirectly
PCCW Media Limited	Hong Kong	Provision of pay television	HK$3,500,000,100		—	100%
		programme services and	(HK$3,500,000,095
		interactive multimedia services	ordinary shares,
			HK$1 “A” Class
			share and HK$4
			“B”	Class shares)
PCCW Teleservices (Hong	Hong Kong	Provision of customer relationship		HK$12	—	100%
Kong) Limited		management and customer
		contact management solutions
		and services
PCCW Teleservices	Hong Kong	Provision of customer relationship		HK$2	—	100%
Operations (Hong Kong)		management and customer
Limited		contact management solutions
		and services
廣州電盈綜合客戶服務	The PRC	Customer service and consultancy	HK$53,803,000		—	100%
技術發展有限公司3
PCCW (Macau), Limitada	Macau	Selling customer premises	MOP2,000,000		—	75%
		equipment and related
		solutions, conducting systems
		integration projects and
		providing outsourced call
		center services
Cascade Limited	Hong Kong	Design, build and operate network		HK$10,000	—	100%
		infrastructures including
		technical consultancy and
		operation outsourcing
PCCW IMS Limited	Hong Kong	Provision of retail broadband and		HK$2	—	100%
		narrowband Internet access
		services under the
		“NETVIGATOR” brandname,
		international telecommunication
		services and the provision of
		support services to a fellow
		subsidiary
PCCW Global (HK) Limited	Hong Kong	Provision of telecommunication		HK$10	—	100%
		services and satellite
		transponder capacity
PCCW Global Limited	Hong Kong	Global Internet Protocol based		HK$2	—	100%
		communication service
PCCW Global, Inc.	U.S.A.	Supply of broadband internet		US$18	—	100%
		access solutions and web
		services
PCCW Global (Singapore)	Singapore	Telecommunication solutions		S$2	—	100%
Pte. Ltd.		related services
電訊盈科（北京）有限公司2	The PRC	Systems integration, consulting	US$10,250,000		—	100%
		and informatization project

— 134 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

	Place of		Nominal value of	Interest held by	Interest held by
	incorporation/		issued capital/	the	Company
Company name	operations	Principal activities	registered capital	Directly	Indirectly
Unihub China Information	The PRC	Selling of hardware and software	RMB200,000,000	—	38.2%
Technology Company		and information system
Limited4		consulting services
PCCW Solutions Limited	Hong Kong	Computer services and provision	HK$1,200	—	100%
		of IP/IT related value-added
		services to business customers
PCCW Business eSolutions	Hong Kong	Provision of IP/IT related	HK$2	—	100%
Limited		value-added services to
		business customers
PCCW Powerbase Data	Hong Kong	Data center services	HK$2	—	100%
Center Services (HK)
Limited
Power Logistics Limited	Hong Kong	Provision of logistics services	HK$100,000	—	100%
PCCW Directories Limited1	Hong Kong	Sale of advertising in the Business	HK$10,000	—	100%
		White Pages, Yellow Pages for
		businesses and Yellow Pages
		for customers, publication of
		directories, provision of
		Internet directory services and
		sale of on-line advertising
Pacific Century Premium	Bermuda/	Investment holding	HK$240,745,987	—	61.53%
Developments Limited	Hong Kong
Cyber-Port Limited	Hong Kong	Property development	HK$2	—	61.53%
Beijing Jing Wei House and	The PRC	Property development	US$100,000,000	—	61.53%
Land Estate Development
Co., Ltd.5
北京啟夏房地產開發	The PRC	Property development	US$78,000,000	—	61.53%
有限公司3
Talent Master Investments	British Virgin	Property development	US$1	—	61.53%
Limited	Islands/
	Hong Kong
Nihon Harmony Resorts	Japan	Project development	JPY405,000,000	—	61.53%
K.K.2
SUNDAY Holdings (Hong	British Virgin	Investment holding	US$112	—	100%
Kong) Corporation	Islands
PCCW Mobile HK Limited	Hong Kong	Provision of mobile services, and	HK$1,254,000,100	—	100%
		sales of mobile phones and	(HK$100 ordinary
		accessories	shares, and
			HK$1,254,000,000
			non-voting
			deferred shares)
UK Broadband Limited	United Kingdom	Wireless broadband access	GBP1	—	100%
		services

Certain subsidiaries which do not materially affect the results or financial position of the Group are not included.

— 135 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

Notes:

1 The subsidiary has accounting year end date of 31 March. These subsidiaries prepare, for the purpose of consolidation, financial statements as at the same date as the Group.
2 The subsidiary has accounting year end date of 30 June. This subsidiary prepares, for the purpose of consolidation, financial statements as at the same date as the Group.
3 Represents a wholly foreign owned enterprise.
4 Represents a sino-foreign equity joint venture.
5 Represents a sino-foreign cooperative joint venture.

23 INTEREST IN ASSOCIATES

In HK$ million Share of net assets of associates, net of unrecognized losses Loans due from an associate Amount due from an associate Provision for impairment Investments at cost, unlisted shares	The Group 2007 2006 715 698 78 78 34 34 827 810 (172) (173) 655 637 975 975	The Group 2007 2006 715 698 78 78 34 34 827 810 (172) (173) 655 637 975 975
		810 (173)
		637
		975

Balances with associates are unsecured, non-interest bearing and have no fixed terms of repayment.

As at 31 December, 2007, particulars of the principal associates of the Group are as follows:

	Place of		Nominal value of	Interest	held by	held by
	incorporation/		issued capital/	the Company
Company name	operations	Principal activities	registered capital	Directly	Indirectly
Great Eastern	Cayman Islands	Non-trading	US$43,112,715	—		49%
Telecommunications
Limited*
Abacus Distribution	Hong Kong	Provision of computer	HK$15,600,000	—	37.04%
Systems (Hong Kong)		reservation systems
Limited		and travel related
		services
石化盈科信息技術	The PRC	Design and development	RMB50,000,000	—		45%
有限責任公司		of Enterprise
		Resource Planning
		systems, and
		customer relationship
		management systems

The associate has accounting year end date of 31 March. The associate prepares, for the purpose of consolidation, financial statements as at the same date as the Group.

— 136 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

Summarised unaudited financial information of the associates of the Group is as follows:

In HK$ million	2007	2006
Total assets	1,764	1,615
Total liabilities	(378)	(316)
Turnover	761	622
Profit after taxation	63	55

During the year ended 31 December, 2007, the Group has not recognized its share of losses of its associates amounting to approximately HK$1 million (2006: HK$2 million). As at 31 December, 2007, the accumulated share of losses of the associates unrecognized by the Group was HK$8 million (2006: HK$8 million).

24 INTEREST IN JOINTLY CONTROLLED COMPANIES

In HK$ million Share of net assets of jointly controlled companies, net of unrecognized losses Loans due from jointly controlled companies Amounts due from jointly controlled companies Provision for impairment Investments at cost, unlisted shares	The Group 2007 2006 3,119 2,815 10 8 24 24 3,153 2,847 (2,837) (2,837) 316 10 3,449 3,130	The Group 2007 2006 3,119 2,815 10 8 24 24 3,153 2,847 (2,837) (2,837) 316 10 3,449 3,130
		2,847 (2,837)
		10
		3,130

Balances with jointly controlled companies are unsecured, non-interest bearing and have no fixed terms of repayment.

As at 31 December, 2007, particulars of the principal jointly controlled companies of the Group are as follows:

			Nominal value of	Interest held by	Interest held by
	Place of		issued capital/	the Company
Company name	incorporation	Principal activities	registered capital	Directly	Indirectly
Reach Ltd.	Bermuda	Provision of	US$5,890,000,000	—	50%
		international
		telecommunication
		services
網通寬帶網絡有限責任公司	The PRC	Provision of	RMB644,518,697	—	50%
		telecommunication
		services and IPTV
		services

— 137 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

Summarised unaudited financial information of Group’s interest in jointly controlled companies is as follows:

In HK$ million Non-current assets Current assets Total assets Non-current liabilities Current liabilities Net liabilities Turnover Expenses Profit before taxation Taxation Profit for the year	2007 1,307 564 1,871 (279) (1,754) (162) 2,532 (2,479) 53 3 56	2006 768 616
		1,384 (341) (1,842)
		(799)
		2,264 (2,213)
		51 (7)
		44

25 INVESTMENTS

Investments are analyzed as follows:

In HK$ million	The Group
	2007	2006
Held-to-maturity investments	6	12
Available-for-sale financial assets (note a)	321	496
Financial assets at fair value through profit or loss (note b)	12	50
	339	558

a. Available-for-sale financial assets

In HK$ million Listed equity securities Overseas Less: Provision for impairment Unlisted equity securities Cost Less: Provision for impairment Market value of listed equity securities	The Group 2007 2006 49 37 (26) — 23 37 1,526 1,790 (1,228) (1,331) 298 459 321 496 23 37	The Group 2007 2006 49 37 (26) — 23 37 1,526 1,790 (1,228) (1,331) 298 459 321 496 23 37
		37
		1,790 (1,331)
		459
		496
		37

— 138 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The movement in the provision for impairment of unlisted equity securities during the year is as follows:

In HK$ million Beginning of year Impairment loss recognized Amount reclassified on transfer to listed equity securities Amounts written off on disposal End of year	The Group 2007 2006 1,331 1,321 34 40 (16) (16) (121) (14) 1,228 1,331	The Group 2007 2006 1,331 1,321 34 40 (16) (16) (121) (14) 1,228 1,331
		1,331

As at 31 December, 2007, the Group’s unlisted equity securities of HK$139 million (2006: HK$198 million) was individually determined to be impaired. Consequently, provision for impairment of HK$34 million (2006: HK$40 million) was recognized in the income statement. The Group does not hold any collateral over these balances.

During the year, available-for-sale financial assets with a carrying value of approximately HK$303 million (2006: HK$101 million) were sold and approximately HK$95 million (2006: HK$88 million) was transferred from equity on disposal (see note 33). As a result, a realized gain of approximately HK$79 million (2006: HK$88 million) was recognized and included in “Other (losses)/gains, net” in the consolidated income statement.

No available-for-sale financial assets (2006: aggregate carrying value of HK$21 million) were pledged as security for bank borrowings of the Group as at 31 December, 2007.

b. Financial assets at fair value through profit or loss

In HK$ million Held for trading Listed equity securities Hong Kong Unlisted equity securities	The Group 2007 2006 12 4 — 46 12 50	The Group 2007 2006 12 4 — 46 12 50
		50

26 CURRENT ASSETS AND LIABILITIES

a. Sales proceeds held in stakeholders’ accounts

The balance represents proceeds from the sales of the residential portion of the Cyberport project retained in bank accounts opened and maintained by stakeholders. These amounts will be transferred to specific bank accounts, which are restricted in use, pursuant to certain conditions and procedures as stated in the Cyberport Project Agreement.

b. Restricted cash

Pursuant to the Cyberport Project Agreement, the Group has a restricted cash balance of approximately HK$575 million as at 31 December, 2007 (2006: HK$826 million) held in specific bank accounts. The uses of the funds are specified in the Cyberport Project Agreement.

— 139 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

In addition, the Company has set aside a total cash balance of approximately HK$106 million as at 31 December, 2007 (2006: HK$4,301 million) in connection with the release of undertakings in relation to the capital reduction of the Company.

The remaining HK$1 million as at 31 December, 2007 (2006: HK$1 million) represented a bank deposit placed by an indirect subsidiary of the Company as a security for a bank guarantee issued in respect of the use of facilities at the Hong Kong International Airport for the provision of mobile services.

c. Prepayments, deposits and other current assets

Included in prepayments, deposits and other current assets was prepaid programme costs of approximately HK$120 million as at 31 December, 2007 (2006: HK$54 million).

d. *Inventories* In HK$ million Work-in-progress Finished goods Consumable inventories e. *Accounts receivable, net* In HK$ million Accounts receivable (note i) Less: Impairment loss for doubtful debts (note ii) Accounts receivable, net	The Group 2007 2006 678 375 138 152 38 17 854 544 The Group 2007 2006 2,987 2,846 (278) (266) 2,709 2,580	The Group 2007 2006 678 375 138 152 38 17 854 544 The Group 2007 2006 2,987 2,846 (278) (266) 2,709 2,580
		2,580

i. *Aging analysis of accounts receivable* In HK$ million 0 - 30 days 31 - 60 days 61 - 90 days 91 - 120 days Over 120 days	The Group 2007 2006 1,584 1,759 461 370 209 143 142 111 591 463 2,987 2,846	The Group 2007 2006 1,584 1,759 461 370 209 143 142 111 591 463 2,987 2,846
		2,846

— 140 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

ii. Impairment loss for doubtful debts

The movement in the provision for doubtful debts during the year, including both specific and collective loss components, is as follows:

In HK$ million Beginning of year Impairment loss recognized Uncollectible amounts written off End of year	The Group 2007 2006 266 228 218 106 (206) (68) 278 266	The Group 2007 2006 266 228 218 106 (206) (68) 278 266
		266

As at 31 December, 2007, the Group’s accounts receivable of HK$214 million (2006: HK$169 million) was individually determined to be impaired. The individually impaired receivable related to customers that were in financial difficulties and management assessed that only a portion of the receivable is expected to be recovered. Consequently, specific provision for doubtful debts of HK$191 million (2006: HK$162 million) was recognized. The Group does not hold any collateral over these balances.

iii. Accounts receivable that is not impaired

The aging analysis of accounts receivable that is neither individually nor collectively considered to be impaired is as follows:

In HK$ million Neither past due nor impaired 0 - 30 days past due 31 - 60 days past due 61 - 90 days past due Over 90 days past due Past due but not impaired	The Group 2007 2006 1,446 1,648 486 364 193 159 135 80 426 324 1,240 927 2,686 2,575	The Group 2007 2006 1,446 1,648 486 364 193 159 135 80 426 324 1,240 927 2,686 2,575
		364 159 80 324
		927
		2,575

Accounts receivable that was neither past due nor impaired relates to a wide range of customers for whom there was no recent history of default.

Accounts receivable that was past due but not impaired relates to a wide range of customers that have a good track record with the Group. Based on past experience, management believes that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral over these balances.

— 141 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

f. Short-term borrowings

In HK$ million	The	Group	The	Company
	2007	2006	2007	2006
Bank loans	10,174	6,311	—	6,300
Current portion of long-term borrowings
(note 27)	—	3,521	—	—
US$450 million 1% guaranteed convertible
bonds due 2007 (note i)	—	4,163	—	—
	10,174	13,995	—	6,300
Secured	—	11	—	—
Unsecured	10,174	13,984	—	6,300

i. US$450 million 1% guaranteed convertible bonds due 2007

On 29 January, 2002, PCCW Capital No. 2 Limited, an indirect wholly-owned subsidiary of the Company, issued US$450 million 1% guaranteed convertible bonds due 2007, which were unconditionally and irrevocably guaranteed on a joint and several basis by the Company and PCCW-HKT Telephone Limited (“HKTC”), an indirect wholly-owned subsidiary of the Company. The convertible bonds due 2007 were listed on the Luxembourg Stock Exchange. They were convertible, at the option of their holders, into ordinary shares of the Company at an initial conversion price of HK$13.5836 (approximately US$1.7415) per share at any time up to and including the close of business on 15 January, 2007. The bonds bore interest at 1% per annum, payable semi-annually in arrears on 29 January and 29 July in each year and at maturity, commencing on 29 July, 2002.

As at 31 December, 2006, none of the convertible bonds due 2007 had been converted into ordinary shares of the Company. On 29 January, 2007, these bonds were fully redeemed upon the scheduled maturity in cash, which was equivalent to 119.383% of the principal amount, plus accrued interest as at 29 January, 2007.

The convertible bonds due 2007 were split into the liability and equity components at initial recognition. Interest expense on the convertible bonds is calculated using the effective interest method by applying the effective interest rate of 5.3% to the liability component, including the redemption premium.

Please refer to note 42 for details of the Group’s banking facilities.

— 142 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

g. Accounts payable

An aging analysis of accounts payable is set out below:

In HK$ million 0 - 30 days 31 - 60 days 61 - 90 days 91 - 120 days Over 120 days	The Group 2007 2006 721 598 134 90 29 16 24 54 356 264 1,264 1,022	The Group 2007 2006 721 598 134 90 29 16 24 54 356 264 1,264 1,022
		1,022

h. Gross amount due to customers for contract work

In HK$ million Contract costs incurred plus attributable profits less foreseeable losses Less: Estimated value of work performed	The Group 2007 2006 779 779 (786) (786) (7) (7)	The Group 2007 2006 779 779 (786) (786) (7) (7)
		(7)

The total amount of progress billings, included in the estimated value of work performed as at 31 December, 2007, was approximately HK$786 million (2006: HK$786 million).

Included in other current assets at 31 December, 2007 was approximately HK$8 million (2006: HK$8 million being included in other non-current assets) representing retention receivable from customers in respect of construction contracts in progress.

— 143 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

27 LONG-TERM BORROWINGS

In HK$ million Repayable within a period - not exceeding one year - over two years, but not exceeding five years - over five years Less: Amounts repayable within one year included under current liabilities (note 26(f)): US$456 million 7.88% guaranteed notes due 2013 (note b) Representing: US$1,000 million 8% guaranteed notes due 2011 (note a) US$500 million 6% guaranteed notes due 2013 (note c) US$500 million 5.25% guaranteed notes due 2015 (note d) Secured Unsecured	The Group 2007 2006 — 3,521 7,765 7,731 7,740 7,707 15,505 18,959 — (3,521) 15,505 15,438 7,765 7,731 3,878 3,862 3,862 3,845 15,505 15,438 — — 15,505 15,438	The Group 2007 2006 — 3,521 7,765 7,731 7,740 7,707 15,505 18,959 — (3,521) 15,505 15,438 7,765 7,731 3,878 3,862 3,862 3,845 15,505 15,438 — — 15,505 15,438
		18,959 (3,521)
		15,438
		7,731 3,862 3,845
		15,438
		—
		15,438

a. US$1,000 million 8% guaranteed notes due 2011

In November 2001, PCCW-HKT Capital Limited, an indirect wholly-owned subsidiary of the Company, issued US$1,000 million 7.75% guaranteed notes due 2011 (the “Notes due 2011”). Interest is payable semi-annually in arrears. The interest rate payable on the Notes due 2011 will be subject to adjustment from time to time if the relevant rating agencies downgrade the rating ascribed to the Notes due 2011 below a pre-agreed level. The interest rate payable on the Notes due 2011 has been adjusted to 8% based on the current ratings.

The Notes due 2011 are unconditionally and irrevocably guaranteed by HKTC and will rank pari passu with all other outstanding unsecured and unsubordinated obligations of HKTC.

b. US$456 million 7.88% guaranteed notes due 2013

On 24 January, 2003, PCCW Capital No. 3 Limited, an indirect wholly-owned subsidiary of the Company, privately placed US$456 million 7.88% guaranteed notes due 2013 to raise funds for general corporate purposes. The notes were listed on the Luxembourg Stock Exchange and were unconditionally and irrevocably guaranteed by the Company until 12 May, 2004. On 12 May, 2004, the noteholders approved the novation of the guarantee to HKTC and amendments to certain terms of the notes. On 24 January, 2007, these guaranteed notes were fully redeemed.

— 144 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

c. US$500 million 6% guaranteed notes due 2013

On 17 July, 2003, PCCW-HKT Capital No.2 Limited, an indirect wholly-owned subsidiary of the Company, issued US$500 million 6% guaranteed notes due 2013 which are listed on the Luxembourg Stock Exchange. The notes are irrevocably and unconditionally guaranteed by HKTC and will rank pari passu with all other outstanding unsecured and unsubordinated obligations of HKTC. The proceeds are used for general corporate purposes.

d. US$500 million 5.25% guaranteed notes due 2015

On 20 July, 2005, PCCW-HKT Capital No.3 Limited, an indirect wholly-owned subsidiary of the Company, issued US$500 million 5.25% guaranteed notes due 2015, which are listed on the Singapore Exchange Securities Trading Limited. Interest is payable semi-annually in arrears. The notes are irrevocably and unconditionally guaranteed by HKTC and will rank pari passu with all other outstanding unsecured and unsubordinated obligations of HKTC. The proceeds are used for general corporate purposes.

Please refer to note 42 for details of the Group’s banking facilities.

28 AMOUNT PAYABLE TO THE GOVERNMENT UNDER THE CYBERPORT PROJECT AGREEMENT

In HK$ million		The Group
		2007
	Government share
	under the
	Cyberport Project
	Agreement	Others	Total
	(Note a)
Beginning of year	3,480	25	3,505
Additional amount payable included
in properties under development	6,745	—	6,745
Additional amount payable	—	33	33
Settlement during the year	(3,339)	(25)	(3,364)
End of year	6,886	33	6,919
Less: Amounts classified as current liabilities	(5,145)	(33)	(5,178)
Amounts classified as non-current liabilities	1,741	—	1,741

a. Pursuant to the Cyberport Project Agreement, the Government shall be entitled to receive payments of approximately 65% of the surplus cash flow arising from the sales of the residential portion of the Cyberport project, net of certain allowable costs incurred on the project, as stipulated under certain terms and conditions of the Cyberport Project Agreement. The amount payable to the Government is included in properties under development as the amount is considered as a part of the development costs of the Cyberport project. The amount payable is based on estimated sales proceeds of the residential portion of the Cyberport project and the estimated development costs of the Cyberport project. The estimated amount to be paid to the Government during the forthcoming year is classified as current liabilities.

— 145 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

29 DERIVATIVE FINANCIAL INSTRUMENTS

In HK$ million Current assets Cross currency swap contracts — cash flow hedges (note a) Interest rate option contract — held for trading (note b) Current liabilities Cross currency swap contracts — cash flow hedges (note a) Cross currency swap contracts — not qualified for hedge accounting Forward foreign exchange contract (note c)	The Group 2007 2006 43 — — — 43 — (6) (470) — (85) (7) — (13) (555)	The Company 2007 2006 — — — — — — — — — (6) — — — (6)	The Company 2007 2006 — — — — — — — — — (6) — — — (6)
			—
			— (6) —
			(6)

a. As at 31 December, 2007, the Group had outstanding cross currency swap contracts with notional contract amounts of US$2,000 million (approximately HK$15,517 million) (2006: US$2,906 million (approximately HK$22,616 million)) at various rates, to manage the Group’s exposure to foreign currencies fluctuations. As at 31 December, 2006, the Company had outstanding cross currency swap contracts with notional contract amounts of US$450 million (approximately HK$3,506 million) at various rates. The Company had no outstanding cross currency swap contract as at 31 December, 2007.

The carrying amounts of cross currency swap contracts represent either the net fair value receivables, which are included in current assets, or net fair value payables, which are included in current liabilities, as at 31 December, 2007.

All cross currency swap contracts outstanding as at 31 December, 2007 with notional contract amounts of US$2,000 million (approximately HK$15,517 million) were designated as cash flow hedges of the foreign exchange rate risk in the Group’s foreign currency denominated borrowings. Maturity of these swaps range from approximately 1 year to the full term of the underlying borrowings and has fixed the USD/HKD exchange rate at 7.7508 to 7.7790 for the notional amounts. As at 31 December, 2006 certain cross currency swap contracts outstanding with notional contract amounts of US$2,000 million (approximately HK$15,562 million) were designated as cash flow hedges. The maturity of these swaps matched the maturity of the underlying borrowings and have fixed the USD/HKD exchange rate at 7.7625 to 7.7915 for the notional amounts (see note 39(c)(i)). Gains and losses recognized in the hedging reserve under equity on these cross currency swap contracts will be continuously released to the income statement until the repayment of the borrowings.

b. The Group enters into interest rate option contracts to manage its interest rate risk. As at 31 December, 2007, the total notional amount of such instruments was HK$20 million (2006: HK$28 million) and the carrying amount of such instruments representing the fair value was nil (2006: Nil).
c. As at 31 December, 2007, the Group has outstanding forward foreign exchange contract to sell THB2,425 million at approximately US$70 million fixing the THB/USD forward rate at 34.113. The contract has incurred an estimated loss of HK$7 million as at 31 December, 2007. There was no outstanding forward foreign exchange contract as at 31 December, 2006.

— 146 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

30 SHARE CAPITAL

Authorized: Ordinary shares of HK$0.25 each Beginning and end of year Issued and fully paid: Ordinary shares of HK$0.25 each Beginning of year Exercise of employee share options (note a) End of year	2007 Number of shares Nominal value HK$ million 10,000,000,000 2,500 6,750,171,317 1,688 28,455,836 7 6,778,627,153 1,695	2007 Number of shares Nominal value HK$ million 10,000,000,000 2,500 6,750,171,317 1,688 28,455,836 7 6,778,627,153 1,695	2006 Number of shares Nominal value HK$ million 10,000,000,000 2,500 6,723,020,490 1,681 27,150,827 7 6,750,171,317 1,688	2006 Number of shares Nominal value HK$ million 10,000,000,000 2,500 6,723,020,490 1,681 27,150,827 7 6,750,171,317 1,688
		1,688 7		1,681 7
		1,695		1,688

a. During 2007, 28,455,836 (2006: 27,150,827) employee share options were exercised by the eligible option holders at their respective subscription prices for a total cash consideration of HK$125,113,074 (2006: HK$119,277,935) resulting in the issue of an aggregate of 28,455,836 (2006: 27,150,827) new ordinary shares of the Company of HK$0.25 each, details of which are set out in note 32(a)(iv).

All new ordinary shares issued during the year rank pari passu in all respects with the existing shares.

31 EMPLOYEE RETIREMENT BENEFITS

a. Defined benefit retirement schemes

The Group operates defined benefit retirement schemes (“DB Schemes”) that provide lump sum benefits for employees upon resignation and retirement. The DB Schemes are final salary defined benefit schemes. The scheme assets are administered by independent trustees and are maintained independently of the Group’s finances.

The DB Schemes are funded by contributions from the Group and employees in accordance with qualified independent actuaries’ recommendation from time to time on the basis of periodic valuations.

The latest independent actuarial valuation of the DB Schemes, prepared in accordance with HKAS 19, was carried out on 31 December, 2007 and was prepared by Mr Aaron Wong of Watson Wyatt Hong Kong Limited, fellow of the Canadian Institute of Actuaries and also fellow of the Society of Actuaries, USA, using the projected unit credit method. The actuary was of the opinion that the fair value of the scheme assets was sufficient to cover 81.4% (2006: 87.8%) of the present value of the defined benefit obligations as at 31 December, 2007.

— 147 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

i. The amount recognized in the consolidated balance sheet is as follows:

In HK$ million Present value of the defined benefit obligations (note iii) Fair value of scheme assets (note iv) Unrecognized actuarial losses Defined benefit liability in the consolidated balance sheet	The Group 2007 2006 253 237 (206) (208) 47 29 (38) (18) 9 11	The Group 2007 2006 253 237 (206) (208) 47 29 (38) (18) 9 11
		29 (18)
		11

No employer’s contributions are expected to be paid to the scheme in 2008.

ii. Major categories of scheme assets as a percentage of total scheme assets are as follows:

Equity securities Cash or short-term fixed deposits Other (insurance fund)	The Group 2007 2006 — — — 100% 100% — 100% 100%	The Group 2007 2006 — — — 100% 100% — 100% 100%
		100%

As at 31 December, 2007, the scheme assets do not include any ordinary shares issued by the Company (2006: Nil).

iii. Movements in the present value of the defined benefit obligations are as follows:

In HK$ million Beginning of year Benefits paid Interest cost Actuarial losses End of year	The Group 2007 2006 237 228 (11) (11) 9 10 18 10 253 237	The Group 2007 2006 237 228 (11) (11) 9 10 18 10 253 237
		237

— 148 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

iv. Movements in the present value of scheme assets are as follows:

In HK$ million Beginning of year Benefits paid Expected return on scheme assets Actuarial losses End of year	The Group 2007 2006 208 211 (11) (11) 11 12 (2) (4) 206 208	The Group 2007 2006 208 211 (11) (11) 11 12 (2) (4) 206 208
		208

v. (Income)/Expense recognized in the consolidated income statement is as follows:

In HK$ million Interest cost Expected return on scheme assets The income is recognized in the following line item in the consolidated income statement: General and administrative expenses — retirement costs for other staff (note 9(a)) Actual return on scheme assets	The Group 2007 2006 9 10 (11) (12) (2) (2) (2) (2) 9 8	The Group 2007 2006 9 10 (11) (12) (2) (2) (2) (2) 9 8
		(2)
		(2)
		8

vi. The principal actuarial assumptions used (expressed as weighted averages) are as follows:


	2007	2006
Discount rate	3.55%	4.00%
Expected rate of return on scheme assets	5.75%	5.75%
Future pension increase	3.00%	3.00%

The expected rate of return on scheme assets is based on the long-term benchmark allocation of the scheme.

— 149 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

vii. Historical information:

In HK$ million Present value of the defined benefit obligations Fair value of scheme assets Deficit in the scheme Experience losses on scheme liabilities Experience losses on scheme assets	The Group 2007 2006 253 237 (206) (208) 47 29 3 2 2 4	The Group 2007 2006 253 237 (206) (208) 47 29 3 2 2 4
		29
		2 4

b. Defined contribution retirement schemes

The Group also operates defined contribution schemes, including the Mandatory Provident Fund Scheme (the “MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance, for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The schemes are administered by independent trustees.

