##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition period from  to
 Commission file number: 1-33430
 QIAO XING MOBILE COMMUNICATION CO., LTD.
  British Virgin Islands
 30th Floor, Tower A, Eagle Run Plaza, No. 26 Xiaoyun Road, Chaoyang District, Beijing 100016, Peoples Republic of China
   Title of each class
    
    Exchange on which registeredOrdinary Shares, without par value
    
    New York Stock Exchange, Inc.
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 Number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2010:
   o þ
  o þ
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  þ
    o þ
  o þ




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##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    1FORWARD-LOOKING STATEMENTS
    
    
    2PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    19Item 4A. Unresolved Staff Comments
    
    
    29Item 5. Operating and Financial Review and Prospects
    
    
    29Item 6. Directors, Senior Management and Employees
    
    
    44Item 7. Major Shareholders and Related Party Transactions
    
    
    50Item 8. Financial Information
    
    
    51Item 9. The Offer and Listing
    
    
    52Item 10. Additional Information
    
    
    53Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    56Item 12. Description of Securities Other than Equity Securities
    
    
    57PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    59Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    59Item 15T. Controls and Procedures
    
    
    59Item 16A. Audit Committee Financial Expert
    
    
    59Item 16B. Code of Ethics
    
    
    59Item 16C. Principal Accountant Fees and Services
    
    
    59Item16D. Exemptions from The Listing Standards for Audit Committees
    
    
    60Item 16E. Purchases of Equity Securities by The Issuer and Affiliated Purchasers
    
    
    60Item 16F. Change in Registrants Certifying Accountant
    
    
    60Item 16G. Corporate Governance
    
    
    60PART IIIItem 17. Financial Statements
    
    
    61Item 18. Financial Statements
    
    
    61Item 19. Exhibits
    
    
    61EX-8.1 SUBSIDIARIES OF THE REGISTRANTEX-12.1 CERTIFICATION OF CEOEX-12.2 CERTIFICATION OF CFOEX-13.1 CERTIFICATION OF CFO AND CEOEX-15.1 CONSENT OF CROWE HORWATH LLP, DATED JUNE 30, 2011




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##### Table of Contents



INTRODUCTION
    
    
    3G are to the third generation of telecommunication hardware standards and general
technology for mobile networking that provides increased bandwidth and allows a mobile device
user to access a wide variety of services, such as multimedia;
 
    
    CECT are to CEC Telecom Co., Ltd., our principal operating subsidiary in China;
 
    
    China or the PRC are to the Peoples Republic of China, excluding, for the purpose of
this annual report only, Taiwan and the special administrative regions of Hong Kong, or the
Hong Kong SAR, and Macau;
 
    
    CDMA are to Code Division Multiple Access, a method for transmitting simultaneous encoded
signals over a shared portion of the spectrum. The foremost application of CDMA is digital
cellular phone technology;
 
    
    EDGE are to Enhanced Data GSM Environment, a faster version of the GSM wireless service
designed to deliver data at rates up to 384 Kbps;
 
    
    EMS are to electronic manufacturing services, a general term used to describe the
services provided by companies that design, test, manufacture, distribute and provide return
and repair services for electronic components and assemblies for original equipment
manufacturers;
 
    
    GSM are to Global System for Mobile Communications, a digital cellular phone technology
based on time division multiple access;
 
    
    GPS are to Global Positioning System, a global navigation satellite system often used for
navigation purposes;
 
    
    MIIT are to China Ministry of Industry and Information Technology;
 
    
    RMB and Renminbi are to the legal currency of China;
 
    
    SIM are to Subscriber Identity Module, the smart card used in cellular phones to securely
store the key that is used to identify the mobile phone service subscriber;
 
    
    SMT are to Surface Mount Technology, a space saving technique whereby special leadless
components are soldered onto the surface of a printed circuit board;
 
    
    TD-SCDMA are to Time Division-Synchronous Code Division Multiple Access, a 3G wireless
standard that supports data transmission at speeds up to 2 Mbps. The standard combines time
division multiple access with an adaptive, synchronous-mode code division multiple access
component;
 
    
    US$, $, and U.S. dollars are to the legal currency of the United States;
 
    
    WCDMA are to Wideband Code Division Multiple Access, a 3G wireless standard which
utilizes one 5 MHz channel for both voice and data, initially offering data speeds up to 384
Kbps; and
 
    
    We, us, our company and our are to Qiao Xing Mobile Communication Co., Ltd., its
predecessor entities and its consolidated subsidiaries, unless the context indicates
otherwise.
   1




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
    
    our expectations regarding the market for mobile handsets;
 
    
    our expectations regarding the continued growth of the mobile communications industry;
 
    
    our expectations with respect to advancements in our technologies;
 
    
    our beliefs regarding the competitiveness of our mobile handset products;
 
    
    our expectations regarding our manufacturing capacity;
 
    
    our expectations with respect to revenue growth and our ability to achieve profitability;
 
    
    our future business development, results of operations and financial condition; and
 
    
    competition from other manufacturers of mobile handsets.
   2




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##### Table of Contents



PART I
 
 ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3.
    
    KEY INFORMATION
 A. Selected Financial Data
   (OldBasis)
    
    
    
    (New Basis)January 1,
    
    
    
    November2006 to
    
    
    
    30, 2006 toConsolidated statement of operations data
    
    November
    
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands, except per share data)
    
    30, 2006
    
    
    
    31, 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Revenues
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    855,544
    
    
    
    129,628Gross profit (loss)
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    885,250
    
    
    
    866,777
    
    
    
    251,317
    
    
    
    (48,784
    )
    
    
    (7,392
    )In-process research and development
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (4,433
    )
    
    
    (672
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (112,814
    )
    
    
    (17,093
    )Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,957
    )
    
    
    
    
    
    
    Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    729,017
    
    
    
    608,791
    
    
    
    7,406
    
    
    
    (348,672
    )
    
    
    (52,830
    )Interest expense
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (326,512
    )
    
    
    (45,159
    )
    
    
    (6,842
    )Gain (loss) on remeasurement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,939
    
    
    
    (87,935
    )
    
    
    19,006
    
    
    
    2,880(Loss) gain on remeasurement of warrant liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,219
    )
    
    
    4,343
    
    
    
    658(Loss) gain on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,634
    )
    
    
    159,326
    
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,803
    )
    
    
    
    
    
    
    Income (loss) before income tax expense and extraordinary items
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (353,767
    )
    
    
    (53,601
    )Income tax expense
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (11,632
    )
    
    
    (17,456
    )
    
    
    (2,645
    )Income (loss) before extraordinary items
    
    
    315,616
    
    
    
    
    (17,686
    )
    
    
    597,874
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (371,223
    )
    
    
    (56,246
    )Extraordinary items: Gains on acquisitions of additional equity interests in CECT, net of nil tax
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)(1)
    
    
    333,412
    
    
    
    
    (17,686
    )
    
    
    626,563
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (371,223
    )
    
    
    (56,246
    )Net (income) loss attributable to noncontrolling interests
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    8,381
    
    
    
    1,270Net income (loss) attributable to holders of ordinary shares
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (362,842
    )
    
    
    (54,976
    )Earnings (loss) per share before extraordinary gains(2) Basic
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )
Diluted
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )Earnings (loss) per share(1)(2) Basic
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    ) Diluted
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )Weighted average number of shares outstanding Basic
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    49,216
    
    
    
    48,034
    
    
    
    52,935
    
    
    
    52,935 Diluted
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    56,386
    
    
    
    48,034
    
    
    
    52,935
    
    
    
    52,935
  3




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##### Table of Contents



(Old Basis)
    
    
    
    (New Basis)Consolidated balance sheet data
    
    November
    
    
    
    December 31,(Amounts in thousands)
    
    30, 2006
    
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Cash
    
    
    713,099
    
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    3,129,070
    
    
    
    2,755,505
    
    
    
    417,501Accounts receivable, net
    
    
    407,610
    
    
    
    
    546,893
    
    
    
    418,564
    
    
    
    462,282
    
    
    
    114,689
    
    
    
    239,390
    
    
    
    36,271Prepayments to suppliers
    
    
    145,652
    
    
    
    
    232,008
    
    
    
    155,993
    
    
    
    363,907
    
    
    
    181,550
    
    
    
    86,302
    
    
    
    13,076Total current assets
    
    
    1,684,197
    
    
    
    
    1,893,910
    
    
    
    3,601,182
    
    
    
    4,177,000
    
    
    
    3,989,431
    
    
    
    3,212,607
    
    
    
    486,758Total assets
    
    
    1,985,147
    
    
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    4,522,920
    
    
    
    4,136,593
    
    
    
    3,233,437
    
    
    
    489,914Short-term borrowings
    
    
    610,314
    
    
    
    
    602,790
    
    
    
    983,904
    
    
    
    983,950
    
    
    
    884,708
    
    
    
    446,000
    
    
    
    67,576Accounts payable
    
    
    177,609
    
    
    
    
    165,326
    
    
    
    107,990
    
    
    
    52,047
    
    
    
    60,751
    
    
    
    39,737
    
    
    
    6,021Embedded derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,130
    
    
    
    39,978
    
    
    
    20,113
    
    
    
    3,047Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,211
    
    
    
    112,162
    
    
    
    112,162
    
    
    
    16,994Total current liabilities
    
    
    1,026,702
    
    
    
    
    1,207,228
    
    
    
    1,239,764
    
    
    
    1,515,747
    
    
    
    1,211,060
    
    
    
    657,306
    
    
    
    99,591Total liabilities
    
    
    1,030,413
    
    
    
    
    1,218,968
    
    
    
    1,245,325
    
    
    
    1,516,067
    
    
    
    1,233,697
    
    
    
    674,956
    
    
    
    102,265Total shareholders equity
    
    
    879,637
    
    
    
    
    1,040,288
    
    
    
    2,670,542
    
    
    
    2,914,788
    
    
    
    2,810,451
    
    
    
    2,474,417
    
    
    
    374,912
 (OldBasis)
    
    
    
    (New Basis)January 1,
    
    
    
    November2006 to
    
    
    
    30, 2006 toConsolidated cash flow data
    
    November
    
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands)
    
    30, 2006
    
    
    
    31, 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Net cash provided by (used in) operating activities
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    855,524
    
    
    
    110,106
    
    
    
    602,369
    
    
    
    (268,049
    )
    
    
    (40,613
    )Net cash (used in) provided by investing activities
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (58,529
    )
    
    
    331,026
    
    
    
    50,155Net cash provided by (used in) financing activities
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    (321,981
    )
    
    
    (436,582
    )
    
    
    (66,149
    )
 Year ended December 31,Other selected operating data(3)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Mobile handsets shipped (in thousands of units)
    
    
    2,262
    
    
    
    3,816
    
    
    
    2,714
    
    
    
    2,123
    
    
    
    1,238Average mobile handset selling price (RMB)(4)
    
    
    1,094
    
    
    
    816
    
    
    
    788
    
    
    
    735
    
    
    
    672
 
 (1)
    
    Our PRC operating subsidiary, CECT, enjoys certain preferential tax rates and holidays
under local government policies. See Item 5. Operating and financial review and
prospectsTaxation. Without the tax holidays, our net income (loss) and basic and diluted
earnings (loss) per share for the following periods would have been reduced or increased as
follows: (OldBasis)
    
    
    
    (New Basis)January 1,
    
    
    
    November2006 to
    
    
    
    30, 2006 toNovember
    
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands)
    
    30, 2006
    
    
    
    31, 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)(Reduction in net income by) / increase in net loss by
    
    
    (1,147
    )
    
    
    
    1
    
    
    
    (1,056
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reduction in basic and diluted earnings per share by (2)
    
    
    (0.02
    )
    
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (2)
    
    Basic and diluted earnings (loss) per share data reflects on a retroactive basis a
40-for-one share split that became effective on April 13, 2007.(3)
    
    Other selected operating data is derived from our operating records.(4)
    
    The average mobile handset selling price for handsets in a given period is calculated by
dividing revenue from handsets by unit sales volume during the same period.  4




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##### Table of Contents



Renminbi per U.S. dollar certified exchange ratePeriod end
    
    
    Average(1)
    
    
    Low
    
    
    High2006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    7.8041
    
    
    
    8.07022007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.2946
    
    
    
    7.81272008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    6.7800
    
    
    
    7.29462009
    
    
    6.8259
    
    
    
    6.8295
    
    
    
    6.8176
    
    
    
    6.84702010
    
    
    6.6000
    
    
    
    6.7603
    
    
    
    6.6000
    
    
    
    6.8330December
    
    
    6.6000
    
    
    
    6.6497
    
    
    
    6.6000
    
    
    
    6.67452011January
    
    
    6.6017
    
    
    
    6.5964
    
    
    
    6.5809
    
    
    
    6.6364February
    
    
    6.5713
    
    
    
    6.5761
    
    
    
    6.5520
    
    
    
    6.5965March
    
    
    6.5483
    
    
    
    6.5645
    
    
    
    6.5483
    
    
    
    6.5743April
    
    
    6.4900
    
    
    
    6.5267
    
    
    
    6.4900
    
    
    
    6.5477May
    
    
    6.4786
    
    
    
    6.4957
    
    
    
    6.4786
    
    
    
    6.5073June (through June 24, 2011)
    
    6.4737
    
    
    6.4757
    
    
    6.4628
    
    
    6.4824
 
 Source:
    
    For the period from January 1, 2006 to December 31, 2008, the exchange rates were
the noon buying rates in New York City for cable transfers as certified for customs purposes
by the Federal Reserve Bank of New York and for the period subsequent to and including
January 5, 2009, the exchange rates were the certified exchange rates as published by the
Federal Reserve Board of the United States. Effective January 1, 2009, the Federal Reserve
Bank of New York discontinued publication of foreign exchange rates certified for customs
purposes; and effective January 5, 2009, the Federal Reserve Board of the United States
reinstituted the publication of the daily exchange rate data in a weekly version of the H.10
release.(1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Risks Related to Our Business
 Any recurrence of the global financial crisis and economic downturn similar to that occurred in
2008 and early 2009 could materially and adversely affect our business, financial condition,
results of operation and prospects.
  Evaluating our business and prospects may be difficult and our past results may not be indicative
of our future performance.
   5




---



##### Table of Contents



If we cannot keep pace with market changes and produce mobile handsets with new technologies and
features in a timely and cost-efficient manner to meet our customers requirements and preferences,
the growth and success of our business will be materially adversely affected.
    
    
    the perceived advantages of our new products over existing competing products;
 
    
    our ability to attract mobile handset users who are currently using products of our
competitors;
 
    
    product cost relative to performance; and
 
    
    the level of customer service available to support new products.
   Competition in our industry is intense. Our failure to maintain or improve our market position and
respond successfully to changes in the competitive landscape may have a material adverse impact on
our business and results of operations.
   6




---



##### Table of Contents



Our sales, results of operations and reputation could be materially adversely affected if we fail
to efficiently manage our manufacturing operations without interruption, or fail to ensure that our
products meet the expectations of our distributors and our end-user customers and are delivered on
time.
  Our operations could be materially adversely affected if we fail to manage effectively our
relationships with, or lose the services of, our third-party manufacturers or other third-party
service providers.
  We rely on independent mobile handset designers in China for certain software and hardware designs
used in our production. If these or other mobile handset designers terminate their business
relationships with us, or are otherwise unable to provide us with designs suitable for our
products, or if we fail to enhance our in-house research and development activities to compensate
for our inability to obtain designs suitable for our products from these handset designers, our
business and our results of operations could be materially adversely affected.
   7




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##### Table of Contents



Our results of operations, particularly our profitability, may be materially adversely affected if
we do not successfully manage price erosion and are not able to manage costs related to our
products and operations.
  We rely primarily on our distributors for marketing our products at the provincial and local levels
and for after-sales support of our products. Because we have limited influence over our
distributors, we cannot be certain that their marketing and after-sale support of our products will
be adequate or will not harm our brand and reputation. Moreover, if we fail to timely identify
additional or replacement distributors upon the loss of one or more of our distributors, or if we
are unable to successfully manage our distribution network, or if we are unable to collect payments
from our distributors on a timely basis, our operating results may suffer.
   
    
    reduction, delay or cancellation of orders from one or more of our distributors;
 
    
    selection by one or more of our distributors of our competitors products;
 
    
    failure to timely identify additional or replacement distributors upon the loss of one or
more of our distributors; and
 
    
    failure of any of our distributors to make timely payment for our products.
    If we fail to source a sufficient quantity of high-quality components used in our products at
reasonable costs from our suppliers, our competitive position, reputation and business could
suffer. Our dependence on suppliers for certain types of components could jeopardize our production
activities and increase our cost of sales.
  8




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##### Table of Contents



We maintain inventories of raw materials, components and handsets, and our inventories may become
obsolete.
  We may require additional capital and we may not be able to obtain it on acceptable terms or at
all.
  
    
    investors perception of, and demand for, securities of China-based mobile handset
companies;
 
    
    conditions of the U.S. and other capital markets in which we may seek to raise funds;
 
    
    our future results of operations, financial condition and cash flows;
 
    
    PRC governmental regulation of foreign investment in the telecommunications industry;
    
    economic, political and other conditions in China; and
 
    
    PRC governmental policies relating to foreign currency borrowings.
  Our past brand-sharing practices may result in negative publicity and may even lead to
investigations or penalties by relevant PRC regulatory authorities, which could have a material
adverse impact on our reputation and business.
   9




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##### Table of Contents



Our operating results are difficult to predict and may fluctuate significantly from period to
period in the future.
  We must develop or otherwise acquire complex, evolving technologies to use in our business and meet
market demand. Our failure to develop or otherwise acquire these complex technologies, or to
successfully commercialize such technologies as new advanced products that meet customer demand on
a timely basis, will have a material adverse effect on our business, our ability to meet our
targets and our results of operations.
    We rely on a number of technologies licensed from third parties and the loss of some or all of
these licenses or failure to renew them on a timely basis could interrupt our production and have a
material adverse impact on our business.
  We have not applied for patents or registered copyrights for most of our intellectual property and
our failure to adequately protect our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be costly.
    10




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##### Table of Contents



We may be exposed to infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant liability to third
parties, as well as have a material adverse effect on our financial condition and results of
operations.
      
    
    pay damage awards;
 
    
    seek licenses from third parties;
 
    
    pay additional ongoing royalties, which could decrease our profit margins;
 
    
    redesign our products; or
 
    
    be restricted by injunctions,
  It may become more difficult to maintain our quality standards, and problems with product quality
or product performance could result in a decrease in customers and revenue, unexpected expenses and
loss of market share. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.
   11




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##### Table of Contents



Our sales and profitability depend on the continued growth of the mobile telecommunications
industry, especially in China, and if the mobile telecommunications industry does not grow as we
expect or grows at a slower speed than we expect, our sales and profitability may be materially
adversely affected.
    Changes in the regulatory environment for telecommunications systems and services, especially in
China, could negatively impact our business.
   Any environmental claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially adversely affect our financial
condition and results of operations.
   12




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##### Table of Contents



We do not carry any business interruption insurance or third-party liability insurance for our
manufacturing facilities.
  Labor laws in the PRC may adversely affect our results of operations.
  The dividends we receive from CECT and our global income may be subject to PRC tax under the PRC
Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.
In addition, our foreign corporate holders of ordinary shares may be subject to a PRC withholding
tax upon the dividends payable by us and upon gains realized on the sale of our ordinary shares, if
we are classified as a PRC resident enterprise.
    We depend on our key personnel, and our business and growth may be severely disrupted if we lose
their services. We may also have difficulty attracting and retaining qualified management and
research and development personnel.
    13




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##### Table of Contents



Fluctuations in exchange rates could adversely affect our business.
    We believe that we were a passive foreign investment company for U.S. federal income tax purposes
for our taxable year that ended December 31, 2010 and we may continue to be a passive foreign
investment company in the current and future taxable years, which could result in adverse U.S.
federal income tax consequences to U.S. investors.
      If we fail to maintain an effective system of internal control over financial reporting, our
ability to accurately and timely report our financial results or prevent fraud may be adversely
affected. In addition, investor confidence and the market price of our ordinary shares may be
adversely impacted if we conclude that our internal control over financial reporting is not
effective, in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
   14




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##### Table of Contents



Compliance with new rules and regulations applicable to companies publicly listed in the United
States is costly and complex and any failure by us to comply with these requirements on an ongoing
basis could negatively affect investor confidence in us and cause the market price of our ordinary
shares to decrease.
  Risks Related to our Relationship with XING
 Our parent company has substantial control over us, and one of the existing shareholders of our
parent company has substantial control over our parent company and us. The interests of our parent
company and its controlling shareholder/shareholders may not be aligned with the interests of our
other shareholders.
    As a controlled company, we are exempt from certain NYSE corporate governance requirements, which
may result in our independent directors not having as much influence as they would if we were not a
controlled company.
  15




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##### Table of Contents




    
    our compensation committee must be composed entirely of independent directors; and
 
    
    our nomination committee must be composed entirely of independent directors.
  Risks Related to Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially adversely affect our competitive position.
  
    
    the higher level of government involvement;
 
    
    the early stage of development of the market-oriented sector of the economy;
 
    
    the rapid growth rate;
 
    
    the higher level of control over foreign exchange; and
 
    
    the allocation of resources.
    Uncertainties with respect to the PRC legal system could limit the legal protections available to
you and us.
   16




---



##### Table of Contents



We rely principally on dividends and other distributions on equity paid by our operating subsidiary
to fund our cash and financing requirements, but such dividends and other distributions are subject
to restrictions under PRC law. Limitations on the ability of our operating subsidiary to pay
dividends or other distributions to us could have a material adverse effect on our ability to grow,
make investments or acquisitions, pay dividends to you, and otherwise fund and conduct our
business.
  Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
   Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiarys
ability to distribute profits to us, or otherwise materially and adversely affect us.
    17




---



##### Table of Contents



We face risks related to health epidemics and other outbreaks.
  Risks Related to Investment in our Shares
 The market price for our ordinary shares may be highly volatile.
  
    
    announcements of technological or competitive developments;
 
    
    regulatory developments in our target markets affecting us, our customers or our
competitors;
 
    
    announcements regarding intellectual property infringement litigation involving us or other
mobile handset manufacturers or the issuance of patents to us or our competitors;
 
    
    actual or anticipated fluctuations in our quarterly operating results;
 
    
    changes in financial estimates by securities research analysts;
 
    
    changes in the economic performance or market valuations of other mobile handset companies;
 
    
    additions or departures of our directors, executive officers and key research personnel;
and
 
    
    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary
shares.
  Substantial future sales or perceived sales of our ordinary shares in the public market could cause
the price of our ordinary shares to decline.
   18




---



##### Table of Contents



Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
  Certain judgments obtained against us by our shareholders may not be enforceable.
  Since we are a British Virgin Islands company, the rights of our shareholders may be more limited
than those of shareholders of a company organized in the United States.
   
 ITEM 4.
    
    INFORMATION ON THE COMPANY
 A. History and Development of the Company
    19




---



##### Table of Contents



B. Business Overview
      20




---



##### Table of Contents



PRC Mobile Handset Industry
     Growing affordability of mobile handsets
  Continuing growth increasingly driven by replacement demand
  Increasing demand for differentiated mobile handsets with more functions and personalized features
    Continual evolution of wireless network technologies
   21




---



##### Table of Contents



Highly competitive market
  Increasing presence of mobile telecommunication operators and large electronic retailers in handset
distribution
   Our Products
     22




---



##### Table of Contents



Research and Development
     Manufacturing
 Manufacturing facilities
    Raw materials and components
     23




---



##### Table of Contents



Production management
  Manufacturing process
  
 Quality control and certifications
   Distribution and Marketing
 Distribution network
     24




---



##### Table of Contents



Marketing
  Pricing
   After-Sales Services
  Intellectual Property and Proprietary Rights
     Technology Licenses and Agreements
    25




---



##### Table of Contents



Competition
      Environmental Matters
  Employees
  As of December 31,Functions
    
    2008
    
    
    2009
    
    
    2010Manufacturing and engineering
    
    
    373
    
    
    
    378
    
    
    
    89General and administration
    
    
    66
    
    
    
    47
    
    
    
    53Marketing and sales
    
    
    85
    
    
    
    42
    
    
    
    31Research and development
    
    
    168
    
    
    
    133
    
    
    
    105
      26




---



##### Table of Contents



Insurance
  Our Principal Facilities
  Regulations
  Chinese Regulatory Framework for the Telecommunications Industry
 Overview
   
    
    Formulating and enforcing industry policies, regulations and technology standards;
 
    
    Granting network access licenses for telecommunications equipment;
 
    
    Supervising the quality and the operation of telecommunications equipment connected to
public telecommunication networks; and
 
    
    Together with other relevant regulatory authorities, formulating the macro-planning of
mobile telecommunications equipment production.
   MIIT license
     27




---



##### Table of Contents



NDRC approval
     Environmental Regulations
   28




---



##### Table of Contents



C. Organizational Structure
  D. Property, Machinery and Equipment
  
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this annual report. This discussion contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should carefully consider the
information provided under Item 3. Key InformationD. Risk factors.
 Overview
   Key Factors Affecting Our Financial Performance
  
    
    Industry growth;
 
    
    Competition and market position;
 
    
    Product offerings and pricing;
 
    
    Cost management; and
 
    
    Working capital management.
 Industry growth
     29




---



##### Table of Contents



Competition and market position
   Product offerings and pricing
  Cost management
  Working capital management
  Financial Impact of Our Corporate History
  
    
    In July 2006, we made an additional capital contribution of $18.8 million (equivalent to
RMB149.6 million) into CECT. As the minority CECT shareholder did not make a corresponding
additional capital contribution, our ownership interest in CECT increased by 3.4% to 93.4%.
The transaction resulted in an extraordinary gain of RMB17.8 million.
 
    
    In June 2007, we made another capital contribution of $50 million (equivalent to RMB380.4
million) into CECT. As the minority CECT shareholder did not make a corresponding additional
capital contribution, our ownership interest in CECT increased by 3.14% to 96.6%. The
transaction resulted in an extraordinary gain of RMB28.7 million.
 
    
    In May 2008, we issued $70.0 million of senior convertible notes, or the Notes, in exchange
for a combination of 6,966,666 shares of our ordinary share that were owned by the Investors
of the Notes, valued at approximately $48,349,000, and cash of $21,651,000. See Item 12.
Description of Securities Other Than Equity Securities. For the year ended December 31, 2008,
the Notes resulted in interest expense of RMB92.9 million, gain on revaluation of the
derivative instruments embedded in the Notes of RMB144.9 million and an exchange loss of
RMB11.5 million that arose from the revaluation of the Notes. For the year ended December 31,
2009, the Notes resulted in interest expense of RMB276.1 million, loss on revaluation of the
derivative instruments embedded in the Notes of RMB87.9 million, loss on revaluation of
warrant liability of RMB7.2 million and an exchange gain of RMB0.4 million that arose from the
revaluation of the Notes. For the year ended December 31, 2010, the Notes resulted in interest
expense of RMB4.8 million ($0.7 million), gain on revaluation of the derivative instruments
embedded in the Notes of RMB19.0 million ($2.9 million), gain on revaluation of warrant
liability of RMB4.3 million ($0.7 million) and an exchange loss of RMB3.8 million ($0.6
million) that arose from the revaluation of the Notes.
 
    
    In August 2008, the holders of the Notes exercised the option to convert $8,251,000 of the
principal amount of the Notes and accrued interest thereon of $46,000 into 1,511,397 of our
ordinary shares at a conversion price of $5.49 per share, resulting in a loss on
extinguishment of the convertible debts of RMB10.6 million.
 
    
    In November and December 2009, the holders of the Notes exercised the option to require us
to redeem $30,706,000 of the principal amount of the Notes and to convert $16,073,000 of the
principal amount of the Notes and accrued interest thereon of $590,000 into 4,114,286 of our
ordinary shares at a conversion price of $4.05 per share, resulting in a gain on
extinguishment of the convertible debts of RMB159.3 million.
  30




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##### Table of Contents



Revenue
   Year ended December 31,2008
    
    
    2009
    
    
    2010Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except percentages)
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue(RMB)
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    (RMB)
    
    
    ($)Revenues:Handsets and accessories
    
    
    2,140,346
    
    
    
    99.4
    %
    
    
    1,624,270
    
    
    
    99.5
    %
    
    
    848,169
    
    
    
    128,511
    
    
    
    99.1
    %Services and others
    
    
    13,527
    
    
    
    0.6
    %
    
    
    8,642
    
    
    
    0.5
    %
    
    
    7,375
    
    
    
    1,117
    
    
    
    0.9
    %Total
    
    
    2,153,873
    
    
    
    100.0
    %
    
    
    1,632,912
    
    
    
    100.0
    %
    
    
    855,544
    
    
    
    129,628
    
    
    
    100.0
    %
    31




---



##### Table of Contents



Cost of Goods Sold and Operating Expenses
  Year ended December 31,2008
    
    
    2009
    
    
    2010Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except percentages)
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue(RMB)
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    (RMB)
    
    
    ($)Cost of goods sold
    
    
    1,287,096
    
    
    
    59.8
    %
    
    
    1,381,595
    
    
    
    84.6
    %
    
    
    904,328
    
    
    
    137,020
    
    
    
    105.7
    %Operating expenses:Selling and distribution
    
    
    146,551
    
    
    
    6.8
    %
    
    
    109,598
    
    
    
    6.7
    %
    
    
    108,578
    
    
    
    16,451
    
    
    
    12.7
    %General and administrative
    
    
    44,231
    
    
    
    2.1
    %
    
    
    73,619
    
    
    
    4.5
    %
    
    
    55,120
    
    
    
    8,352
    
    
    
    6.4
    %Research and development
    
    
    29,242
    
    
    
    1.4
    %
    
    
    36,404
    
    
    
    2.2
    %
    
    
    18,943
    
    
    
    2,870
    
    
    
    2.2
    %Amortization of other intangible
assets
    
    
    11,727
    
    
    
    0.5
    %
    
    
    4,733
    
    
    
    0.3
    %
    
    
    4,433
    
    
    
    672
    
    
    
    0.5
    %Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,814
    
    
    
    17,093
    
    
    
    13.2
    %Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    5,957
    
    
    
    0.4
    %
    
    
    
    
    
    
    
    
    
    
    
    %Impairment of other intangible assets
    
    
    26,235
    
    
    
    1.2
    %
    
    
    13,600
    
    
    
    0.8
    %
    
    
    
    
    
    
    
    
    
    
    
    %Total operating expenses
    
    
    257,986
    
    
    
    12.0
    %
    
    
    243,911
    
    
    
    14.9
    %
    
    
    299,888
    
    
    
    45,438
    
    
    
    35.0
    %
 Cost of goods sold
   Operating expenses
 Selling and distribution expenses
  General and administrative expenses
   Research and development expenses
    32




---



##### Table of Contents



Amortization of other intangible assets
  Impairment of goodwill
  Impairment of assets held for sale
  Impairment of other intangible assets
  Share-based compensation expense
    Taxation
 Taxation in the British Virgin Islands
   PRC enterprise income tax
   33




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Obligations for product warranties
   34




---



##### Table of Contents



Year ended December 31,2008
    
    
    2009
    
    
    2010(Amounts in thousands)
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Balance at beginning of year
    