Under the defined contribution scheme, the employer is required to make contributions to the scheme at rates specified under the rules of the scheme. Where employees leave the scheme prior to the full vesting of the employer’s contributions, the amount of forfeited contributions is used to reduce the contributions payable by the Group.

Under the MPF scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HK$20,000. Contributions to the scheme vest immediately upon the completion of the service in the relevant service period.

32 EQUITY COMPENSATION BENEFITS

a. Share option schemes of the Company

The Company has a share option scheme (the “1994 Scheme”) which was adopted in September 1994 and amended in May 2002 under which the board of directors (the “Board”) of the Company may, at its discretion, invite employees of the Group, including directors of any company in the Group, and other eligible persons, to take up options to subscribe for shares of the Company. The vesting period and exercise period of the options are determined by the Board but in any case no options can be exercised later than 10 years from the date of grant. Each option gives the holder the right to subscribe for one share. The 1994 Scheme was due to expire in September 2004.

At the Company’s annual general meeting held on 19 May, 2004, the shareholders of the Company approved the termination of the 1994 Scheme and the adoption of a new share option scheme (the “2004 Scheme”). Since 19 May, 2004, the Board may, at its discretion, grant share options to any eligible person to subscribe for shares in the Company subject to the terms and conditions stipulated in the 2004 Scheme. The overall limit on the number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the 2004 Scheme and any other share option schemes including 1994 Scheme must not exceed 30% of the shares in issue from time to time. In addition, the maximum number of shares which may be granted under the 2004 Scheme must not exceed 10% of the Company’s issued share capital as at 19 May, 2004 (or some other date if renewal of this limit is approved by shareholders). The exercise price of the options under the 2004 Scheme shall be determined by the Board at its absolute discretion but in any event shall not be less than the highest of (i) the closing price of the shares as stated in the daily quotations sheet of the Stock Exchange on the date of grant, (ii) the average closing price of the shares as stated in the daily quotations sheet of the Stock Exchange for the five days last preceding the date of grant on which days it has been possible to trade shares on the Stock Exchange, and (iii) the nominal value of a share on the date of grant. The vesting period and exercise period of the options are determined by the Board, but no option can be exercised later than the day last preceding the

— 150 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

tenth anniversary of the date of grant in respect of such option. In general, the subscription price is determined by reference to the closing prices of the shares as stated in the daily quotations sheet of the Stock Exchange. The basis for determination of the subscription price and the total number of shares that can be granted to eligible persons are precisely specified in the rules of the 2004 Scheme. The 2004 Scheme does not specify a minimum period for which an option must be held nor a performance target which must be achieved before an option can be exercised. The Group has no legal or constructive obligation to repurchase or settle the options in cash.

i. Movements in the number of share options outstanding and their related weighted average exercise prices

		2007		2006
	Weighted		Weighted
	average	Number of	average	Number of
	exercise price	options	exercise price	options
	HK$		HK$
Beginning of year	8.78	211,116,828	9.49	231,498,073
Issued (note iii)	N/A	—	4.92	25,000,000
Exercised (note iv)	4.40	(28,455,836)	4.39	(27,150,827)
Cancelled/Lapsed (note v)	6.64	(38,294,221)	19.06	(18,230,418)
End of year (note ii)	10.20	144,366,771	8.78	211,116,828
Exercisable at end of year	10.20	144,366,771	10.34	152,323,328

— 151 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

ii. Terms of unexpired and unexercised share options at balance sheet date

Date of grant Vesting period Exercise period Exercise price HK$ 17 August, 1999 to 15 September, 1999 17 August, 2000 to 17 August, 2004 17 August, 2000 to 17 August, 2009 11.7800 25 October, 1999 to 23 November, 1999 25 October, 2000 to 25 October, 2004 25 October, 2000 to 25 October, 2009 22.7600 8 February, 2000 to 8 March, 2000 8 February, 2001 to 8 February, 2003 8 February, 2001 to 8 February, 2010 75.2400 26 August, 2000 to 24 September, 2000 26 May, 2001 to 26 May, 2005 26 May, 2001 to 26 August, 2010 60.1200 27 October, 2000 to 25 November, 2000 15 March, 2001 to 15 March, 2005 15 March, 2001 to 27 October, 2010 24.3600 22 January, 2001 to 20 February, 2001 22 January, 2001 to 22 January, 2005 22 January, 2001 to 22 January, 2011 16.8400 20 February, 2001 8 February, 2002 to 8 February, 2004 8 February, 2002 to 8 February, 2011 18.7600 17 April, 2001 to 16 May, 2001 26 May, 2001 to 26 May, 2005 26 May, 2001 to 17 April, 2011 10.3000 16 July, 2001 to 15 September, 2001 16 July, 2002 to 16 July, 2004 16 July, 2002 to 16 July, 2011 9.1600 15 October, 2001 to 13 November, 2001 15 October, 2002 to 15 October, 2004 15 October, 2002 to 15 October, 2011 8.6400 10 May, 2002 11 April, 2003 to 11 April, 2007 11 April, 2003 to 11 April, 2012 7.9150 1 August, 2002 1 August, 2003 to 1 August, 2005 1 August, 2003 to 31 July, 2012 8.0600 11 October, 2002 11 October, 2002 11 October, 2002 to 10 October, 2007 8.6165 13 November, 2002 13 November, 2003 to 13 November, 2005 13 November, 2003 to 12 November, 2012 6.1500 25 July, 2003 25 July, 2004 to 25 July, 2006 25 July, 2004 to 23 July, 2013 4.3500 16 September, 2003 16 September, 2004 to 16 September, 2006 16 September, 2004 to 14 September, 2013 4.9000 8 February, 2005 8 February, 2006 to 8 February, 2007 8 February, 2006 to 7 February, 2009 4.4750 1 September, 2005 1 September, 2006 to 1 September, 2008 1 September, 2006 to 31 August, 2010 5.2500 15 September, 2006 15 September, 2007 to 15 September, 2009 15 September, 2007 to 14 September, 2010 4.9240	Number of options 2007 2006 13,569,593 14,137,058 1,724,000 3,184,400 86,700 86,700 6,549,600 6,571,200 8,742,906 9,218,282 11,171,039 12,673,839 86,700 86,700 1,068,840 1,122,560 236,320 272,680 — 120,000 86,700 86,700 200,000 200,000 — 1,200,000 6,500,000 6,680,000 52,911,873 71,006,209 157,000 177,000 41,275,500 52,293,500 — 7,000,000 — 25,000,000 144,366,771 211,116,828	Number of options 2007 2006 13,569,593 14,137,058 1,724,000 3,184,400 86,700 86,700 6,549,600 6,571,200 8,742,906 9,218,282 11,171,039 12,673,839 86,700 86,700 1,068,840 1,122,560 236,320 272,680 — 120,000 86,700 86,700 200,000 200,000 — 1,200,000 6,500,000 6,680,000 52,911,873 71,006,209 157,000 177,000 41,275,500 52,293,500 — 7,000,000 — 25,000,000 144,366,771 211,116,828
		211,116,828

— 152 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The range of exercise prices and the weighted average remaining contractual life of the share options outstanding are as follows:

		2007			2006
	Weighted			Weighted
	average			average
	remaining			remaining
	contractual	Number of		contractual	Number of
Range of exercise prices	life		options	life	options
	(years)			(years)
HK$ 4.01 to 5.04	3.61	94,344,373		4.51	148,476,709
5.05 to 7.54	4.87		6,500,000	4.74	13,680,000
7.55 to 11.29	3.55		1,591,860	3.05	3,001,940
11.30 to 16.79	1.63	13,569,593		2.63	14,137,058
16.80 to 25.04	2.87	21,724,645		3.82	25,163,221
55.05 to 70.04	2.65		6,549,600	3.65	6,571,200
70.05 to 85.00	2.10		86,700	3.10	86,700
		144,366,771			211,116,828

iii. Details of share options granted during the year

				2007			2006
	Exercise	Exercise	Consideration	Number of		Consideration	Number of
Vesting period	period	price	received		options	received	options
		HK$	HK$			HK$
15 September,	15 September,
2007 to 15	2007 to 14
September,	September,
2009	2010	4.9240	—		—	—	25,000,000
			—		—	—	25,000,000

The fair value of share options granted during 2006 was determined using the trinomial option pricing model. The weighted average fair value of share options granted and the respective weighted average inputs and assumptions to the model were as follows:

	2006
Fair value at measurement date	HK$0.95
Share price	HK$4.92
Exercise price	HK$4.92
Expected volatility	27.66%
Expected option life (in years)	4 years
Expected dividends	3.78%
Risk-free interest rate	3.94%

The expected volatility was based on statistical analysis of daily share prices over one year immediately preceding the grant date. Expected dividends were based on historical dividends. Risk-free interest rate was based on the market yield of Exchange Fund Notes with a term similar to the expected option life.

— 153 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

Share options were granted under a service condition. This condition has not been taken into account in the grant date fair value measurement of the services received. There were no market conditions associated with the share option grants.

iv. Details of share options exercised during the year

Exercise date Exercise price Market value per share at exercise date HK$ HK$ 4 January, 2006 to 29 December, 2006 4.3500 4.67 to 5.75 8 February, 2006 to 28 November, 2006 4.4750 4.65 to 5.75 8 February, 2006 4.9000 5.55 4 January, 2007 to 27 December, 2007 4.4750 4.62 to 5.14 5 January, 2007 to 17 December, 2007 4.3500 4.56 to 5.14	2007 Proceeds received Number of options HK$ — — — — — — 47,620,712 10,641,500 77,492,362 17,814,336 125,113,074 28,455,836	2007 Proceeds received Number of options HK$ — — — — — — 47,620,712 10,641,500 77,492,362 17,814,336 125,113,074 28,455,836	2006 Proceeds received Number of options HK$ 77,518,422 17,820,327 41,695,813 9,317,500 63,700 13,000 — — — — 119,277,935 27,150,827	2006 Proceeds received Number of options HK$ 77,518,422 17,820,327 41,695,813 9,317,500 63,700 13,000 — — — — 119,277,935 27,150,827
		28,455,836		27,150,827

The weighted average share price at the date of exercise for share options exercised during the year was HK$4.85 (2006: HK$5.28).

v. Details of share options cancelled or lapsed during the year

Exercise period Exercise price HK$ 17 August, 2000 to 17 August, 2009 11.7800 17 August, 2000 to 25 October, 2009 22.7600 26 May, 2001 to 26 August, 2010 60.1200 15 March, 2001 to 27 October, 2010 24.3600 22 January, 2001 to 22 January, 2011 16.8400 26 May, 2001 to 17 April, 2011 10.3000 16 July, 2002 to 16 July, 2011 9.1600 15 October, 2002 to 15 October, 2011 8.6400 11 October, 2002 to 10 October, 2007 8.6165 13 November, 2003 to 12 November, 2012 6.1500 25 July, 2004 to 23 July, 2013 4.3500 16 September, 2004 to 14 September, 2013 4.9000 8 February, 2006 to 7 February, 2009 4.4750 1 September, 2006 to 31 August, 2010 5.2500 15 September, 2007 to 14 September, 2010 4.9240	Number of 2007 567,465 1,460,400 21,600 475,376 1,502,800 53,720 36,360 120,000 1,200,000 180,000 280,000 20,000 376,500 7,000,000 25,000,000 38,294,221	options 2006 2,275,067 186,000 3,316,000 771,508 3,694,613 24,480 93,080 — — 140,000 3,741,670 — 3,988,000 — —
		18,230,418

— 154 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

b. Share award schemes of the Company

In 2002, the Company established two employee share incentive award schemes under which awards of shares may be granted to employees of participating subsidiaries. Directors of the Company are not eligible to participate in either scheme. On 10 June, 2002, the Company approved the establishment of the Purchase Scheme under which selected employees are awarded shares purchased in the market. On 12 November, 2002, the Company approved the establishment of the Subscription Scheme under which selected employees are awarded newly issued shares. The purpose of both the Purchase Scheme and the Subscription Scheme is to recognize the contributions of certain employees of the Group, to retain them for the continued operation and development of the Group, and to attract suitable personnel for the further development of the Group. Under both schemes, following the making of an award to an employee, the relevant shares are held on trust for that employee and then vest over a period of time provided that the employee remains an employee of the Group at the relevant time and satisfies any other conditions specified at the time the award is made. In May 2006, the Purchase Scheme was altered such that the directors of the Company are also eligible to participate in this scheme. The maximum aggregate number of shares that can be awarded under the two schemes is limited to 1% of the issued share capital of the Company (excluding shares that have already been transferred to employees on vesting).

A summary of movements in shares held under the share award schemes during the year is as follows:

Beginning of year Purchase from the market by the trustee at average market price of HK$4.81 per share Awards of vested shares to employees Forfeiture of lapsed shares End of year	Number of 2007 6,500,000 — (3,980,891) — 2,519,109	shares 2006 — 5,073,600 — 1,426,400
		6,500,000

The fair value of shares awarded under the Purchase Scheme in 2006 at the measurement date was HK$4.90, which was measured by the quoted market price of the shares at grant date.

c. Share option schemes of PCPD

PCPD approved and adopted a share option scheme on 17 March, 2003 (the “2003 PCPD Scheme”), which was valid for 10 years after the date of adoption. In order to align the terms of the share option scheme of PCPD with those of the Company and in view of the limited number of shares capable of being issued under the 2003 PCPD Scheme relative to the current capital base of PCPD, the shareholders of PCPD approved the termination of the 2003 PCPD Scheme and the adoption of a new share option scheme (the “2005 PCPD Scheme”) at PCPD’s annual general meeting held on 13 May, 2005. The 2005 PCPD Scheme became effective on 23 May, 2005 following its approval by the shareholders of the Company. No further share options will be granted under the 2003 PCPD Scheme following its termination, but the provisions of such scheme will remain in full force and effect with respect to the options granted prior to its termination.

Under the 2005 PCPD Scheme, the board of directors of PCPD may, at its discretion, grant share options to any eligible person to subscribe for shares in PCPD subject to the terms and conditions stipulated in the 2005 PCPD Scheme. The exercise price of the options under the 2005 PCPD Scheme is determined by the board of directors of PCPD at its absolute discretion but in any event shall not be less than the highest of (i) the closing price of the shares of PCPD as stated in the daily quotations sheet of the Stock Exchange on the date of grant; (ii) the average closing price of the shares of PCPD as stated in the daily quotations sheet of the Stock Exchange for the five days last preceding the date of grant on which days it has been possible to trade shares on the Stock Exchange; and (iii) the nominal value of the share of PCPD on the date of grant. The overall limit on the number of shares which may be issued upon exercise of all

— 155 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

outstanding options granted and yet to be exercised under the 2005 PCPD Scheme and other share option schemes of PCPD must not exceed 30% of the shares in issue from time to time. In addition, the maximum number of shares of PCPD in respect of which options may be granted under the 2005 PCPD Scheme shall not (when aggregated with any shares subject to any grants made after 23 May, 2005 pursuant to any other share option schemes of PCPD) exceed 10% of the issued share capital of PCPD on 23 May, 2005 (or some other date if renewal of this limit is approved by shareholders).

No share options have been granted under the 2005 PCPD Scheme during the year ended 31 December, 2007 and no share options were outstanding at 31 December, 2007 under such scheme.

Details of share options granted by PCPD pursuant to the 2003 PCPD Scheme and the share options outstanding, are as follows:

i. Movements in the number of share options outstanding and their related weighted average exercise prices

2007 Weighted average exercise price HK$ Beginning of year 2.375 Exercised (note iii) 2.375 End of year (note ii) 2.375 Exercisable at end of year 2.375	2006 Number of options Weighted average exercise price HK$ 10,000,000 2.375 (5,000,000) N/A 5,000,000 2.375 5,000,000 2.375	Number of options 10,000,000 —
		10,000,000
		10,000,000

ii. Terms of unexpired and unexercised share options at balance sheet date

Date of grant Vesting period Exercise period Exercise price HK$ 20 December, 2004 20 December, 2004 20 December, 2004 to 19 December, 2014 2.375	Number of 2007 5,000,000 5,000,000	options 2006 10,000,000
		10,000,000

The options outstanding at 31 December, 2007 had a weighted average remaining contractual life of 7 years (2006: 8 years).

As the share options were vested before 1 January, 2005, there was no expense recognized in the consolidated income statement.

— 156 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

iii. Details of share options exercised during the year

Exercise date Exercise price Market value per share at exercise date HK$ HK$ 17 May, 2007 2.375 2.46	2007 Proceeds received Number of options HK$ 11,875,000 5,000,000 11,875,000 5,000,000	2006 Proceeds received Number of options HK$ — — — —	2006 Proceeds received Number of options HK$ — — — —
			—

The weighted average share price at the date of exercise for share options exercised during the year was HK$2.46 (2006: Nil).

— 157 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

33 RESERVES/(DEFICIT)

In HK$ million					2007
								Available-
				Employee	Convertible			for-sale
		Special		share-based	note and	Currency		financial	(Deficit)/
	Share	capital	Treasury	compensation	bonds	translation	Hedging	assets	Retained
	premium	reserve	stock	reserve	reserve	reserve	reserve	reserve	profits	Total
THE GROUP
At 1 January, 2007	7,791	21,254	(37)	213	183	87	(447)	79	(30,381)	(1,258)
Exercise of employee share
options	118	—	—	—	—	—	—	—	—	118
Premium arising from exercise of
employee share options	59	—	—	(59)	—	—	—	—	—	—
Awards of vested shares under
share award schemes to
employees	—	—	19	(19)	—	—	—	—	—	—
Employee share-based
compensation	—	—	—	8	—	—	—	—	—	8
Translation exchange differences	—	—	—	—	—	240	—	—	—	240
Profit for the year	—	—	—	—	—	—	—	—	1,503	1,503
Dividend paid in respect of the
previous year	—	—	—	—	—	—	—	—	(813)	(813)
Dividend declared and paid in
respect of the current year	—	—	—	—	—	—	—	—	(440)	(440)
Available-for-sale financial
assets:
- changes in fair value	—	—	—	—	—	—	—	25	—	25
- transfer to income statement
on disposal	—	—	—	—	—	—	—	(95)	—	(95)
- transfer to income statement
on impairment	—	—	—	—	—	—	—	7	—	7
Cash flow hedges:
- effective portion of changes
in fair value	—	—	—	—	—	—	631	—	—	631
- transfer from equity to
income statement	—	—	—	—	—	—	(69)	—	—	(69)
Redemption of convertible bonds	—	—	—	—	(183)	—	—	—	183	—
At 31 December, 2007	7,968	21,254	(18)	143	—	327	115	16	(29,948)	(143)
THE COMPANY
At 1 January, 2007	7,791	21,254	—	206	—	—	—	—	4,221	33,472
Exercise of employee share
options	118	—	—	—	—	—	—	—	—	118
Premium arising from exercise of
employee share options	59	—	—	(59)	—	—	—	—	—	—
Employee share-based
compensation	—	—	—	(5)	—	—	—	—	—	(5)
Profit for the year	—	—	—	—	—	—	—	—	22,382	22,382
Dividend paid in respect of the
previous year	—	—	—	—	—	—	—	—	(813)	(813)
Dividend declared and paid in
respect of the current year	—	—	—	—	—	—	—	—	(440)	(440)
At 31 December, 2007	7,968	21,254	—	142	—	—	—	—	25,350	54,714

— 158 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million					2006
								Available-
				Employee	Convertible			for-sale
		Special		share-based	note and	Currency		financial	(Deficit)/
	Share	capital	Treasury	compensation	bonds	translation	Hedging	assets	Retained
	premium	reserve	stock	reserve	reserve	reserve	reserve	reserve	profits	Total
THE GROUP
At 1 January, 2006	7,622	22,255	—	223	183	(55)	—	89	(31,388)	(1,071)
Exercise of employee share
options	112	—	—	—	—	—	—	—	—	112
Premium arising from exercise of
employee share options	57	—	—	(57)	—	—	—	—	—	—
Employee share-based
compensation	—	—	—	47	—	—	—	—	—	47
Forfeiture of lapsed shares under
share award schemes	—	—	(13)	—	—	—	—	—	—	(13)
Purchase of shares under share
award schemes	—	—	(24)	—	—	—	—	—	—	(24)
Translation exchange differences	—	—	—	—	—	142	—	—	—	142
Profit for the year	—	—	—	—	—	—	—	—	1,252	1,252
Dividend paid in respect of the
previous year	—	(634)	—	—	—	—	—	—	(174)	(808)
Dividend declared and paid in
respect of the current year	—	(367)	—	—	—	—	—	—	(71)	(438)
Available-for-sale financial
assets:
- changes in fair value	—	—	—	—	—	—	—	78	—	78
- transfer to income statement
on disposal	—	—	—	—	—	—	—	(88)	—	(88)
Cash flow hedges:
- effective portion of changes
in fair value	—	—	—	—	—	—	(428)	—	—	(428)
- transfer from equity to
income statement	—	—	—	—	—	—	(19)	—	—	(19)
At 31 December, 2006	7,791	21,254	(37)	213	183	87	(447)	79	(30,381)	(1,258)
THE COMPANY
At 1 January, 2006	7,622	22,255	—	223	—	—	—	—	174	30,274
Exercise of employee share
options	112	—	—	—	—	—	—	—	—	112
Premium arising from exercise of
employee share options	57	—	—	(57)	—	—	—	—	—	—
Employee share-based
compensation	—	—	—	40	—	—	—	—	—	40
Profit for the year	—	—	—	—	—	—	—	—	4,292	4,292
Dividend paid in respect of the
previous year	—	(634)	—	—	—	—	—	—	(174)	(808)
Dividend declared and paid in
respect of the current year	—	(367)	—	—	—	—	—	—	(71)	(438)
At 31 December, 2006	7,791	21,254	—	206	—	—	—	—	4,221	33,472

— 159 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The special capital reserve was created as a result of capital reduction in 2004 where the Company applied its entire share premium balance to eliminate accumulated losses as at 30 June, 2004. The special capital reserve was not treated as realized profit and (for so long as the Company remains a listed company) was treated as an undistributable reserve for the purposes of section 79C of the Hong Kong Companies Ordinance.

On 10 January, 2006, the High Court of Hong Kong (the “High Court”) made an order which permitted the Company to distribute dividend out of the special capital reserve providing that the Company setting aside sums totalling approximately US$544 million (approximately HK$4,243 million) and HK$106 million for the sole purpose of discharging certain debts or liabilities of the Company existing at the date of the Capital Reduction, principally being the aggregate amount of principal, accrued interest and redemption premium payable on maturity of the US$450 million 1% guaranteed convertible bonds due 2007 issued by PCCW Capital No. 2 Limited. Those amounts were set aside, and the High Court order thereby became effective, on 27 March, 2006. As at 31 December, 2007, the total cash set aside was approximately HK$106 million (2006: HK$4,301 million) and has been recorded under “Restricted cash” in the balance sheet of the Company (see note 26(b)).

34 DEFERRED TAXATION

a. Movement in deferred tax liabilities/(assets) during the year is as follows:

In HK$ million 2007 Accelerated tax depreciation Valuation adjustment resulting from acquisition of subsidiaries Leasing partnership Revaluation of properties in THE GROUP Beginning of year 1,644 366 173 146 Charged/(Credited) to consolidated income statement (note 12(a)) 3 (24) (79) (34) Disposal of subsidiaries — — — — Exchange differences 16 — — 9 End of year 1,663 342 94 121 In HK$ million 2006 Accelerated tax depreciation Valuation adjustment resulting from acquisition of subsidiaries Leasing partnership Revaluation of properties in THE GROUP Beginning of year 1,634 394 224 144 Charged/(Credited) to consolidated income statement (note 12(a)) 3 (28) (51) (3) Exchange differences 7 — — 5 End of year 1,644 366 173 146	Deferred stallation revenue T (130) 84 — — (46) Deferred stallation revenue T (166) 36 — (130)	ax losses (170) (35) — — (205) ax losses (11) (159) — (170)	Others (24) (13) 4 (2) (35) Others (42) 18 — (24)	Total 2,005 (98) 4 23
				1,934
				Total 2,177 (184) 12
				2,005

— 160 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million Net deferred tax assets recognized in the consolidated balance sheet Net deferred tax liabilities recognized in the consolidated balance sheet	The Group 2007 2006 (216) (174) 2,150 2,179 1,934 2,005	The Group 2007 2006 (216) (174) 2,150 2,179 1,934 2,005
		2,005

b. During the year, deferred tax assets of HK$36 million (2006: HK$170 million) have been recognized for tax loss carry-forward to the extent that realization of the related tax benefit through utilization against future taxable profits is probable, by considering the future taxable income and ongoing prudent and feasible tax planning strategies. The Group has unutilized estimated tax losses for which no deferred tax assets have been recognized of HK$23,430 million (2006: HK$21,885 million) to carry forward for deduction against future taxable income. Estimated tax losses of HK$1,325 million (2006: HK$1,078 million) and HK$225 million (2006: HK$496 million) will expire within 1-5 years and after 5 years from 31 December, 2007 respectively. The remaining portion of the tax losses, mainly relating to Hong Kong companies, can be carried forward indefinitely.

35 MOBILE CARRIER LICENCE FEE LIABILITIES

As at 31 December, 2007, the Group had mobile carrier licence fee liabilities repayable as follows:

In HK$ million			The Group	The Group
		2007			2006
		Interest			Interest
	Present	expense		Present	expense
	value of the	relating to	Total	value of the	relating to	Total
	minimum	future	minimum	minimum	future	minimum
	annual fees	periods	annual fees	annual fees	periods	annual fees
Repayable within a period
- not exceeding one year	67	7	74	58	7	65
- over one year, but not
exceeding two years	71	14	85	60	14	74
- over two years, but not
exceeding five years	205	101	306	186	91	277
- over five years	256	288	544	293	362	655
	599	410	1,009	597	474	1,071
Less: Amounts repayable
within one year
included under
current liabilities	(67)	(7)	(74)	(58)	(7)	(65)
	532	403	935	539	467	1,006

— 161 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

36 NET LEASE PAYMENTS RECEIVABLE

A company within the Group is a limited partner in a number of limited partnerships, which own and lease assets to third

parties.