    
    8,097
    
    
    
    5,029
    
    
    
    1,923
    
    
    
    291Provision
    
    
    7,485
    
    
    
    2,830
    
    
    
    2,713
    
    
    
    411Utilization
    
    
    (10,553
    )
    
    
    (5,936
    )
    
    
    (3,100
    )
    
    
    (469
    )Balance at end of year
    
    
    5,029
    
    
    
    1,923
    
    
    
    1,536
    
    
    
    233
  Collectibility of accounts receivable
  Year ended December 31,2008
    
    
    2009
    
    
    2010(Amounts in thousands)
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Balance at beginning of year
    
    
    5,429
    
    
    
    6,043
    
    
    
    18,441
    
    
    
    2,794Bad debt expense
    
    
    1,277
    
    
    
    12,938
    
    
    
    8,601
    
    
    
    1,303Bad debt recovery
    
    
    (595
    )
    
    
    (540
    )
    
    
    (110
    )
    
    
    (16
    )Bad debt write-off
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    6,043
    
    
    
    18,441
    
    
    
    26,932
    
    
    
    4,081
   Inventories
   Recoverability of the carrying amount of goodwill
    35




---



##### Table of Contents



CECT brand name
   Impairment of long-lived assets
    Depreciation and amortization of long-lived assets
   Valuation of the Embedded Derivatives
   36




---



##### Table of Contents



Recent Accounting Pronouncements
      37




---



##### Table of Contents



A. Operating Results
  Consolidated statements of operations data
    
    Year ended December 31,(Amounts in thousands)
    
    2008
    
    
    2009
    
    
    2010(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Revenues
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    855,544
    
    
    
    129,628Cost of goods sold
    
    
    (1,287,096
    )
    
    
    (1,381,595
    )
    
    
    (904,328
    )
    
    
    (137,020
    )Gross profit (loss)
    
    
    866,777
    
    
    
    251,317
    
    
    
    (48,784
    )
    
    
    (7,392
    )Operating expenses:Selling and distribution
    
    
    (146,551
    )
    
    
    (109,598
    )
    
    
    (108,578
    )
    
    
    (16,451
    )General and administrative
    
    
    (44,231
    )
    
    
    (73,619
    )
    
    
    (55,120
    )
    
    
    (8,352
    )Research and development
    
    
    (29,242
    )
    
    
    (36,404
    )
    
    
    (18,943
    )
    
    
    (2,870
    )Amortization of other intangible assets
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (4,433
    )
    
    
    (672
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (112,814
    )
    
    
    (17,093
    )Impairment of assets held for sale
    
    
    
    
    
    
    (5,957
    )
    
    
    
    
    
    
    Impairment of other intangible assets
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    608,791
    
    
    
    7,406
    
    
    
    (348,672
    )
    
    
    (52,830
    )Interest income
    
    
    24,405
    
    
    
    18,850
    
    
    
    21,978
    
    
    
    3,330Interest expense
    
    
    (165,506
    )
    
    
    (326,512
    )
    
    
    (45,159
    )
    
    
    (6,842
    )Foreign currency exchange (loss) gain, net
    
    
    (5,142
    )
    
    
    352
    
    
    
    (3,815
    )
    
    
    (578
    )Gain (loss) on remeasurement of embedded derivatives
    
    
    144,939
    
    
    
    (87,935
    )
    
    
    19,006
    
    
    
    2,880(Loss) gain on remeasurement of warrant liability
    
    
    
    
    
    
    (7,219
    )
    
    
    4,343
    
    
    
    658(Loss) gain on extinguishment of convertible debts
    
    
    (10,634
    )
    
    
    159,326
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    (2,803
    )
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    2,269
    
    
    
    
    
    
    
    
    
    
    
    Other income (loss), net
    
    
    (3,700
    )
    
    
    178
    
    
    
    (1,448
    )
    
    
    (219
    )Income (loss) before income tax expense and extraordinary items
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (353,767
    )
    
    
    (53,601
    )Income tax expense
    
    
    (155,717
    )
    
    
    (11,632
    )
    
    
    (17,456
    )
    
    
    (2,645
    )Net income (loss)
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (371,223
    )
    
    
    (56,246
    )Net (income) loss attributable to noncontrolling interests
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    8,381
    
    
    
    1,270Net income (loss) attributable to holders of ordinary shares
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (362,842
    )
    
    
    (54,976
    )
 Period-to-Period Comparisons of Historical Financial Data
 Revenue
 2010 compared to 2009
   2009 compared to 2008
   38




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##### Table of Contents



Cost of goods sold
 2010 compared to 2009
  2009 compared to 2008
  Gross profit (loss) and gross margin
 2010 compared to 2009
  2009 compared to 2008
  Operating expenses
 2010 compared to 2009
  2009 compared to 2008
  Selling and distribution expenses
 2010 compared to 2009
    39




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##### Table of Contents



2009 compared to 2008
   General and administrative expenses
 2010 compared to 2009
   2009 compared to 2008
   Research and development expenses
 2010 compared to 2009
   2009 compared to 2008
   Amortization of other intangible assets
  Impairment of goodwill
  Impairment of assets held for sale
   40




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##### Table of Contents



Impairment of other intangible assets
  Operating income (loss)
  Interest income, interest expenses, foreign currency exchange (loss) gain, net, and other income (loss), net
 2010 compared to 2009
  2009 compared to 2008
  Gain (loss) on remeasurement of embedded derivatives
  (Loss) gain on remeasurement of warrant liability
  (Loss) gain on extinguishment of convertible debts
   Impairment of investment at cost
  Gain on disposal of subsidiaries
   41




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##### Table of Contents



Income tax expense
  Net (income) loss attributable to noncontrolling interests
  Net income (loss) attributable to holders of ordinary shares
  Inflation
  B. Liquidity and Capital Resources
 Liquidity
     Year ended December 31,(Amounts in thousands)
    
    2008
    
    
    2009
    
    
    2010(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Net cash provided by (used in) operating activities
    
    
    110,106
    
    
    
    602,369
    
    
    
    (268,049
    )
    
    
    (40,613
    )Net cash (used in) provided by investing activities
    
    
    (57,663
    )
    
    
    (58,529
    )
    
    
    331,026
    
    
    
    50,155Net cash provided by (used in) financing activities
    
    
    143,738
    
    
    
    (321,981
    )
    
    
    (436,582
    )
    
    
    (66,149
    )
 Net cash provided by (used in) operating activities
    42




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##### Table of Contents



Net cash (used in) provided by investing activities
  Net cash provided by (used in) financing activities
  Capital resources
  Capital expenditures
  C. Research, Development, Patents and Licenses, Etc.
   43




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##### Table of Contents



D. Trend Information
  E. Off-Balance Sheet Arrangements
   F. Tabular Disclosure of Contractual Obligations
  Due by PeriodLess than
    
    
    1 to
    
    
    3 to
    
    
    More thanTotal
    
    
    1 year
    
    
    3 years
    
    
    5 years
    
    
    5 years(amounts in thousands of Renminbi)Purchase obligations relating to raw materials and components
    
    
    17,828
    
    
    
    17,828
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    5,178
    
    
    
    2,376
    
    
    
    2,802
    
    
    
    
    
    
    
    Total
    
    
    23,006
    
    
    
    20,204
    
    
    
    2,802
    
    
    
    
    
    
    
    
 G. Safe Harbor
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  Name
    
    Age
    
    Position/TitleZhi Yang Wu
    
    
    37
    
    
    Chairman, Director and Chief Executive OfficerRui Lin Wu
    
    
    58
    
    
    Vice Chairman and DirectorZacky Sun
    
    
    48
    
    
    Independent DirectorXin Zhang
    
    
    46
    
    
    Independent DirectorPei De Lou
    
    
    49
    
    
    Independent DirectorDavid Li
    
    
    41
    
    
    General Manager, Research and DevelopmentKok Seong Tan
    
    
    39
    
    
    Chief Financial Officer and Principal Accounting Officer
 Directors
     44




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##### Table of Contents



Executive officers
   B. Compensation
 Cash Compensation of Directors and Executive Officers
  Equity Incentive Plan
  Administration
   45




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##### Table of Contents



Options
   Change of control
  Amendment and termination of plan and awards
   
 UnvestedrestrictedName
    
    shares
    
    
    Grant date
    
    
    Vesting dateZhi Yang Wu
    
    
    242,981
    
    
    December 4, 2009
    
    
    April 1, 2012David Li
    
    
    23,326
    
    
    December 4, 2009
    
    
    April 1, 2012Others (1)
    
    
    61,196
    
    
    December 4, 2009
    
    
    April 1, 2012
 
 (1)
    
    Consists of employees that are not our directors or executive officers. Employment Agreements
   46




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##### Table of Contents



C. Board Practices
 Board Composition
   
    
    the establishment of a compensation committee composed entirely of independent directors;
and
 
    
    the establishment of a nomination committee composed entirely of independent directors.
 Board Committees
  Audit committee
  
    
    the appointment, re-appointment, evaluation, compensation, oversight and termination of the
work of our independent auditor (including resolution of disagreements between management and
the independent auditor regarding financial reporting);
 
    
    ensuring that it receives from our independent auditor a formal written statement attesting
to the auditors independence and describing all relationships between the independent auditor
and us;
 
    
    pre-approving any audit and non-audit services, including tax services, to be provided by
our independent auditor in accordance with NYSE rules;
 
    
    reviewing and discussing our annual audited financial statements and quarterly financial
statements with management and our independent auditor;
 
    
    reviewing and discussing with our independent auditor all critical accounting policies and
practices to be used by us in preparing our financial statements, all alternative treatments
of financial information within U.S. GAAP, and other material communications between our
independent auditor and management;
 
    
    reviewing and discussing our policies with respect to risk assessment and risk management;
 
    
    reviewing and discussing, with management and counsel, any legal matters that may have a
material impact on us and any material reports or inquiries from regulatory or governmental
agencies;
 
    
    establishing procedures for the receipt, retention and treatment of complaints regarding
accounting, internal accounting controls, auditing matters or potential violations of law, and
the confidential, anonymous submission by our employees of concerns regarding questionable
accounting or auditing matters or potential violations of law;
 
    
    annually reviewing the independent auditors report describing the auditing firms internal
quality control procedures, any material issues raised by the most recent internal quality
control review, or peer review of the independent auditors and all relationships between the
independent auditors and us;
 
    
    setting hiring policies for employees or former employees of the independent auditors;
 
    
    reviewing reports prepared by management or the independent auditors relating to
significant financial reporting issues and judgments;
 
    
    reviewing major issues as to the adequacy of our internal controls and any special audit
steps adopted in light of material control deficiencies;
 
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
  47




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##### Table of Contents




    
    meeting separately and periodically with management, the internal auditors and the
independent auditors and reporting regularly to the full board of directors; and
 
    
    reviewing and approving policies and procedures with respect to proposed transactions
between us and our related parties, and approving in advance all proposed related-party
transactions as defined in Item 404 of Regulation S-K promulgated by the SEC.
 Nominating and corporate governance committee
   
    
    identifying and recommending to the board nominees for election or re-election to the
board, or for appointment to fill any vacancy;
 
    
    reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and availability of service to us;
 
    
    reviewing the continued board membership of a director upon a significant change in such
directors principal occupation;
 
    
    identifying and recommending to the board the names of directors to serve as members of the
audit committee and the compensation committee, as well as the nominating and corporate
governance committee itself;
 
    
    advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate governance
and on any corrective action to be taken;
 
    
    establishing criteria and processes for, and leading the board and each committee of the
board in, its annual performance self-evaluation;
 
    
    monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance; and
 
    
    ensuring that the composition of the board facilitates our ability to maintain our status
as a foreign private issuer.
 Compensation committee
   
    
    approving and overseeing the total compensation package for our executives;
 
    
    reviewing and making recommendations to the board with respect to the compensation of our
directors and officers;
 
    
    reviewing and approving corporate goals and objectives relevant to the compensation of our
chief executive officer, evaluating the performance of our chief executive officer in light of
those goals and objectives, and setting the compensation, including any bonus compensation, of
our chief executive officer based on this evaluation;
 
    
    reviewing the results of, and procedures for, the evaluation of the performance of other
executive officers, including any bonus compensation;
 
    
    reviewing periodically and making recommendations to the board regarding any long-term
incentive compensation or equity plans, programs or similar arrangements, administering these
plans and reviewing and determining share-based compensation for our directors and officers;
 
    
    reviewing and making recommendations to the board regarding all new employment, consulting,
retirement and severance agreements and arrangements proposed for our executives; and
 
    
    selecting peer groups of companies to be used for purposes of determining competitive
compensation packages.
  48




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##### Table of Contents



Duties of Directors
   
    
    convening shareholders annual general meetings and reporting its work to shareholders at
such meetings;
 
    
    declaring dividends and distributions;
 
    
    appointing officers and determining the term of office of the officers;
 
    
    exercising the borrowing powers of our company and mortgaging the property of our company;
and
 
    
    approving the transfer of shares in our company, including the registering of such shares
in our share register.
 Interested Transactions
  Remuneration and Borrowing
  Qualification
  Terms of Directors and Executive Officers
  Limitation on Liability and Indemnification Matters
   D. Employees
   49




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##### Table of Contents



E. Share Ownership
  
    
    each of our current directors and executive officers; and
 
    
    each person known to us to own beneficially more than 5.0% of our shares.
 Shares beneficially owned(1)(2)Number
    
    
    PercentageDirectors and executive officers:Zhi Yang Wu(3)
    
    
    33,191,361
    
    
    
    57.3
    %Rui Lin Wu(4)
    
    
    32,200,000
    
    
    
    55.6
    %All Directors and Executive Officers as a Group
    
    
    33,191,361
    
    
    
    57.3
    %Principal shareholder:Qiao Xing Universal Resources, Inc.(5)
    
    
    32,200,000
    
    
    
    55.6
    %
 
 (1)
    
    Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the ordinary shares.(2)
    
    The percentage of beneficial ownership of each listed person is based on 57,893,248 ordinary
shares outstanding as of June 24, 2011 and any ordinary shares underlying share options
exercisable by such person within 60 days of the date of this annual report but excludes
ordinary shares underlying options held by any other person.(3)
    
    Includes 991,361 ordinary shares held by Mr. Zhi Yang Wu and 32,200,000 ordinary shares held
by Xing. Excluding equity interest owned by his brother, Mr. Zhi Jian Wu Li, and his father,
Mr. Rui Ling Wu, Mr. Zhi Yang Wu does not own any equity interest in Xing. Mr. Zhi Yang Wu
disclaims ownership of the ordinary shares held by Xing except to the extent of his pecuniary
interest therein.(4)
    
    Includes 32,200,000 ordinary shares held by Xing. Mr. Rui Lin Wu is the chairman and chief
executive officer of Xing. Mr. Zhi Jian Wu Li, brother of our chairman and son of our vice
chairman, owned an aggregate of 7.1% equity interest in Xing through Qiao Xing Trust and Wu
Holdings Ltd. as of June24, 2011. Mr. Rui Lin Wu also owned 41.5% equity interest in Xing as
of June24, 2011. Mr. Rui Lin Wu disclaims ownership of the ordinary shares held by Xing
except to the extent of his pecuniary interest therein.(5)
    
    Xing is a British Virgin Islands company currently listed on the Nasdaq Global Market. Mr.
Zhi Jian Wu Li, brother of our chairman and son of our vice chairman, owned an aggregate of
7.1% equity interest in Xing through Qiao Xing Trust and Wu Holdings Ltd. as of June 24, 2011.
Mr. Rui Lin Wu also owned a 41.5% equity interest in Xing as of June24, 2011. The address of
Xing is Qiao Xing Science Technological & Industrial Zone, Tangquan, Huizhou, Guangdong,
516023, Peoples Republic of China.   
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  B. Related Party Transactions
 Equity Incentive Plan
  Service Transactions
  Convertible Notes Held by Xing
   50




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##### Table of Contents



Cash Advances To and From Related Parties
    Guarantees and Pledges
  Non-Competition Arrangement
  C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
  Dividend Policy
   51




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##### Table of Contents



B. Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 A. Offering and Listing Details
  Trading priceHigh
    
    
    Low($)
    
    
    ($)Annual highs and lows:Year ended December 31, 2007 (from May 3, 2007)
    
    
    15.48
    
    
    
    6.76Year ended December 31, 2008
    
    
    8.89
    
    
    
    1.56Year ended December 31, 2009
    
    
    5.24
    
    
    
    1.32Year ended December 31, 2010
    
    
    4.58
    
    
    
    2.05Quarterly highs and lows:First quarter 2009
    
    
    2.95
    
    
    
    1.32Second quarter 2009
    
    
    4.33
    
    
    
    2.00Third quarter 2009
    
    
    3.58
    
    
    
    2.52Fourth quarter 2009
    
    
    5.24
    
    
    
    2.75First quarter 2010
    
    
    3.91
    
    
    
    2.05Second quarter 2010
    
    
    3.14
    
    
    
    2.10Third quarter 2010
    
    
    3.61
    
    
    
    2.30Fourth quarter 2010
    
    
    4.58
    
    
    
    3.29First quarter 2011
    
    
    5.96
    
    
    
    3.60Monthly highs and lows:December 2010
    
    
    4.58
    
    
    
    3.30January 2011
    
    
    5.96
    
    
    
    4.10February 2011
    
    
    5.06
    
    
    
    4.31March 2011
    
    
    4.73
    
    
    
    3.60April 2011
    
    
    4.63
    
    
    
    2.75May 2011
    
    
    2.83
    
    
    
    2.52June 2011 (through June 24, 2011)
    
    3.18
    
    
    1.80
 B. Plan of Distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
   52




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##### Table of Contents



ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Association
  C. Material Contracts
  D. Exchange Controls
   E. Taxation
 British Virgin Islands Taxation
   U.S. Federal Income Taxation
   
    
    banks;
 
    
    certain financial institutions;
 
    
    insurance companies;
 
    
    broker dealers;
 
    
    U.S. expatriates;
 
    
    traders that elect to mark-to-market;
 
    
    tax-exempt entities;
 
    
    persons that have a functional currency other than the U.S. dollar;
  53




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##### Table of Contents




    
    persons liable for alternative minimum tax;
 
    
    persons holding an ordinary share as part of a straddle, hedging, conversion or integrated
transaction; or
 
    
    persons that actually or constructively own 10% or more of our voting stock.
 PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL INCOME TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.
  
    
    an individual citizen or resident of the United States as determined for U.S. federal
income tax purposes;
 
    
    a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any state thereof or the District of
Columbia;
 
    
    an estate whose income is subject to U.S. federal income taxation regardless of its source;
or
 
    
    a trust that (1) is subject to the primary supervision of a court within the United States
and one or more U.S. persons have the authority to control all substantial decisions of the
trust or (2) was in existence on August 20, 1996, was treated as a U.S. person under the
Internal Revenue Code on the previous day and has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
  Taxation of dividends and other distributions on the ordinary shares
      Taxation of disposition of ordinary shares
    54




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##### Table of Contents



Passive foreign investment company
 .
  
    
    at least 75% of its gross income is passive income, or
 
    
    at least 50% of the average quarterly value of its assets during a taxable year is derived
from assets that produce, or that are held for the production of, passive income.
    
    
    the excess distribution or gain will be allocated ratably on a daily basis over your
holding period for the ordinary shares,
 
    
    the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we became a PFIC, will be treated as ordinary income, and
 
    
    the amount allocated to each other year will be subject to the highest tax rate in effect
for that year and the interest charge applicable to underpayments of tax will be imposed on
the resulting tax attributable to each such year.
       55




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##### Table of Contents



Information reporting and backup withholding
    F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
    I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Exchange Risk
     56




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##### Table of Contents



Interest Rate Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    the Notes are unsecured and mature on May 15, 2011;
 
    
    the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008;
 
    
    the Notes are convertible at the holders option into our ordinary shares at an initial
conversion price of $7.43 per ordinary share (which represents a 10% premium to the arithmetic
average of the daily volume-weighted average price (VWAP) of our ordinary shares during the
five trading day period ending on the day immediately prior to the date of execution of the
SPA), subject to adjustments as provided for in the Notes;
 
    
    the conversion price for our ordinary shares is subject to reset if the average of the
daily VWAP of our ordinary shares for the five consecutive trading days ending on each
three-month anniversary of the issuance date of the Notes until maturity (each a Reset Date)
is less than $6.76. In that event, the conversion price is reset to a price equal to 92.5% of
the arithmetic average of the daily VWAP of our common stock for the five trading days ending
on the applicable Reset Date. In no event will the conversion price be reset to a price less
than $4.05 per share. The conversion price of the Notes was reset to $4.05 per share on
November 15, 2008;
 
    
    the Notes cannot be converted if, after giving effect to such conversion, the holders of
the Notes (together with their affiliates) would beneficially own in excess of 9.99% of our
ordinary shares outstanding immediately after giving effect to the conversion;
 
    
    the Notes require an automatic re-pricing of the conversion price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the conversion price;
 
    
    the holders of the Notes can require us to redeem the Notes at any time on or after the 18
month anniversary of the issuance date of the Notes in an amount equal to the sum of (a) the
outstanding principal of the Notes, and (b) the accrued and unpaid interest thereon;
 
    
    in the event of a default, change of control and certain other fundamental transactions,
the holders of the Notes have the right to require us to redeem all or any portion of the
Notes at a price equal to the greater of (i) the amount to be redeemed multiplied by a
redemption premium of 125% and (ii) the amount to be redeemed multiplied by the quotient
determined by dividing the closing bid price of our ordinary shares on the date immediately
preceding such event by the conversion price of the Notes;
 
    
    all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable U.S.
dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided by the
exchange rate of one U.S. dollar to Renminbi on the date such payment is due; and
 
    
    we are required under the terms of a Registration Rights Agreement entered into
concurrently with the SPA to file with the SEC a registration statement to register the
ordinary shares issuable upon the conversion of the Notes and the exercise of the Warrants to
permit the resale of such ordinary shares to the public. The registration statement was filed
by the Company on June 27, 2008 and was declared effective by the SEC on July 11, 2008.
  57




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##### Table of Contents




    
    each Warrant is exercisable to purchase one ordinary share;
 
    
    the initial exercise price of each Warrant is $8.91 per share, subject to adjustments as
provided for in the Warrant;
 
    
    the Warrants are exercisable at any time during a period of five years from May 15, 2008,
the date of issuance;
 
    
    the Warrants contain a cashless exercise feature if the registration statement covering
the shares underlying the Warrants is not available for the resale of the ordinary shares upon
the exercise of the Warrants;
 
    
    the Warrants contain certain limitations on the exercise thereof in the event that the
holder would beneficially own in excess of 9.99% of our ordinary shares outstanding
immediately after giving effect to such exercise; and
 
    
    the Warrants require an automatic re-pricing of the exercise price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the exercise price of the Warrants.
      58




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##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Year ended December 31,2009(1)
    
    
    2010(2)(Amounts in thousands)
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Audit fees
    
    
    1,288
    
    
    
    990
    
    
    
    150Audit-related fees
    
    
    
    
    
    
    
    
    
    
    
  59




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##### Table of Contents



(1)
    
    The audit fees billed by KPMG, our prior independent registered public accounting firm, in
connection with the re-issuance of their audit report on our financial statements for the year
ended December 31, 2007 was $39,000. The audit fees billed by Crowe Horwath LLP, our
independent registered public accounting firm, in connection with the audit of our financial
statements for the year ended December 31, 2009 was $150,000.(2)
    
    The audit fees billed by Crowe Horwath LLP, our independent registered public accounting
firm, in connection with the audit of our financial statements for the year ended December 31,
2010 was $150,000.  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   
 ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  
 ITEM 16G. CORPORATE GOVERNANCE
  
    
    As a controlled company as defined under Section 303A of the NYSE Listed Company Manual,
we are exempt from certain corporate governance requirements. Relying on this exemption, Mr.
Zhi Yang Wu, who does not satisfy the independence requirements of Section 303A of the NYSE
Listed Company Manual, serves as a member of our nominating and corporate governance committee
and compensation committee;
 
    
    We do not have formal corporate governance guidelines similar to those required for U.S.
domestic companies; and
 
    
    Our non-management directors do not schedule regular executive sessions similar to those
followed by U.S. domestic companies.
  60




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##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 ExhibitNumber
    
    Description1.1
    
    Amended and Restated Memorandum of Association(1)1.2
    
    Second Amended and Restated Memorandum and Articles of Association of the Registrant(1)4.1
    
    Equity Incentive Plan(1)4.2
    
    Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant(1)4.3
    
    Non-Competition Agreement(1)4.4
    
    Securities Purchase Agreement, dated May 15, 2008(2)4.5
    
    Registration Rights Agreement, dated May 15, 2008(2)8.1
    
    Subsidiaries of the Registrant12.1
    
    Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 200212.2
    
    Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    Certification of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    
    Consent of Crowe Horwath LLP, dated June 30, 2011
 
 (1)
    
    Incorporated by reference from the Registrants F-1 registration statement (File No.
333-142162), as amended, first filed with the SEC on April 17, 2007.(2)
    
    Incorporated by reference from the Registrants 6-K furnished on May 19, 2008.  61




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##### Table of Contents



SIGNATURE
  QIAO XING MOBILE COMMUNICATION CO., LTD.Date: June 30, 2011
    By:
    /s/ Zhi Yang WuName:
    Zhi Yang WuTitle:
    Chairman  62




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and 2010
    
    
    F-3Consolidated Statements of Operations for the Years Ended December 31, 2008, 2009 and 2010
    
    
    F-4Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2008, 2009 and 2010
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010
    
    
    F-6Consolidated Statements of Equity for the Years Ended December 31, 2008, 2009 and 2010
    
    
    F-8Notes to the Consolidated Financial Statements
    
    
    F-9
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
  F-2




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (amounts in thousands, except share and per share data
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$AssetsCurrent assets:Cash
    
    
    3,129,070
    
    
    
    2,755,505
    
    
    
    417,501Restricted cash
    
    
    251,720
    
    
    
    37,758
    
    
    
    5,721Accounts receivable, net
    
    
    114,689
    
    
    
    239,390
    
    
    
    36,271Inventories
    
    
    97,146
    
    
    
    59,969
    
    
    
    9,086Prepayments to suppliers
    
    
    181,550
    
    
    
    86,302
    
    
    
    13,076Prepaid expenses and other current assets
    
    
    36,007
    
    
    
    33,683
    
    
    
    5,103Assets held for sale
    
    
    163,000
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    16,249
    
    
    
    
    
    
    
    Total current assets
    
    
    3,989,431
    
    
    
    3,212,607
    
    
    
    486,758Property, machinery and equipment, net
    
    
    23,708
    
    
    
    20,830
    
    
    
    3,156Equity investment, at cost
    
    
    5,000
    
    
    
    
    
    
    
    Goodwill
    
    
    112,814
    
    
    
    
    
    
    
    Other intangible assets, net
    
    
    4,433
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    1,207
    
    
    
    
    
    
    
    Total assets
    
    
    4,136,593
    
    
    
    3,233,437
    
    
    
    489,914Liabilities and EquityCurrent liabilities:Short-term borrowings
    
    
    884,708
    
    
    
    446,000
    
    
    
    67,576Accounts payable
    
    
    60,751
    
    
    
    39,737
    
    
    
    6,021Prepayments from customers
    
    
    16,370
    
    
    
    3,902
    
    
    
    591Accrued liabilities
    
    
    34,590
    
    
    
    19,178
    
    
    
    2,906Amounts due to related parties
    
    
    5,568
    
    
    
    8,136
    
    
    
    1,233Other payables and current liabilities
    
    
    56,933
    
    
    
    8,078
    
    
    
    1,223Embedded derivative liability
    
    
    39,978
    
    
    
    20,113
    
    
    
    3,047Convertible notes
    
    
    112,162
    
    
    
    112,162
    
    
    
    16,994Total current liabilities
    
    
    1,211,060
    
    
    
    657,306
    
    
    
    99,591Warrant liability
    
    
    22,637
    
    
    
    17,650
    
    
    
    2,674Total liabilities
    
    
    1,233,697
    
    
    
    674,956
    
    
    
    102,265Commitments and contingenciesEquity:Ordinary shares:Par value: noneAuthorized: UnlimitedIssued and outstanding: 52,684,901 and
53,016,292 shares, respectively
    
    
    1,191,071
    
    
    
    1,191,071
    
    
    
    180,465Additional paid-in capital
    
    
    848,320
    
    
    
    870,212
    
    
    
    131,850Retained earnings
    
    
    800,597
    
    
    
    437,755
    
    
    
    66,327Accumulated other comprehensive loss
    
    
    (29,537
    )
    
    
    (24,621
    )
    
    
    (3,730
    )Total shareholders equity
    
    
    2,810,451
    
    
    
    2,474,417
    
    
    
    374,912Noncontrolling interests
    
    
    92,445
    
    
    
    84,064
    
    
    
    12,737Total equity
    
    
    2,902,896
    
    
    
    2,558,481
    
    
    
    387,649Total liabilities and equity
    
    
    4,136,593
    
    
    
    3,233,437
    
    
    
    489,914
   F-3




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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (amounts in thousands, except share and per share data)
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Revenues:External parties
    
    
    2,147,300
    
    
    
    1,631,541
    
    
    
    855,544
    
    
    
    129,628Related parties
    
    
    6,573
    
    
    
    1,371
    
    
    
    
    
    
    
    Total revenues
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    855,544
    
    
    
    129,628Cost of goods sold
    
    
    (1,287,096
    )
    
    
    (1,381,595
    )
    
    
    (904,328
    )
    
    
    (137,020
    )Gross profit (loss)
    
    
    866,777
    
    
    
    251,317
    
    
    
    (48,784
    )
    
    
    (7,392
    )Operating expenses:Selling and distribution
    
    
    (146,551
    )
    
    
    (109,598
    )
    
    
    (108,578
    )
    
    
    (16,451
    )General and administrative
    
    
    (44,231
    )
    
    
    (73,619
    )
    
    
    (55,120
    )
    
    
    (8,352
    )Research and development
    
    
    (29,242
    )
    
    
    (36,404
    )
    
    
    (18,943
    )
    
    
    (2,870
    )Amortization of other intangible assets
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (4,433
    )
    
    
    (672
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (112,814
    )
    
    
    (17,093
    )Impairment of assets held for sale
    
    
    
    
    
    
    (5,957
    )
    
    
    
    
    
    
    Impairment of other intangible assets
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    608,791
    
    
    
    7,406
    
    
    
    (348,672
    )
    
    
    (52,830
    )Other income (expense):Interest income
    
    
    24,405
    
    
    
    18,850
    
    
    
    21,978
    
    
    
    3,330Interest expense
    
    
    (165,506
    )
    
    
    (326,512
    )
    
    
    (45,159
    )
    
    
    (6,842
    )Foreign currency exchange gain (loss), net
    
    
    (5,142
    )
    
    
    352
    
    
    
    (3,815
    )
    
    
    (578
    )Gain (loss) on remeasurement of embedded derivatives
    
    
    144,939
    
    
    
    (87,935
    )
    
    
    19,006
    
    
    
    2,880(Loss) gain on remeasurement of warrant liability
    
    
    
    
    
    
    (7,219
    )
    