In HK$ million The net investment in relation to these finance leases comprises: Net lease payments receivable Less: Current portion of net lease payments receivable (included in “Prepayments, deposits and other current assets” in the consolidated balance sheet)	The Group 2007 2006 203 203 (112) — 91 203	The Group 2007 2006 203 203 (112) — 91 203
		203

— 162 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

37 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

a. Reconciliation of profit before taxation to net cash generated from operating activities

In HK$ million Profit before taxation Adjustment for: Write back of impairment loss on interest in an associate Employee share-based compensation Forfeiture of lapsed shares under share award schemes Provision for inventory obsolescence Interest income Interest expense Finance charges Depreciation of property, plant and equipment Net realized and unrealized gains on financial assets at fair value through profit or loss Net realized gains on disposal of available-for-sale financial assets Net realized and unrealized fair value (gains)/losses on derivative financial instruments Net gain on cash flow hedging instruments transferred from equity Fair value gains on investment properties Provision for impairment of investments Losses on property, plant and equipment Provision for rental guarantee (Gain)/loss on disposal of property, plant and equipment Impairment loss on goodwill Impairment loss for doubtful debts Other impairment loss Dividend income Write back of provision for loss on legal claims Amortization of intangible assets Amortization of land lease premium Share of results of associates and jointly controlled companies Exchange losses Decrease/(Increase) in operating assets - interest in leasehold land for development - properties held for/under development and for sale - inventories - accounts receivable - prepayments, deposits and other current assets - sales proceeds held in stakeholders’ accounts - restricted cash - amounts due from related companies - other non-current assets Increase/(Decrease) in operating liabilities - accruals, accounts payable, other payables and deferred income - amount payable to the Government under the Cyberport Project Agreement - gross amount due to customers for contract work - amounts due to related companies - other long-term liabilities - advances from customers CASH GENERATED FROM OPERATIONS	The Group 2007 2006 2,807 2,552 (1) — 8 47 — (13) 1 5 (429) (732) 1,617 1,898 41 110 2,795 2,776 (8) (17) (79) (88) (62) 110 (9) — (3) (1) 60 40 7 11 36 — (7) 25 58 — 218 106 20 25 — (6) — (105) 445 232 30 28 (13) (37) 52 47 — (260) (6,698) 4,044 (314) (15) (356) (678) (573) 12 1,047 821 251 765 35 90 (128) (209) (160) (194) 3,414 (3,229) — (4) (347) (267) 33 (19) 2,016 (832) 5,804 7,038	The Group 2007 2006 2,807 2,552 (1) — 8 47 — (13) 1 5 (429) (732) 1,617 1,898 41 110 2,795 2,776 (8) (17) (79) (88) (62) 110 (9) — (3) (1) 60 40 7 11 36 — (7) 25 58 — 218 106 20 25 — (6) — (105) 445 232 30 28 (13) (37) 52 47 — (260) (6,698) 4,044 (314) (15) (356) (678) (573) 12 1,047 821 251 765 35 90 (128) (209) (160) (194) 3,414 (3,229) — (4) (347) (267) 33 (19) 2,016 (832) 5,804 7,038
		7,038

— 163 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million CASH GENERATED FROM OPERATIONS Interest received Income tax paid, net of tax refund - Hong Kong profits tax paid - overseas profits tax paid NET CASH GENERATED FROM OPERATING ACTIVITIES	The Group 2007 2006 5,804 7,038 433 713 (1,082) (1,217 (34) (12 5,121 6,522	The Group 2007 2006 5,804 7,038 433 713 (1,082) (1,217 (34) (12 5,121 6,522
		6,522

b. Acquisition of the business of a subsidiary

In HK$ million Net assets acquired: Property, plant and equipment Other non-current assets Accounts receivable, deposits, prepayments and other current assets Trade payable, other payable and accrued charges Goodwill on acquisition Satisfied by: Cash Analysis of the net outflow of cash and cash equivalents in respect of the acquisition of the business of a subsidiary: Cash Net cash outflow in respect of acquisition of the business of a subsidiary	The Group 2007 2006 12 — 2 — 2 — (3) — 13 — 10 — 23 — 23 — 23 — 23 —	The Group 2007 2006 12 — 2 — 2 — (3) — 13 — 10 — 23 — 23 — 23 — 23 —
		— —
		—
		—
		—
		—

— 164 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

c. Disposal of subsidiaries

In HK$ million Net assets disposed of: Property, plant and equipment Goodwill Available-for-sale financial assets Deferred tax assets Inventories Accounts receivable, prepayments, deposits and other current assets Financial assets at fair value through profit or loss Cash and bank balances Accounts payable, accruals and other payables Advances from customers Minority interests Exchange reserve Satisfied by: Cash Analysis of the net inflow of cash and cash equivalents in respect of the disposal of subsidiaries: Cash Cash and bank balances disposed of Net cash inflow in respect of disposal of subsidiaries	The Group 2007 2006 72 — 78 — 48 — 4 — 3 — 19 — 33 — 53 — (16) — (19) — (72) — 15 — 218 — 218 — 218 — (53) — 165 —	The Group 2007 2006 72 — 78 — 48 — 4 — 3 — 19 — 33 — 53 — (16) — (19) — (72) — 15 — 218 — 218 — 218 — (53) — 165 —
		—
		—
		— —
		—

d. Analysis of cash and cash equivalents

In HK$ million Cash and bank balances Bank overdrafts Restricted cash Cash and cash equivalents as at 31 December	The Group 2007 2006 4,367 10,100 (7) (21) (682) (5,128) 3,678 4,951	The Company 2007 2006 142 4,520 — — (106) (4,301) 36 219	The Company 2007 2006 142 4,520 — — (106) (4,301) 36 219
			219

38 CAPITAL MANAGEMENT

The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders, to support the Group’s stability and growth; and to earn a margin commensurately with the level of business and market risks in the Group’s operation.

The Group monitors capital by reviewing the level of capital that is at the disposal of the Group (“adjusted capital”), taking into consideration the future capital requirements of the Group, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities. Adjusted capital comprises all components of equity, other than currency translation reserve, hedging reserve relating to cash flow hedges and available-for-sale financial assets reserve.

— 165 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The adjusted capital at 31 December, 2007 and 2006 was as follows:

In HK$ million Total equity Excluding: Currency translation reserve Hedging reserve Available-for-sale financial assets reserve Adjusted capital	The Group 2007 2006 4,351 2,899 (327) (87) (115) 447 (16) (79) 3,893 3,180	The Group 2007 2006 4,351 2,899 (327) (87) (115) 447 (16) (79) 3,893 3,180
		3,180

The increase in adjusted capital during 2007 is due to the increase in retained earnings and reserves.

Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements, except for the debt covenant requirement of the loan agreements with external parties and the minimum capital requirement of a subsidiary regulated by Bermuda Monetary Authority.

39 FINANCIAL INSTRUMENTS

Exposure to credit, liquidity, and market (including foreign currency, interest rate) risks arises in the normal course of the Group’s business. The Group is also exposed to equity price risk arising from its equity investments in other entities. Exposures to these risks are controlled by the Group’s financial management policies and practices described below.

a. Credit risk

The Group’s credit risk is primarily attributable to accounts receivable, amounts due from related companies, investments, over-the-counter derivative transactions and cash transactions entered into for risk management purposes. Management has policies in place and exposures to these credit risks are monitored on an ongoing basis.

Accounts receivable in respect of properties sold is payable by the purchasers pursuant to the terms of the sales contracts. Other accounts receivable has a normal credit period ranging up to 30 days from the date of invoice unless there is a separate mutual agreement on extension of the credit period. Individual credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Debtors who have overdue payable are requested to settle all outstanding balances before any further credit is granted. Normally, the Group does not obtain collateral from customers.

Amounts due from related companies and other receivables are continuously monitored by assessing the credit quality of the counterparty, taking into account its financial position, past experience and other factors. Where necessary, impairment loss is made for estimated irrecoverable amounts. As at 31 December, 2007, the amounts due from related companies and other receivables are fully performing.

Investments, derivative financial instruments, interests receivable, net lease payments receivable and cash transactions are executed with financial institutions or investment counterparties with sound credit ratings and the Group does not expect any significant counterparty risk. Moreover, credit limits are set for individual counterparties and periodic reviews are conducted to ensure that the limits are strictly followed.

The Group does not have a significant exposure to any individual debtors or counterparties.

— 166 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. Except for the guarantees given by the Group as disclosed in note 41, the Group does not provide any other guarantees which would expose the Group to credit risk.

Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 26(e).

b. Liquidity risk

The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with debt covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term. Management believes there is no liquidity risk as the Group has sufficient committed facilities to fund its operations and debt servicing requirements.

The following table details the remaining contractual maturities at the balance sheet date of the Group’s and the Company’s non-derivative financial liabilities and derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the balance sheet date) and the earliest date the Group and the Company can be required to pay:

In HK$ million Within 1 year or on demand Current liabilities Short-term borrowings 10,198 Derivative financial instruments 65 Accounts payable 1,264 Accruals and other payables 4,785 Amount payable to the Government under the Cyberport Project Agreement 5,178 Mobile carrier licence fee liabilities 74 Amounts due to related companies 539 Gross amount due to customers for contract work 7 22,110 Non-current liabilities Long-term borrowings 1,063 Amount payable to the Government under the Cyberport Project Agreement — Mobile carrier licence fee liabilities — Other long-term liabilities 38 1,101 Total 23,211	More than 1 year but within 2 years — (12) — — — — — — (12) 1,063 1,741 85 101 2,990 2,978	The Group 2007 More than 2 years but within 5 years More than 5 years Total contractual undiscounted cash flow — — 10,198 (46) (83) (76) — — 1,264 — — 4,785 — — 5,178 — — 74 — — 539 — — 7 (46) (83) 21,969 10,315 8,469 20,910 — — 1,741 306 544 935 52 59 250 10,673 9,072 23,836 10,627 8,989 45,805	Carrying amount 10,174 13 1,264 4,785 5,178 67 539 7
			22,027
			15,505 1,741 532 205
			17,983
			40,010

— 167 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million


In HK$ million						The Group
							2006
			More than			More than					Total
			1 year but			2 years but					contractual
	Within 1 year			within		within			More than		undiscounted	Carrying
	or on demand			2 years		5 years				5 years	cash flow	amount
Current liabilities
Short-term borrowings	14,047				—		—			—	14,047	13,995
Derivative financial instruments	(63)			(62)		(212)				(212)	(549)	555
Accounts payable	1,022				—		—			—	1,022	1,022
Accruals and other payables	4,989				—		—			—	4,989	4,989
Amount payable to the
Government under the
Cyberport Project Agreement	1,914				—		—			—	1,914	1,914
Mobile carrier licence fee
liabilities		65			—		—			—	65	58
Amounts due to related
companies	886				—		—			—	886	886
Gross amount due to customers
for contract work		7			—		—			—	7	7
	22,867			(62)		(212)				(212)	22,381	23,426
Non-current liabilities
Long-term borrowings	1,059			1,059		10,902				8,876	21,896	15,438
Amount payable to the
Government under the
Cyberport Project Agreement		—		1,591			—			—	1,591	1,591
Mobile carrier licence fee
liabilities		—			74	277				655	1,006	539
Other long-term liabilities		10			11		20			25	66	97
	1,069			2,735		11,199				9,556	24,559	17,665
Total	23,936			2,673		10,987				9,344	46,940	41,091
In HK$ million						The Company
			2007								2006
			Total								Total
		contractual									contractual
	Within 1 year	undiscounted				Carrying		Within 1 year			undiscounted	Carrying
	or on demand		cash	flow		amount		or	on	demand	cash flow	amount
Current liabilities
Short-term borrowings	—			—		—				6,300	6,300	6,300
Derivative financial
instruments	—			—		—				(1)	(1)	6
Total	—			—		—				6,299	6,299	6,306

— 168 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

c. Market risk

Market risk composed of foreign currency, interest rate and equity price exposure deriving from the Group’s operation, investment and funding activities. As a matter of policy, the Group enters into currency forward contracts, interest rate and currency swap contracts, forward rate agreements, option contracts and other financial instruments to manage its exposure to market risk directly related to its operations and financing. The Group does not undertake any speculative trading activities in connection with these financial instruments or enter into or acquire market risk sensitive instruments for trading purposes.

The Finance and Management Committee, a subcommittee of the Executive Committee of the Board, determines the appropriate risk management activities with the aim of prudently manage the market risk associated with transactions entered into in the normal course of the business.

All treasury risk management activities are carried out in accordance with policies and guidelines approved by the Finance and Management Committee and the Executive Committee, which are reviewed on a regular basis. Early termination and amendments to the terms of the transaction would typically occur when there are changes in the underlying assets or liabilities or in the risk management strategy of the Group.

In the normal course of business, the Group uses the above-mentioned financial instruments to limit its exposure to adverse fluctuations in foreign currency exchange rates and interest rates. These instruments are executed with creditworthy financial institutions, and all contracts are denominated in currencies of major industrial countries.

i. Foreign currency risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises when the Group’s recognized assets and liabilities are denominated in a currency that is not the entity’s functional currency.

All the Group’s borrowings are mainly denominated in either Hong Kong dollars or United States dollars. As at 31 December, 2007 and 2006, all of the Group’s long-term borrowings and convertible bonds denominated in United States dollars were swapped into Hong Kong dollar by cross currency swap contracts. Given this, management does not expect that there will be any significant currency risk associated with the Group’s borrowings. All cross currency swap contracts outstanding as at 31 December, 2007 with an aggregate notional contract amounts of US$2,000 million (approximately HK$15,517 million) were designated as cash flow hedges against foreign exchange rate risk, while certain cross currency swap contracts with notional contract amounts of US$2,000 million (approximately HK$15,562 million) were designated as cash flow hedges during 2006.

In respect of accounts receivable and payable held in currencies other than the functional currency of the operations to which they relate, the Group ensures that the net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances.

— 169 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The following table details the Group’s exposure at the balance sheet date to currency risk arising from significant recognized assets or liabilities denominated in foreign currencies.

In HK$ million		The Group	The Group
		2007		2006
	United States	Chinese	United States	Chinese
	Dollars	Renminbi	Dollars	Renminbi
Accounts receivable	546	198	462	270
Amounts due from related companies	35	—	57	—
Cash and cash equivalents	933	359	1,156	134
Accounts payable	(528)	(234)	(202)	(274)
Amounts due to related companies	—	—	(311)	—
Bank loans	—	(24)	—	(11)
Convertible bonds	—	—	(4,163)	—
Long-term borrowings	(15,505)	—	(18,959)	—
Gross exposure arising from
recognized assets and liabilities	(14,519)	299	(21,960)	119
Notional amounts of cross currency
swap contracts designated as cash
flow hedges	15,517	—	15,562	—
Overall net exposure	998	299	(6,398)	119

As at 31 December, 2007, if Hong Kong dollar had weakened/strengthened by 1% against the United States dollar, with all other variables held constant, the Group’s profit after tax for the year would have been increased/decreased by approximately HK$8 million (2006: HK$53 million), mainly as a result of foreign exchange gains/losses on translation of United States dollar denominated recognized assets and liabilities which are not hedged by hedging instruments. Meanwhile, the hedging reserve as at 31 December, 2007 would have been increased/decreased by approximately HK$155 million (2006: HK$156 million), mainly as a result of foreign exchange gains/losses on the long-term borrowings being hedged by cross currency swap contracts.

As at 31 December, 2007, if Hong Kong dollar had weakened/strengthened by 5% against the Chinese renminbi, with all other variables held constant, the Group’s profit after tax for the year would have been increased/decreased by approximately HK$12 million (2006: HK$5 million), mainly as a result of foreign exchange gains/losses on translation of Chinese renminbi denominated recognized assets and liabilities which are not hedged by hedging instruments.

The sensitivity analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the Group’s exposure to currency risk for recognized assets and liabilities in existence at the date, and that all other variables, in particular interest rates, remain constant.

The stated changes represent management’s assessment of reasonably possible changes in foreign exchange rates over the period until the next annual balance sheet date. In this respect, it is assumed that the pegged rate between the Hong Kong dollar and the United States dollar would be materially unaffected by any change in the movement in value of the United States dollar against other currencies. The analysis is performed on the same basis for 2006.

ii. Interest rate risk

As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates.

— 170 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The Group’s interest rate risk arises primarily from long-term borrowings. Borrowings at variable rates and fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. Most of the Group’s long-term borrowings are on fixed rate basis in order to keep funding cost at a steady level. In addition, from time to time, the Group drew under long-term revolving loan facilities which are denominated in Hong Kong dollars and pay interest at floating rate.

The following table details the interest rate profile of the Group’s and the Company’s borrowings at the balance sheet date, after taking into account the effect of cross currency swap contracts designated as cash flow hedging instruments.

In HK$ million, except for %

		The	Group				The	Company	Company
		2007		2006			2007			2006
	Effective		Effective			Effective			Effective
	interest		interest			interest			interest
	rate		rate			rate			rate
	%		%			%			%
Net fixed rate
borrowings:
Bank loans	5.43	24	5.58		11	—		—	—		—
Convertible bonds	—	—	5.30	4,163		—		—	—		—
Current portion of long
term borrowings	—	—	8.03	3,521		—		—	—		—
Long term borrowings
with cash flow
hedging instruments	6.84	15,505	6.84	15,438		—		—	—		—
		15,529		23,133				—			—
Variable rate borrowings:
Bank loans	4.03	10,150	4.36	6,300		—		—	4.36	6,300
Total borrowings		25,679		29,433				—		6,300

At 31 December, 2007, if interest rates on Hong Kong dollar denominated borrowings had been increased/decreased by 14 basis points, with all other variables held constant, the Group’s profit after tax for the year would have been decreased/increased by approximately HK$11 million (2006: HK$7 million), mainly as a result of higher/lower interest expense on floating rate borrowings.

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the exposure to interest rate risk for the Group’s floating rate borrowings in existence at that date. The 14 basis point increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date. The analysis is performed on the same basis for 2006.

iii. Equity price risk

The Group is exposed to equity price changes arising from equity investments classified as held for trading securities (see note 25(b)) and available-for-sale equity securities (see note 25(a)). Other than unquoted equity securities held for strategic purposes, all of these investments are listed on a recognized stock exchange.

To manage its equity price risk, the portfolio is diversified in accordance with the limits set by the Group. Given the insignificant portfolio of listed equity securities held by the Group, management believes that the Group’s equity price risk is minimal.

— 171 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

Performance of the Group’s unquoted investments held for long term strategic purposes is assessed at least bi-annually against performance of their business as well as similar listed entities, based on the limited information available to the Group, together with an assessment of their relevance to the Group’s long term strategic plans.

d. Fair values

All financial instruments are carried at amounts not materially different from their fair values as at 31 December, 2007 and 2006 except as follows:

In HK$ million	2007		2006
	Carrying		Carrying
	amount	Fair value	amount	Fair value
THE GROUP
Short-term borrowings	(10,174)	(10,174)	(13,995)	(14,057)
Long-term borrowings	(15,505)	(16,287)	(15,438)	(16,194)

e. Estimation of fair values

Fair value of financial instruments is estimated as follows:

i. The fair value of financial instruments traded in active markets (such as trading and available-for-sale financial assets, and listed long-term borrowings and convertible note and bonds) is based on quoted market prices at the balance sheet date.
ii. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine the fair value for the remaining financial instruments. The fair value of cross currency swap contracts is calculated as the present value of the estimated future cash flows.
iii. The nominal value less impairment provision of trade and other receivables and amounts due from related companies that are classified as current assets are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

40 COMMITMENTS

a. Capital

In HK$ million Authorized and contracted for Authorized but not contracted for	The Group 2007 1,820 2,002 3,822	2006 2,931 1,968
		4,899

— 172 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

An analysis of the above capital commitments by nature is as follows:

In HK$ million Investments Investment properties Property development for Cyberport project (note i) Property development for other projects Acquisition of property, plant and equipment Others	The Group 2007 361 8 1,573 190 1,688 2 3,822	2006 861 37 2,148 171 1,675 7
		4,899

i. The capital commitment as disclosed above represented management’s best estimate of total construction costs of the Cyberport project, which has been revised from the total construction costs since the Cyberport Project Agreement was entered into on 17 May, 2000.

b. Operating leases

As at 31 December, 2007, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Land and buildings

In HK$ million Within 1 year After 1 year but within 5 years After 5 years	The Group 2007 528 611 299 1,438	2006 427 477 56
		960

Network capacity and equipment

In HK$ million Within 1 year After 1 year but within 5 years After 5 years	The Group 2007 108 84 — 192	2006 59 19 1
		79

The leases typically run for an initial period of 1 to 13 years. None of the leases include contingent rentals.

— 173 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

c. Others

As set out in note 4(c), on 17 June, 2004, the Company agreed to provide Reach Ltd. (“REACH”) with a revolving working capital loan facility up to US$25 million (approximately HK$195 million). The facility was secured and expired on 31 December, 2007. The interest receivable under this facility was at LIBOR plus 250 basis points. During the years ended 31 December, 2007 and 2006, none of this working capital loan facility was drawn down by REACH.

As at 31 December, 2007, the Group has other outstanding commitments as follows:

In HK$ million Purchase of rights to broadcast certain TV content Purchase commitment on telecommunications services Operating expenditure commitment	The Group 2007 2006 2,559 1,032 110 205 315 335 2,984 1,572	The Group 2007 2006 2,559 1,032 110 205 315 335 2,984 1,572
		1,572

41 CONTINGENT LIABILITIES

In HK$ million	The Group		The Company
	2007	2006	2007	2006
Performance guarantee	841	611	543	417
Tender guarantee	2	—	2	—
Advance payment guarantee	1	9	1	—
Payment guarantee	59	—	47	—
Guarantees given for bonds/notes issued by
subsidiaries	—	—	—	4,182
Guarantee in lieu of cash deposit	1	3	1	2
Employee compensation	6	6	6	6
Guarantee indemnity	11	11	—	—
	921	640	600	4,607

a. HKTC was in dispute with Hong Kong’s Inland Revenue Department (the “IRD”) regarding the deductibility of certain finance expenses. The IRD had raised assessments for part of the disputed finance expenses for the years of assessment 2000/01 to 2005/06 on 21 April, 2005, 3 February, 2006 and 5 February, 2007. HKTC had lodged objections to the assessments. The dispute was fully settled in December 2007.
b. The Group is subject to certain corporate guarantee obligations to guarantee performance of its wholly-owned subsidiaries in the normal course of their businesses. The amount of liabilities arising from such obligations, if any, cannot be ascertained but the directors are of the opinion that any resulting liability would not materially affect the financial position of the Group.

— 174 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

42 BANKING FACILITIES

Aggregate banking facilities as at 31 December, 2007 were HK$16,972 million (2006: HK$16,698 million) of which the unused facilities amounted to HK$6,798 million (2006: HK$10,387 million).

A summary of major borrowings is set out in notes 26(f) and 27.

Security pledged for certain banking facilities includes:

In HK$ million Land and buildings Bank deposit Available-for-sale financial assets	The Group 2007 2006 — 31 25 67 — 21 25 119	The Group 2007 2006 — 31 25 67 — 21 25 119
		119

As at 31 December, 2007, an indirect subsidiary of the Company had been granted a banking facility amounting to approximately HK$20 million (2006: HK$20 million) from a bank for the purpose of providing guarantee to the Government. Such facility was secured by a bank deposit placed by that indirect subsidiary of the Company from time to time to secure the amount of guarantee issued by the bank. No guarantee was issued by the bank under this banking facility as at 31 December, 2007 (2006: Nil).

43 BUSINESS COMBINATIONS

On 23 August, 2007, PCPD acquired 100% of the share capital of Nihon Harmony Resorts K.K., a company incorporated in Japan. The acquired business contributed revenue of HK$8 million and net loss of HK$7 million to PCPD for the period from 23 August, 2007 to 31 December, 2007.

Details of net assets acquired and goodwill are as follows:

	HK$ million
Purchase consideration in cash	179
Direct costs in relation to acquisition	3
Less: Purchase consideration in cash for properties held for development	(159)
Purchase consideration in cash for the business of a subsidiary	23
Less: Fair value of net assets acquired	(13)
Goodwill on acquisition (note 20)	10

The goodwill is attributable to future profit generated from the ski operations.

— 175 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

The net assets of the business of a subsidiary at the acquisition date are as follows:

		Carrying
In HK$ million	Fair value	amount
Property, plant and equipment	12	12
Other non-current assets	2	2
Accounts receivable, deposits, prepayments and other current assets	2	2
Trade payable, other payables and accrued charges	(3)	(3)
Net assets acquired	13	13
		HK$ million
Purchase consideration for the business of a subsidiary settled in cash		23
Cash and cash equivalents acquired		—
Cash outflow on acquisition of the business of a subsidiary (note 37(b))		23

44 POST BALANCE SHEET EVENT

The following event occurred subsequent to 31 December, 2007 and up to the date of approval of these financial statements by the Board:

On 12 February, 2008, an indirect wholly-owned subsidiary of the Company requested the board of directors of PCPD to put forward a proposal to the shareholders other than Asian Motion Limited (“Asian Motion”), a wholly-owned subsidiary of the Company with approximately 61.53% interest in PCPD, regarding a proposed privatization of PCPD by way of a scheme of arrangement under section 99 of the Companies Act 1981 of Bermuda (as amended) (the “Proposal”). Under the Proposal, all the shares in PCPD held by its shareholders other than Asian Motion will be cancelled in exchange for the payment to each shareholders other than Asian Motion of an amount of HK$2.85 in cash for each share. The amount of cash required in order to effect the Proposal is approximately HK$2,642 million, which will be financed from available financial resources of the Group. Upon the scheme becoming effective, the listing of PCPD’s shares on the Stock Exchange would be withdrawn and PCPD would become an indirect wholly-owned subsidiary of the Company.

45 COMPARATIVE FIGURES

Certain comparative figures have been adjusted or re-classified as a result of the reclassification of certain operations among business segments, details of which are set out in note 6. Certain comparative figures have also been reclassified to conform with the current year’s presentation.

— 176 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

III. UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION

Set out below is the full text of the unaudited condensed consolidated financial information of the PCCW Group for the six months ended 30 June, 2008 extracted from the interim report of the PCCW Group for the six months ended 30 June, 2008.

CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June, 2008

In HK$ million (except for earnings per share)	Note	2008	2007
		(Unaudited)	(Unaudited)
Turnover	2	11,372	11,607
Cost of sales		(4,942)	(5,199)
General and administrative expenses		(4,744)	(4,398)
Other gains, net	3	16	55
Losses on property, plant and equipment		—	(2)
Interest income		74	236
Finance costs		(664)	(846)
Share of results of associates		4	7
Share of results of jointly controlled companies		(11)	(8)
Profit before income tax	4	1,105	1,452
Income tax	5	(417)	(377)
Profit for the period	2	688	1,075
Attributable to:
Equity holders of the Company		656	822
Minority interests		32	253
Profit for the period		688	1,075
Interim dividend declared after the interim period	6(a)	474	440
Earnings per share	7
Basic		9.68 cents	12.16 cents
Diluted		9.67 cents	11.96 cents

— 177 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET As at 30 June, 2008

In HK$ million		As at	As at
		30 June,	31 December,
	Note	2008	2007
		(Unaudited)	(Audited)
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment		16,792	16,852
Investment properties		4,194	3,920
Interests in leasehold land		604	615
Properties held for/under development		1,518	1,671
Goodwill		3,017	3,016
Intangible assets		1,729	1,638
Interest in associates		656	655
Interest in jointly controlled companies		305	316
Held-to-maturity investments		5	6
Available-for-sale financial assets		384	321
Amounts due from related companies		6	9
Lease payments receivable		91	91
Deferred income tax assets		174	216
Other non-current assets		487	471
		29,962	29,797
Current assets
Properties under development		9,299	8,436
Properties for sale		622	697
Sales proceeds held in stakeholders’ accounts		1,668	2,425
Restricted cash		802	682
Prepayments, deposits and other current assets		1,880	2,007
Inventories		914	854
Amounts due from related companies		22	16
Derivative financial instruments		376	43
Financial assets at fair value through profit or loss		—	12
Trade receivables, net	8	2,833	2,709
Tax recoverable		2	1
Cash and cash equivalents		4,075	3,678
		22,493	21,560

— 178 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million		As at	As at
		30 June,	31 December,
	Note	2008	2007
		(Unaudited)	(Audited)
Current liabilities
Short-term borrowings		(11,773)	(10,174)
Derivative financial instruments		—	(13)
Trade payables	9	(1,141)	(1,264)
Accruals and other payables		(4,170)	(4,785)
Amount payable to the Government under
the Cyberport Project Agreement		(6,968)	(5,178)
Mobile carrier licence fee liabilities		(73)	(67)
Amounts due to related companies		(611)	(539)
Gross amounts due to customers for contract work		(4)	(7)
Advances from customers		(3,397)	(3,434)
Current income tax liabilities		(559)	(684)
		(28,696)	(26,145)
Net current liabilities		(6,203)	(4,585)
Total assets less current liabilities		23,759	25,212
Non-current liabilities
Long-term borrowings		(15,518)	(15,505)
Deferred income tax liabilities		(2,041)	(2,150)
Deferred income		(712)	(719)
Defined benefit liability		(8)	(9)
Amount payable to the Government under
the Cyberport Project Agreement		—	(1,741)
Mobile carrier licence fee liabilities		(557)	(532)
Other long-term liabilities		(152)	(205)
		(18,988)	(20,861)
Net assets		4,771	4,351
CAPITAL AND RESERVES
Share capital	10	1,693	1,695
Reserves/(deficit)		140	(143)
Equity attributable to equity holders of the Company		1,833	1,552
Minority interests		2,938	2,799
Total equity		4,771	4,351

— 179 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June, 2008

In HK$ million
At 1 January, 2008
Translation exchange
differences
Available-for-sale financial
assets:
- changes in fair value
- transfer to income
statement on
impairment
Cash flow hedges:
- effective portion of
changes in fair value
- transfer from equity to
income statement
Net gains/(losses)
recognized directly in
equity
Profit for the period
Total recognized
income/(expense) for
the period
Repurchase of shares
Exercise of employee share
options
Premium arising from
exercise of employee
share options
Movements in equity
arising from capital
transactions
Dividend paid in respect of
the previous year
At 30 June, 2008

2008
(Unaudited)
Attributable to equity holders of the Company
Share
capital
Share
premium
Special
capital
reserve
Capital
redemption
reserve
Treasury
stock
Employee
share-based
compensation
reserve
Currency
translation
reserve
Hedging
reserve
Available-
for-sale
financial
assets
reserve
1,695
7,968
21,254
—
(18)
143
327
115
16

— 180 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

In HK$ million	In HK$ million						2007
							(Unaudited)
														Minority		Total
					Attributable to equity holders of the			Company						interests		equity
										Available-
						Employee					for-sale
				Special		share-based	Convertible	Currency			financial
		Share	Share	capital	Treasury	compensation	note and	translation		Hedging	assets
		capital	premium	reserve	stock	reserve	bonds reserve		reserve	reserve	reserve	Deficit	Total
At 1 January, 2007		1,688	7,791	21,254	(37)	213	183		87	(447)	79	(30,381)	430		2,469	2,899
Translation exchange
differences		—	—	—	—	—	—		113	—	—	—	113		51	164
Available-for-sale financial
assets:
- changes in fair value		—	—	—	—	—	—		—	—	44	—	44		—	44
Cash flow	hedges:
- effective	portion of
changes in fair value		—	—	—	—	—	—		—	529	—	—	529		—	529
- transfer from equity to
income statement		—	—	—	—	—	—		—	(79)	—	—	(79)		—	(79)
Redemption of convertible
bonds		—	—	—	—	—	(183)		—	—	—	183	—		—	—
Net gains/(losses)
recognized directly in
equity		—	—	—	—	—	(183)		113	450	44	183	607		51	658
Profit for the period		—	—	—	—	—	—		—	—	—	822	822		253	1,075
Total recognized
income/(expense) for
the period		—	—	—	—	—	(183)		113	450	44	1,005	1,429		304	1,733
Exercise of employee share
options		5	96	—	—	—	—		—	—	—	—	101		—	101
Premium arising from
exercise of employee
share options		—	49	—	—	(49)	—		—	—	—	—	—		—	—
Awards of	vested shares
under share award
schemes to employees		—	—	—	19	(19)	—		—	—	—	—	—		—	—
Employee share-based
compensation		—	—	—	—	11	—		—	—	—	—	11		—	11
Movements in equity
arising	from capital
transactions		5	145	—	19	(57)	—		—	—	—	—	112		—	112
		1,693	7,936	21,254	(18)	156	—		200	3	123	(29,376)	1,971		2,773	4,744
Dividend paid in respect of
the previous year		—	—	—	—	—	—		—	—	—	(813)	(813)		—	(813)
Dividend paid to minority
shareholders of a
subsidiary in respect of
the previous year		—	—	—	—	—	—		—	—	—	—	—		(51)	(51)
Increase in minority
interests arising from
decrease in holding in
a subsidiary		—	—	—	—	—	—		—	—	—	—	—		13	13
At 30 June, 2007		1,693	7,936	21,254	(18)	156	—		200	3	123	(30,189)	1,158		2,735	3,893

— 181 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT For the six months ended 30 June, 2008

In HK$ million	2008	2007
	(Unaudited)	(Unaudited)
Net cash generated from operating activities	2,007	1,899
Net cash used in investing activities	(1,599)	(2,916)
Net cash (used in)/generated from financing activities	(45)	638
Increase/(decrease) in cash and cash equivalents	363	(379)
Exchange differences	34	(34)
Cash and cash equivalents at 1 January	3,678	4,951
Cash and cash equivalents at 30 June	4,075	4,538
Analysis of the balance of cash and cash equivalents:
Cash and bank balances	4,888	6,451
Bank overdrafts	(11)	(6)
Less: Restricted cash	(802)	(1,907)
	4,075	4,538

— 182 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION

For the six months ended 30 June, 2008

1 BASIS OF PREPARATION

The unaudited condensed consolidated interim financial information of PCCW Limited (the “Company”) and its subsidiaries (collectively the “Group”) has been prepared in accordance with Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). This unaudited condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December, 2007.