    
    4,343
    
    
    
    658(Loss) gain on extinguishment of convertible debts
    
    
    (10,634
    )
    
    
    159,326
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    (2,803
    )
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    2,269
    
    
    
    
    
    
    
    
    
    
    
    Other income (loss), net
    
    
    (3,700
    )
    
    
    178
    
    
    
    (1,448
    )
    
    
    (219
    )Income (loss) before income tax expense
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (353,767
    )
    
    
    (53,601
    )Income tax expense
    
    
    (155,717
    )
    
    
    (11,632
    )
    
    
    (17,456
    )
    
    
    (2,645
    )Net income (loss)
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (371,223
    )
    
    
    (56,246
    )Net (income) loss attributable to noncontrolling interests
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    8,381
    
    
    
    1,270Net income (loss) attributable to holders of ordinary
shares
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (362,842
    )
    
    
    (54,976
    )Earnings (loss) per ordinary share:Basic
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )Diluted
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )
   F-4




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (amounts in thousands)
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net income (loss)
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (371,223
    )
    
    
    (56,246
    )Foreign currency translation adjustments
    
    
    (7,771
    )
    
    
    (126
    )
    
    
    4,916
    
    
    
    745Comprehensive income (loss)
    
    
    431,934
    
    
    
    (250,115
    )
    
    
    (366,307
    )
    
    
    (55,501
    )Comprehensive income attributable to
noncontrolling interests
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    8,381
    
    
    
    1,270Comprehensive income (loss)
attributable to holders of ordinary shares
    
    
    416,033
    
    
    
    (250,495
    )
    
    
    (357,926
    )
    
    
    (54,231
    )
   F-5




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (amounts in thousands)
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (371,223
    )
    
    
    (56,246
    )Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:Depreciation
    
    
    11,957
    
    
    
    10,607
    
    
    
    4,931
    
    
    
    747Amortization of land use rights
    
    
    802
    
    
    
    803
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    11,727
    
    
    
    4,733
    
    
    
    4,433
    
    
    
    672Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    112,814
    
    
    
    17,093Impairment of assets held for sale
    
    
    
    
    
    
    5,957
    
    
    
    
    
    
    
    Impairment of other intangible assets
    
    
    26,235
    
    
    
    13,600
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    2,803
    
    
    
    
    
    
    
    Bad debt expense
    
    
    682
    
    
    
    12,938
    
    
    
    8,491
    
    
    
    1,287Inventory write-downs
    
    
    6,650
    
    
    
    18,016
    
    
    
    20,012
    
    
    
    3,032Inventory write-off
    
    
    
    
    
    
    
    
    
    
    32,350
    
    
    
    4,902Foreign currency exchange (gain) loss, net
    
    
    5,142
    
    
    
    (352
    )
    
    
    3,815
    
    
    
    578(Gain) loss on disposal of property, machinery and equipment
    
    
    (15
    )
    
    
    162
    
    
    
    (117
    )
    
    
    (18
    )Accretion of discount on convertible notes
    
    
    70,512
    
    
    
    225,634
    
    
    
    
    
    
    
    Amortization of deferred debt issuance costs
    
    
    10,851
    
    
    
    34,723
    
    
    
    
    
    
    
    (Gain) loss on remeasurement of embedded derivatives
    
    
    (144,939
    )
    
    
    87,935
    
    
    
    (19,006
    )
    
    
    (2,880
    )(Gain) loss on remeasurement of warrant liability
    
    
    
    
    
    
    7,219
    
    
    
    (4,343
    )
    
    
    (658
    )Loss (gain) on extinguishment of convertible debts
    
    
    10,634
    
    
    
    (159,326
    )
    
    
    
    
    
    
    Accrued interest settled through the issuance of ordinary
shares on the conversion of convertible notes
    
    
    316
    
    
    
    4,028
    
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    (2,269
    )
    
    
    
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (6,550
    )
    
    
    (10,782
    )
    
    
    17,456
    
    
    
    2,645Share-based compensation
    
    
    14,668
    
    
    
    34,922
    
    
    
    21,892
    
    
    
    3,317Changes in operating assets and
liabilities:Accounts receivable
    
    
    (53,844
    )
    
    
    334,655
    
    
    
    (133,192
    )
    
    
    (20,181
    )Bills receivable
    
    
    (43,516
    )
    
    
    43,516
    
    
    
    
    
    
    
    Inventories
    
    
    (15,527
    )
    
    
    68,007
    
    
    
    (15,185
    )
    
    
    (2,301
    )Prepayments to suppliers
    
    
    (195,018
    )
    
    
    189,820
    
    
    
    95,248
    
    
    
    14,432Prepaid expenses and other current assets
    
    
    (13,684
    )
    
    
    (6,603
    )
    
    
    2,324
    
    
    
    352Accounts payable
    
    
    (50,844
    )
    
    
    8,704
    
    
    
    (21,014
    )
    
    
    (3,184
    )Prepayments from customers
    
    
    37,966
    
    
    
    (26,181
    )
    
    
    (12,468
    )
    
    
    (1,889
    )Accrued liabilities
    
    
    9,213
    
    
    
    (15,424
    )
    
    
    (15,412
    )
    
    
    (2,335
    )Other payables and current liabilities
    
    
    (20,488
    )
    
    
    706
    
    
    
    145
    
    
    
    22Income taxes payable
    
    
    (260
    )
    
    
    (38,462
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    110,106
    
    
    
    602,369
    
    
    
    (268,049
    )
    
    
    (40,613
    )
  F-6




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from investing activities:Purchase of property, machinery and equipment
    
    
    (14,895
    )
    
    
    (912
    )
    
    
    (2,079
    )
    
    
    (315
    )Restricted cash related to new bank borrowings
    
    
    (108,858
    )
    
    
    (206,891
    )
    
    
    (176,739
    )
    
    
    (26,779
    )Release of restricted cash upon repayment of bank borrowings
    
    
    66,943
    
    
    
    91,470
    
    
    
    390,701
    
    
    
    59,197Net cash (outflow) inflow on disposal of subsidiaries
    
    
    (1,162
    )
    
    
    8,764
    
    
    
    
    
    
    
    Proceeds from disposal of equity investment held at cost
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    758Proceeds from disposal of assets held for sale
    
    
    
    
    
    
    49,000
    
    
    
    114,000
    
    
    
    17,273Proceeds from disposal of property, machinery and equipment
    
    
    309
    
    
    
    40
    
    
    
    143
    
    
    
    21Net cash (used in) provided by investing activities
    
    
    (57,663
    )
    
    
    (58,529
    )
    
    
    331,026
    
    
    
    50,155Cash flows from financing activities:Net proceeds from issuance of convertible notes
    
    
    128,887
    
    
    
    
    
    
    
    
    
    
    
    Redemption of convertible notes
    
    
    
    
    
    
    (209,700
    )
    
    
    Proceeds from short-term borrowings
    
    
    1,650,123
    
    
    
    1,418,588
    
    
    
    1,318,422
    
    
    
    199,761Repayments of short-term borrowings
    
    
    (1,643,314
    )
    
    
    (1,517,830
    )
    
    
    (1,757,130
    )
    
    
    (266,232
    )Proceeds from borrowings from Xing or from related parties on behalf
of Xing
    
    
    57,681
    
    
    
    43,871
    
    
    
    2,126
    
    
    
    322Repayments of borrowings from Xing or from related parties on behalf
of Xing
    
    
    (49,639
    )
    
    
    (56,910
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    143,738
    
    
    
    (321,981
    )
    
    
    (436,582
    )
    
    
    (66,149
    )Effect of foreign exchange rate changes
    
    
    (19,015
    )
    
    
    63
    
    
    
    40
    
    
    
    6Net increase (decrease) in cash
    
    
    177,166
    
    
    
    221,922
    
    
    
    (373,565
    )
    
    
    (56,601
    )Cash, beginning of year
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    3,129,070
    
    
    
    474,102Cash, end of year
    
    
    2,907,148
    
    
    
    3,129,070
    
    
    
    2,755,505
    
    
    
    417,501Supplemental disclosure of cash flow
information:Interest paid
    
    
    77,622
    
    
    
    71,672
    
    
    
    40,673
    
    
    
    6,163Income tax paid
    
    
    162,527
    
    
    
    90,031
    
    
    
    
    
    
    
    Warrant issuance costs in the form of share-based payment
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    Convertible note issuance costs in the form of share-based payment
    
    
    31,451
    
    
    
    
    
    
    
    
    
    
    
    Ordinary shares repurchased through the issuance of convertible notes
    
    
    338,165
    
    
    
    
    
    
    
    
    
    
    
    Ordinary shares issued on partial conversion of convertible notes
    
    
    55,054
    
    
    
    126,650
    
    
    
    
    
    
    
    
    F-7




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF EQUITY
 (amounts in thousands, except share data)
 AccumulatedOrdinary shares
    
    
    Additional
    
    
    
    
    
    
    other
    
    
    TotalNumber
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    shareholders
    
    
    Noncontrolling
    
    
    Totalof shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    equity
    
    
    interests
    
    
    equityRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBBalance as of January 1, 2008
    
    
    52,500,000
    
    
    
    1,316,726
    
    
    
    802,892
    
    
    
    574,004
    
    
    
    (23,080
    )
    
    
    2,670,542
    
    
    
    78,235
    
    
    
    2,748,777Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423,804
    
    
    
    
    
    
    
    423,804
    
    
    
    15,901
    
    
    
    439,705Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,771
    )
    
    
    (7,771
    )
    
    
    
    
    
    
    (7,771
    )Issuance of ordinary shares
    
    
    2,076,397
    
    
    
    85,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,860
    
    
    
    
    
    
    
    85,860Cancellation of ordinary shares
    
    
    (6,966,666
    )
    
    
    (338,165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,165
    )
    
    
    
    
    
    
    (338,165
    )Issuance of stock purchase warrants to
convertible note investors and external
consultants
    
    
    
    
    
    
    
    
    
    
    70,012
    
    
    
    
    
    
    
    
    
    
    
    70,012
    
    
    
    
    
    
    
    70,012Warrant issuance costs
    
    
    
    
    
    
    
    
    
    
    (4,162
    )
    
    
    
    
    
    
    
    
    
    
    (4,162
    )
    
    
    
    
    
    
    (4,162
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    14,668
    
    
    
    
    
    
    
    
    
    
    
    14,668
    
    
    
    
    
    
    
    14,668Noncontrolling interests derecognized upon
disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,071
    )
    
    
    (2,071
    )Balance as of December 31, 2008
    
    
    47,609,731
    
    
    
    1,064,421
    
    
    
    883,410
    
    
    
    997,808
    
    
    
    (30,851
    )
    
    
    2,914,788
    
    
    
    92,065
    
    
    
    3,006,853Effect of change in accounting principle (Note 11)
    
    
    
    
    
    
    
    
    
    
    (70,012
    )
    
    
    53,158
    
    
    
    1,440
    
    
    
    (15,414
    )
    
    
    
    
    
    
    (15,414
    )Balance as of December 31, 2008 as adjusted
    
    
    47,609,731
    
    
    
    1,064,421
    
    
    
    813,398
    
    
    
    1,050,966
    
    
    
    (29,411
    )
    
    
    2,899,374
    
    
    
    92,065
    
    
    
    2,991,439Net (loss) income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250,369
    )
    
    
    
    
    
    
    (250,369
    )
    
    
    380
    
    
    
    (249,989
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )
    
    
    
    
    
    
    (126
    )Issuance of ordinary shares
    
    
    5,075,170
    
    
    
    126,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,650
    
    
    
    
    
    
    
    126,650Share-based compensation
    
    
    
    
    
    
    
    
    
    
    34,922
    
    
    
    
    
    
    
    
    
    
    
    34,922
    
    
    
    
    
    
    
    34,922Balance as of December 31, 2009
    
    
    52,684,901
    
    
    
    1,191,071
    
    
    
    848,320
    
    
    
    800,597
    
    
    
    (29,537
    )
    
    
    2,810,451
    
    
    
    92,445
    
    
    
    2,902,896Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (362,842
    )
    
    
    
    
    
    
    (362,842
    )
    
    
    (8,381
    )
    
    
    (371,223
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,916
    
    
    
    4,916
    
    
    
    
    
    
    
    4,916Issuance of ordinary shares
    
    
    331,391
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    21,892
    
    
    
    
    
    
    
    
    
    
    
    21,892
    
    
    
    
    
    
    
    21,892Balance as of December 31, 2010
    
    
    53,016,292
    
    
    
    1,191,071
    
    
    
    870,212
    
    
    
    437,755
    
    
    
    (24,621
    )
    
    
    2,474,417
    
    
    
    84,064
    
    
    
    2,558,481US$
    
    
    
    
    
    
    180,465
    
    
    
    131,850
    
    
    
    66,327
    
    
    
    (3,730
    )
    
    
    374,912
    
    
    
    12,737
    
    
    
    387,649
   F-8




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (amounts in thousands, except share data)
 1
    
    Principal activities, organization and significant concentrations and risks
 (a)
    
    Principal activities
 Qiao Xing Mobile Communication Co., Ltd. (the Company) and its subsidiaries (collectively,
the Group) are principally engaged in the production and sale of mobile phones and
accessories in the Peoples Republic of China (the PRC).
 (b)
    
    Organization
 The Company was incorporated in the British Virgin Islands (the BVI) on January 31, 2002.
The Company listed its ordinary shares on the New York Stock Exchange (the NYSE) under the
symbol QXM on May 3, 2007.
 As of December 31, 2010, the Company was 60.7% owned by Qiao Xing Universal Resources, Inc.
(Xing), a company listed on the Nasdaq National Market.
 Details of the Groups subsidiaries are as follows:
 Percentage of equity interestPlace of
    
    
    attributable to the GroupName of subsidiary
    
    incorporation
    
    
    as of December 31,2009
    
    
    2010CEC Telecom Co., Ltd. (CECT)
    
    PRC
    
    
    96.6
    %
    
    
    96.6
    %Beijing VEVA Technology Co., Ltd.
    
    PRC
    
    
    96.6
    %
    
    
    96.6
    %Beijing Yilian Xuntong Technology Co., Ltd.
    
    PRC
    
    
    
    
    
    
    96.6
    %
 (c)
    
    Significant concentrations and risks
 The Group is subject to, among others, the following significant concentrations and risks:
 Country
 As substantially all of the Groups operations are conducted in the PRC, the Group is subject
to special considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency exchange. The
Groups results may be adversely affected by changes in the political and social conditions in
the PRC, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, foreign currency exchange and remittance abroad, and rates and
methods of taxation, among other things.
 Revenue concentrations
 Individual customers accounting for more than 10% of the Groups revenue for the years ended
December 31, 2008, 2009 and 2010, are as follows:
 Year ended December 31,2008
    
    
    2009
    
    
    2010Beijing Jiasheng Ruitong Electronics Co., Ltd.
    
    
    12
    %
    
    
    18
    %
    
    
    26
    %Beijing Jiusheng Aoxiang Technology Co., Ltd.
    
    
    
    
    
    
    15
    %
    
    
    20
    %Shenzhen Siecom Communication Technology
Development Co., Ltd.
    
    
    
    
    
    
    20
    %
    
    
    17
    %Beijing Ousa Technology Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    15
    %Beijing U-life International Technology Co., Ltd.
    
    
    53
    %
    
    
    17
    %
    
    
    Shenzhen Laidi Technical Co., Ltd.
    
    
    
    
    
    
    16
    %
    
    
    Total
    
    
    65
    %
    
    
    86
    %
    
    
    78
    %
 As of December 31, 2009 and 2010, the Groups five largest accounts receivable accounted for
approximately 82% and 68%, respectively, of the Groups total accounts receivable.
  F-9




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 Concentrations of cash balances held at financial institutions
 As of December 31, 2009 and 2010, cash of RMB3,118,231 and RMB2,750,481 (US$416,740),
respectively, was held in uninsured accounts at major financial institutions located in the
PRC, and cash of RMB10,839 and RMB5,024 (US$761), respectively, was held in uninsured accounts
at major financial institutions located in the Hong Kong Special Administrative Region (the
HK SAR). Further, as of December 31, 2009 and 2010, the Companys cash balance included
U.S. dollar denominated bank deposits of US$246 and US$247 (equivalent to RMB1,678 and
RMB1,633), respectively, in uninsured accounts at major institutions located in the PRC, and
US$1,558 and US$692 (equivalent to RMB10,638 and RMB4,570), respectively, in uninsured
accounts at major financial institutions located in the HK SAR. Management believes that these
major financial institutions are of high credit quality.
 Technology
 The Group is developing products which incorporate complex and evolving technologies that
require substantial expenditures and resources. These new products may fail to be accepted at
the rates or levels the Group anticipates and the Group may fail to realize the expected
benefits from its investments in these new technologies. Further, the Group may experience
greater variability in its operating results than in the past, particularly depending on the
general economic conditions and the pace of development and acceptance of new technologies.
Changes in the communication industry are expected to increase competition and change the
competitive landscape and may adversely affect the Groups operating results.
 Suppliers
 The Group purchases materials and components from various suppliers in the PRC. The Group
believes that there are a number of suppliers in the PRC with the ability to consistently
supply materials and components that meet the Groups quality standards and requirements. In
the event that a major supplier ceases to sell to the Group, the Group believes that it could
shift to other suppliers without incurring undue costs or revenue loss.
 2
    
    Summary of significant accounting policies
 (a)
    
    Basis of presentation
 The Groups consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP).
 Prior to November 30, 2006, the Company was 80% owned by Xing. The Company became a wholly
owned subsidiary of Xing on November 30, 2006 when Xing acquired the remaining 20% equity
interest in the Company from Galbo Enterprise Limited
(Galbo (Xings interest in the Company was
subsequently diluted and as of December 31, 2010, the Company was
60.7% owned by Xing)). Xings acquisition of the
20% minority interest in the Company on November 30, 2006 was accounted for by Xing using the purchase method.
Accordingly, the purchase accounting adjustments as a result of Xings acquisition of the 20%
minority interest in the Company have been pushed-down and reflected in the accompanying
financial statements.
 (b)
    
    Principles of consolidation
 The consolidated financial statements include the financial statements of the Company and its
majority-owned subsidiaries. All significant inter-company balances and transactions have
been eliminated upon consolidation.
 (c)
    
    Cash, restricted cash and related party cash management arrangement
 Cash consists of cash on hand and interest-bearing deposits placed with banks.
 Cash that is restricted as to withdrawal for use or pledged as security is disclosed
separately on the face of the consolidated balance sheet, and is not included in cash in the
consolidated statements of cash flows. Restricted cash of RMB251,720 and RMB37,758 (US$5,721)
as of December 31, 2009 and 2010, respectively, represents pledged deposits for securing
short-term bank borrowings.
 The Group participates in a cash management arrangement at the direction and discretion of
Xing. Consequently, the Group periodically both transfers cash to and receives cash from
certain related parties. These cash flows are unrelated to the production and delivery of the
Groups products and services and are not derived from transactions or other events that enter
into the determination of the Groups net income (loss). For purposes of the consolidated
statements of cash flows, the cash inflows and outflows under this related party financing
arrangement are presented under cash flows from financing activities.
 (d)
    
    Accounts and bills receivables
 Accounts receivable are recorded at invoiced amount net of deductions for trade discounts.
The Group maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Group determines the allowance for
doubtful accounts based on the age of the accounts receivable balance, the customers payment
history and its current credit-worthiness and current economic trends. Account balances are
charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. The Group
does not have any off-balance-sheet credit exposure related to its customers.
  F-10




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 To reduce the Groups credit risk, the Group has required certain customers to purchase the
Groups products using bills receivable. Bills receivable represents interest-free short-term
notes receivable issued by a financial institution that entitles the Group to receive the full
face amount from the financial institution at a stated maturity date, which is within one year
from the date of issuance.
 In certain circumstances, the Group has sold, with recourse, bills receivables to banks. The
recourse obligation represents the amount the Group would be obligated to repay to the extent
that the issuing financial institution does not make payment upon maturity. Because the
discounted bills receivables have not been legally isolated from the Group, the discounted
bills receivables sold with recourse have been accounted for as short-term secured borrowings
until the bills receivable are paid. Upon payment of bills receivable, the discounted bills
receivables and related short-term secured borrowings are derecognized. Historically, the
Group has experienced no losses on bills receivable.
 (e)
    
    Inventories
 Inventories are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. Costs of finished goods are composed of direct materials, direct
labor and an attributable portion of manufacturing overhead based on normal operating
capacity. Adjustments are recorded to write-down damaged, obsolete and slow-moving items to
their estimated net residual value based on the ageing of the inventories, current and
expected future market trends and conditions, and the physical condition of the inventory.
 (f)
    
    Prepayments to suppliers
 Advance payments for purchases of raw materials are included in prepayments to suppliers and
represent cash deposits paid to vendors for future purchases. The Group is required to make
advance payments for certain new suppliers. Advanced payments are unsecured, non-interest
bearing and expected to be utilized within one year. The outstanding balance of prepayments
to suppliers is reduced and reclassified to inventories when inventory is received and
passes quality inspection based on the terms of the purchase order.
 (g)
    
    Property, machinery and equipment
 Property, machinery and equipment are stated at cost less accumulated depreciation and
impairment. Property, machinery and equipment acquired in a purchase business combination and
upon acquisitions of minority interest are initially recorded based on a purchase price
allocation. In addition, as a result of the application of push-down accounting (Note 2(a)),
the Groups property, machinery and equipment have been adjusted to a new cost basis, which
reflects Xings original 80% interest at depreciated cost and Xings 20% acquired interest at
fair value as of November 30, 2006.
 Major expenditures for betterments and renewals are capitalized. All ordinary repair and
maintenance costs are expensed as incurred. Depreciation on property, machinery and equipment
is provided using the straight-line method (after taking into account their respective
estimated residual values) over the following estimated useful lives:
 Buildings and improvements
    
    5  30 yearsMachinery and equipment
    
    5  12 yearsFurniture and office equipment
    
    5  10 yearsMotor vehicles
    
    5  8 years
 Depreciation of property, machinery and equipment attributable to manufacturing activities is
capitalized as part of inventory and expensed to cost of goods sold when the inventory is
sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of goods
sold in the period it becomes idled. When items are retired or otherwise disposed of, income
is charged or credited for the difference between the net book value and proceeds received
thereon. Assets to be disposed of are separately presented on the consolidated balance sheet
and reported at the lower of their carrying amount or fair value less costs to sell, and are
no longer depreciated.
 (h)
    
    Land use rights
 Land use rights represent the exclusive right to occupy and use a piece of land in the PRC
during the contractual period of the rights. Land use rights are carried at cost, subject to
adjustments resulting from the effects of purchase accounting and push-down accounting, and
are charged to expense on a straight-line basis over 50 years, the contractual period of the
rights.
  F-11




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 (i)
    
    Goodwill and other intangible assets
 Goodwill represents the excess of the cost of an acquisition over the fair value of net assets
acquired. Goodwill is not amortized, but is instead tested for impairment at least annually (See note 8).
 Acquired intangible assets are recognized if it satisfies either the contractual-legal or
separability criterion specified under U.S. GAAP. Such intangible assets are initially
measured and recorded at fair value. As a result of the application of push-down accounting,
other intangible assets have been adjusted to a new cost basis, which reflects Xings original
80% interest at amortized cost and the 20% acquired interest at fair value as of November 30,
2006.
 Intangible assets with determinable useful lives are amortized as follows:
 Customer relationships
    
    3  5 yearsCompleted technology
    
    1.8  5 yearsCore technology
    
    4  5 yearsBacklog
    
    4  5 monthsLicenses
    
    5 years
 Management has determined that the Groups CECT brand name held by its subsidiary, CECT,
does not have a determinable useful life. Consequently, the carrying amount of this brand
name is not amortized but is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the assets might be impaired. Such impairment test
consists of a comparison of the fair value of the brand name with its carrying amount, and an
impairment loss is recognized if and when the carrying amount of the brand name exceeds its
fair value. As of December 31, 2009, full impairment provision has been made on the Groups
CECT brand name. As indicated by Note 8 as of December
31, 2010, full impairment provision has been made on goodwill.
 (j)
    
    Impairment of long-lived assets
 Long-lived assets with determinable useful lives, such as property, machinery and equipment
and amortizable intangible assets, are tested for impairment if events or changes in
circumstances indicate that the asset might be impaired. Recoverability of such assets to be
held and used is measured by a comparison of the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset.
 Goodwill and the CECT brand name which are not subject to amortization are tested annually for
impairment, and are tested for impairment more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss would be recognized on the CECT brand
name to the extent that the carrying amount of the CECT brand name exceeds its fair value.
For goodwill, the impairment determination is made at the reporting unit level and consists of
two steps. In the first step, the Company determines the fair value of its reporting unit and
compares it to its carrying amount, including goodwill. Second, if the carrying amount of the
reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the
carrying amount of the reporting units goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill. Management
has determined that CECT is the reporting unit for testing goodwill impairment. The fair
value of the CECT is determined based on the market approach, under which the fair value is
estimated based on market multiples of earnings for comparable companies.
 (k)
    
    Revenue recognition
 The Group derives revenues principally from the sales of mobile phones and accessories in the
PRC, and to a lesser extent the rendering of technical, processing and other related services.
 Sales of mobile phones and accessories
 Sales represent the invoiced amount, net of discounts, returns, volume rebates and price
guarantees granted to customers. The Group recognizes revenue when products are received by
the customers at the location designated by the customer and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence
of an arrangement exists and the selling price is fixed or determinable.
 The Group recognizes a liability for price guarantees, which generally cover a period of
between three to four months, based on managements estimates of future price reductions and
the level of unsold inventories held by customers at the dates of expected price adjustments.
Price guarantees reported as a reduction of revenues amounted to RMB91, RMB118 and nil for the
years ended December 31, 2008, 2009 and 2010, respectively.
  F-12




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 In the PRC, value-added-tax (VAT) at a rate of 17% of invoiced amount is collected on behalf
of the PRC tax authorities. Revenue is recorded net of VAT. VAT collected from customers is
offset against VAT paid for purchases and is recorded as a liability on the consolidated
balance sheet until paid.
 Provision of services
 Revenues from the provision of technical, processing and other related services are recognized
in the period when performance of the service is completed as agreed to in each written
service agreement, the fee is fixed or determinable, and collection of relevant receivable is
reasonably assured.
 (l)
    
    Product warranties
 The Group provides a warranty to customers that its products will meet the functionality
standards agreed to in each sales arrangement. The Group provides for the estimated warranty
costs under these guarantees based upon historical experience and managements estimate of the
level of future claims, and accrues for specific items at the time their existence is known
and the amounts are estimable. Provisions of product warranty costs, which are charged to
cost of goods sold, are analyzed as follows:
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Balance at beginning of year
    
    
    8,097
    
    
    
    5,029
    
    
    
    1,923
    
    
    
    291Provision
    
    
    7,485
    
    
    
    2,830
    
    
    
    2,713
    
    
    
    411Utilization
    
    
    (10,553
    )
    
    
    (5,936
    )
    
    
    (3,100
    )
    
    
    (469
    )Balance at end of year
    
    
    5,029
    
    
    
    1,923
    
    
    
    1,536
    
    
    
    233
 (m)
    
    Research and development costs, advertising costs, and shipping and handling costs
 Research and development costs are expensed as incurred.
 Adverting costs are charged to selling and distribution expenses when incurred. Advertising
costs amounted to RMB137,166, RMB92,212 and RMB99,089 (US$15,013) for the years ended December
31, 2008, 2009 and 2010, respectively.
 The costs of shipping and distributing products are included in cost of sales.
 (n)
    
    Retirement and other postretirement benefits
 Pursuant to relevant PRC regulations, the Groups subsidiaries are required to make
contributions to various defined contribution plans organized by the PRC government. The
contributions are made for each qualifying PRC employee at 20% of a standard salary base as
determined by the PRC governmental authority. Contributions to the defined contribution plans
are charged to expense as the service is provided. For the years ended December 31, 2008,
2009 and 2010, contributions to the defined contribution plans were RMB2,228, RMB3,165 and
RMB2,805 (US$425), respectively. The Group has no other obligation for the payment of
employee benefits associated with these plans beyond the contributions described above.
 (o)
    
    Share-based payments
 Compensation cost related to share options or similar equity instruments are measured at fair
value as of the date of the award and recognized over the requisite service period, which is
generally the same as the vesting period. When no future services are required to be
performed by the employee in exchange for the reward, and if such award does not contain a
performance or market condition, the cost of the award (as measured based on the grant-date
fair value) is expensed on the grant date.
 (p)
    
    Income taxes
 Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized
in the statement of operations in the period that the change in tax rates or tax laws is
enacted. Interest and penalties related to unrecognized tax benefits, if and when required,
are classified as part of income tax expense in the statement of operations.
 (q)
    
    Foreign currency transactions
 The reporting currency of the Group is Renminbi (RMB).
  F-13




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 The Companys functional currency is the United States dollars (U.S. dollar or US$). The
functional currency of all other companies within the Group is the RMB. Monetary assets and
liabilities which are denominated in currencies other than RMB are translated into RMB using
the applicable exchange rates quoted by the Peoples Bank of China (the PBOC) at each
balance sheet date. Transactions of the Company and of all other companies within the Group
denominated in currencies other than RMB are translated into RMB at the exchange rates quoted
by the PBOC prevailing at the dates of transactions. Foreign exchange gains or losses
resulting from the settlement of foreign currency transactions and from the translation at
each period of assets and liabilities denominated in foreign currencies are recorded as
foreign currency exchange gain, net in the consolidated statements of operations.
 Assets and liabilities of the Company are translated into RMB using the exchange rate as of
the balance sheet date. Income and expenses are translated at the average exchange rate
prevailing during the reporting period. The gains and losses resulting from the translation
of the financial statements of the Company are recorded as accumulated other comprehensive
loss, a separate component within shareholders equity.
 RMB is not freely convertible into foreign currencies. All foreign exchange transactions
involving RMB must take place either through the PBOC or other institutions authorized to buy
and sell foreign currency. The exchange rate adopted for foreign exchange transactions are
the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.
 For the convenience of readers, certain 2010 RMB amounts included in the accompanying
consolidated financial statements have been translated into U.S. dollars at the rate of
US$1.00 = RMB6.6000, being the noon buy rate for U.S. dollars in effect on December 30, 2010
in the City of New York for cable transfer in RMB per U.S. dollar as certified for custom
purposes by the Federal Reserve Bank. No representation is made that RMB amounts could have
been, or could be, converted into U.S. dollars at that rate or at any other certain rate on
December 31, 2010, or at any other date.
 (r)
    
    Earnings (loss) per share
 Basic earnings (loss) per share is computed using the two-class method by dividing net
income (loss) allocated to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the year. Diluted earnings (loss) per share is calculated by
dividing net income (loss) by the weighted average number of ordinary and dilutive ordinary
shares equivalents outstanding during the year. Potential dilutive securities are not
included in the calculation of diluted earnings (loss) per share if the impact is
anti-dilutive.
 (s)
    