The unaudited condensed consolidated interim financial information has been reviewed by the Company’s Audit Committee and, in accordance with Hong Kong Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the HKICPA, by the Company’s independent auditor.

The preparation of the unaudited condensed consolidated interim financial information in conformity with HKAS 34 requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year-to-date basis. Actual results may differ from these estimates.

The accounting policies and methods of computation used in preparing this unaudited condensed consolidated interim financial information are consistent with those followed in preparing the Group’s annual financial statements for the year ended 31 December, 2007, except for the adoption of the following new and revised Hong Kong Financial Reporting Standards, HKASs and Interpretations (“Ints”) (collectively “new HKFRSs”) which are effective for accounting periods beginning on or after 1 January, 2008:

— HK(IFRIC)-Int 11 HKFRS 2 — Group and Treasury Share Transactions

— HK(IFRIC)-Int 12 Service Concession Arrangements

— HK(IFRIC)-Int 14 HKAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction

The adoption of these new HKFRSs has no material effect on the Group’s results and financial position for the current or prior periods.

— 183 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

2 SEGMENT INFORMATION

An analysis of turnover and contribution to the Group’s results by business segment is set out below:

In HK$ million										Pacific Century	Pacific Century
	Telecommunications									Premium Developments
	Services			TV & Content		Mobile		PCCW Solutions		Limited		Other Businesses		Eliminations		Consolidated
For the six months ended 30 June,	2008	2007		2008	2007	2008	2007	2008	2007	2008	2007	2008	2007	2008	2007	2008	2007
	_(Unaudited) (Unaudited) _			_(Unaudited) (Unaudited) _		_(Unaudited) (Unaudited) _		_(Unaudited) _	_(Unaudited) _	_(Unaudited) (Unaudited) _		_(Unaudited) _	_(Unaudited) _	_(Unaudited) (Unaudited) _		_(Unaudited) _	(Unaudited)
TURNOVER	8,551	7,706		1,039	715	857	668	900	826	618	2,100	43	165	(636)	(573)	11,372	11,607
RESULTS
Segment results	2,465	2,392		(169)	(150)	(252)	(361)	55	73	65	531	(462)	(422)	—	—	1,702	2,063
Interest income																74	236
Finance costs																(664)	(846)
Share of results of associates and
jointly controlled companies	(7)		(1)	—	—	—	—	—	—	—	—	—	—	—	—	(7)	(1)
Profit before income tax																1,105	1,452
Income tax																(417)	(377)
Profit for the period																688	1,075

3 OTHER GAINS, NET

In HK$ million	Six months ended	Six months ended
	30 June, 2008	30 June,	2007
	(Unaudited)	(Unaudited)
Net realized gains/(losses) on disposals of available-for-sale financial assets
and financial assets at fair value through profit or loss	18		(21)
Net unrealized gains on financial assets at fair value through profit or loss	—		3
Net realized and unrealized fair value gains on derivative financial
instruments	7		69
Provision for impairment of investment	(24)		—
Unclaimed dividend payable by a subsidiary written back	—		2
Net gain on cash flow hedging instruments transferred from equity	15		—
Others	—		2
	16		55

— 184 —

APPENDIX I

FINANCIAL INFORMATION OF THE PCCW GROUP

4 PROFIT BEFORE INCOME TAX

Profit before income tax is stated after crediting and charging the following:

In HK$ million	Six months ended	Six months ended
	30 June, 2008	30 June,	2007
	(Unaudited)	(Unaudited)
Crediting:
Revenue from properties sold	415		1,939
Gain on disposal of property, plant and equipment	—		11
Charging:
Cost of sales, excluding properties sold	4,634		3,833
Cost of properties sold	308		1,366
Depreciation of property, plant and equipment	1,369		1,432
Amortization of intangible assets	365		165
Amortization of land lease premium	16		13
Finance costs on borrowings	630		813
Staff costs	1,378		1,342

*INCOME TAX*
In HK$ million	Six months ended
	30 June, 2008	30 June,	2007
	(Unaudited)	(Unaudited)
Current income tax:
Hong Kong profits tax	464		534
Overseas tax	41		21
Recovery of deferred income tax	(88)		(178)
	417		377

Hong Kong profits tax has been provided at the rate of 16.5% (2007: 17.5%) on the estimated assessable profits for the period. Overseas tax has been calculated on the estimated assessable profits for the period at the rates prevailing in the respective jurisdictions.

On 16 March, 2007, the National People’s Congress of the People’s Republic of China (the “PRC”) approved the Corporate Income Tax Law (the “new CIT Law”). The new CIT Law reduced the corporate income tax rate applicable to the Group’s operations in the PRC from 33% to 25% with effect from 1 January, 2008. Accordingly, the deferred tax liabilities for the Group’s operations in the PRC as at 30 June, 2007 was provided at the rate of 25% on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases. The effect on the change in corporate income tax rate applicable to the Group’s operations in the PRC was recognized in the income statement for the six months ended 30 June, 2007.

— 185 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

6 DIVIDENDS

a. Dividend attributable to the interim period

In HK$ million	Six months ended	Six months ended
	30 June, 2008	30 June,	2007
	(Unaudited)	(Unaudited)
Interim dividend declared after the interim period of 7 HK cents
(2007: 6.5 HK cents) per ordinary share	474		440

At a meeting held on 21 August, 2008, the directors declared an interim dividend of 7 HK cents per ordinary share for the year ending 31 December, 2008. This interim dividend is not reflected as a dividend payable in this unaudited condensed consolidated interim financial information, but will be reflected as an appropriation of retained earnings for the year ending 31 December, 2008.

b. Dividend attributable to the previous financial year, approved and paid during the interim period

In HK$ million	Six months ended	Six months ended
	30 June, 2008	30 June,	2007
	(Unaudited)	(Unaudited)
Final dividend in respect of the previous financial year, approved and
paid during the interim period, of 13.5 HK cents (2007: 12 HK
cents) per ordinary share	915		813

7 EARNINGS PER SHARE

The calculations of basic and diluted earnings per share are based on the following data:

Earnings (in HK$ million) Earnings for the purposes of basic and diluted earnings per share Number of shares Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of deemed issue of shares under the Company’s share option scheme for nil consideration Effect of awards of vested shares under the Company’s share award schemes Weighted average number of ordinary shares for the purpose of diluted earnings per share	Six months ended 30 June, 2008 30 June, 2007 (Unaudited) (Unaudited) 656 822 6,776,300,672 6,758,086,867 6,072,024 111,466,808 2,519,109 3,731,974 6,784,891,805 6,873,285,649	Six months ended 30 June, 2008 30 June, 2007 (Unaudited) (Unaudited) 656 822 6,776,300,672 6,758,086,867 6,072,024 111,466,808 2,519,109 3,731,974 6,784,891,805 6,873,285,649
		6,758,086,867 111,466,808 3,731,974
		6,873,285,649

— 186 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

8 TRADE RECEIVABLES, NET

An aging analysis of trade receivables is set out below:

In HK$ million	As at 30 June, 2008	As at 31 December, 2007
	(Unaudited)	(Audited)
0 — 30 days	1,365	1,584
31 — 60 days	637	461
61 — 90 days	271	209
91 — 120 days	157	142
Over 120 days	700	591
	3,130	2,987
Less: Impairment loss for doubtful debts	(297)	(278)
	2,833	2,709

Trade receivables in respect of properties sold are payable by the purchasers pursuant to the terms of the sales contracts. Other trade receivables have a normal credit period ranging up to 30 days from the date of invoice or per contracted terms unless there is a separate mutual agreement on extension of the credit period. Credit evaluations are performed on all customers requiring credit over a certain amount. Debtors who have overdue payable are requested to settle all outstanding balances before any further credit is granted.

9 TRADE PAYABLES

An aging analysis of trade payables is set out below:

In HK$ million	As at 30 June, 2008	As at 31 December, 2007
	(Unaudited)	(Audited)
0 — 30 days	610	721
31 — 60 days	123	134
61 — 90 days	105	29
91 — 120 days	10	24
Over 120 days	293	356
	1,141	1,264

— 187 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

10 SHARE CAPITAL

	Number of shares	Nominal value
	(Unaudited)	(Unaudited)
		HK$ million
Authorized:
Ordinary shares of HK$0.25 each	10,000,000,000	2,500
Issued and fully paid:
Ordinary shares of HK$0.25 each
Balances as at 1 January, 2008	6,778,627,153	1,695
Exercise of employee share options (note a)	3,031,001	1
Repurchase of shares (note b)	(10,000,000)	(3)
Balances as at 30 June, 2008	6,771,658,154	1,693

a. During the period, 963,001 and 2,068,000 employee share options were exercised by the eligible option holders at subscription prices of HK$4.35 and HK$4.475 respectively for a total cash consideration of HK$13,443,354 resulting in the issue of an aggregate of 3,031,001 new ordinary shares of the Company of HK$0.25 each.
b. On 6 June, 2008, the Company repurchased a total of 10,000,000 ordinary shares on The Stock Exchange of Hong Kong Limited at a purchase price of HK$4.84 per share at an aggregate consideration of HK$48,400,000 (before transaction costs). The repurchased shares were cancelled prior to 30 June, 2008 and accordingly the issued share capital of the Company was reduced by the nominal value of these shares.

11 CAPITAL COMMITMENTS

In HK$ million	As at 30 June, 2008	As at 31 December, 2007
	(Unaudited)	(Audited)
Authorized and contracted for	1,544	1,820
Authorized but not contracted for	2,113	2,002
	3,657	3,822
*CONTINGENT LIABILITIES*
In HK$ million	As at 30 June, 2008	As at 31 December, 2007
	(Unaudited)	(Audited)
Performance guarantee	845	841
Others	45	80
	890	921

12 CONTINGENT LIABILITIES

The Group is subject to certain corporate guarantee obligations to guarantee the performance of its wholly-owned subsidiaries in the normal course of their businesses. The amount of liabilities arising from such obligations, if any, cannot be ascertained but the directors are of the opinion that any resulting liability would not materially affect the financial position of the Group.

— 188 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

13 CHARGE ON ASSETS

As at 30 June, 2008, certain assets of the Group with an aggregate carrying value of HK$1 million (31 December, 2007: HK$25 million) were pledged to secure loans and banking facilities of the Group.

14 RELATED PARTY TRANSACTIONS

During the period, the Group had the following significant transactions with related parties:

In HK$ million		Six months ended	Six months ended
	Note(s)	30 June, 2008	30 June,	2007
		(Unaudited)	(Unaudited)
Telecommunications service fees, rental charges, facility
management services and subcontracting charges received or
receivable from a jointly controlled company	a & c	51		62
Telecommunications service fees and systems integration charges
received or receivable from a substantial shareholder	a	30		77
Telecommunications service fees, outsourcing fees and rental
charges paid or payable to a jointly controlled company	a & c	380		492
Telecommunications service fees paid or payable to a substantial
shareholder	a	23		44
Key management compensation	b	51		83

a. These transactions were carried out after negotiations between the Group and the related parties in the ordinary course of business. In respect of transactions for which the price or volume has not yet been agreed with the relevant related parties, the directors have determined the relevant amounts based on their best estimation.

b. Details of key management compensation

In HK$ million	Six months	ended	ended
	30 June, 2008	30 June,		2007
	(Unaudited)		(Unaudited)
Salaries and other short-term employee benefits	49			66
Post-employment benefits	2			2
Share-based compensation	—			15
	51			83

c. Details of transactions with a jointly controlled company of a subsidiary (the “JV”)

On 17 June, 2004, the Company and Telstra Corporation Limited (“Telstra”) agreed to provide the JV with a revolving working capital loan facility with each of the Company and Telstra contributing up to US$25 million (approximately HK$195 million) to this facility. During the six months ended 30 June, 2007, no draw down was made by the JV under this facility and the facility expired on 31 December, 2007.

On 16 April, 2005, the Company agreed with Telstra and the JV on an operating model under which the JV would operate as an outsourcer of telecommunications network services for the Group and Telstra and its subsidiaries. During the six months ended 30 June, 2008, the outsourcing fees paid or payable by the Group to the JV, determined on a cost plus basis, were HK$291 million (2007: HK$397 million).

— 189 —

FINANCIAL INFORMATION OF THE PCCW GROUP

APPENDIX I

IV. STATEMENT OF INDEBTEDNESS

At the close of business on 30 September, 2008, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this document, the PCCW Group had outstanding indebtedness of approximately HK$32,813 million, comprising short term unsecured bank loans of approximately HK$16,600 million, long term unsecured guaranteed notes of approximately HK$15,449 million and other liabilities of approximately HK$764 million.

At the close of business on 30 September, 2008, the PCCW Group had contingent liabilities of approximately HK$904 million in respect of guarantees for its subsidiaries in the normal course of business and other guarantees of approximately HK$11 million.

Save as aforesaid and apart from intra-group liabilities and normal trade payables in the ordinary course of business, the PCCW Group did not have any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptance credits, debentures, mortgages, charges, material obligations under hire purchase contracts or finance leases, guarantees or other material contingent liabilities as at the close of business on 30 September, 2008.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the respective rates of exchange prevailing at the close of business on 30 September, 2008.

Subsequent to 30 September, 2008, the following material changes in the PCCW Group’s indebtedness took place:

(a) On 28 November, 2008, the PCCW Group drew down HK$9,500 million under the HK$23,800 million HKT Loan Facilities to effect the transfer of certain businesses and assets between the PCCW Group companies.
(b) On 28 November, 2008, the PCCW Group repaid in full the HK$10,150 million bank loan under the Existing Facilities.

Except as disclosed in the preceding paragraphs, there are no material changes in respect of the indebtedness and contingent liabilities of the PCCW Group since 30 September, 2008.

V. MATERIAL CHANGES

There are no material changes in the financial or trading position or outlook of the PCCW Group since 30 June, 2008, the date to which the latest unaudited condensed consolidated financial information of the PCCW Group were made up.

— 190 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

PART A — PROPERTY VALUATION BY CBRE

The texts of a letter and summary of values, prepared for the purpose of incorporation in this document, received from CB Richard Ellis Limited, an independent valuer, in connection with their valuations of the property interests of the PCCW Group in land and buildings in Hong Kong (other than those in Chai Wan, Hong Kong) and excluding any investment properties, properties held for/under development and properties for sale of the PCCW Group as at 31 October 2008 are set out below:

==> picture [125 x 161] intentionally omitted <==

6 December 2008

The Board of Directors, PCCW Limited 39th Floor, PCCW Tower TaiKoo Place 979 King’s Road Quarry Bay Hong Kong

Dear Sirs,

Re: Valuation of certain property interests (as listed in the Summary of Values) which include telephone exchanges, office premises and holiday houses located in Hong Kong

In accordance with your instruction for us to value certain property interests (as listed in the Summary of Values of this report) held by PCCW Limited (the “Company”) and its subsidiaries (together known as the “Group”) in Hong Kong, we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the capital values of such property interests as at 31 October 2008 (the “date of valuation”).

We have confirmed that we have made relevant investigations and enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market values of the properties.

— 191 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Basis of Valuation

Unless otherwise stated, our valuation is prepared in accordance with the “First Edition of The HKIS Valuation Standards on Properties” published by The Hong Kong Institute of Surveyors (“HKIS”). We have also complied with all requirements contained in Paragraph 34(2), (3) of Schedule 3 of the Companies Ordinance (Cap. 32) and Chapter 5, as well as Practice Note 12 of the Rule Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

Our valuation is made on the basis of Market Value which is defined to mean: “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

Direct Comparison method has been adopted in our valuation which are subject to the existing tenancies profile and licences of the properties.

For the purpose of the valuation, the portfolio of properties has been divided into four categories. These categories have been based upon the extent to which the alienation of the property is permitted:

Group I — Properties Where No Right of Alienation Exists

This group of properties comprises majority of the telephone exchanges (including engineering centres, a training centre and a sports complex). The uses of these properties are specifically restricted under the provisions of the Government Leases under which each site is held, and in connection with which alienation is absolutely prohibited. These sites were generally granted to the Group by the Government via private treaty for the purpose of the provision of utility services.

Group II — Properties Where a Restricted Right of Alienation Exists

West Exchange and East Exchange are the properties which fall within this category. We are not aware of any approval or waiver granted by the Lands Department for properties where no rights of alienation exist to permit alienation to third parties.

According to the conditions of the Government Leases under which the sites occupied by the East Exchange and West Exchange are held, part of the office accommodation can be sub-let to commercial tenants for periods not exceeding five years.

Group III — Property subject to First Offering to the Developer upon a Sale

Victoria Exchange is the only one property under this category. Under the Assignment dated September 1998, upon the disposal of the property in future, the former vendor (as one of the developers of the development) has the first right of refusal to repurchase the property at the then current open market value less 25%. The property cannot be leased except to subsidiaries with a prescribed ownership level and purpose of occupation. Our valuation of this property is subject to these restrictions.

— 192 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Group IV — Properties with No Restriction upon Alienation

These properties include land and building where there is no restriction upon the alienation of the interest held by the Company to a third party. It is held under the provisions of Government Lease which are not restricted to any uses which are directly related to utility facilities.

General Assumptions

The valuation has been prepared upon the assumption that the Group could sell those properties as if no alienation restriction exists. The valuation has been made on the basis of arm’s length transaction in which the owners sell the properties on the open market without benefit or burden of a deferred term contract, leaseback, joint-venture, management agreement, forced sale or any similar arrangement which would serve to affect the values of the property interests.

The valuation has been prepared upon the basis that each property is considered individually. No discount has been allowed for the properties to be sold to a single party and no account has been taken of any effect upon the values of the properties in the event that the properties where to be offered for sale at the same time as a portfolio.

In preparing the valuation, documentation relating to the ownership of the properties has been reviewed, where such information is relevant to the valuation. However, no examination of the original title documents has been undertaken to verify the ownership of the properties, and it has been assumed that the Company can demonstrate good title in all cases.

We have caused searches to be made at the Land Registry. No allowance has been made within the valuation to reflect any charges, mortgages, or amounts owning on any of the properties valued, nor incurred in effecting a sale. Unless otherwise stated in our report, the Land Registry records and our enquiries made of the Company did not reveal any encumbrances, restrictions or outgoings of an onerous nature affecting the properties which could have a material impact upon their values and our report is prepared on that basis. The report assumes no responsibility for matters legal in nature and assumes that good title exists in relation to all properties.

External inspections have been conducted to the properties. No structural survey nor on-site measurement has been conducted. In addition, none of the services within any of the properties have been tested. It is therefore not possible to report that whether or not the properties are free from any structural defects. The valuation has been conducted upon the basis of the assumption that the conditions of the existing buildings are satisfactory.

We have not carried out investigations on site to determine the suitability of soil conditions and the availability of services etc. for future development. Our report is prepared on the assumption that these aspects are satisfactory. This report does not make any allowance for contamination or pollution of the land, if any, which may have occurred as a result of past usage.

We have also not undertaken archaeological, ecological or environmental surveys. Our valuation is on the basis that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period, due to these, or to archaeological or ecological matters.

— 193 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

The valuation has been prepared upon the basis of information provided by the Company and it has been assumed that such information is reliable and accurate. This information has related to matters such as land title, statutory notice, easement, planning approval, site and building areas, building completion dates, occupancy, tenancy schedules and other relevant matters associated with the properties. We have no reason to doubt the truth and accuracy of the information, which is material to valuation provided by us.

We have also been advised by the Company that no material facts have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view and have no reason to suspect that material information has been withheld.

A summary of values is enclosed.

Yours faithfully, For and on behalf of

CB Richard Ellis Limited Alex PW Leung MHKIS MRICS RPS(GP) Director

Valuation & Advisory Services

Note: Mr Alex PW Leung is a Registered Professional Surveyor (General Practice), a member of the Hong Kong Institute of Surveyors, a member of Royal Institution of Chartered Surveyors. He has over 13 years experience in valuation in Hong Kong.

Encl.

— 194 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Summary of Values

			Capital Values
			as at
			31 October
Ref	Property	Lot No. and Share	2008
			(HK$)
*Group I : Properties Where No Right of Alienation Exists*
1.	Aberdeen Exchange, 6 Wong Chuk Hang Road,	AIL 358	$10,900,000
	Aberdeen, Hong Kong
2.	Admiralty Exchange, Portions of 2nd Basement,	6383/102750	$41,300,000
	1st Basement, G/F, 1/F, M1/F, M2/F, 2/F & 3/F	undivided shares of
	Lippo Centre, 89 Queensway, Admiralty,	and in IL 8615
	Hong Kong
3.	Ngau Tau Kok Engineering Centre,	NKIL 5570	$38,900,000
	7 Siu Yip Street, Ngau Tau Kok, Kowloon
4.	Chek Lap Kok Exchange (Portion),	57/100 undivided	$3,030,000
	1 Chun Ming Road, Chek Lap Kok,	shares of and in
	Lantau Island, New Territories	CLKL 1 R.P. & Ext.
5.	Cheung Sha Exchange, South Lantau Road,	Lot 241 in DD 331	$1,040,000
	57A Cheung Sha, Lantau Island,
	New Territories
6.	Clear Water Bay Exchange, 652 Clear Water Bay	Lot 802 in DD 227	$2,600,000
	Road, Sai Kung, New Territories
7.	Chai Wan Exchange, 13-15 Cheung Lee Street,	CWIL 64	$9,980,000
	Chai Wan, Hong Kong
8.	Chuk Yuen Exchange, 388 Castle Peak Road Tam	Lot 4647 in DD 104	$1,820,000
	Mei, Yuen Long, New Territories
9.	Fanling Exchange, 88-98 Jockey Club Road,	Lot 3867 in DD 91	$4,490,000
	Shek Wu Hui, Fanling, New Territories
10.	Foot Hills Telphone Exchange, 1 Kam Shing Road,	KTIL 5183	$8,260,000
	Kowloon Tong, Kowloon
11.	Fo Tan Exchange, 32 Shan Mei Street, Shatin, New	STTL 400	$24,600,000
	Territories
12.	Hunghom Exchange, 140 Gillies Avenue,	KIL 8230	$17,100,000
	Hung Hom, Kowloon
13.	Hei Ling Chau Exchange, Hei Ling Chau,	Lot 433 in DD 355	$230,000
	Lantau Island, New Territories
14.	Junk Bay Exchange, 22 Wan Lung Road,	JBTL 8	$14,600,000
	Tseung Kwan O, New Territories

— 195 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

			Capital Values
			as at
			31 October
Ref	Property	Lot No. and Share	2008
			(HK$)
15.	Jordan Exchange, 5/F - 7/F, 8 Austin Road,	109056/860000	$39,800,000
	Tsim Sha Tsui, Kowloon	undivided shares of
		and in KIL 10973
16.	Kowloon City Exchange, 28 Lung Kong Road,	NKIL 4101	$4,980,000
	Kowloon City, Kowloon
17.	King’s Road Exchange, 511 King’s Road,	IL 8143	$18,000,000
	North Point, Hong Kong
18.	Ko Tong Exchange, 360 Pak Tam Road, Tai Po,	Lot 455 in DD 292	$140,000
	New Territories
19.	Kwai Shing Engineering Centre, 298 Kwai Shing	KCTL 418	$123,000,000
	Circuit, Kwai Chung, New Territories
20.	Kwun Tong Exchange, 406 Kwun Tong Road,	KTIL 256	$6,820,000
	Kwun Tong, Kowloon
21.	Kennedy Town Exchange, 14 Smithfield Road,	IL 8340	$12,700,000
	Kennedy Town, Hong Kong
22.	Kwai Chung Exchange, 145-149 Kwok Shui Road,	KCTL 82	$19,000,000
	Kwai Chung, New Territories
23.	Lai Chi Kok Exchange, 2 Yuet Lun Street,	Certain undivided	$37,000,000
	Lai Chi Kok, Kowloon	shares of and in
		NKIL 5218
24.	Lai Chi Wo Exchange, Lai Chi Wo, Fanling,	Lot 2202 in DD 145	$73,000
	New Territories
25.	Lau Fau Shan Exchange, Lau Fau Shan Road,	Lot 3498 in DD 129	$1,020,000
	Yuen Long, New Territories
26.	Lai Chi Kok Engineering Centre, 4 Yuet Lun Street,	NKIL 5934	$82,500,000
	Lai Chi Kok, Kowloon
27.	Lockhart Exchange, 3 Hennessy Road, Wanchai,	IL 8189 & Ext.	$98,600,000
	Hong Kong
28.	Lamma Exchange, 70A Po Wah Yuen, Lamma	Lot 1715 in DD 3,	$320,000
	Island, New Territories	Lamma Island &
		Ext.
29.	Lai Chi Kok Sports Complex, 2 Yuet Lun Street,	Certain undivided	$61,000,000
	Lai Chi Kok, Kowloon	shares of and in
		NKIL 5218

— 196 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

			Capital Values
			as at
			31 October
Ref	Property	Lot No. and Share	2008
			(HK$)
30.	Mongkok Exchange, 37 Bute Street, Mong Kok,	KIL 7274	$29,600,000
	Kowloon
31.	Ma Mei Ha Exchange, 2 Ping Che Road, Fanling,	Lot 2522 in DD 76	$690,000
	New Territories
32.	Ma On Shan Exchange, 20 On Shing Street,	STTL 238	$16,600,000
	Ma On Shan, New Territories
33.	North Point Exchange, 14 Fortress Hill Road,	IL 7676	$15,400,000
	North Point, Hong Kong
34.	Peng Chau Exchange, 5 Nam Shan Road, Peng	PCL 621	$200,000
	Chau, New Territories
35.	Pak Tin Exchange, 41 Wai Chi Street,	NKIL 5572	$11,600,000
	Shek Kip Mei, Kowloon
36.	Po Man Exchange, 43 Sheung Shing Street, Ho	KIL 10051	$21,400,000
	Man Tin, Kowloon
37.	Repulse Bay Exchange, 6 Beach Road, Repulse	RBL 871	$2,360,000
	Bay, Hong Kong
38.	Sai Kung Exchange, 66 Man Nin Street, Sai Kung,	Lot 750 in DD 215	$1,550,000
	New Territories
39.	Shanghai Street Exchange, 663 Shanghai Street,	KIL 9469	$17,400,000
	Mongkok, Kowloon
40.	Shatin Exchange, 14-16 Man Lai Road, Shatin,	Lot 774 in DD 179	$9,740,000
	New Territories
41.	Shek Kong Exchange, 400 Kam Sheung Road,	Lot 1797 in DD 114	$690,000
	Yuen Long, New Territories
42.	Sok Kwu Wan Exchange, Sok Kwu Wan,	Lot 633 in DD 10,	$340,000
	Lamma Island, New Territories	Lamma Island
43.	Shek O Exchange, 185 Shek O Village Road,	SOIL 84	$740,000
	Shek O, Hong Kong
44.	Shaukeiwan Exchange, 17 Sun Sing Street,	SKWIL 745	$12,000,000
	Shau Kai Wan, Hong Kong
45.	Sham Tseng Exchange, 44 Castle Peak Road,	Lot 231 in DD 390	$2,130,000
	Sham Tseng, New Territories
46.	Shamshuipo Exchange, 330 Cheung Sha Wan Road,	NKIL 4515	$15,800,000
	Sham Shui Po, Kowloon