    Use of estimates
 The preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Group to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant items subject to estimates and assumptions
in the Groups consolidated financial statements include determining the fair values of assets
and liabilities acquired in business combinations, the estimated useful lives of property,
machinery and equipment and intangible assets with determinable lives, the recoverability of
the carrying values of property, machinery and equipment, goodwill, other intangible assets,
receivables, inventories, deferred income tax assets and other assets, the fair value of
share-based payments, the fair values of conversion options and other derivatives embedded in
convertible notes, the fair value of ordinary share warrants granted, and the allowances for
warranty obligations and price guarantees. Actual result could differ from those estimates.
 (t)
    
    Segment information
 The Group uses the management approach in determining reportable operating segments. The
management approach considers the internal organization and reporting used by the Groups
chief operating decision maker for making operating decisions and assessing performance as the
source for determining the Groups operating segments. Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue and operating
results of CECT, the operating subsidiary in the PRC. As such, management has determined that
CECT is the Groups only operating segment. As the Groups operations and customers are
principally all located in the PRC, no geographic information has been presented.
 (u)
    
    Contingencies
 In the normal course of business, the Group is subject to contingencies, including legal
proceedings and claims arising out of the business that relate to a wide range of matters.
The Group recognizes a liability for such contingency if it determines it is probable that a
loss has occurred and a reasonable estimate of the loss can be made. The Group may consider
many factors in making these assessments including past history and the specifics of each
matter. As the Group has not become aware of any claims since operations commenced, the Group
has not recognized a liability for any claims.
  F-14




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 (v)
    
    Recently issued accounting standards
 In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving
Disclosures about Fair Value Measurements (ASU 2010-13). ASU 2010-06 amends Accounting
Standards Codification (ASC) 820 to add new requirements for disclosures about (1) the
different classes of assets and liabilities measured at fair value, (2) the valuation
techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the
transfers between Levels 1, 2, and 3. The guidance in ASU 2010-06 is effective for the first
reporting period beginning after December 15, 2009, the adoption of which did not have a
material impact on the Groups financial statements, except for the requirement to provide the
Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will
be effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. In the period of initial adoption, entities will not be required to
provide the amended disclosures for any previous periods presented for comparative purposes.
However, those disclosures are required for periods ending after initial adoption. The
adoption of the Level 3 guidance of ASU 2010-06 is not expected to have a material impact on
the Groups consolidated financial statements.
 In April 2010, the FASB issued ASU No. 2010-13, Compensation  Stock Compensation (Topic
718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency
of the Market in Which the Underlying Equity Security Trades (ASU 2010-13). The objective
of ASU 2010-13 is to address the classification of an employee share-based payment award with
an exercise price dominated in the currency of a market in which the underlying equity
security trades. ASC 718 provides guidance on the classification of a share-based payment
award as either equity or liability. A share-based payment award that contains a condition
that is not a market, performance, or service condition is required to be classified as a
liability. ASU 2010-13 provide amendments to ASC 718 to clarify that an employee share-based
payment award with an exercise price denominated in the currency of a market in which a
substantial portion of the entitys equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies as equity.
Then amendments in this standard are effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 31, 2010. The adoption of ASU 2010-13 is
not expected to have a material impact on the Groups consolidated financial statements.
 In December 2010, the FASB issued ASU No. 2010-28, Intangibles  Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts (ASU 2010-28). The objective of ASU 2010-28 is to address
questions about entities with reporting units with zero or negative carrying amounts because
some entities concluded that Step 1 of the test is passed in those circumstances because the
fair value of their reporting unit will generally be greater than zero. The amendments in this
standard modify Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to perform Step 2
of the goodwill impairment test if it is more likely than not that a goodwill impairment
exists. This standard is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. The adoption of ASU 2010-28 is not expected to have a
material impact on the Groups consolidated financial statements.
 In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29).
ASU 2010-29 specifies that if a public company presents comparative financial statements, the
entity should only disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010, with early adoption permitted. The
adoption of ASU 2010-29 is not expected to have a material impact on the Groups consolidated
financial statements.
 3
    
    Disposals
 The Group disposed of its interests in two subsidiaries, Beijing CECT Yitong Technology Co.,
Ltd. (BCYT) and Huizhou CEC Telecom Co., Ltd. (HCECT), during the year ended December 31,
2008. The condensed historical balances of the subsidiaries assets and liabilities that were
disposed of consisted of:
 BCYT
    
    
    HCECT
    
    
    TotalRMB
    
    
    RMB
    
    
    RMBCash
    
    
    924
    
    
    
    238
    
    
    
    1,162Other current assets
    
    
    20,866
    
    
    
    14,616
    
    
    
    35,482Property, machinery and equipment
    
    
    
    
    
    
    10,876
    
    
    
    10,876Current liabilities
    
    
    
    
    
    
    (5,808
    )
    
    
    (5,808
    )Noncontrolling interests
    
    
    (2,071
    )
    
    
    
    
    
    
    (2,071
    )Net assets disposed
    
    
    19,719
    
    
    
    19,922
    
    
    
    39,641
  F-15




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 The gain on disposal of subsidiaries reflected in the consolidated statement of operations for
the year ended December 31, 2008 is calculated as follows:
 BCYT
    
    
    HCECT
    
    
    TotalRMB
    
    
    RMB
    
    
    RMBConsideration
    
    
    20,000
    
    
    
    21,910
    
    
    
    41,910Net assets disposed
    
    
    (19,719
    )
    
    
    (19,922
    )
    
    
    (39,641
    )Gain on disposal
    
    
    281
    
    
    
    1,988
    
    
    
    2,269
 The net cash outflow in respect of the disposal of subsidiaries during the year ended December
31, 2008 is as follows:
 BCYT
    
    
    HCECT
    
    
    TotalRMB
    
    
    RMB
    
    
    RMBConsideration
    
    
    20,000
    
    
    
    21,910
    
    
    
    41,910Cash disposed
    
    
    (924
    )
    
    
    (238
    )
    
    
    (1,162
    )Consideration paid through set-off of payables
    
    
    (20,000
    )
    
    
    (13,146
    )
    
    
    (33,146
    )Unpaid consideration as at December 31, 2008
    
    
    
    
    
    
    (8,764
    )
    
    
    (8,764
    )Net cash outflow
    
    
    (924
    )
    
    
    (238
    )
    
    
    (1,162
    )
 The unpaid consideration of RMB8,764 relating to the disposal of HCECT that was outstanding as
of December 31, 2008 was fully repaid during the year ended December 31, 2009.
 4
    
    Accounts receivable, net
 Accounts receivable, net consists of the following:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Accounts receivable
    
    
    133,130
    
    
    
    266,322
    
    
    
    40,352Less: Allowance for doubtful accounts
    
    
    (18,441
    )
    
    
    (26,932
    )
    
    
    (4,081
    )Accounts receivable, net
    
    
    114,689
    
    
    
    239,390
    
    
    
    36,271
 The following table presents the movement of the allowance for doubtful accounts:
 Year ended December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Balance at beginning of year
    
    
    6,043
    
    
    
    18,441
    
    
    
    2,794Bad debt expense
    
    
    12,938
    
    
    
    8,601
    
    
    
    1,303Bad debt recovery
    
    
    (540
    )
    
    
    (110
    )
    
    
    (16
    )Bad debt write-off
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    18,441
    
    
    
    26,932
    
    
    
    4,081
 The Group has a credit policy in place and the exposure to credit risk is monitored on an
ongoing basis. Credit evaluations are performed on all customers requiring credit over a
certain amount. These receivables are due within 30 to 90 days from the date of billing.
Normally, the Group does not obtain collateral from customers.
  F-16




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 5
    
    Inventories
 Inventories by category consist of the following:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Raw materials
    
    
    77,296
    
    
    
    43,903
    
    
    
    6,652Finished goods
    
    
    19,850
    
    
    
    16,066
    
    
    
    2,434Total inventories
    
    
    97,146
    
    
    
    59,969
    
    
    
    9,086
 Inventories write-downs of RMB6,650, RMB18,016 and RMB20,012 (US$3,032) were charged to cost
of goods sold during the years ended December 31, 2008, 2009 and 2010, respectively.
 6
    
    Assets held for sale
 In November 2009, the Group entered into an agreement for the sale of a property and the
associated land use rights to a third party for a total consideration of RMB163,000. A deposit
of RMB49,000 was received from the purchaser, the amount of which has been included in other
payables and current liabilities as of December 31, 2009. The sale transaction was
subsequently completed and the balance consideration of RMB114,000 was received in the second
quarter of 2010. As of December 31, 2009, the land and property have been reclassified from
non-current assets to current assets held for sale. In addition, an impairment charge of
RMB5,957 was made during the year ended December 31, 2009 to write down the value of the
assets to their fair value which was estimated based on the expected net sales proceeds.
 7
    
    Property, machinery and equipment, net
 Property, machinery and equipment consist of the following:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Buildings and improvements
    
    
    554
    
    
    
    554
    
    
    
    84Machinery and equipment
    
    
    32,378
    
    
    
    32,719
    
    
    
    4,957Furniture and office equipment
    
    
    2,916
    
    
    
    4,593
    
    
    
    696Motor vehicles
    
    
    3,483
    
    
    
    2,615
    
    
    
    396Total property, machinery, and equipment
    
    
    39,331
    
    
    
    40,481
    
    
    
    6,133Less: accumulated depreciation
    
    
    (15,623
    )
    
    
    (19,651
    )
    
    
    (2,977
    )Property, machinery, and equipment, net
    
    
    23,708
    
    
    
    20,830
    
    
    
    3,156
 All the Groups property, machinery and equipment are located in the PRC.
 Depreciation charge was allocated to the following expenses items:
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cost of goods sold
    
    
    10,134
    
    
    
    8,512
    
    
    
    3,531
    
    
    
    535Selling and distribution expenses
    
    
    4
    
    
    
    6
    
    
    
    55
    
    
    
    8General and administrative expenses
    
    
    1,819
    
    
    
    2,089
    
    
    
    1,345
    
    
    
    204Total
    
    
    11,957
    
    
    
    10,607
    
    
    
    4,931
    
    
    
    747
  F-17




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 8
    
    Goodwill
 The impairment tests conducted by the Group on goodwill for the years ended December 31, 2008
and 2009 did not result in any impairment charges. In 2010, the impairment test conducted by
the Group resulted in an impairment charge of RMB112,814 (US$17,093), which reflects the
reduction in the estimated fair value of CECT that resulted mainly from the intensely
competitive and difficult operating environment in the PRC mobile handset industry.
 9
    
    Other intangible assets, net
 Intangible assets, which arose from the acquisition of the Groups initial 65% equity interest
in CECT on February 8, 2003, and from the push-down accounting adjustments on November 30,
2006 upon Xings acquisition of an additional 20% equity interest in the Company (as discussed
in Note 2(a)), comprise the following components:
 December 31, 2009Gross
    
    
    
    
    
    
    
    
    
    
    Othercarrying
    
    
    Accumulated
    
    
    Accumulated
    
    
    intangiblesamount
    
    
    amortization
    
    
    impairment
    
    
    assets, netRMB
    
    
    RMB
    
    
    RMB
    
    
    RMBCECT brand
    
    
    39,835
    
    
    
    
    
    
    
    (39,835
    )
    
    
    Customer relationships
    
    
    5,418
    
    
    
    (5,418
    )
    
    
    
    
    
    
    Completed technology
    
    
    16,950
    
    
    
    (16,950
    )
    
    
    
    
    
    
    Core technology
    
    
    24,193
    
    
    
    (19,760
    )
    
    
    
    
    
    
    4,433Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    
    
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,725
    )
    
    
    
    
    
    
    Total
    
    
    97,296
    
    
    
    (53,028
    )
    
    
    (39,835
    )
    
    
    4,433
 December 31, 2010Grosscarrying
    
    
    Accumulated
    
    
    Accumulatedamount
    
    
    amortization
    
    
    impairment
    
    
    Other intangible assets, netRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$CECT brand
    
    
    39,835
    
    
    
    
    
    
    
    (39,835
    )
    
    
    
    
    
    
    Customer relationships
    
    
    5,418
    
    
    
    (5,418
    )
    
    
    
    
    
    
    
    
    
    
    Completed technology
    
    
    16,950
    
    
    
    (16,950
    )
    
    
    
    
    
    
    
    
    
    
    Core technology
    
    
    24,193
    
    
    
    (24,193
    )
    
    
    
    
    
    
    
    
    
    
    Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    
    
    
    
    
    
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,725
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    97,296
    
    
    
    (57,461
    )
    
    
    (39,835
    )
    
    
    
    
    
    
    
 Due to the Groups strategic shift to focus more on its high-end VEVA-branded handsets, the
Group recorded an impairment charge of RMB26,235 on its CECT brand name in 2008 and an
impairment charge of RMB13,600 (US$1,992) in 2009.
  F-18




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 10
    
    Short-term borrowings
 Short-term borrowings consist of the following:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Bills payable
    
    
    191,200
    
    
    
    
    
    
    
    Bank loans
    
    
    693,508
    
    
    
    446,000
    
    
    
    67,576Total short-term borrowings
    
    
    884,708
    
    
    
    446,000
    
    
    
    67,576
 Bills payable represents bank borrowings with payment terms of not more than 180 days. These
are non-interest bearing unless they become trust receipt loans which then bear interest at
the prevailing bank lending rates.
 During each of the periods presented, the Group entered into various loan agreements with
commercial banks in the PRC at terms ranging from three months to one year. The weighted
average interest rate on bank loans outstanding as of December 31, 2009 and 2010 was 6.0% and
6.1%, respectively. The principal amounts of these short-term loans are repayable at the end
of the loan period, while the related interest expense of these short-term loans is payable on
a monthly or quarterly basis.
 Short-term borrowings of RMB135,008 and RMB106,000 (US$16,061) as of December 31, 2009 and
2010, respectively are subject to certain financial covenants relating to certain of the
Groups and Xings tangible net worth, borrowing to tangible net worth plus minority interest,
current ratio, and interest to earnings before interest and taxes ratios. If the Group were
to breach the covenants, the drawn down facilities would become payable on demand. The Group
was in compliance with these financial covenants as of December 31, 2009 and 2010.
 Short-term borrowings are secured by the following:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Pledged by bank deposits
    
    
    251,720
    
    
    
    37,758
    
    
    
    5,721Guarantees provided by:- Qiao Xing Group Limited (QXGL)
    
    
    50,000
    
    
    
    50,000
    
    
    
    7,576- QXGL and directors of the Company
    
    
    290,000
    
    
    
    260,000
    
    
    
    39,394- Xing
    
    
    285,008
    
    
    
    106,000
    
    
    
    16,061- Directors of the Company
    
    
    68,500
    
    
    
    30,000
    
    
    