— 197 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

			Capital Values
			as at
			31 October
Ref	Property	Lot No. and Share	2008
			(HK$)
47.	Stanley Exchange, 36 Stanley Village Road,	STIL 48	$1,780,000
	Stanley, Hong Kong
48.	Silver Mine Bay Exchange, 5 Wan Tsai, Mui Wo,	Lot 645 in DD 4,	$630,000
	Lantau Island, New Territories	Mui Wo
49.	Tung Chung Exchange, Wong Lung Hang Road,	Lot 2401 in DD 3,	$220,000
	Tung Chung, Lantau Island, New Territories	Tung Chung
50.	Tung Chung Wan Exchange (Portion),	5850/10000	$2,690,000
	12 Cheung Tung Road, Tung Chung, Lantau Island,	undivided shares of
	New Territories	and in TCTL 8
51.	Training & Development, 70 Wan Hon Street,	KTIL 617	$40,800,000
	Kwun Tong, Kowloon
52.	Tai O Exchange, 91 Shek Tsai Po Street, Tai O,	Lot 390 in DD 302	$120,000
	Lantau Island, New Territories
53.	Tuen Mun Exchange, 6 Shek Pai Tau Road,	CPTL 58	$8,630,000
	Tuen Mun, New Territories
54.	Tai Po Central Exchange, 5 On Po Lane, Tai Po,	TPTL 70	$26,300,000
	New Territories
55.	Tap Mun Exchange, 30 Sheung Wai, Tai Po,	Lot 786 in DD 296	$200,000
	New Territories
56.	Tai Po Exchange, 41-49 Tai Ming Lane, Tai Po,	Lot 1773 in DD 6	$6,380,000
	New Territories
57.	Tin Shui Wai Exchange, 8 Tin Pak Road,	TSWTL 8	$28,300,000
	Tin Shui Wai, New Territories
58.	Tsing Shan Wan Exchange, 1 Hing On Lane,	TMTL 265	$30,900,000
	Tuen Mun, New Territories
59.	Tsuen Wan Telephone Exchange, 303-313 Castle	TWTL 178	$7,170,000
	Peak Road, Tsuen Wan, New Territories
60.	Tsing Yi Exchange, 12 Chung Mei Road, Tsing Yi,	TYTL 70	$5,770,000
	New Territories
61.	Wanchai Exchange, 44-46 Wood Road, Wanchai,	IL 7887	$22,100,000
	Hong Kong
62.	Waterloo Road Exchange, 524A Nathan Road,	KIL 8003	$17,600,000
	Yaumatei, Kowloon
63.	Wong Tai Sin Exchange, 19 Muk Lun Street,	NKIL 5094	$16,200,000
	Wong Tai Sin, Kowloon

— 198 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Ref Property Lot No. and Share 64. Sha Lo Wan Telephone Line Concentrator Hut, Sha Lo Wan, Lantau Island, New Territories Lot 2278 in DD 305 65. Yuen Chau Kok Exchange, 16 Siu Lek Yuen Road, Shatin, New Territories STTL 162 66. Yuen Long Exchange, 3 Yuen Long Tai Yuk Road, Yuen Long, New Territories YLTL 30 67. Yau Tong Exchange, 6 Junk Bay Road, Yau Tong, Kowloon NKIL 5401 68. Brick Hill PMR Station, Nam Long Shan Brick Hill, Island South, Hong Kong RBL 1089 69. Kau Sai Radio-telephone Hut, Kau Sai Village, Kau Sai Chau, Sai Kung, New Territories Lot 104 in DD 265 70. Mount Parker PMR Station, Peak, Hong Kong IL 8594 Group I Sub-total: *Group II : Properties Where a Restricted Right of Alienation Exists* 71. West Exchange, 1B Morrison Street, Sheung Wan, Hong Kong IL 6691 72. East Exchange Tower, 38-40 Leighton Road, Causeway Bay, Hong Kong IL 6362 Group II Sub-total: *Group III: Property subject to First Offering to the Developer upon a Sale* 73. Portions of B/F to 6/F of Low Block HKT Accommodation, Grand Millennium Plaza, Hong Kong 2675/116009 undivided shares of and in IL 8911 Group III Sub-total:	Capital Values as at 31 October 2008 (HK$) $26,000 $63,800,000 $6,590,000 $9,390,000 $380,000 $24,000 $450,000
	$1,138,493,000
	$303,000,000 $460,000,000
	$763,000,000
	$106,000,000
	$106,000,000

— 199 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Ref
Property
Lot No. and Share
Group IV: Properties With No Restriction upon Alienation
74.
On Lok Exchange, 21 Lok Yip Road, Fanling,
New Territories
FSSTL 21
75.
Cheung Chau Exchange, Sports Road,
Cheung Chau, New Territories
CCIL 10
76.
Cheung Chau Island Lot 54, Cheung Chau,
New Territories
CCIL 54
77.
House Nos. 1-3, Fa Peng Holiday House Estates,
52-54 Fa Peng Road, Cheung Chau, New Territories
3/20 undivided
shares of and in
CCL 1644
78.
House Nos. 4 & 7, Fa Peng Holiday House Estates,
52-54 Fa Peng Road, Cheung Chau, New Territories
2/20 undivided
shares of and in
CCL 1644
79.
House No. 19, Fa Peng Holiday House Estates,
52-54 Fa Peng Road, Cheung Chau, New Territories
1/20 undivided share
of and in CCL 1644
Group IV Sub-total:
Grand Total

Capital Values
as at
31 October
2008
(HK$)
$80,900,000
$1,480,000
$7,050,000
$2,110,000
$1,400,000
$700,000

$93,640,000

$2,101,133,000

— 200 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

PART B — PROPERTY VALUATION BY SAVILLS

The texts of a letter and summary of values, prepared for the purpose of incorporation in this document, received from Savills Valuation and Professional Services Limited, an independent valuer, in connection with their valuations of the development rights and property interests of the PCCW Group other than those included in CBRE’s summary of values in Part A of this Appendix II as at 31 October, 2008 are set out below:

==> picture [72 x 72] intentionally omitted <==

==> picture [118 x 93] intentionally omitted <==

The Directors PCCW Limited 39th Floor, PCCW Tower TaiKoo Place 979 King’s Road Quarry Bay Hong Kong

6 December 2008

Dear Sirs,

RE: VALUATION OF VARIOUS DEVELOPMENT RIGHTS AND PROPERTY INTERESTS IN HONG KONG, THE PEOPLE’S REPUBLIC OF CHINA (THE “PRC”), THE KINGDOM OF THAILAND (“THAILAND”) AND JAPAN

In accordance with your instructions for us to value the various development rights and property interests held by PCCW Limited (the “Company”) and its subsidiaries (hereinafter together referred to as the “Group”) located in Hong Kong, the PRC, Thailand and Japan, we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market values of these development rights and property interests as at 31 October 2008 for the purpose of incorporation in the scheme document of the Company dated 6 December 2008.

— 201 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Our valuation is prepared in accordance with The HKIS Valuation Standards on Properties (1st Edition 2005) published by The Hong Kong Institute of Surveyors and in compliance with the requirements of Chapter 5 and Practice Note 12 of Listing Rules published by The Stock Exchange of Hong Kong Limited.

Our valuation of each of the development rights and property interests in Group I to Group VII is our opinion of the market value which we would define as intended to mean “the estimated amount for which the development rights or property interest should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

The market value is the best price reasonably obtainable in the market by the seller and the most advantageous price reasonably obtainable in the market by the buyer. This estimate specifically excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, joint ventures, management agreements, special considerations or concessions granted by anyone associated with the sale, or any element of special value. The market value is also estimated without regard to costs of sale and purchase, and without offset for any associated taxes. In respect of the development rights in the project in each of Group I and Group II, we have valued the rights by assessing the surplus proceeds receivable by the Group by reference to sale evidence as available in the market together with the contracted sales proceeds of units therein. We have allowed for the estimated government sharing of the surplus proceeds in the projects and the outstanding development costs including mainly construction cost, allocated overheads and related costs, sales and marketing cost and finance cost.

In valuing the property interest in Group III, we have taken into account the contracted sales proceeds receivable by the Group. We have allowed for the outstanding development costs including mainly construction and land costs, sales and marketing costs and finance cost.

We have valued the property interests in Group IV, V, VI and VII by reference to sales evidence as available on the market and where appropriate on the basis of capitalization of the net income shown on schedules handed to us. We have allowed for outgoings and, in appropriate cases, made provisions for reversionary income potential.

The property interest in Group VIII is valued by the depreciated replacement cost approach and the assessed value is based on an estimate of the market value for the existing use of the land plus the cost of replacement of the improvements less deductions for physical deterioration and all relevant forms of obsolescence and optimisation. The assessed value is subject to adequate potential profitability of the business.

We have relied to a very considerable extent on information given by the Group and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, particulars of occupancy, lettings, development proposals, development costs, income sharing of joint venture partners, site and floor areas and all other relevant matters. Dimensions,

— 202 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

measurements and areas included in the valuation certificate are based on information contained in the documents provided to us and are therefore approximations. We have no reason to doubt the truth and accuracy of the information provided to us. We are also advised by the Group that no material facts have been omitted from the information provided.

We have also been provided with extracts of title documents relating to the development rights and property interests and we have caused searches to be made at the Land Registry for the concerned properties in Hong Kong. We have not, however, searched the original documents to verify ownership or to ascertain the existence of any amendment which does not appear on the copies handed to us. We do not accept a liability for any interpretation which we have placed on such information which is more properly the sphere of your legal advisers. We have relied on the advice given by the Group and its legal advisers, Haiwen & Partners and Zhong Lun Law Firm, on PRC laws, regarding the titles to the property interests in the PRC.

We have inspected the exterior of all the properties concerned and, where possible, we have also inspected the interior of the premises. However, no structural survey of the existing buildings has been made but, in the course of our inspection, we did not note any serious defects. We are not, however, able to report that the properties are free from rot, infestation or any other structural defect. No tests were carried out to any of the services.

We have not been able to carry out investigations on the development sites to determine the suitability of the ground conditions and services etc. for development. Our valuation is prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delay will be incurred during construction periods.

No allowance has been made in our valuation for any charge, mortgage or amount owing on the development rights and property interests nor for any expense or taxation which may be incurred in effecting a sale. Unless otherwise stated in our report, the land search records, PRC legal opinion and our enquiries with the Company did not reveal any encumbrances, restrictions, and outgoings of an onerous nature which could materially affect the values of the development rights and property interests and our report is prepared on that basis.

According to the information prepared by the Group, the potential tax liabilities which would arise on the disposal of the development rights and property interests under Group I to VIII in this report at the amounts as valued by us comprise Hong Kong profits tax, Chinese business tax, Chinese land appreciation tax, Chinese corporate income tax, Chinese stamp duty and Thai value-added tax. As advised by the Group, depending on the then sale status, there is a likelihood of such liabilities being crystallized.

— 203 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

Unless otherwise stated, all money amounts stated in our valuation are in Hong Kong dollars. The exchange rates adopted in our valuation are HK$1 = RMB0.8806, HK$1 = THB4.5260 and HK$1 = JPY12.6890 which were the approximate exchange rates prevailing as at the valuation date and there has been no significant fluctuation in such exchange rates between that date and the date of this letter.

We enclose herewith our summary of values.

Yours faithfully

For and on behalf of

Savills Valuation and Professional Services Limited Charles C K Chan MSc FRICS FHKIS MCIArb RPS (GP) Managing Director

Note : Mr Charles C K Chan, chartered estate surveyor, MSc, FRICS, FHKIS, MCIArb, RPS(GP), has been a qualified valuer since June 1987 and has about 24 years of experience in the valuation of properties and development rights in Hong Kong, about 19 years experience in the valuation of properties in the PRC and extensive experience in the valuation of properties in the Asia-Pacific Region including Thailand and Japan.

— 204 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

SUMMARY OF VALUES

No. Property

Capital value in Market value existing state as at in existing Interest 31 October 2008 state as at attributable attributable to the 31 October 2008 to the Group Group’s interest

Group I — Development Rights held by the Group in project for sale in Hong Kong

Development Rights in 26 houses of Villa Bel-Air, Bel-Air On The Peak, 7 Bel-Air Peak Rise, Pokfulam, Hong Kong
HK$500,000,000 61.53% HK$307,650,000

Group II — Development Rights held by the Group in project under development in Hong Kong

Development Rights in HK$2,120,000,000 61.53% HK$1,304,436,000 Bel-Air No. 8, Bel-Air On The Peak, Pokfulam, Hong Kong

Group III — Property interest held by the Group under development in Hong Kong

1 Wo Fung Street, Sheung Wan, Hong Kong

HK$630,000,000 61.53% HK$387,639,000

Group IV — Property interests held by the Group for occupation / investment in Hong Kong

Units 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, HK$25,300,000 100% HK$25,300,000 11, 12, 13, 14 and 15, Female Disable Lavatory, Male Lavatory, Disable Lavatory and Lift Lobby and Corridor on 18th Floor, Parking Spaces Nos. 5, 6 and L5 on 1st Floor, Paramount Building, 12 Ka Yip Street, Chai Wan Hong Kong

— 205 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

				Capital value in
		Market value		existing state as at
		in existing	Interest	31 October 2008
		state as at	attributable	attributable to the
No.	Property	31 October 2008	to the Group	Group’s interest
5.	Units 1, 2, 3, 4, 5, 6, 7, 8, 9, 10,	HK$24,900,000	100%	HK$24,900,000
	11, 12, 13, 14 and 15,
	Female Disable Lavatory,
	Male Lavatory, Disable Lavatory
	and Lift Lobby and Corridor on
	19th Floor, Parking Spaces Nos.
	10 and L6 on 1st Floor,
	Paramount Building,
	12 Ka Yip Street,
	Chai Wan
	Hong Kong
6.	Units 1, 2, 3, 4, 5, 6, 7, 8, 9, 10,	HK$27,400,000	100%	HK$27,400,000
	11, 12, 13, 14 and 15,
	Female Disable Lavatory, Male
	Lavatory, Disable Lavatory and
	Lift Lobby and Corridor on 20th
	Floor and Roof, Parking Spaces
	Nos. 7, 8, L3 and L4 on 1st Floor,
	Paramount Building,
	12 Ka Yip Street,
	Chai Wan
	Hong Kong
Group V — Property interest held by		the Group for investment in the PRC
7.	Unsold portion of	HK$3,600,000,000	61.53%	HK$2,215,080,000
	Pacific Century Place,
	2A Gong Ti Bei Lu,
	Chaoyang District,
	Beijing,
	PRC

— 206 —

PROPERTY VALUATIONS OF THE PCCW GROUP

APPENDIX II

No. Property

Capital value in Market value existing state as at in existing Interest 31 October 2008 state as at attributable attributable to the 31 October 2008 to the Group Group’s interest

Group VI — Property interest held by the Group for future development in the PRC

A parcel of land situated at HK$350,000,000 61.53% HK$215,355,000 4 Gong Ti Bei Lu, Chaoyang District, Beijing, PRC

Group VII — Property interest held by the Group for future development in Thailand

A parcel of land, HK$513,000,000 61.53% HK$315,648,900 Thai Muang Subdistrict, Thai Muang District Phang-nga, Greater Phuket, Thailand
No. Property

			Capital value in
	Capital value		existing state as at
	in existing	Interest	31 October 2008
	state as at	attributable	attributable to the
31	October 2008	to the Group	Group’s interest

Group VIII — Property interest held by the Group for future development in Japan

A parcel of land, HK$50,000,000 61.53% HK$30,765,000 Grand Hirafu Hanazono Area, Niseko, Hokkaido, Japan

TOTAL

HK$7,840,600,000 HK$4,854,173,900

— 207 —

GENERAL INFORMATION

APPENDIX III

1. RESPONSIBILITY STATEMENTS

This document includes particulars given in compliance with the Takeovers Code for the purpose of giving information with regard to the Scheme and PCCW.

The directors of PCCW jointly and severally accept full responsibility for the accuracy of the information contained in this document relating to the PCCW Group and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document by PCCW have been arrived at after due and careful consideration and there are no other facts relating to the PCCW Group not contained in this document, the omission of which would make any statement in this document misleading.

The directors of PCRD jointly and severally accept full responsibility for the accuracy of the information contained in this document (other than that relating to the PCCW Group and the Netcom Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document (other than opinions expressed by the PCCW Group and the Netcom Group) have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document misleading.

The directors of Starvest jointly and severally accept full responsibility for the accuracy of the information contained in this document (other than that relating to the PCCW Group and the Netcom Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document (other than opinions expressed by the PCCW Group and the Netcom Group) have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document misleading.

The authorised representative of CNC accepts full responsibility for the accuracy of the information contained in this document (other than that relating to the PCCW Group and the PCRD Group) and confirms, having made all reasonable enquiries, that to the best of his knowledge, opinions expressed in this document (other than opinions expressed by the PCCW Group and the PCRD Group) have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document misleading.

The directors of Netcom BVI jointly and severally accept full responsibility for the accuracy of the information contained in this document (other than that relating to the PCCW Group and the PCRD Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document (other than opinions expressed by the PCCW Group and the PCRD Group) have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document misleading.

— 208 —

GENERAL INFORMATION

APPENDIX III

2. SHARE CAPITAL

The authorised and issued share capital of PCCW as at the Latest Practicable Date were as follows:

Authorised: 10,000,000,000 Shares

HK$ 2,500,000,000

Issued and fully paid up: 6,772,294,654 Shares

1,693,073,663.50

All of the Shares currently in issue rank pari passu in all respects with each other, including, in particular, as to dividends, voting rights and capital. 3,667,501 Shares have been issued since 31 December, 2007 (being the end of the last financial year of PCCW) up to the Latest Practicable Date.

The Shares are listed on the Stock Exchange and other than the ADSs that are traded on the Pink OTC Markets in the US, none of the securities of PCCW are listed or dealt in on any other stock exchange and no such listing or permission to deal is being or is proposed to be sought.

As at the Latest Practicable Date, apart from the Options and the ADSs, there were no outstanding options, warrants, derivatives or convertible securities issued by PCCW.

— 209 —

GENERAL INFORMATION

APPENDIX III

3. MARKET PRICES

(a) The highest and lowest closing prices of the Shares as quoted on the Stock Exchange during the Relevant Period were HK$5.16 per Share on 18 August, 2008 and HK$2.75 per Share on 13 October, 2008, respectively.
(b) The table below sets out the closing prices of the Shares on the Stock Exchange on the last Business Day on which trading of the Shares took place in each of the calendar months during the Relevant Period:

Dates	Closing
(2008)	price
	(HK$)
28 November	3.54
31 October	N/A
30 September	3.20
29 August	4.90
31 July	4.95
30 June	4.72
30 May	4.90
30 April	5.03

Note

1 On 14 October, 2008, trading in the Shares was suspended pending issue of the Announcement. See (c) below for confirmation of the closing price on the Last Trading Date.
(c) The closing price of the Shares on the Stock Exchange on the Last Trading Date was HK$2.75.
(d) The closing price of the Shares on the Stock Exchange on the Latest Practicable Date was HK$3.55.

— 210 —

GENERAL INFORMATION

APPENDIX III

4. DISCLOSURE OF INTERESTS UNDER THE SFO

(a) Directors’ interests and short positions in the Shares and the shares of PCCW’s associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of PCCW in the Shares, underlying Shares and debentures of PCCW or any of its associated corporations (within the meaning of Part XV of the SFO) which: (a) were required to be notified to PCCW and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO); or (b) were required pursuant to Section 352 of the SFO to be entered in the register referred to therein; or (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers of the Listing Rules, to be notified to PCCW and the Stock Exchange were as follows:

(A) Interests in PCCW

The table below sets out the aggregate long positions in the Shares and underlying Shares held by the Directors and chief executive of PCCW:

					Number of
		Number of	ordinary Shares		underlying Shares held		Approximate percentage of
Name of Director/	Personal	Family	Corporate	Other	under equity		issued Share
chief executive	interests	interests	interests	interests	derivatives	Total	capital
Richard Li	—	—	250,109,824	1,674,560,335	—	1,924,670,159	28.42%
			(Note 1(a))	(Note 1(b))
Alexander Anthony	760,000	—	—	—	15,800,200	16,560,200	0.24%
Arena					(Note 2)
Peter Anthony Allen	253,200	—	—	—	4,629,200	4,882,400	0.07%
					(Note 3)
Chung Cho Yee, Mico	1,176,260	18,455	—	—	14,390,400	15,585,115	0.23%
		(Note 4)			(Note 3)
Lee Chi Hong, Robert	992,600	511	—	—	6,000,000	6,993,111	0.10%
	(Note 5(a))	(Note 5(b))			(Note 3)
Sir David Ford	—	—	—	—	3,000,000	3,000,000	0.04%
					(Note 3)
Professor Chang	64,000	—	—	—	—	64,000	0.001%
Hsin-kang
Dr The Hon Sir David	600,000	—	—	—	—	600,000	0.009%
Li Kwok Po

— 211 —

GENERAL INFORMATION

APPENDIX III

Notes:

1. (a) Of these Shares, PCD, a wholly-owned subsidiary of Chiltonlink Limited, held 216,362,824 Shares and Eisner held 33,747,000 Shares. Richard Li owned 100% of Chiltonlink Limited and Eisner.

(b) These interests represented:
- (i) a deemed interest in 36,726,857 Shares held by Yue Shun, a subsidiary of Hutchison Whampoa Limited (“HWL”). Cheung Kong (Holdings) Limited (“Cheung Kong”) through certain subsidiaries held more than one-third of the issued share capital of HWL. Richard Li was a discretionary beneficiary of certain discretionary trusts which held units in unit trusts which in turn held interests in certain shares of Cheung Kong and HWL. Richard Li was also interested in one-third of the issued share capital of two companies, which owned all the shares of the trustee companies which acted as trustees of such discretionary trusts and unit trusts. Accordingly, Richard Li was deemed, under the SFO, to have an interest in the 36,726,857 Shares held by Yue Shun;
- (ii) a deemed interest in 102,122,177 Shares held by PCGH. Richard Li was the founder of certain trusts which held 100% interests in PCGH. Accordingly, Richard Li was deemed, under the SFO, to have an interest in the 102,122,177 Shares held by PCGH; and
- (iii) a deemed interest in 1,535,711,301 Shares held by PCRD, a company in which PCGH had, through certain wholly-owned subsidiaries being Anglang, PCG Cayman, Pacific Century International Limited and Borsington, an aggregate of 75.74% interest. Richard Li was the founder of certain trusts which held 100% interests in PCGH. Accordingly, Richard Li was deemed, under the SFO, to have an interest in the 1,535,711,301 Shares held by PCRD.

2. These interests represented Alexander Anthony Arena’s beneficial interest in: (a) 200 underlying Shares held in the form of 20 American depositary receipts which constituted listed equity derivatives; and (b) 15,800,000 underlying Shares in respect of the Options granted by PCCW to Alexander Anthony Arena as beneficial owner, the details of which are set out in paragraph (C) below.

3. These interests represented the interests in underlying Shares in respect of the Options granted by PCCW to these Directors as beneficial owners, the details of which are set out in paragraph (C) below.

4. These Shares were held by the spouse of Chung Cho Yee, Mico.

5. (a) These Shares were held jointly by Lee Chi Hong, Robert and his spouse.

(b) These Shares were held by the spouse of Lee Chi Hong, Robert.

— 212 —

GENERAL INFORMATION

APPENDIX III

(B) Interests in associated corporation of PCCW

The table below sets out the long position in the shares and underlying shares of PCPD held by the Directors and chief executive of PCCW:

					Number of	Approximate	Approximate
					underlying		percentage
	Number of ordinary shares				shares held		of issued
Name of Director/	Personal	Family	Corporate	Other	under equity		share
chief executive	interests	interests	interests	interests	derivatives	Total	capital
Chung Cho Yee,	—	—	—	—	5,000,000	5,000,000	0.21%
Mico

The above interest represented the interest in underlying shares in respect of share options granted by PCPD to the Director as beneficial owner pursuant to PCPD’s share option scheme, the details of which are set out as follows:

					Number of
Name of Director/	Date of	Vesting	Exercisable	Exercise	options
chief executive	grant	period	period	price	outstanding
	(Note)	(Note)	(Note)	HK$
Chung Cho Yee, Mico	12.20.2004	Fully vested	12.20.2004	2.375	5,000,000
		on 12.20.2004	to 12.19.2014

Note: All dates are shown month/day/year.

(C) Directors’ rights to acquire Shares

As at the Latest Practicable Date, the Directors’ interests in Options which remain outstanding are summarised below:

					Number of
Name of Directors/	Date of	Vesting	Exercisable	Exercise	Options
chief executive	grant	period	period	price	outstanding
	(Note)	(Note)	(Note)	HK$
Alexander Anthony	08.28.1999	08.17.2000	08.17.2000	11.7800	3,200,000
Arena		to 08.17.2004	to 08.17.2009
	08.26.2000	08.26.2001	08.26.2001	60.1200	1,600,000
		to 08.26.2005	to 08.26.2010
	02.20.2001	08.26.2001	08.26.2001	16.8400	1,600,000
		to 08.26.2005	to 01.22.2011

— 213 —

GENERAL INFORMATION

APPENDIX III

					Number of
Name of Directors/	Date of	Vesting	Exercisable	Exercise	Options
chief executive	grant	period	period	price	outstanding
	(Note)	(Note)	(Note)	HK$
	07.25.2003	07.25.2004	07.25.2004	4.3500	6,400,000
		to 07.25.2006	to 07.23.2013
	02.08.2005	02.08.2006	02.08.2006	4.4750	3,000,000
		to 02.08.2007	to 02.07.2009
Peter Anthony Allen	08.28.1999	08.17.2000	08.17.2000	11.7800	272,000
		to 08.17.2002	to 08.17.2009
	08.26.2000	08.26.2001	08.26.2001	60.1200	178,600
		to 08.26.2005	to 08.26.2010
	02.20.2001	08.26.2001	08.26.2001	16.8400	178,600
		to 08.26.2005	to 01.22.2011
	07.25.2003	07.25.2004	07.25.2004	4.3500	2,000,000
		to 07.25.2006	to 07.23.2013
	02.08.2005	02.08.2006	02.08.2006	4.4750	2,000,000
		to 02.08.2007	to 02.07.2009
Chung Cho Yee,	08.28.1999	08.17.2000	08.17.2001	11.7800	3,575,200
Mico		to 08.17.2004	to 08.17.2009
	08.26.2000	08.26.2001	08.26.2001	60.1200	1,060,000
		to 08.26.2005	to 08.26.2010
	02.20.2001	08.26.2001	08.26.2001	16.8400	1,060,000
		to 08.26.2005	to 01.22.2011
	07.25.2003	07.25.2004	07.25.2004	4.3500	5,695,200
		to 07.25.2006	to 07.23.2013
	02.08.2005	02.08.2006	02.08.2006	4.4750	3,000,000
		to 02.08.2007	to 02.07.2009
Lee Chi Hong,	07.25.2003	07.25.2004	07.25.2004	4.3500	5,000,000
Robert		to 07.25.2006	to 07.23.2013
	02.08.2005	02.08.2006	02.08.2006	4.4750	1,000,000
		to 02.08.2007	to 02.07.2009
Sir David Ford	07.25.2003	07.25.2004	07.25.2004	4.3500	1,000,000
		to 07.25.2006	to 07.23.2013
	02.08.2005	02.08.2006	02.08.2006	4.4750	2,000,000
		to 02.08.2007	to 02.07.2009

Note: All dates are shown month/day/year.

— 214 —

APPENDIX III

GENERAL INFORMATION

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or the chief executive of PCCW had any interests or short positions in the Shares, underlying Shares and debentures of PCCW or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to PCCW and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO) or the Model Code for Securities Transactions by Directors of Listed Issuers of the Listing Rules and which were required to be entered into the register required to be kept under Section 352 of the SFO.

(b) Interests and short positions of substantial Shareholders and other persons required to be disclosed under the SFO

As at the Latest Practicable Date, so far as is known to the Directors and chief executive of PCCW, the following persons (other than any Directors or chief executive of PCCW) were substantial Shareholders of PCCW (as defined in the Listing Rules) and had interests or short positions in the Shares and underlying Shares which fall to be disclosed to PCCW under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required to be entered into the register required to be kept under Section 336 of the SFO:

(A) Interests of substantial Shareholders

		Number of	Approximate
		Shares/	percentage
		underlying	of issued
Name of Shareholder	Note	Shares held	share capital
PCRD		1,535,711,301	22.68%
PCGH	1	1,637,833,478	24.18%
Star Ocean Ultimate Limited	2	1,637,833,478	24.18%
The Ocean Trust	2	1,637,833,478	24.18%
The Starlite Trust	2	1,637,833,478	24.18%
OS Holdings Limited	2	1,637,833,478	24.18%
Ocean Star Management Limited	2	1,637,833,478	24.18%
The Ocean Unit Trust	2	1,637,833,478	24.18%
The Starlite Unit Trust	2	1,637,833,478	24.18%
CNC	3	1,343,571,766	19.84%

Notes:

These interests represented (i) PCGH’s beneficial interests in 102,122,177 Shares; and (ii) PCGH’s interests through its controlled corporations (being its wholly-owned subsidiaries, Borsington, Pacific Century International Limited, PCG Cayman and Anglang, which together controlled 75.74% of PCRD) in 1,535,711,301 Shares held by PCRD.

— 215 —

GENERAL INFORMATION

APPENDIX III

On 18 April, 2004, Richard Li transferred the entire issued share capital of PCGH to Ocean Star Management Limited as trustee of The Ocean Unit Trust and The Starlite Unit Trust. The entire issued share capital of Ocean Star Management Limited was held by OS Holdings Limited. The Ocean Trust and The Starlite Trust held all units of The Ocean Unit Trust and The Starlite Unit Trust respectively. Star Ocean Ultimate Limited was the discretionary trustee of The Ocean Trust and The Starlite Trust.
CNC indirectly holds these interests through its indirect wholly-owned subsidiary Netcom BVI.

(B) Interests of other persons required to be disclosed under the SFO

As at the Latest Practicable Date, the following person (not being a Director, chief executive or substantial Shareholder of PCCW) had interests or short positions in the Shares and underlying Shares as recorded in the register required to be kept under Section 336 of the SFO:

						Number of	Approximate
						Shares/	percentage
						underlying	of issued
Name						Shares held	share capital
Ocean	Star	Investment	Management	Limited	Note	1,637,833,478	24.18%

Note: Ocean Star Investment Management Limited was deemed interested under the SFO in the Shares by virtue of it being the investment manager of The Ocean Unit Trust and The Starlite Unit Trust which together held 100% of PCGH (see the notes to paragraph 4(b)(A) above).

5. DISCLOSURE OF INTERESTS UNDER THE TAKEOVERS CODE

5.1 Interests discloseable under Schedule I to the Takeovers Code

(a) The shareholdings of the Joint Offerors in PCCW as at the Latest Practicable Date are set out in the section of the Explanatory Statement headed “Effects of the Scheme” on pages 53 to 56 of this document.
(b) As at the Latest Practicable Date, save as disclosed in the section of the Explanatory Statement headed “Effects of the Scheme” set out on pages 53 to 56 of this document, no director of either of the Joint Offerors was interested in any Shares, convertible securities, warrants, options or derivatives of PCCW.
(c) As at the Latest Practicable Date, save as disclosed in the section of the Explanatory Statement headed “Effects of the Scheme” set out on pages 53 to 56 of this document, none of the parties acting in concert with the Joint Offerors owned or controlled any Shares, convertible securities, warrants, options or derivatives of PCCW.
(d) Except for Yue Shun, which has undertaken (pursuant to the Irrevocable Undertaking) to vote in favour of the resolution to be proposed at the EGM, as at the Latest Practicable Date no one has irrevocably committed to vote in favour of or against the Scheme.

— 216 —

APPENDIX III

GENERAL INFORMATION

(e) Except for the interests in Shares, convertible securities, warrants, options or derivatives of PCCW held by the parties to the Consortium Agreement, PCGH, PCD and Eisner disclosed in the section of the Explanatory Statement headed “Effects of the Scheme” set out on pages 53 to 56 of this document, as at the Latest Practicable Date, no person that had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with Starvest, PCRD, CNC, Netcom BVI or any person acting in concert with any of them owned or controlled any Shares, convertible securities, warrants, options or derivatives of PCCW.
(f) As at the Latest Practicable Date, none of Starvest, PCRD, CNC, Netcom BVI or any person acting in concert with any of them had borrowed or lent any Shares, convertible securities, warrants, options or derivatives of PCCW (save for any borrowed shares which have been either on-lent or sold).

5.2 Interests discloseable under Schedule II to the Takeovers Code

(a) As at the Latest Practicable Date, PCCW had no holdings of shares, convertible securities, warrants, options or derivatives of PCRD, Starvest, CNC or Netcom BVI.
(b) As at the Latest Practicable Date, save as disclosed in the section of the Explanatory Statement headed “Effects of the Scheme” set out on pages 53 to 56 of this document and paragraphs 4(a)(A) and 4(a)(C) under the section headed “4. Disclosure of Interests under the SFO” set out on pages 211 to 215 of this Appendix III, no Director was interested in any Shares, convertible securities, warrants, options or derivatives of PCCW.
(c) Richard Li is the founder of certain trusts which wholly own PCGH. PCGH, through certain wholly-owned subsidiaries (Anglang, PCG Cayman, Pacific Century International Limited and Borsington) held an aggregate of 2,345,250,230 shares in PCRD, as at the Latest Practicable Date. Hopestar, a company wholly-owned by Richard Li, held 28,167,000 shares in PCRD as at the Latest Practicable Date. Mr. Peter Anthony Allen and Mr. Chung Cho Yee, Mico were interested in 5,010,000 shares in PCRD and 8,000,000 shares in PCRD, respectively, as at the Latest Practicable Date. Mr. Alexander Anthony Arena was interested in options to subscribe for 15,300,000 shares in PCRD, as at the Latest Practicable Date. Mr. Richard Li, Mr. Peter Anthony Allen, Mr. Chung Cho Yee, Mico and Mr. Alexander Anthony Arena are all Directors. Save for the foregoing, as at the Latest Practicable Date, no Director was interested in the shares, convertible securities, warrants, options or derivatives of PCRD, Starvest, CNC or Netcom BVI.
(d) As at the Latest Practicable Date, no subsidiary of PCCW, nor any pension fund of PCCW or any of its subsidiaries owned or controlled any Shares, convertible securities, warrants, options or derivatives of PCCW.
(e) As at the Latest Practicable Date, UBS and persons controlling, controlled by or under the same control as UBS, owned or controlled an aggregate of 107,763,508 Shares and 800 American depositary receipts, of which 127,178 Shares and nil American depositary receipts were held proprietarily and 3,611,796 Shares and nil American depositary receipts

— 217 —

GENERAL INFORMATION

APPENDIX III

were under discretionary management authority. The balance of 104,024,534 Shares and 800 American depositary receipts were held under stock borrowing and lending and price brokerage accounts. Subject to the foregoing, as at the Latest Practicable Date, none of the advisers to PCCW as specified in class (2) of the definition of Associate under the Takeovers Code (excluding exempt principal traders) owned or controlled any Shares, convertible securities, warrants, options or derivatives of PCCW.

(f) Except for the parties to the Consortium Agreement and the undertakings given by each of PCGH, PCD and Eisner referred to on page 59 of this document, as at the Latest Practicable Date, no person that had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with PCCW or with any person who is an Associate of PCCW by virtue of classes (1), (2), (3) or (4) of the definition of Associate under the Takeovers Code owned or controlled any Shares, convertible securities, warrants, options or derivatives of PCCW.
(g) Except as disclosed in paragraph 5.2(e) above, as at the Latest Practicable Date, there were no Shares, convertible securities, warrants, options or derivatives of PCCW managed on a discretionary basis by fund managers (other than exempt fund managers) connected with PCCW.
(h) The following directors of PCRD hold Shares and each of them is presumed to be acting in concert with Starvest in accordance with class 2 of the definition of “acting in concert” in the Takeovers Code: Mr. Alexander Anthony Arena holds 760,200 Shares (including 200 Shares in the form of 20 ADSs); Mr. Peter Anthony Allen holds 253,200 Shares; Mr. Francis Yuen Tin Fan holds 1,420,000 Shares; and Mr. Tom Yee Lat Shing holds 2,520 Shares. Mr. Alexander Anthony Arena also holds 15,800,000 Options and Mr. Peter Anthony Allen also holds 4,629,200 Options. Mr. Alexander Anthony Arena is also a director of PCCW and Mr. Peter Anthony Allen is also a director of Starvest and PCCW. Each of those directors is a Scheme Shareholder but is not treated as an Independent Shareholder and will not vote at the Court Meeting. In addition, the Directors nominated for appointment by CNC (namely Mr. Lu Yimin, Mr. Zuo Xunsheng and Mr. Li Fushen) would not be permitted to vote at the Court Meeting, if they were to hold any Shares at the relevant time. As at the Latest Practicable Date, none of the other Directors who hold Shares have indicated whether or not they will vote in favour of or against the resolution to be proposed at the Court Meeting. Similarly, as at the Latest Practicable Date, none of the Directors who hold Shares have indicated whether or not they will vote in favour of or against the resolution to be proposed at the EGM. As at the Latest Practicable Date, none of the Directors who hold Options have indicated whether or not they will accept or reject the Option Offer.
(i) As at the Latest Practicable Date, none of PCCW nor any Directors had borrowed or lent any Shares, convertible securities, warrants, options or derivatives of PCCW (save for any borrowed shares which have been either on-lent or sold).

— 218 —

GENERAL INFORMATION

APPENDIX III

6. DEALINGS IN SHARES

6.1 Dealings in Shares by PCRD and PCGH during the Relevant Period

(a) The dealings in Shares by PCRD during the Relevant Period are as follows:

	Number		Dealing price
Sale/Purchase	of Shares	Dealing date	(per Share)
			(HK$)
Purchase	50,000	12 November 2008	3.35
Purchase	383,000	12 November 2008	3.36
Purchase	186,000	12 November 2008	3.37
Purchase	69,000	12 November 2008	3.38
Purchase	91,000	12 November 2008	3.39
Purchase	10,000	12 November 2008	3.40
Purchase	17,000	12 November 2008	3.43
Purchase	341,000	12 November 2008	3.45
Purchase	400,000	12 November 2008	3.46
Purchase	450,000	12 November 2008	3.47
Purchase	1,100,000	12 November 2008	3.48
Purchase	960,000	12 November 2008	3.49
Purchase	790,000	12 November 2008	3.50
Purchase	335,000	12 November 2008	3.51
Purchase	384,000	12 November 2008	3.52
Purchase	214,000	12 November 2008	3.53
Purchase	131,000	12 November 2008	3.54
Purchase	1,259,000	12 November 2008	3.55
Purchase	50,000	13 November 2008	3.49
Purchase	450,000	13 November 2008	3.50
Purchase	526,000	13 November 2008	3.51
Purchase	742,000	13 November 2008	3.52

(b) The dealings in Shares by PCGH during the Relevant Period are as follows:

	Number		Dealing price
Sale/Purchase	of Shares	Dealing date	(per Share)
			(HK$)
Purchase	226,000	11 July 2008	4.86
Purchase	4,000	11 July 2008	4.87
Purchase	555,000	11 July 2008	4.89
Purchase	933,000	11 July 2008	4.90
Purchase	1,603,000	11 July 2008	4.91
Purchase	2,586,000	11 July 2008	4.92
Purchase	7,997,000	11 July 2008	4.93
Purchase	1,200,000	11 July 2008	4.94

— 219 —

GENERAL INFORMATION

APPENDIX III

6.2 Dealings in Shares by ABN AMRO Bank N.V., London Branch during the Relevant Period

The following are the dealings in Shares, ADSs and options relating to Shares during the Relevant Period conducted by ABN AMRO Bank N.V., London Branch, being a member of the ABN AMRO group (other than exempt fund managers) (ABN AMRO group companies are subsidiary undertakings of the Royal Bank of Scotland Group plc.), but excluding dealings on an agency or non-discretionary basis which are subject to private disclosure during the Offer Period under the Takeovers Code.

	Number		Price	Price
Purchase/Sale	of Shares	Dealing date	(High)	(Low)	Price
			HK$	HK$	HK$
Purchase	18,000	2 May 2008	5.05	5.05	5.05
Sale	100,000	8 May 2008	4.98	4.95	4.97
Sale	11,000	9 May 2008	4.91	4.91	4.91
Sale	124,000	14 May 2008	4.90	4.85	4.87
Purchase	25,000	16 May 2008	4.83	4.83	4.83
Sale	1,600,000	16 May 2008	4.86	4.83	4.83
Sale	1,600,000	2 June 2008	4.99	4.90	4.94
Sale	23,000	5 June 2008	4.71	4.71	4.71
Sale	699,000	6 June 2008	4.84	4.84	4.84
Sale	1,600,000	6 June 2008	4.79	4.76	4.78
Purchase	4,253,000	6 June 2008	4.84	4.84	4.84
Sale	276	11 June 2008	4.70	4.70	4.70
Sale	24,000	9 July 2008	4.80	4.80	4.80
Sale	50,000	11 July 2008	4.90	4.90	4.90
Sale	48	14 July 2008	4.82	4.82	4.82
Sale	193,000	28 August 2008	4.85	4.83	4.84
Purchase	193,000	11 September 2008	4.90	4.89	4.89
Sale	200,000	23 September 2008	3.84	3.84	3.84
Purchase	146,000	24 September 2008	3.55	3.51	3.54
Purchase	100,000	25 September 2008	3.41	3.41	3.41
Sale	100,000	25 September 2008	3.48	3.48	3.48
Purchase	50,000	29 September 2008	3.24	3.24	3.24
Sale	80,000	30 September 2008
	35,000				3.06
	100,000				3.06
	28,000				3.06
	7,000				3.06
Sale	226,000	8 October 2008
	100,000				2.74
	45,000				2.76
	6,000				2.76
	4,000				2.76
	14,000				2.76
	36,000				2.76
	8,000				2.76
	2,000				2.76
	6,000				2.76
	5,000				2.76
Sale	200,000	13 October 2008
	1,000				2.62
	88,000				2.62
	1,000				2.62
	10,000				2.62
	8,000				2.67

— 220 —

APPENDIX III

GENERAL INFORMATION

	Number		Price	Price
Purchase/Sale	of Shares	Dealing date	(High)	(Low)	Price
			HK$	HK$	HK$
	5,000				2.67
	12,000				2.67
	75,000				2.67
Purchase	256,000	13 October 2008
	156,000				2.55
	58,000				2.53
	1,000				2.53
	8,000				2.53
	8,000				2.53
	10,000				2.53
	15,000				2.53
Purchase	100,000	5 November 2008
	2,000				3.77
	8,000				3.77
	10,000				3.77
	1,000				3.77
	20,000				3.77
	10,000				3.77
	40,000				3.77
	9,000				3.77
Purchase(1)	1,500,000	5 November 2008			3.74
Sale(1)	1,500,000	5 November 2008			3.69
Sale	486,000	11 November 2008
	44,000				3.37
	6,000				3.37
	1,000				3.37
	60,000				3.37
	10,000				3.37
	5,000				3.37
	1,000				3.37
	9,000				3.37
	5,000				3.38
	1,000				3.38
	10,000				3.38
	6,000				3.38
	220,000				3.38
	10,000				3.38
	6,000				3.38
	10,000				3.38
	5,000				3.38
	10,000				3.38
	51,000				3.38
	16,000				3.38
Purchase(2)	5,000	17 November 2008			Nil
Sale	8,000	17 November 2008
	1,000				3.55
	7,000				3.55
Sale(1)	1,000	17 November 2008			3.50
Purchase(1)	1,000	18 November 2008			3.51
Sale(2)	5,000	3 December 2008			Nil

Notes:

(1) ABN AMRO error account

(2) Stock borrowing for the error and unwinding borrowing

— 221 —

GENERAL INFORMATION

APPENDIX III

6.3 Dealings in Shares by the HSBC Group during the Relevant Period

The dealings in Shares under discretionary investment authority and/or on a proprietary basis by the HSBC Group during the Relevant Period were as follows (these exclude dealings on an agency or non-discretionary basis which are subject to private disclosure during the Offer Period under the Takeovers Code):

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
				(HK$)
HSBC Broking Securities	Purchase	10,000	29 May 2008	4.78
(Asia) Limited
HSBC Broking Securities	Purchase	10,000	29 May 2008	4.78
(Asia) Limited
HSBC Broking Securities	Purchase	50,000	29 May 2008	4.81
(Asia) Limited
HSBC Broking Securities	Sale	10,000	29 May 2008	4.84
(Asia) Limited
HSBC Broking Securities	Sale	10,000	29 May 2008	4.84
(Asia) Limited
HSBC Broking Securities	Sale	34,000	29 May 2008	4.84
(Asia) Limited
HSBC Broking Securities	Sale	16,000	29 May 2008	4.86
(Asia) Limited
HSBC Broking Securities	Purchase	20,000	29 May 2008	4.83
(Asia) Limited
HSBC Broking Securities	Purchase	20,000	29 May 2008	4.85
(Asia) Limited
HSBC Broking Securities	Purchase	20,000	29 May 2008	5.00
(Asia) Limited
HSBC Broking Securities	Purchase	20,000	29 May 2008	5.02
(Asia) Limited
HSBC Broking Securities	Purchase	10,000	29 May 2008	5.12
(Asia) Limited
HSBC Broking Securities	Purchase	20,000	29 May 2008	4.85
(Asia) Limited
HSBC Broking Securities	Purchase	10,000	29 May 2008	5.00
(Asia) Limited
HSBC Broking Securities	Purchase	10,000	29 May 2008	5.02
(Asia) Limited
HSBC Broking Securities	Purchase	10,000	29 May 2008	5.12
(Asia) Limited

— 222 —

GENERAL INFORMATION

APPENDIX III

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
				(HK$)
HSBC Broking Securities	Sale	24,000	29 May 2008	5.04
(Asia) Limited
HSBC Broking Securities	Sale	16,000	29 May 2008	5.07
(Asia) Limited
HSBC Broking Securities	Sale	20,000	29 May 2008	5.09
(Asia) Limited
HSBC Broking Securities	Sale	10,000	29 May 2008	5.04
(Asia) Limited
HSBC Broking Securities	Sale	10,000	29 May 2008	5.06
(Asia) Limited
HSBC Broking Securities	Sale	10,000	29 May 2008	5.09
(Asia) Limited
HSBC Broking Securities	Sale	5,000	29 May 2008	5.12
(Asia) Limited
HSBC Broking Securities	Sale	15,000	30 May 2008	5.06
(Asia) Limited
HSBC Broking Securities	Sale	30,000	30 May 2008	5.06
(Asia) Limited
HSBC Broking Securities	Purchase	5,000	9 October 2008	2.88
(Asia) Limited
HSBC International Trustee	Sale	3,000	29 May 2008	5.00
Limited
HSBC International Trustee	Sale	800	29 May 2008	4.92
Limited
HSBC International Trustee	Sale	13,000	5 August 2008	4.92
Limited
HSBC International Trustee	Sale	6,000	27 November 2008	3.50
Limited
HSBC International Trustee	Sale	386	27 November 2008	3.40
Limited
HSBC Bank Plc	Purchase	1,300,000	17 June 2008	4.75
HSBC Bank Plc	Purchase	500,000	18 June 2008	4.73
HSBC Bank Plc	Sale	23,000	30 June 2008	4.68
HSBC Bank Plc	Sale	57,000	30 June 2008	4.68
HSBC Bank Plc	Sale	20,000	30 June 2008	4.68
HSBC Bank Plc	Sale	59,000	30 June 2008	4.69
HSBC Bank Plc	Sale	30,000	30 June 2008	4.68
HSBC Bank Plc	Sale	21,000	30 June 2008	4.69
HSBC Bank Plc	Sale	40,000	30 June 2008	4.69
HSBC Bank Plc	Sale	7,000	30 June 2008	4.69

— 223 —

GENERAL INFORMATION

APPENDIX III

						Dealing
				Number		price
Party			Sale/Purchase	of Shares	Dealing date	(per Share)
						(HK$)
HSBC	Bank	Plc	Sale	1,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	3,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	19,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	26,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	20,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	4,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	1,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	1,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	10,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	58,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	50,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	2,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	10,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	3,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	2,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	20,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	13,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	2,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	48,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	11,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	1,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	38,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	8,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	40,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	2,000	30 June 2008	4.68
HSBC	Bank	Plc	Sale	50,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	10,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	25,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	10,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	15,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	50,000	30 June 2008	4.70
HSBC	Bank	Plc	Sale	50,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	60,000	30 June 2008	4.69
HSBC	Bank	Plc	Sale	97,000	30 June 2008	4.67
HSBC	Bank	Plc	Sale	4,000	30 June 2008	4.67
HSBC	Bank	Plc	Sale	180,000	30 June 2008	4.67
HSBC	Bank	Plc	Sale	19,000	30 June 2008	4.67
HSBC	Bank	Plc	Sale	80,000	30 June 2008	4.72

— 224 —

GENERAL INFORMATION

APPENDIX III

						Dealing
				Number		price
Party			Sale/Purchase	of Shares	Dealing date	(per Share)
						(HK$)
HSBC	Bank	Plc	Sale	60,000	30 June 2008	4.72
HSBC	Bank	Plc	Sale	140,000	30 June 2008	4.72
HSBC	Bank	Plc	Sale	100,000	2 July 2008	4.68
HSBC	Bank	Plc	Sale	20,000	2 July 2008	4.68
HSBC	Bank	Plc	Sale	54,000	2 July 2008	4.68
HSBC	Bank	Plc	Sale	23,000	2 July 2008	4.68
HSBC	Bank	Plc	Sale	3,000	2 July 2008	4.68
HSBC	Bank	Plc	Sale	100,000	2 July 2008	4.68
HSBC	Bank	Plc	Purchase	32,000	6 October 2008	2.83
HSBC	Bank	Plc	Purchase	1,000	6 October 2008	2.83
HSBC	Bank	Plc	Purchase	50,000	6 October 2008	2.83
HSBC	Bank	Plc	Purchase	17,000	6 October 2008	2.83
HSBC	Bank	Plc	Purchase	29,000	6 October 2008	2.82
HSBC	Bank	Plc	Purchase	71,000	6 October 2008	2.82
HSBC	Bank	Plc	Purchase	9,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	1,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	4,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	3,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	41,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	6,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	10,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	3,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	3,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	20,000	6 October 2008	2.84
HSBC	Bank	Plc	Purchase	200,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	19,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	20,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	24,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	4,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	43,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	1,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	37,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	52,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	25,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	24,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	68,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	24,000	9 October 2008	2.92
HSBC	Bank	Plc	Purchase	15,000	9 October 2008	2.92

— 225 —

GENERAL INFORMATION

APPENDIX III

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
				(HK$)
HSBC Bank Plc	Purchase	6,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	5,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	100,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	1,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	100,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	30,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	12,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	20,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	10,000	9 October 2008	2.92
HSBC Bank Plc	Purchase	279,000	9 October 2008	3.10
HSBC Bank Plc	Purchase	10,000	9 October 2008	3.10
HSBC Bank Plc	Purchase	37,000	9 October 2008	3.10
HSBC Bank Plc	Purchase	42,000	9 October 2008	3.10
HSBC Bank Plc	Purchase	5,000	9 October 2008	3.10
HSBC Bank Plc	Purchase	12,000	9 October 2008	3.10
HSBC Bank Plc	Purchase	175,000	9 October 2008	3.10
HSBC Global Markets	Purchase	233,000	19 May 2008	High 4.91
Division				Low 4.84
HSBC Global Markets	Sale	500,000	22 May 2008	High 4.68
Division				Low 4.68
HSBC Global Markets	Purchase	400,000	29 May 2008	High 5.03
Division				Low 5.03
HSBC Global Markets	Sale	755,000	10 June 2008	High 4.74
Division				Low 4.71
HSBC Global Markets	Sale	233,000	23 June 2008	High 4.74
Division				Low 4.67
HSBC Global Markets	Borrowing	3,000,000	4 June 2008	N/A
Division
HSBC Global Markets	Unwinding	3,000,000	15 July 2008	N/A
Division	of borrowing
HSBC Life (International)	Purchase	199,000	10 June 2008	4.85
Limited (see note 1)
HSBC Life (International)	Purchase	500,000	11 June 2008	4.80
Limited (see note 1)
HSBC Life (International)	Purchase	400,000	12 June 2008	4.66
Limited (see note 1)
HSBC Life (International)	Sale	199,000	8 July 2008	4.76
Limited (see note 1)

— 226 —

GENERAL INFORMATION

APPENDIX III

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
				(HK$)
HSBC Life (International)	Sale	500,000	8 July 2008	4.76
Limited (see note 1)
HSBC Life (International)	Sale	400,000	8 July 2008	4.76
Limited (see note 1)
HSBC Life (International)	Purchase	318,000	16 July 2008	4.97
Limited (see note 1)
HSBC Life (International)	Purchase	2,086,000	16 July 2008	4.97
Limited (see note 1)
HSBC Life (International)	Purchase	77,000	4 August 2008	4.91
Limited (see note 1)
HSBC Life (International)	Purchase	70,000	4 August 2008	4.91
Limited (see note 1)
HSBC Life (International)	Purchase	225,000	4 August 2008	4.91
Limited (see note 1)
HSBC Life (International)	Purchase	148,000	4 August 2008	4.91
Limited (see note 1)
HSBC Life (International)	Purchase	162,000	5 August 2008	4.92
Limited (see note 1)
HSBC Life (International)	Purchase	147,000	5 August 2008	4.92
Limited (see note 1)
HSBC Life (International)	Purchase	471,000	5 August 2008	4.92
Limited (see note 1)
HSBC Life (International)	Purchase	310,000	5 August 2008	4.92
Limited (see note 1)
HSBC Life (International)	Purchase	155,000	7 August 2008	4.94
Limited (see note 1)
HSBC Life (International)	Purchase	141,000	7 August 2008	4.94
Limited (see note 1)
HSBC Life (International)	Purchase	452,000	7 August 2008	4.94
Limited (see note 1)
HSBC Life (International)	Purchase	298,000	7 August 2008	4.94
Limited (see note 1)
HSBC Life (International)	Purchase	45,000	14 August 2008	4.93
Limited (see note 1)
HSBC Life (International)	Purchase	41,000	14 August 2008	4.93
Limited (see note 1)
HSBC Life (International)	Purchase	131,000	14 August 2008	4.93
Limited (see note 1)

— 227 —

GENERAL INFORMATION

APPENDIX III

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
				(HK$)
HSBC Life (International)	Purchase	85,000	14 August 2008	4.93
Limited (see note 1)
HSBC Life (International)	Purchase	125,000	15 August 2008	5.04
Limited (see note 1)
HSBC Life (International)	Purchase	113,000	15 August 2008	5.04
Limited (see note 1)
HSBC Life (International)	Purchase	363,000	15 August 2008	5.04
Limited (see note 1)
HSBC Life (International)	Purchase	238,000	15 August 2008	5.04
Limited (see note 1)
HSBC Life (International)	Purchase	70,000	18 August 2008	5.12
Limited (see note 1)
HSBC Life (International)	Purchase	64,000	18 August 2008	5.12
Limited (see note 1)
HSBC Life (International)	Purchase	205,000	18 August 2008	5.12
Limited (see note 1)
HSBC Life (International)	Purchase	134,000	18 August 2008	5.12
Limited (see note 1)
HSBC Life (International)	Sale	203,000	19 September 2008	3.54
Limited (see note 1)
HSBC Life (International)	Sale	115,000	19 September 2008	3.51
Limited (see note 1)
HSBC Life (International)	Purchase	7,000	30 September 2008	3.00
Limited (see note 1)
HSBC Life (International)	Purchase	258,000	3 October 2008	2.99
Limited (see note 1)
HSBC Life (International)	Purchase	320,000	6 October 2008	2.79
Limited (see note 1)
HSBC Life (International)	Purchase	133,000	6 October 2008	2.83
Limited (see note 1)
HSBC Life (International)	Purchase	151,000	9 October 2008	3.08
Limited (see note 1)
HSBC Life (International)	Purchase	130,000	9 October 2008	3.08
Limited (see note 1)
HSBC Life (International)	Purchase	500,000	9 October 2008	3.08
Limited (see note 1)
HSBC Life (International)	Purchase	286,000	9 October 2008	3.08
Limited (see note 1)

— 228 —

GENERAL INFORMATION

APPENDIX III

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
				(HK$)
HSBC Life (UK) Limited	Purchase	52,000	4 August 2008	4.91
(see note 1)
HSBC Life (UK) Limited	Purchase	110,000	5 August 2008	4.92
(see note 1)
HSBC Life (UK) Limited	Purchase	105,000	7 August 2008	4.94
(see note 1)
HSBC Life (UK) Limited	Purchase	29,000	14 August 2008	4.93
(see note 1)
HSBC Life (UK) Limited	Purchase	82,000	15 August 2008	5.04
(see note 1)
HSBC Life (UK) Limited	Purchase	46,000	18 August 2008	5.12
(see note 1)
HSBC Life (UK) Limited	Purchase	39,000	1 September 2008	4.88
(see note 1)
HSBC Life (UK) Limited	Purchase	58,000	2 September 2008	4.87
(see note 1)
HSBC Life (UK) Limited	Purchase	34,000	3 September 2008	4.81
(see note 1)
HSBC Life (UK) Limited	Purchase	59,000	4 September 2008	4.79
(see note 1)
HSBC Life (UK) Limited	Purchase	83,000	5 September 2008	4.81
(see note 1)
HSBC Life (UK) Limited	Purchase	10,000	8 September 2008	4.84
(see note 1)
HSBC Life (UK) Limited	Purchase	301,000	19 September 2008	3.59
(see note 1)
HSBC Life (UK) Limited	Purchase	94,000	9 October 2008	3.08
(see note 1)
HSBC Financial Products	Sale	450,000	2 July 2008	4.76
(France) SNC
HSBC Financial Products	Sale	132,000	13 November 2008	3.52
(France) SNC

Note 1: For HSBC Life (International) Limited and HSBC Life (UK) Limited, the Shares are proprietary holdings but managed by non-HSBC fund managers and/or HSBC Group exempt fund managers on a discretionary basis.

— 229 —

APPENDIX III

GENERAL INFORMATION

The dealings in derivatives of PCCW under discretionary investment authority and/or on a proprietary basis by HSBC Group during the Relevant Period are as follows:

		Number of	Number				Dealing
	Nature of	derivatives	of Shares	Exercise	Dealing	Exercise	Price
Party	dealing	of PCCW	concerned	Price	date	Period	(per unit)
							(US$)
HSBC Financial Products	OTC Decrease	4,300	350	Nil	7 October	31 March	8.01
(France) SNC					2008	2010

6.4 Other dealings in Shares during the Relevant Period discloseable under Schedule I to the Takeovers Code
(a) As at the Latest Practicable Date, save as disclosed in paragraphs 6.1 to 6.3 above, none of Starvest, PCRD nor parties acting in concert with any of them under the Takeovers Code have dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Relevant Period.
(b) As at the Latest Practicable Date, save as disclosed in paragraphs 6.1 to 6.3 above, none of CNC, Netcom BVI nor parties acting in concert with any of them under the Takeovers Code have dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Relevant Period.
(c) As at the Latest Practicable Date, no director of Starvest, PCRD, CNC or Netcom BVI has dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Relevant Period.
(d) Yue Shun, which has undertaken (pursuant to the Irrevocable Undertaking) to vote in favour of the resolution to be proposed at the EGM, has not dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Relevant Period.
(e) Save for the dealings by PCRD and PCGH disclosed in paragraph 6.1 above, no person that had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with Starvest, PCRD, CNC, Netcom BVI or with any person acting in concert with any of them has dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Relevant Period. Save for the dealings by PCRD disclosed in paragraph 6.1 above, none of the other parties to the Consortium Agreement has dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Relevant Period.
(f) None of Starvest, PCRD, CNC, Netcom BVI or any person acting in concert with any of them borrowed or lent any Shares, convertible securities, warrants, options or derivatives of PCCW (save for any borrowed shares which have been either on-lent or sold) during the Relevant Period.

— 230 —

GENERAL INFORMATION

APPENDIX III

6.5 Dealings in Shares discloseable under Schedule II to the Takeovers Code

(a) The following are the dealings in Shares, American depositary receipts and Options during the Offer Period ending with the Latest Practicable Date conducted by UBS (other than exempt fund mangagers), but excluding dealings on an agency or non-discretionary basis and certain dealings by UBS during the Offer Period which the Executive has permitted to be continued but subject to private disclosure during the Offer Period under the Takeovers Code.

The dealings in Shares during the Offer Period and ending with the Latest Practicable Date are as follows:

				Dealing
		Number		price
Party	Sale/Purchase	of Shares	Dealing date	(per Share)
UBS Securities LLC	Purchase	1,667	30 October 2008	US$0.33
UBS Securities LLC	Purchase	20	30 October 2008	US$0.32
UBS Securities LLC	Sale	1,687	30 October 2008	US$0.33
UBS AG	Purchase	45,000	30 October 2008	HK$3.60
UBS AG	Sale	380,000	5 November 2008	HK$4.60
UBS AG	Sale	380,000	5 November 2008	HK$4.60
UBS AG	Sale	400,000	5 November 2008	HK$4.63
UBS AG	Sale	400,000	5 November 2008	HK$4.63
UBS AG	Sale	400,000	5 November 2008	HK$4.63
UBS AG	Sale	218,400	5 November 2008	HK$4.18
UBS AG	Purchase	200,000	6 November 2008	HK$3.66
UBS AG	Purchase	23,000	6 November 2008	HK$3.65
UBS AG	Sale	22,000	12 November 2008	HK$3.35
UBS AG	Sale	21,000	13 November 2008	HK$3.51
UBS AG	Sale	21,000	14 November 2008	HK$3.55
UBS AG	Sale	20,000	17 November 2008	HK$3.55
UBS AG	Sale	21,000	18 November 2008	HK$3.49
UBS AG	Sale	21,000	21 November 2008	HK$3.52
UBS AG	Sale	21,000	24 November 2008	HK$3.59
UBS AG	Sale	20,000	25 November 2008	HK$3.57
UBS AG	Sale	20,000	26 November 2008	HK$3.56
UBS AG	Sale	21,000	27 November 2008	HK$3.51
UBS AG	Purchase	45,000	27 November 2008	HK$3.60
UBS AG	Purchase	10,000	27 November 2008	HK$3.40
UBS AG	Sale	2,000	1 December 2008	HK$3.55
UBS AG	Sale	148,000	2 December 2008	HK$3.51
UBS AG	Sale	218,400	2 December 2008	HK$4.18

— 231 —

APPENDIX III

GENERAL INFORMATION

The dealings in American depositary receipts during the Offer Period and ending with the Latest Practicable Date are as follows:

				Dealing
		Number of		price (per
		American		American
		depositary		depositary
Party	Sale/Purchase	receipts	Dealing date	receipts)
				(US$)
UBS Securities LLC	Purchase	1,022	30 October 2008	3.10
UBS Securities LLC	Sale	3,100	30 October 2008	3.34
UBS Securities LLC	Sale	200	31 October 2008	4.15
UBS Securities LLC	Purchase	46	3 November 2008	3.65
UBS Securities LLC	Purchase	58	4 November 2008	4.63
UBS Securities LLC	Purchase	800	5 November 2008	4.50
UBS Securities LLC	Purchase	537	6 November 2008	4.69
UBS Securities LLC	Sale	200	6 November 2008	4.80
UBS Securities LLC	Sale	330	6 November 2008	4.39

The dealings in derivatives of PCCW during the Offer Period and ending with the Latest Practicable Date are as follows:

		Number of	Number of	Number of				Dealing
		derivatives		Shares	Exercise		Exercise	Price
Party	Nature of dealing	of PCCW		concerned	Price	Dealing date	Period	(per unit)
					(HK$)			(HK$)
UBS AG	Exchange Traded		45	45,000	3.60	30 October	3 November	0
	Derivative					2008	2008
UBS AG	Exchange Traded		10	10,000	3.40	6 November	6 November	0.49
	Derivative					2008	2008
UBS AG	OTC variance swap	11,255		N/A	N/A	26 November	28 November	985.17
						2008	2008
UBS AG	Exchange Traded		10	10,000	3.40	27 November	1 December	0
	Derivative					2008	2008
UBS AG	Exchange Traded		45	45,000	3.60	27 November	1 December	0
	Derivative					2008	2008
UBS AG	Exchange Traded		15	15,000	3.80	27 November	27 November	0
	Derivative					2008	2008

(b) PCCW has not dealt for value in the shares, convertible securities, warrants, options or derivatives of Starvest, PCRD, CNC or Netcom BVI during the Relevant Period.

— 232 —

GENERAL INFORMATION

APPENDIX III

(c) No Directors have dealt for value in the shares, convertible securities, warrants, options or derivatives of any of PCCW, Starvest, PCRD, CNC or Netcom BVI during the Relevant Period.
(d) None of PCCW nor any subsidiary of PCCW, nor any pension fund of PCCW or any of its subsidiaries have dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Offer Period and ending with the Latest Practicable Date.
(e) Save as disclosed in paragraph 6.5(a) above, no adviser to PCCW as specified in class (2) of the definition of Associate under the Takeovers Code (but excluding exempt principal traders) has dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Offer Period and ending with the Latest Practicable Date.
(f) As at the Latest Practicable Date, save for the dealings of PCRD and PCGH disclosed in paragraph 6.1 above, no person that had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with PCCW or with any person who is an Associate of PCCW by virtue of classes (1), (2), (3) or (4) of the definition of Associate under the Takeovers Code had dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Offer Period and ending with the Latest Practicable Date. Save for the dealings by PCRD disclosed in paragraph 6.1 above, none of the other parties to the Consortium Agreement has dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Offer Period and ending with the Latest Practicable Date.
(g) No fund managers (other than exempt fund managers) managing funds on a discretionary basis which are connected with PCCW have dealt for value in the Shares, convertible securities, warrants, options or derivatives of PCCW during the Offer Period and ending with the Latest Practicable Date.

7. LITIGATION

As at the Latest Practicable Date, none of the members of the PCCW Group was engaged in any litigation or arbitration or claim of material importance to the PCCW Group as a whole and no such litigation or claim of material importance is known to the Directors to be pending or threatened by or against any member of the PCCW Group.

8. MATERIAL CONTRACTS

As at the Latest Practicable Date, except for the HKT Loan Facilities, none of the members of the PCCW Group had entered into any material contract, not being contracts entered into in the ordinary course of business carried on or intended to be carried on by any member of the PCCW Group, after the date two years preceding the date of the Rule 3.2 Announcement.

— 233 —

GENERAL INFORMATION

APPENDIX III

9. EXPERTS

The following are the qualifications of each of the experts who are named in this document or have given their opinion or advice which is contained in this document:

Name

Qualification

The Hongkong and Shanghai A registered institution under the SFO, licensed to Banking Corporation Limited conduct Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts) and Type 6 (advising on corporate finance) of the regulated activities under the SFO and a licenced bank under the Banking Ordinance.

N M Rothschild & Sons A licensed corporation under the SFO, licensed to (Hong Kong) Limited conduct Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) of the regulated activities under the SFO.

RBS Asia Corporate Finance A licensed institution under the SFO, licensed to Limited conduct Type 1 (dealing in securities) and Type 6 (advising on corporate finance) of the regulated activities under the SFO.

UBS AG A registered institution under the SFO, to conduct Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) of the regulated activities under the SFO.

CB Richard Ellis Limited Property Valuer Savills Valuation and Professional Property Valuer Services Limited

10. CONSENTS

Each of HSBC, Rothschild, RBS, UBS, CBRE and Savills has given and has not withdrawn its written consent to the issue of this document with the inclusion in this document of the texts of its letter and references to its name in the form and context in which they are included.

— 234 —

GENERAL INFORMATION

APPENDIX III

11. COSTS OF THE SCHEME

In the event that the Scheme is either not recommended by the Independent Board Committee or is not recommended as fair and reasonable by Rothschild to the Independent Board Committee and is not approved at the relevant Shareholders’ meeting(s), all the expenses incurred by PCCW in connection with the Scheme shall be borne by the Joint Offerors.

12. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection from 9:30 a.m. to 5:30 p.m., Monday to Friday at (i) the office of Richards Butler in association with Reed Smith LLP , Hong Kong legal adviser to PCCW, at 20th Floor, Alexandra House, 16-20 Chater Road, Central, Hong Kong; (ii) the website of PCCW at http://www.pccw.com; and (iii) the website of the SFC at http://www.sfc.hk from the date of this document until the Effective Date or the date on which the Scheme lapses, whichever is earliest:

(a) the memorandum and articles of association of Starvest;
(b) the memorandum and articles of association of PCRD;
(c) the memorandum and articles of association of PCCW;
(d) the memorandum and articles of association of Netcom BVI;
(e) the articles of association of CNC;
(f) the annual reports of PCCW for the two years ended 31 December, 2006 and 31 December, 2007;
(g) the interim report of PCCW for the six months ended 30 June, 2008;
(h) the letter from the Board, the text of which is set out on pages 4 to 11 of this document;
(i) the letter of recommendation from the Independent Board Committee, the text of which is set out on pages 12 to 13 of this document;
(j) the letter of advice from Rothschild, the text of which is set out on pages 14 to 42 of this document;
(k) the letters and full valuation reports from CBRE and Savills, the texts of which are set out in Appendix II of this document;

— 235 —

GENERAL INFORMATION

APPENDIX III

(l) the written consents referred to in the section headed “Consents” in Appendix III of this document;
(m) the HKT Loan Facilities, referred to in the section headed “Material Contracts” in Appendix III of this document;
(n) the Irrevocable Undertaking;
(o) the Voting Instruction Card; and
(p) full details of dealings by members of the HSBC Group and ABN AMRO Bank N.V., London Branch during the Relevant Period.

13. MISCELLANEOUS

(a) None of the existing Directors will be given any benefit as compensation for loss of office or otherwise in connection with the Scheme.
(b) Except for the Consortium Agreement, there is no agreement or arrangement between any of the Directors and any other person which is conditional on or dependent upon the outcome of the Scheme or otherwise connected with the Scheme.
(c) Except for the Consortium Agreement and the Irrevocable Undertaking, there is no agreement or arrangement or understanding (including any compensation arrangement) between either of the Joint Offerors or any person acting in concert with either of them and any of the Directors, recent directors, shareholders or recent shareholders of PCCW having any connection with or dependence upon the Scheme.
(d) The registered office of Starvest is Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands and the registered office of PCRD is 6 Battery Road, #38-02, Singapore 049909.
(e) The registered office of Netcom BVI is Romasco Place, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola, British Virgin Islands and the registered office of CNC is Building C, No. 156 Fuxingmennei Street, Beijing 100031, PRC.
(f) Save for the security granted in connection with the Starvest Facility Agreement in respect of the Shares held by Starvest and the Excluded Group, any security which may be granted in connection with the Netcom Facility in respect of the Shares held by Netcom BVI and/or CNC and any transfer of Shares by Netcom BVI to CNC, each as referred to in the Explanatory Statement, Starvest, PCRD, CNC and Netcom BVI do not have any intention to transfer, charge or pledge any securities acquired pursuant to the Scheme to any other person. Save as referred to above in this paragraph (f) and except for the Consortium Agreement referred to in the Explanatory Statement, there is no agreement, arrangement or understanding, or any related charge or pledge, which has been entered into which may result in the transfer of voting rights attaching to any securities acquired pursuant to the Scheme.

— 236 —

GENERAL INFORMATION

APPENDIX III

(g) The directors of Starvest are Mr. Peter Anthony Allen and Ms. Winnie King Yan Siu Morrison.
(h) The directors of Netcom BVI are Mr. Lu Yimin, Mr. Zuo Xunsheng and Mr. Li Fushen.
(i) The directors of PCRD are Mr. Li Tzar Kai, Richard (Chairman), Mr. Yuen Tin Fan, Francis (Deputy Chairman), Mr. Peter Anthony Allen (Group Managing Director), Mr. Alexander Anthony Arena, Mr. Seow Li-Ming, Gordon, Mr. Yee Lat Shing, Tom and Mr. Chng Hee Kok.
(j) The authorised representative of CNC is Mr. Zuo Xunsheng.
(k) The company secretary of PCCW is Ms. Philana W.Y. Poon, B. Comm, J.D.
(l) The qualified accountant of PCCW is Mr. Peter Anthony Allen. He is a Fellow of both the Institute of Chartered Accountants in England and Wales and the Institute of Certified Public Accountants of Singapore.
(m) The registered office of PCCW is at 39th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong.
(n) The principal share registrar and transfer agent of PCCW is Computershare Hong Kong Investor Services Limited, which is situated at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.
(o) The registered office of HSBC is 1 Queen’s Road Central, Hong Kong.
(p) The registered office of RBS is 40/F, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.
(q) The principal place of business of UBS is 52F Two International Finance Centre, 8 Finance Street, Central, Hong Kong.
(r) The principal place of business of Rothschild is 16th Floor, Alexandra House, 18 Chater Road, Central, Hong Kong.
(s) As at the Latest Practicable Date, there was no material contract entered into by Starvest, PCRD, CNC or Netcom BVI in which any of the Directors had a material personal interest.
(t) As at the Latest Practicable Date, save for the Consortium Agreement and the undertakings given by each of PCGH, PCD and Eisner referred to on page 59 of this document, there is no arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code between Starvest, PCRD, CNC or Netcom BVI, any parties acting in concert with any of them, or any Associate of any of them, and any other person.

— 237 —

GENERAL INFORMATION

APPENDIX III

(u) As at the Latest Practicable Date, none of the Directors has entered into any service contract with PCCW or any of its subsidiaries or associated companies for a fixed term contract with more than 12 months to run irrespective of notice period, or which has been entered into or amended within six months before the commencement of the Offer Period or which are continuous contracts with a notice period of 12 months or more.
(v) As described in the Explanatory Statement, the Proposal is conditional on the Conditions being fulfilled or (to the extent applicable) waived. Any decision in relation to invoking or waiving a Condition must be made jointly by the Joint Offerors. The circumstances in which the Conditions can be waived or invoked are set out in the Explanatory Statement on pages 44 to 51 of this document. Subject to the foregoing, there are no other arrangements or agreements to which either of the Joint Offerors is a party which relate to the circumstances in which the Joint Offerors may or may not invoke or seek to invoke a condition to the Proposal.
(w) The English language text of this document shall prevail over the Chinese language text.

— 238 —

DEFINITIONS

APPENDIX IV

In this document, the following expressions have the meanings set out below unless the context requires otherwise:

“1994 Share Option Scheme”

the share option scheme of PCCW adopted on 20 September, 1994, the termination of which was approved by the Shareholders at PCCW’s annual general meeting held on 19 May, 2004

“2004 Share Option Scheme”

the share option scheme of PCCW which was adopted at PCCW’s annual general meeting held on 19 May, 2004

“acting in concert” has the meaning set out in the Takeovers Code
“ADS Holders” holders of ADSs
“ADSs”
American depositary shares of PCCW, each representing 10 Shares and evidenced by American depositary receipts
“Anglang” Anglang Investments Limited, a company incorporated in the British Virgin Islands with limited liability and an indirect wholly-owned subsidiary of PCGH
“Announcement” the announcement dated 4 November, 2008 issued jointly by PCCW, the Joint Offerors, PCRD and CNC pursuant to Rule 3.5 of the Takeovers Code, in relation to the Proposal
“Associates”
has the meaning set out in the Takeovers Code

“Authorisations” all necessary notifications, registrations, applications, filings, authorisations, orders, recognitions, grants, consents, licences, confirmations, clearances, permissions, no-action relief, exemption relief orders and approvals, and all appropriate waiting periods (including extensions thereof), in connection with the Proposal

“Banking Ordinance” the Banking Ordinance (Chapter 155 of the Laws of Hong Kong)
“Board” the board of Directors
“Borsington” Borsington Limited, a company incorporated in the British Virgin Islands with limited liability and a wholly-owned subsidiary of PCGH
“Business Day” a day (excluding Saturday and Sunday) on which banks in Hong Kong are open for business
“Cancellation Price” a price of HK$4.20 per Scheme Share payable in cash to the Scheme Shareholders pursuant to the Proposal

— 239 —

DEFINITIONS

APPENDIX IV

“CBRE” CB Richard Ellis Limited, an independent firm of professional surveyors “China Unicom” China Unicom (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability and the shares of which are listed on the Stock Exchange and the New York Stock Exchange

“CNC” China Network Communications Group Corporation, a PRC State-owned enterprise established in the PRC (or such successor entity to CNC upon completion of its recent merger with China United Telecommunications Corporation) “CNG” China Netcom Group Corporation (BVI) Limited, a company incorporated in the British Virgin Islands with limited liability, which is a wholly-owned subsidiary of CNC and the immediate holding company of Netcom BVI

“Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)
“Companies Registry” the Hong Kong Companies Registry
“Conditions” the conditions to which the Proposal is subject, which are set out in the section headed “Conditions of the Proposal” in the Explanatory Statement on pages 44 to 51 of this document
“Consortium Agreement” the consortium agreement dated 3 November, 2008 between PCRD, CNC, Starvest and Netcom BVI in connection with the Proposal and PCCW
“Court Meeting” a meeting of the Scheme Shareholders to be convened at the direction of the High Court at which the Scheme will be voted upon which will be held in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008 at 10:00 a.m., the notice of which is set out on pages 257 to 258 of this document, or any adjournment thereof
“Court Order(s)” the order(s) of the High Court confirming the sanction of the Scheme as required by Section 166 of the Companies Ordinance and confirming the reduction of capital of PCCW as required by Section 60 of the Companies Ordinance

— 240 —

DEFINITIONS

APPENDIX IV

“Deposit Agreement”

the amended and restated deposit agreement dated 7 August, 2000, by and among PCCW, the Depositary and each beneficial owner and holder from time to time of ADSs issued thereunder (as amended by an amendment agreement dated 4 June, 2007)

“Depositary”
Citibank, N.A., in its capacity as depositary for the ADSs pursuant to the Deposit Agreement
“Directors” the directors of PCCW
“Effective Date”

the later of: (i) the date on which the Court Order(s) have been filed with the Companies Registry (as required by Section 166 and Section 61 of the Companies Ordinance); and (ii) the date on which the Companies Registry issues the relevant certificate of registration pursuant to Section 61 of the Companies Ordinance

“EGM”
the extraordinary general meeting of PCCW to be held at 10:30 a.m. (or as soon thereafter as the Court Meeting convened for the same date and place has concluded or adjourned) in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008, for the approval and implementation of the Scheme (including but not limited to the capital reduction in connection with the Scheme), the notice of which is set out on pages 259 to 261 of this document, or any adjournment thereof

“Eisner”

Eisner Investments Limited, a company incorporated in the British Virgin Islands with limited liability which is wholly-owned by Richard Li and which is a person acting in concert with Starvest
“Excluded Group” PCRD, PCGH, PCD and Eisner, which are parties acting in concert with Starvest
“Executive”
the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director
“Existing Facilities”
the loan agreement between, among others, PCCW as borrower and Bayerische Landesbank, Hong Kong Branch as agent dated 18 July, 2006 in the amount of HK$6,450 million and the loan agreement between, among others, PCCW-HKT Telephone Limited (an indirect wholly-owned subsidiary of PCCW) as borrower and Bayerische Landesbank, Hong Kong Branch as agent dated 3 October, 2006 in the amount of HK$10,150 million

— 241 —

DEFINITIONS

APPENDIX IV

“Explanatory Statement” the explanatory statement set out on pages 43 to 76 of this document and issued in compliance with Section 166A of the Companies Ordinance “High Court” the High Court of Hong Kong “HK$” Hong Kong dollars, the lawful currency of Hong Kong “HKT” Hong Kong Telecommunications (HKT) Limited, a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of PCCW and HKTGH “HKTC” has the meaning given to it in the section headed “Conditions of the Proposal” in the Explanatory Statement “HKT Loan Facilities” the term and revolving credit facility agreement dated 29 September, 2008 between HKT as borrower, HKTGH as guarantor, HSBC as agent and various other financial institutions referred to therein as lenders (as amended) “HKTGH” HKT Group Holdings Limited, a company incorporated in the Cayman Islands with limited liability and an indirect wholly-owned subsidiary of PCCW “HKTGH Restructuring” has the meaning given to it in the section headed “Reasons for and benefits of the Proposal” in the Explanatory Statement “HKTGH Sale” has the meaning given to it in the section headed “Reasons for and benefits of the Proposal” in the Explanatory Statement “Hong Kong” the Hong Kong Special Administrative Region of the PRC “Hong Kong Financial Reporting a collective term for all individual Hong Kong Financial Standards” Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants “Hopestar” Hopestar Holdings Limited, a company incorporated in the British Virgin Islands with limited liability and which is wholly-owned by Richard Li “HSBC” The Hongkong and Shanghai Banking Corporation Limited, a registered institution under the SFO, licensed to conduct Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts) and Type 6 (advising on corporate finance) regulated activities under the SFO, and a licensed bank under the Banking Ordinance, which is the financial adviser to PCRD and Starvest in connection with the Proposal

— 242 —

DEFINITIONS

APPENDIX IV

“HSBC Group”

has the meaning given to it in Note 4 to the table in the section headed “Effects of the Scheme” in the Explanatory Statement

“Independent Board Committee”

the independent board committee of PCCW, comprising Professor Chang Hsin-kang, FREng, GBS, JP, Dr. The Hon. Sir David Li Kwok Po, GBM, GBS, OBE, JP, Sir Roger Lobo, CBE, LLD, JP, Mr. Aman Mehta and The Hon. Raymond George Hardenbergh Seitz, all of whom are independent non-executive Directors, which has been established to advise the Independent Shareholders in connection with the Proposal

“Independent Shareholders”
Shareholders other than the Excluded Group, the Starvest Concert Parties, the Joint Offerors and any other persons acting in concert with any of the Joint Offerors
“Irrevocable Undertaking”
the irrevocable undertaking given by Yue Shun to PCCW and Starvest dated 30 October, 2008
“Joint Offerors” Starvest and Netcom BVI
“Last Trading Date”
13 October, 2008, being the last full trading day prior to the suspension of trading in the Shares pending the issue of the Announcement
“Latest Practicable Date”
3 December, 2008 being the latest practicable date prior to the despatch of this document for ascertaining certain information contained in it, except that the latest practicable date for information relating to the ADSs is 2 December 2008 (which is the latest practicable date prior to the despatch of this document for ascertaining information contained in it relating to the ADSs)
“LIBOR”
the British Bankers’ Association Interest Settlement Rate for the relevant currency and period displayed on the appropriate page of the Reuters screen or any such replacement page at the relevant time
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange
“Netcom BVI”
“Netcom Facility”

China Netcom Corporation (BVI) Limited, a company incorporated in the British Virgin Islands with limited liability and a wholly-owned subsidiary of CNC the facility letter dated 28 October, 2008 from Bank of China (Hong Kong) Limited (as lender) to Netcom BVI (as borrower) and CNG (as guarantor) and accepted by Netcom BVI and CNG on 3 November, 2008

— 243 —

DEFINITIONS

APPENDIX IV

“Netcom Group” CNC and its subsidiaries “New Shares” the new Shares to be issued to Starvest and Netcom BVI (and/or CNC) pursuant to the Scheme and being the same number as the number of Scheme Shares to be cancelled pursuant to the Scheme

“Offer Period” the period from 30 October, 2008, being the date of the Rule 3.2 Announcement until the earlier of: (i) the Effective Date; (ii) the date on which the Scheme lapses; or (iii) the date on which an announcement is made of the withdrawal of the Scheme

“Options” options granted under the Share Option Schemes which remain unexercised

“Optionholders” holders of Options
“Option Offer”

the conditional offer by the Joint Offerors to the Optionholders to cancel the outstanding Options on the terms and subject to the conditions contained in this document and the Option Offer Form

“Option Offer Form” the yellow form setting out the terms and conditions of the Option Offer to be completed by the Optionholders for acceptance of the Option Offer “Option Payment” the payment by the Joint Offerors to each Optionholder who completes an Option Offer Form of an amount of HK$0.01 for every 10,000 Option Shares underlying the Options in respect of which the Option Offer is accepted, as consideration for the cancellation of those Options

“Option Share(s)” means Share(s) in respect of which an Option is granted

“PCCW” PCCW Limited, a company incorporated in Hong Kong with limited liability and the shares of which are listed on the Stock Exchange and traded in the form of American Depositary receipts on the Pink OTC Markets in the US “PCCW Group” PCCW and its subsidiaries “PCD” Pacific Century Diversified Limited, a company incorporated in the Cayman Islands with limited liability which is wholly-owned by Richard Li and which is a person acting in concert with Starvest

— 244 —

DEFINITIONS

APPENDIX IV

“PCG Cayman” Pacific Century Group (Cayman Islands) Limited, a company incorporated in the Cayman Islands with limited liability and which is an indirect wholly-owned subsidiary of PCGH “PCGH” Pacific Century Group Holdings Limited, a company incorporated in the British Virgin Islands with limited liability and which is a person acting in concert with Starvest “PCPD” Pacific Century Premium Developments Limited, a company incorporated in Bermuda with limited liability and the shares of which are listed on the Stock Exchange “PCPD Group” PCPD and its subsidiaries “PCRD” Pacific Century Regional Developments Limited (Company Registration No. 196300381N), a public company incorporated in the Republic of Singapore with limited liability, the shares of which are listed on the Official List of the Singapore Exchange and which is a person acting in concert with Starvest “PCRD Group” PCRD and its subsidiaries “PCRD Shares” ordinary shares in the share capital of PCRD “Pink OTC Markets” a daily listing of bid and ask prices for over-the-counter stocks, published by the National Quotation Bureau “Post-Scheme Shareholders” Starvest, Netcom BVI (and/or CNC) and the Excluded Group “PRC” the People’s Republic of China “Proposal” the proposal for the privatisation of PCCW by the Joint Offerors by way of the Scheme as described in this document and including the Option Offer described in this document “Purchase Scheme” the purchase scheme for PCCW adopted on 15 November, 2002 by participating subsidiaries of PCCW “RBS” RBS Asia Corporate Finance Limited, formerly known as ABN AMRO Asia Corporate Finance Limited, a licensed institution under the SFO, licensed to conduct Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, which is the financial adviser to CNC and Netcom BVI in connection with the Proposal and which is a member of the ABN AMRO group. ABN AMRO group companies are subsidiary undertakings of The Royal Bank of Scotland Group plc

— 245 —

DEFINITIONS

APPENDIX IV

“RBS Account”

has the meaning given to it in the section headed “Financial advisers to the Joint Offerors and confirmation of financial resources”, in the Explanatory Statement on page 58 of this document

“Record Date”

the Business Day immediately preceding the Effective Date, being the record date for the purpose of determining the entitlement of the Scheme Shareholders under the Scheme

“Register”

the register of members of PCCW

“Relevant Authorities”

appropriate governments and/or governmental bodies, regulatory bodies, courts or institutions (including the SFC, the Stock Exchange and the Singapore Exchange)

“Relevant Period”
the period commencing on the date falling six months prior to the commencement date of the Offer Period and ending on the Latest Practicable Date
“Richard Li”
Mr. Li Tzar Kai, Richard, a director of both PCCW and PCRD
“Rothschild” N M Rothschild & Sons (Hong Kong) Limited, the independent financial adviser to the Independent Board Committee in respect of the Proposal and a corporation licensed by the SFC to conduct Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) of the regulated activities under the SFO
“Rule 3.2 Announcement” the announcement dated 30 October, 2008 issued by PCCW, pursuant to Rule 3.2 of the Takeovers Code, stating that PCCW had been informed that Starvest was considering the feasibility of a proposal for the privatisation of PCCW by way of a scheme of arrangement and that discussions were taking place relating to a possible privatisation proposal to be made jointly by the Joint Offerors
“Savills”

Savills Valuation and Professional Services Limited, an independent professional property valuer

“Scheme”

a scheme of arrangement under Section 166 of the Companies Ordinance between PCCW and the Scheme Shareholders involving the cancellation of all the Scheme Shares, details of which are set out on pages 249 to 256 of this document, with or subject to any modification thereof or addition thereto or condition approved or imposed by the High Court

— 246 —

DEFINITIONS

APPENDIX IV

“Scheme Shareholders”

Shareholders other than the Excluded Group and the Joint Offerors (and, if any Shares are transferred from Netcom BVI to CNC before the Effective Date, CNC)

“Scheme Shares” Shares held by the Scheme Shareholders on the Record Date “SFC” the Securities and Futures Commission of Hong Kong

“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share Award Schemes” the Purchase Scheme and the Subscription Scheme
“Share Option Schemes” the 1994 Share Option Scheme and the 2004 Share Option Scheme
“Shareholders” holders of the Shares
“Shares” shares of HK$0.25 each in the share capital of PCCW
“Singapore Exchange” Singapore Exchange Securities Trading Limited
“Starvest” Starvest Limited, a company incorporated in the Cayman Islands with limited liability and which is a wholly-owned subsidiary of PCRD
“Starvest Concert Parties” Yue Shun (which is a person presumed to be acting in concert with Starvest in accordance with class 8 of the definition of “acting in concert” in the Takeovers Code) and Mr. Alexander Anthony Arena, Mr. Peter Anthony Allen, Mr. Francis Yuen Tin Fan, Mr. Tom Yee Lat Shing and Ms. Winnie King Yan Siu Morrison (who are persons presumed to be acting in concert with Starvest in accordance with class 2 of the definition of “acting in concert” in the Takeovers Code)

“Starvest Facility Agreement” the term facility agreement dated 3 November 2008 between, PCRD, Starvest and HSBC acting as original lender, sole mandated lead arranger, sole bookrunner, agent and security agent

“Stock Exchange”
“Subscription Scheme”
“Takeovers Code”

The Stock Exchange of Hong Kong Limited the subscription scheme for PCCW adopted on 15 November, 2002 by participating subsidiaries of PCCW the Hong Kong Code on Takeovers and Mergers

— 247 —

APPENDIX IV

DEFINITIONS

“UBS” UBS AG, a licensed corporation under the SFO, licensed to conduct Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities under the SFO, which is the financial adviser to PCCW in connection with the Proposal “United States” or “US” the United States of America “US$” United States dollars, the lawful currency of the United States “Voting Instruction Card” the voting instruction card to be used by ADS Holders “Yue Shun” Yue Shun Limited, a company incorporated in the British Virgin Islands with limited liability, which is a wholly-owned subsidiary of Hutchison Whampoa Limited and a person presumed to be acting in concert with Starvest “%” per cent.

Unless otherwise specified, amounts not derived from Appendix I Financial information of the PCCW Group of this document and denominated in HK$ and US$ have been translated for the purposes of illustration only into HK$ in this document at the following rates: HK$7.8:US$1

No representation is made that any amounts in HK$ or US$ can be or could have been converted at the relevant dates at the above rates or any other rates or at all.

Certain amounts set out in this document have been subject to rounding adjustments. Accordingly, figures shown as totals of certain amounts may not be an arithmetic sum of such amounts.

— 248 —

SCHEME OF ARRANGEMENT

HCMP No. : 2382/08

SCHEME OF ARRANGEMENT IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 2382 OF 2008

IN THE MATTER OF PCCW LIMITED

AND

IN THE MATTER OF SECTION 166 OF

THE COMPANIES ORDINANCE CHAPTER 32 OF THE LAWS OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION

SCHEME OF ARRANGEMENT Under Section 166 of the Companies Ordinance Chapter 32 of The Laws of the Hong Kong Special Administrative Region

BETWEEN

PCCW LIMITED AND

THE HOLDERS OF THE SCHEME SHARES (AS HEREINAFTER DEFINED)

(A) In this Scheme of Arrangement, unless inconsistent with the subject or context, the following expressions shall have the following meanings:
“1994 Share Option Scheme”

the share option scheme of PCCW adopted on 20 September, 1994, the termination of which was approved by the Shareholders at PCCW’s annual general meeting held on 19 May, 2004

“2004 Share Option Scheme” the share option scheme of PCCW which was adopted at PCCW’s annual general meeting held on 19 May, 2004

“Business Day”

a day (excluding Saturday and Sunday) on which banks in Hong Kong are open for business

“Cancellation Price”

a price of HK$4.20 per Scheme Share payable in cash to the Scheme Shareholders pursuant to the Scheme

“CNC”

China Network Communications Group Corporation, a PRC State-owned enterprise established in the PRC (or such successor entity to CNC upon completion of its recent merger with China United Telecommunications Corporation)

— 249 —

SCHEME OF ARRANGEMENT

“Companies Ordinance”
the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)
“Companies Registry” the Hong Kong Companies Registry
“Court Meeting”
a meeting of the Scheme Shareholders to be convened at the direction of the High Court at which the Scheme will be voted upon which will be held in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008 at 10:00 a.m., or any adjournment thereof
“Court Order(s)”
the order(s) of the High Court confirming the sanction of the Scheme as required by Section 166 of the Companies Ordinance and confirming the reduction of capital of PCCW as required by Section 60 of the Companies Ordinance
“Effective Date”
the later of: (i) the date on which the Court Order(s) have been filed with the Companies Registry (as required by Section 166 and Section 61 of the Companies Ordinance); and (ii) the date on which the Companies Registry issues the relevant certificate of registration pursuant to Section 61 of the Companies Ordinance
“Eisner”
Eisner Investments Limited, a company incorporated in the British Virgin Islands with limited liability which is wholly-owned by Richard Li and which is a person acting in concert with Starvest
“Excluded Group”
PCRD, PCGH, PCD and Eisner, which are parties acting in concert with Starvest
“Explanatory Statement”
the explanatory statement explaining the effect of the Scheme, required to be furnished pursuant to Section 166A of the Companies Ordinance set out on pages 43 to 76 of the Scheme Document
“High Court”
the High Court of Hong Kong
“HK$”
Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”
“Joint Offerors”
the Hong Kong Special Administrative Region of the PRC Starvest and Netcom BVI

— 250 —

SCHEME OF ARRANGEMENT

“Latest Practicable Date” 3 December, 2008, being the latest practicable date prior to the despatch of the Scheme Document for ascertaining certain information contained in it, except that the latest practicable date for information relating to PCCW’s American depositary receipts is 2 December 2008 (which is the latest practicable date prior to the despatch of the Scheme Document for ascertaining information contained in it relating to PCCW’s American depositary receipts)
“Netcom BVI” China Netcom Corporation (BVI) Limited, a company incorporated in the British Virgin Islands with limited liability and which is a wholly-owned subsidiary of CNC
“Option Offer” the conditional offer by the Joint Offerors to the Optionholders to cancel the outstanding Options on the terms and subject to the conditions contained in the Scheme Document and the Option Offer Form which was despatched together with the Scheme Document
“Option Offer Form” the yellow form setting out the terms and conditions of the Option Offer to be completed by the Optionholders for acceptance of the Option Offer
“Optionholders” holders of Options “Options” options granted under the Share Option Schemes which remain unexercised
“Option Share(s)” Share(s) in respect of which an Option is granted “PCCW” PCCW Limited, a company incorporated in Hong Kong with limited liability and the shares of which are listed on the Stock Exchange and traded in the form of American depositary receipts on the Pink OTC Markets in the US
“PCD” Pacific Century Diversified Limited, a company incorporated in the Cayman Islands with limited liability which is wholly-owned by Richard Li and which is a person acting in concert with Starvest
“PCGH” Pacific Century Group Holdings Limited, a company incorporated in the British Virgin Islands with limited liability and which is a person acting in concert with Starvest

— 251 —

SCHEME OF ARRANGEMENT

“PCRD” Pacific Century Regional Developments Limited (Company Registration No. 196300381N), a public company incorporated in the Republic of Singapore with limited liability, the shares of which are listed on the Official List of Singapore Exchange Securities Trading Limited and which is a person acting in concert with Starvest “PRC” the People’s Republic of China “Record Date” the Business Day immediately preceding the Effective Date, being the record date for the purpose of determining the entitlements of the Scheme Shareholders under the Scheme “Richard Li” Mr. Li Tzar Kai, Richard, a director of both PCCW and PCRD “Scheme” this scheme of arrangement in its present form or with or subject to any modification thereof or addition thereto or condition approved or imposed by the High Court “Scheme Document” the document dated 6 December, 2008 issued by PCCW and the Joint Offerors which includes this Scheme “Scheme Shareholders” Shareholders other than the Excluded Group and the Joint Offerors (and, if any Shares are transferred from Netcom BVI to CNC before the Effective Date, CNC) “Scheme Shares” Shares held by the Scheme Shareholders on the Record Date “Share Option Schemes” the 1994 Share Option Scheme and the 2004 Share Option Scheme “Shareholders” holders of the Shares “Shares” shares of HK$0.25 each in the share capital of PCCW “Starvest” Starvest Limited, a company incorporated in the Cayman Islands with limited liability and which is a wholly-owned subsidiary of PCRD “%” per cent.

(B) The authorised share capital of PCCW is HK$2,500,000,000 divided into 10,000,000,000 Shares of HK$0.25 each, of which 6,772,294,654 Shares have been issued and are fully paid or credited as fully paid.

— 252 —

SCHEME OF ARRANGEMENT

(C) The primary purpose of this Scheme is that on the Effective Date all the Scheme Shares should be cancelled and that the credit arising in PCCW’s books of accounts as a result of the aforesaid reduction of capital be applied to pay up in full and issue to Starvest and Netcom BVI (and/or CNC) such number of new Shares being equal to the Scheme Shares cancelled. Such new Shares shall be issued to Starvest and Netcom BVI (and/or CNC) in the ratio of 74.27:25.73 to Starvest and to Netcom BVI (and/or CNC) respectively.
(D) As at the Latest Practicable Date, the Joint Offerors and the Excluded Group are interested in 3,231,515,068 Shares, constituting approximately 47.72% of the issued share capital of PCCW.
(E) As at the Latest Practicable Date, Options relating to 138,342,090 Shares are currently outstanding and exerciseable under the Share Option Schemes, with exercise prices ranging from HK$4.35 to HK$75.24 per Share. The Joint Offerors have made the Option Offer, conditional upon the Scheme becoming effective, to cancel each existing Option in exchange for cash, being an amount equal to HK$0.01 for each 10,000 Option Shares underlying the Options in respect of which the Option Offer is accepted.
(F) In relation to any Options which are not tendered for acceptance under the Option Offer:
(i) Options granted under the 1994 Share Option Scheme will be exercisable in full (to the extent not already exercised) at any time within one month after the Effective Date. However, if any Options are exercised at any time later than four Business Days prior to the Record Date, PCCW will exercise its discretion under the 1994 Share Option Scheme to cancel such Options, by giving notice of cancellation to the exercising Optionholders and paying the relevant cancellation payment (if any) prescribed by the 1994 Share Option Scheme. On the expiry of the period of one month after the Effective Date, all unexercised Options granted under the 1994 Share Option Scheme will lapse automatically, pursuant to the terms of the 1994 Share Option Scheme.
(ii) In relation to Options granted under the 2004 Share Option Scheme, if the Scheme is approved at the requisite shareholders’ meetings in the manner prescribed by the Companies Ordinance and the Hong Kong Code on Takeovers and Mergers, PCCW will give notice to all holders of Options granted under the 2004 Share Option Scheme as required by the terms of the 2004 Share Option Scheme. Pursuant to that notice and the terms of the 2004 Share Option Scheme, Optionholders will be permitted to exercise their Options, in full, no later than four Business Days prior to the Record Date, but any Options not exercised within that period will lapse and cease to be exercisable with effect from the expiry of that period, subject to the Scheme becoming effective.
(G) The Joint Offerors and the Excluded Group have agreed to appear by counsel on the hearing of the petition to sanction this Scheme and to undertake to the High Court to be bound thereby and to execute and do and procure to be executed and done all such documents, acts and things as may be necessary or desirable to be respectively executed or done by them for the purpose of giving effect to this Scheme.

— 253 —

SCHEME OF ARRANGEMENT

THE SCHEME

PART I

Cancellation of the Scheme Shares

Upon the Effective Date:
(a) the authorised and issued share capital of PCCW shall be reduced by cancelling and extinguishing the Scheme Shares;
(b) subject to and forthwith upon the reduction of capital referred to in paragraph (a) above taking effect, the authorised share capital of PCCW shall be increased to its former amount by the creation of such number of new Shares as is equal to the number of the Scheme Shares cancelled; and
(c) PCCW shall apply the credit in its books of account arising as a result of the said reduction of capital referred to in paragraph (a) of this clause 1 in paying up the new Shares referred to in paragraph (b) of this clause 1 in full at par and those new Shares shall be allotted and issued, credited as fully paid, as to:
- (i) 74.27% of the aggregate number of new Shares referred to in paragraph (b), to Starvest; and
- (ii) 25.73% of the aggregate number of new Shares referred to in paragraph (b), to Netcom BVI (and/or CNC, as Netcom BVI shall in its absolute discretion direct);

and any entitlements to fractions of new Shares which may result from that calculation shall be allocated and dealt with as between Starvest and Netcom BVI as may be agreed between Starvest and Netcom BVI.

PART II

Consideration for cancellation of the Scheme Shares

In consideration of the cancellation and extinguishment of the Scheme Shares, the Joint Offerors shall pay or cause to be paid to the holders of the Scheme Shares (as appearing in the register of members of PCCW on the Record Date) the sum of HK$4.20 in cash for each Scheme Share held. Starvest will pay 74.27% of each such amount and Netcom BVI will pay 25.73% of each such amount.

— 254 —

SCHEME OF ARRANGEMENT

PART III

General

(a) Not later than ten days after the Effective Date, the Joint Offerors shall send or procure to be sent to the holders of the Scheme Shares (as appearing in the register of members of PCCW on the Record Date) cheques in respect of the sums payable to such holders pursuant to clause 2 of this Scheme.
(b) Unless indicated otherwise in writing to Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, all such cheques shall be sent through the ordinary post in pre-paid envelopes addressed to the persons entitled thereto:
- (i) in the case of sole holders, to the respective registered addresses of such holders as appearing in the register of members of PCCW on the Record Date; and
- (ii) in the case of joint holders, to the registered address of that one of the joint holders whose name then stands first in such register of members of PCCW in respect of the joint holding.
(c) Cheques shall be posted at the risk of the addressees and once posted, none of PCCW, PCRD, CNC, the Joint Offerors or their respective financial advisers shall be responsible for any loss or delay in despatch of such cheques.
(d) Such cheques shall be payable to the order of the person to whom, in accordance with the provisions of paragraph (b) of this clause 3, the envelope containing the same is addressed and the encashment of any such cheque shall be a good discharge to the Joint Offerors for the monies represented thereby.
(e) On or after the day being six calendar months after the posting of the said cheques pursuant to paragraph (b) of this clause 3, the Joint Offerors shall have the right to cancel or cause the cancellation of any such cheques which have not then been cashed or have been returned uncashed and shall place all monies represented thereby in a deposit account in PCCW’s name with a licensed bank in Hong Kong selected by PCCW. PCCW shall hold such monies until the expiration of six years from the Effective Date and shall, prior to such date, make payments therefrom of the sums payable pursuant to clause 2 of this Scheme to persons who satisfy PCCW that they are respectively entitled thereto and provided that the cheques referred to in paragraph (b) of this clause 3 of which they are payees have not been cashed. Any payments made by PCCW hereunder shall include any interest accrued on the sums to which the respective persons are entitled pursuant to clause 2 of this Scheme, calculated at the annual rate prevailing from time to time at the licensed bank with which the monies are deposited, from the date which falls six months after the posting of the said cheques pursuant to paragraph (b) of this clause 3 down to the date of payment of such sum, subject, if applicable, to deduction of interest or any other deduction or withholding tax required by law and all expenses and costs incurred or to be incurred in relation to the payment. PCCW

— 255 —

SCHEME OF ARRANGEMENT

shall exercise its absolute discretion in determining whether or not it is satisfied that any person is so entitled and a certificate of PCCW to the effect that any particular person is so entitled or is not so entitled shall be conclusive and binding upon all persons claiming an interest in the relevant monies. Upon the expiry of six years from the Effective Date, the Joint Offerors shall be released from any further obligation to make any payment under this Scheme and PCCW shall thereafter transfer to the Joint Offerors the balance (if any) of the sums standing to the credit of the deposit account referred to in this paragraph (e) of this clause 3 including accrued interest subject, if applicable, to the deduction of interest or any withholding or any other tax or any other deduction required by law and subject to the deduction of any expenses incurred or to be incurred effecting the transfer. Any such payment to Starvest and Netcom BVI will be made in the ratio of 74.27:25.73 respectively.

As from and including the Effective Date, all certificates representing the Scheme Shares shall cease to have effect as documents or evidence of title to the Shares comprised therein and every Scheme Shareholder shall be bound, on the request of PCCW, to deliver up to PCCW or to any person appointed by it to receive the same such certificate(s) for cancellation.
All mandates or relevant instructions in force on the Record Date relating to any of the Scheme Shares shall cease to be valid and effective mandates or instructions.
This Scheme shall become effective on the Effective Date.
Unless this Scheme shall have become effective on or before 23 April, 2009 or such later date, if any, as the Joint Offerors and PCCW may agree and the High Court may allow, this Scheme shall lapse.
The Joint Offerors and PCCW, by their duly authorised agent(s)/servant(s), may jointly consent for and on behalf of all parties concerned to any modification of or addition to this Scheme or to any condition which the High Court may see fit to approve or impose without any further Court Meeting to be held therefor.
All costs, charges and expenses of and incidental to this Scheme and of carrying this Scheme into effect shall be borne by PCCW.

Dated 6 December, 2008

— 256 —

NOTICE OF COURT MEETING

SCHEME OF ARRANGEMENT IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 2382 OF 2008

IN THE MATTER OF PCCW LIMITED 電訊盈科有限公司 AND IN THE MATTER OF SECTION 166 OF THE COMPANIES ORDINANCE

CHAPTER 32 OF THE LAWS OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION

SCHEME OF ARRANGEMENT

Under Section 166 of the Companies Ordinance Chapter 32 of The Laws of the Hong Kong Special Administrative Region

NOTICE OF COURT MEETING

NOTICE IS HEREBY GIVEN that, by an order dated 5 December, 2008 (the “Order”) made in the above matters, the High Court of the Hong Kong Special Administrative Region (the “High Court”) has directed a meeting (the “Meeting”) to be convened of the holders of the Scheme Shares (as defined in the scheme of arrangement hereinafter mentioned) for the purpose of considering and, if thought fit, approving, with or without modification, a scheme of arrangement proposed to be made between PCCW Limited (“PCCW”) and the holders of the Scheme Shares (the “Scheme”), and that the Meeting will be held in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008, at 10:00 a.m. , at which place and time all holders of the Scheme Shares are requested to attend.

A copy of the Scheme and a copy of an explanatory statement (the “Explanatory Statement”) explaining the effect of the Scheme, required to be furnished pursuant to Section 166A of the above mentioned Ordinance, are incorporated in the composite document of which this Notice forms part.

The above-mentioned holders of the Scheme Shares may vote in person at the Meeting or they may appoint one or more proxies (who must be an individual), whether a member of PCCW or not, to attend and vote in their stead. A pink form of proxy for use at the Meeting is enclosed herewith.

In the case of joint holders, the vote of the most senior holder who tenders a vote, whether personally or by proxy, will be accepted to the exclusion of the vote(s) of the other joint holder(s), and, for this purpose, seniority will be determined by the order in which the names of the joint holders stand in the register of members of PCCW in respect of the relevant joint holding.

— 257 —

NOTICE OF COURT MEETING

It is requested that forms appointing proxies be lodged, by hand or by post, with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong not less than forty-eight (48) hours before the time appointed for the Meeting. Forms of proxy may also be returned by facsimile at (852) 2962 5926 up to the time of the Meeting or may be handed to the chairman of the Meeting at the Meeting, if not so lodged.

By the Order, the High Court has appointed Sir David Ford, a director of PCCW or, failing him, any other person who is a director of PCCW as at the date of the Order to act as the chairman of the Meeting and has directed the chairman of the Meeting to report the outcome thereof to the High Court.

The Scheme will be subject to the subsequent approval of the High Court as set out in the Explanatory Statement contained in the document of which this Notice forms part.

Richards Butler in association with Reed Smith LLP 20th Floor, Alexandra House 16-20 Chater Road Central, Hong Kong Solicitors for PCCW Limited

Dated 6 December, 2008

— 258 —

NOTICE OF EGM

==> picture [86 x 41] intentionally omitted <==

PCCW Limited 電訊盈科有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 0008)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of PCCW Limited (“PCCW”) will be held in the Conference Room, 14th Floor, PCCW Tower, TaiKoo Place, 979 King’s Road, Quarry Bay, Hong Kong on Tuesday, 30 December, 2008, at 10:30 a.m. (or as soon thereafter as the Court Meeting (as defined in the scheme of arrangement hereinafter mentioned) convened for the same day and place shall have been concluded or adjourned), for the purpose of considering and, if thought fit, passing the following resolution as a special resolution:

SPECIAL RESOLUTION

“ THAT:

(A) the proposed scheme of arrangement (the “Scheme”) between PCCW and the holders of the Scheme Shares (as defined in the Scheme) in the form of the print thereof, which has been produced to this meeting and for the purposes of identification signed by the chairman of this meeting, or in such other form and on such terms and conditions as may be approved by the High Court of the Hong Kong Special Administrative Region, be and is hereby approved;
(B) for the purposes of giving effect to the Scheme, on the Effective Date (as defined in the Scheme):
(i) the authorised and issued share capital of PCCW shall be reduced by cancelling and extinguishing the Scheme Shares;
(ii) subject to and forthwith upon the said reduction of share capital taking effect, the authorised share capital of PCCW shall be increased to its former amount by the creation of such number of new Shares (as defined in the Scheme) as is equal to the number of Scheme Shares cancelled; and
(iii) PCCW shall apply the credit arising in its books of account as a result of the said reduction of capital in paying up the new Shares referred to in paragraph (ii) above in full at par and those new Shares shall be allotted and issued, credited as fully paid, as to:
- (1) 74.27% of the aggregate number of new Shares referred to in paragraph (ii) above, to Starvest (as defined in the Scheme); and

— 259 —

NOTICE OF EGM

(2) 25.73% of the aggregate number of new Shares referred to in paragraph (ii) above, to Netcom BVI (and/or CNC, as Netcom BVI shall in its absolute discretion direct) (each as defined in the Scheme);

(C) the directors of PCCW be and are hereby authorised to make application to The Stock Exchange of Hong Kong Limited (hereinafter called the “Stock Exchange”) for the withdrawal of the listing of PCCW’s shares on the Stock Exchange, subject to the Scheme taking effect; and
(D) the directors of PCCW be and are hereby authorised to do all other acts and things as considered by them to be necessary or desirable in connection with the implementation of the Scheme, including (without limitation) the giving of consent to any modifications of, or additions to, the Scheme, which the High Court of the Hong Kong Special Administrative Region may see fit to impose and to do all other acts and things as considered by them to be necessary or desirable in connection with the implementation of the Scheme and in relation to the Proposal (as defined in the document of which the notice of this resolution forms part) as a whole.”

By Order of the Board Philana WY Poon

Group General Counsel and Company Secretary

Hong Kong, 6 December, 2008

Registered office:

39th Floor, PCCW Tower TaiKoo Place 979 King’s Road Quarry Bay Hong Kong

Notes:

A white form of proxy for use at this meeting is enclosed.
A member of PCCW entitled to attend and vote at this meeting is entitled to appoint one or more proxies (who must be an individual) to attend and vote instead of him/her. A proxy need not be a member of PCCW.

— 260 —

NOTICE OF EGM

In order to be valid, the white form of proxy together with any power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power of attorney, must be deposited with Computershare Hong Kong Investor Services Limited, the share registrar of PCCW, at Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, not less than forty-eight (48) hours before the time appointed for holding this meeting or any adjournment thereof.
Completion and return of the form of proxy shall not preclude a member from attending and voting in person at this meeting and, in such event, the form of proxy shall be deemed to be revoked.
Where there are joint holders of any share in PCCW, any one of such joint holders may vote at this meeting, either personally or by proxy, in respect of such share as if he/she were solely entitled thereto; but if more than one of such joint holders are present at this meeting personally or by proxy, the most senior shall alone be entitled to vote in respect of the relevant joint holding and, for this purpose, seniority shall be determined by reference to the order in which the names of the joint holders stand on the register of members of PCCW in respect of the relevant joint holding.

— 261 —

AI assistant

Hang Lung Group Limited — Proxy Solicitation & Information Statement 2008

48869_rns_2008-12-07_f26e42f3-9dac-410e-ad9a-e513e812de83.pdf

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

Pacific Century Regional Developments Limited

PCCW Limited 電訊盈科有限公司

PROPOSED PRIVATISATION OF PCCW BY THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

Financial Adviser to PCCW

Independent Financial Adviser to the Independent Board Committee of PCCW

CONTENTS

CONTENTS

IMPORTANT NOTICE

DEFINITIONS

ACTION TO BE TAKEN

Action to be taken by Scheme Shareholders

Action to be taken by ADS Holders

IMPORTANT NOTICE

Action to be taken by Optionholders

EXERCISE YOUR RIGHT TO VOTE

NOTICE TO US SHAREHOLDERS

IMPORTANT NOTICE

EXPECTED TIMETABLE

Hong Kong time

EXPECTED TIMETABLE

EXPECTED TIMETABLE

PCCW Limited 電訊盈科有限公司

PROPOSED PRIVATISATION OF PCCW BY

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

SUMMARY OF THE PROPOSAL

Scheme Shares

ADSs

The Option Offer

Terms of the Proposal

LETTER FROM THE BOARD

COMPARISONS OF VALUE

LETTER FROM THE BOARD

CONDITIONS OF THE PROPOSAL

REASONS FOR AND BENEFITS OF THE PROPOSAL

INTENTION OF PCRD AND CNC WITH REGARD TO PCCW

INFORMATION ON THE PCCW GROUP AND THE JOINT OFFERORS

LETTER FROM THE BOARD

COURT MEETING AND EGM

YUE SHUN IRREVOCABLE UNDERTAKING

LETTER FROM THE BOARD

CONFIRMATIONS TO PCRD WITH RESPECT TO THE EXTRAORDINARY GENERAL MEETING OF PCRD

EXPLANATORY STATEMENT

RECOMMENDATIONS OF THE INDEPENDENT BOARD COMMITTEE

ADVICE OF ROTHSCHILD

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

PCCW Limited 電訊盈科有限公司

PROPOSED PRIVATISATION OF PCCW BY

THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Recommendations

Yours faithfully,

The Hon. Raymond George Hardenbergh Seitz

PROPOSED PRIVATISATION OF PCCW

BY

THE JOINT OFFERORS BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 166 OF THE COMPANIES ORDINANCE) AT THE CANCELLATION PRICE OF HK$4.20 PER SCHEME SHARE

LETTER FROM ROTHSCHILD

TERMS OF THE PROPOSAL

Scheme Shares

ADS

Options

PRINCIPAL FACTORS AND REASONS

1. Background

Table 2 Performance of major indices during the One-Year Period

LETTER FROM ROTHSCHILD

2. Financial performance of PCCW

(i) Historical financial performance

Table 3 Summary of consolidated income statement

LETTER FROM ROTHSCHILD

Revenue

Earnings before interest, tax, depreciation and amortisation (“EBITDA[1] ”) and margin

Profit for the year/period and margin

Indebtedness

(ii) Future prospects of PCCW

Hang Lung Group Limited Proxy Solicitation & Information Statement 2008