    4,545
  F-19




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 11
    
    Convertible notes
 Pursuant to a Securities Purchase Agreement and Registration Rights Agreement signed on May
15, 2008, the Company issued to two existing shareholders of the Company (the Investors)
US$70,000 of senior convertible notes (the Notes) that came with warrants to purchase
1,648,721 ordinary shares of the Company (the Investor Warrants). The consideration paid on
May 15, 2008 by the Investors for the Notes comprised a combination of 6,966,666 ordinary
shares of the Company that were owned by the Investors, valued at approximately US$48,349
based on the closing market price of the Companys ordinary shares on May 14, 2008, and cash
of US$21,651. All ordinary shares submitted by the Investors in exchange for the Notes were
cancelled. In addition, the Company issued warrants to its placement agent to purchase up to
942,127 ordinary shares of the Company at terms identical to the Investor Warrants (the Agent
Warrants and collectively with the Investor Warrants, the Warrants).
 The material terms and conditions of the Notes are summarized as follows:
 
    
    the Notes are unsecured and mature on May 15, 2011;
    
    the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008;
    
    the Notes are convertible at the holders option into ordinary shares of the Company
at an initial conversion price of $7.43 per share. The conversion price is subject to
reset if the average of the daily volume weighted average price (VWAP) of the Companys
ordinary shares for the five consecutive trading days ending on each three-month
anniversary of the issuance date of the Notes until maturity (each a Reset Date) is
less than $6.76. In that event, the conversion price is reset to a price equal to the
greater of US$4.05 or 92.5% of the arithmetic average of the daily VWAP of the Companys
ordinary shares for the five trading days ending on the applicable Reset Date. The
conversion price of the Notes was reset to US$4.05 on November 15, 2008;
    
    the Notes cannot be converted if, after giving effect to such conversion, the holders
of the Notes (together with their affiliates) would beneficially own in excess of 9.99%
of the Companys ordinary shares outstanding immediately after giving effect to the
conversion;
    
    the Notes require an automatic re-pricing of the conversion price if the Company make
certain sales of its ordinary shares or ordinary share equivalents in a capital-raising
transaction at a price below the conversion price;
    
    the holders of the Notes have the right to require the Company to redeem the Notes at
any time on or after the 18 month anniversary of the issuance date of the Notes in an
amount equal to the sum of (a) the outstanding principal of the Notes, and (b) the
accrued and unpaid interest thereon. Accordingly, the Notes were classified as current
liabilities on the consolidated balance sheet as of December 31, 2009 and 2010;
    
    in the event of a default, change of control and certain other fundamental
transactions, the holders of the Notes have the right to require the Company to redeem
all or any portion of the Notes at a price equal to the greater of (i) the amount to be
redeemed multiplied by a redemption premium of 125% and (ii) the amount to be redeemed
multiplied by the quotient determined by dividing the closing bid price of the Companys
ordinary shares on the date immediately preceding such event by the conversion price of
the Notes;
    
    all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable
U.S. dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided
by the exchange rate of one U.S. dollar to RMB on the date such payment is due; and
    
    the Company is required under the terms of the Registration Rights Agreement to file
with the Securities and Exchange Commission (SEC) a registration statement to register
the ordinary shares issuable upon the conversion of the Notes and the exercise of the
Warrants to permit the resale of such ordinary shares to the public. The registration
statement was filed by the Company on June 27, 2008 and was declared effective by the SEC
on July 11, 2008.
 The material terms and conditions of the Warrants are summarized as follows:
 
    
    the initial exercise price of each Warrant is $8.91 per share, subject to adjustments
as provided for in the Warrant;
    
    the Warrants are exercisable at any time during a period of five years from May 15,
2008;
    
    the Warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the Warrants is not available for the resale upon the
exercise of the Warrants;
  F-20




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 
    
    the Warrants contain certain limitations on the exercise thereof in the
event that the holder would beneficially own in excess of 9.99% of the Companys ordinary
shares outstanding immediately after giving effect to such exercise; and
    
    the Warrants require an automatic re-pricing of the exercise price if the Company
makes certain sales of its ordinary shares or ordinary share equivalents in a
capital-raising transaction at a price below the exercise price of the Warrants.
 The Notes included on the consolidated balance sheet as of December 31, 2009 and 2010 are
analyzed as follows:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Gross proceeds
    
    
    489,601
    
    
    
    489,601
    
    
    
    74,182Discount on notes:- Equity-classified Investor Warrants
    
    
    (36,062
    )
    
    
    (36,062
    )
    
    
    (5,464
    )- Liability-classified embedded derivatives
    
    
    (304,037
    )
    
    
    (304,037
    )
    
    
    (46,066
    )Value of debt component at date of issue
    
    
    149,502
    
    
    
    149,502
    
    
    
    22,652Foreign currency realignment
    
    
    7,261
    
    
    
    7,261
    
    
    
    1,100Accretion of discount
    
    
    296,146
    
    
    
    296,146
    
    
    
    44,871Conversion of Notes into ordinary shares
    
    
    (131,047
    )
    
    
    (131,047
    )
    
    
    (19,856
    )Redemption of Notes
    
    
    (209,700
    )
    
    
    (209,700
    )
    
    
    (31,773
    )Net value at end of year
    
    
    112,162
    
    
    
    112,162
    
    
    
    16,994
 The terms and features of the Investor Warrants were evaluated to determine whether they were
to be classified as equity or liability and the Company concluded that all indicators for
equity classification were present at the date of issuance.
 The gross proceeds from the issuance of the Notes were allocated to the Investors Warrants and
the Notes on a relative fair value basis. The fair value of the Investors Warrants applied
for the purposes of the aforementioned allocation was estimated using a multi-period binomial
option pricing model on the grant date of the warrants and amounted to approximately
RMB59,415. As a result of the allocation, approximately RMB36,062 of the gross proceeds from
the issuance of the Notes was allocated to the value of the Investor Warrants, which was
recorded as a discount to the face value of the Notes and credited to additional paid-in
capital.
 The Notes are a form of hybrid instrument that comes with embedded derivatives, including the
right to convert the Notes into ordinary shares of the Company by the note holders, a put
option conditional upon certain events of default and a put option conditional upon a change
of control. The embedded derivatives were removed from the debt host and accounted for
separately as derivative instruments. The embedded derivatives were determined to be
classified as liabilities on the balance sheet. Subsequent to initial recognition, the
liability-classified embedded derivatives are marked-to-market at the end of each reporting
period with the resulting gain or loss recognized in the consolidated statement of operations.
The valuation of the embedded derivatives at each period-end is derived from various valuation
methods which uses significant unobservable inputs (Level 3), including Monte Carlo Simulation
and Backward Dynamic Programming.
 The embedded derivative liability included on the consolidated balance sheet as of December
31, 2009 and 2010 is analyzed as follows:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Value on initial recognition
    
    
    304,037
    
    
    
    304,037
    
    
    
    46,066Foreign currency realignment
    
    
    (6,450
    )
    
    
    (7,309
    )
    
    
    (1,107
    )Cumulative gain on remeasurement
    
    
    (57,004
    )
    
    
    (76,010
    )
    
    
    (11,517
    )Settled on conversion of Notes
    
    
    (87,575
    )
    
    
    (87,575
    )
    
    
    (13,269
    )Settled on redemption of Notes
    
    
    (113,030
    )
    
    
    (113,030
    )
    
    
    (17,126
    )Net value at end of year
    
    
    39,978
    
    
    
    20,113
    
    
    
    3,047Loss (gain) on remeasurement
for the period include in
earnings attributable to the
change in unrealized loss
(gain) of liabilities still
outstanding at end of year
    
    
    1,129
    
    
    
    (19,006
    )
    
    
    (2,880
    )
  F-21




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 The discount arising from the Investors Warrants and the embedded derivatives is accreted to
interest expense to the first put date of the Notes using the effective interest method. The
discount was fully accreted as of December 31, 2009.
 Costs associated with the issuance of the Notes, which have been classified as deferred debt
issuance costs on the consolidated balance sheet, are analyzed as follows:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Amount attributed to Agent Warrants
    
    
    31,451
    
    
    
    31,451
    
    
    
    4,765Other cash costs
    
    
    20,887
    
    
    
    20,887
    
    
    
    3,165Total deferred debt issuance costs on initial recognition
    
    
    52,338
    
    
    
    52,338
    
    
    
    7,930Foreign currency realignment
    
    
    (1,164
    )
    
    
    (1,164
    )
    
    
    (177
    )Amortization
    
    
    (45,574
    )
    
    
    (45,574
    )
    
    
    (6,905
    )Written-off on conversion of Notes
    
    
    (5,600
    )
    
    
    (5,600
    )
    
    
    (848
    )Net value at end of year
    
    
    
    
    
    
    
    
    
    
    
 The fair value of the Agent Warrants on the grant date, which was estimated using a
multi-period binomial option pricing model, amounted to approximately RMB33,951. Of this
amount, RMB31,451 was debited to deferred debt issuance costs as cost associated with the
issuance of the Notes and the balance of RMB2,500 was debited to additional paid-in capital as
cost associated with the issuance of the Investor Warrants.
 The deferred debt issuance costs were amortized to expense to the first put date of the Notes
using the effective interest method.
 Effective January 1, 2009, the Company adopted the guidance provided in FASB ASC 815-40-15-5
through 815-40-15-8 (formerly EITF 07-5, Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock). ASC 815-40-15-5 through 815-40-15-8 applies to
any freestanding financial instruments or embedded features that have the characteristics of a
derivative, as defined in ASC paragraph 815-10-15-83 (formerly SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities) and to any freestanding financial instruments
that are potentially settled in an entitys own common stock.
 As a result of adopting ASC 815-40-15 through 815-40-15-8, the Investors Warrants and the
Agent Warrants outstanding at January 1, 2009, which were previously treated as equity
pursuant to the scope exception in ASC 815-10-15-74 (formerly paragraph 11(a) of SFAS No.
133), were no longer afforded equity treatment. As such, as of January 1, 2009, the Company
reclassified the fair value of the Warrants from equity to liability as if the Warrants had
been treated as a derivative liability since their date of issue. On January 1, 2009, the
Company recognized a cumulative-effect adjustment of RMB15,414, whereby RMB53,158 was
reclassified to beginning retained earnings, RMB1,440 to foreign currency translation
adjustments, and RMB70,012 from additional paid-in capital, to recognize the fair value of the
Warrants as warrant liability on such date.
 The warrant liability included on the consolidated balance sheet as of December 31, 2009 and
2010 is analyzed as follows:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Value on initial recognition
    
    
    15,414
    
    
    
    15,414
    
    
    
    2,335Foreign currency realignment
    
    
    4
    
    
    
    (640
    )
    
    
    (97
    )Cumulative loss on remeasurement
    
    
    7,219
    
    
    
    2,876
    
    
    
    436Net value at end of year
    
    
    22,637
    
    
    
    17,650
    
    
    
    2,674Loss (gain) on remeasurement
for the period included in
earnings attributable to the
change in unrealized loss
(gain) of liabilities still
outstanding at end of year
    
    
    7,219
    
    
    
    (4,343
    )
    
    
    (658
    )
 Changes in the fair value of the warrant liability subsequent to January 1, 2009 are
recognized in the consolidated statement of operations.
  F-22




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 The fair value of the Warrants on the date of grant was US$5.15 per warrant, which was
estimated by management using a multi-period binomial option pricing model based on the
following assumptions:
 Stock price of underlying ordinary share on grant date
    
    
    US$7.45Risk-free interest rate
    
    
    4.3
    %Expected dividend yield
    
    
    0
    %Expected term
    
    5 yearsExpected stock price volatility
    
    
    65.38
    %
 The fair value of the Warrants as of January 1, 2009, December 31, 2009 and December 31, 2010
was US$0.87 per warrant, US$1.28 per warrant, and US$1.03 per warrant, respectively, which was
estimated by management using the Black-Scholes option pricing model based on the following
assumptions (Level 2):
 January 1,
    
    
    December
    
    
    December2009
    
    
    31, 2009
    
    
    31, 2010Stock price of underlying ordinary share
    
    
    US$2.54
    
    
    
    US$3.66
    
    
    
    US$4.06Risk-free interest rate
    
    
    1.54
    %
    
    
    1.88
    %
    
    
    0.74
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected term
    
    4.37 years
    
    
    3.37 years
    
    
    2.37 yearsExpected stock price volatility
    
    
    79.21
    %
    
    
    80.55
    %
    
    
    80.27
    %
 In 2008, US$8,251 of the principal amount of the Notes and accrued interest thereon of US$46
were converted into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49
per share. In 2009, US$30,706 of the principal amount of the Notes were redeemed and
US$16,073 of the principal amount of the Notes plus accrued interest thereon of US$590 were
converted into 4,114,286 ordinary shares at a conversion price of US$4.05 per share. The
extinguishment of the convertible debts that arose from the aforementioned conversions and
redemption resulted in a loss of RMB10,634 for the year ended December 31, 2008 and a gain of
RMB159,326 for the year ended December 31, 2009, computed as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Fair value of ordinary shares issued on conversion
    
    
    55,054
    
    
    
    126,650
    
    
    
    18,555Cash consideration paid on redemption
    
    
    
    
    
    
    209,700
    
    
    
    30,72155,054
    
    
    
    336,350
    
    
    
    49,276(Less) add: Carrying amount of:- Notes
    
    
    (21,287
    )
    
    
    (319,460
    )
    
    
    (46,801
    )- Accrued interest
    
    
    (316
    )
    
    
    (4,028
    )
    
    
    (590
    )- Embedded derivatives
    
    
    (28,417
    )
    
    
    (172,188
    )
    
    
    (25,226
    )- Deferred debt issuance costs
    
    
    5,600
    
    
    
    
    
    
    
    Loss (gain) on extinguishment of convertible debts
    
    
    10,634
    
    
    
    (159,326
    )
    
    
    (23,341
    )
 12
    
    Segment information
 The Group has one operating segment  CECT, the operating subsidiary in the PRC. The results
of CECT used by management to evaluate business performance are based on U.S. GAAP and those
accounting policies are consistent with those used in the preparation of the consolidated
financial statements.
 Segment income is determined based on income before income tax expense and further excludes
amortization of other intangible assets, impairment of goodwill, impairment of other
intangible assets, fair value adjustments on property, machinery and equipment, land use
rights, and income (loss) before income tax expense of the Company. Segment assets consist of
the total assets of CECT excluding goodwill, other intangible assets, fair value adjustments
on property, machinery and equipment, and land use rights, and other assets held by the
Company.
  F-23




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Revenues- Sales of mobile phones and accessories
    
    
    2,140,346
    
    
    
    1,624,270
    
    
    
    848,169
    
    
    
    128,511- Services and other revenues
    
    
    13,527
    
    
    
    8,642
    
    
    
    7,375
    
    
    
    1,117Total segment and consolidated revenue
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    855,544
    
    
    
    129,628Segment income (loss)
    
    
    606,853
    
    
    
    (3,349
    )
    
    
    (247,780
    )
    
    
    (37,542
    )Segment assets
    
    
    4,327,502
    
    
    
    4,012,783
    
    
    
    3,231,470
    
    
    
    489,616Interest income
    
    
    22,758
    
    
    
    18,451
    
    
    
    21,976
    
    
    
    3,330Interest expense
    
    
    (72,562
    )
    
    
    (50,368
    )
    
    
    (40,408
    )
    
    
    (6,122
    )Depreciation
    
    
    (13,898
    )
    
    
    (10,607
    )
    
    
    (4,931
    )
    
    
    (747
    )
 A reconciliation of segment income (loss) to consolidated income (loss) before income tax
expense for the years ended December 31, 2008, 2009 and 2010, is as follows:
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Segment income (loss)  CECT
    
    
    606,853
    
    
    
    (3,349
    )
    
    
    (247,780
    )
    
    
    (37,542
    )Amortization of other intangible assets
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (4,433
    )
    
    
    (672
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (112,814
    )
    
    
    (17,093
    )Impairment of other intangible assets
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    
    
    
    
    Fair value adjustment on property,
machinery and equipment
    
    
    1,941
    
    
    
    5,641
    
    
    
    1,780
    
    
    
    270Fair value adjustment on land use rights
    
    
    26
    
    
    
    1,144
    
    
    
    
    
    
    
    Income (loss) before income tax expense
of the Company
    
    
    24,564
    
    
    
    (223,460
    )
    
    
    9,480
    
    
    
    1,436Consolidated income (loss) before
income tax expense
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (353,767
    )
    
    
    (53,601
    )
 A reconciliation of segment assets to consolidated total assets as of December 31, 2009 and
2010 is as follows:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Total segment assets  CECT
    
    
    4,012,783
    
    
    
    3,231,470
    
    
    
    489,616- Goodwill
    
    
    112,814
    
    
    
    
    
    
    
    - Other intangible assets, net
    
    
    4,433
    
    
    
    
    
    
    
    - Property, machinery and equipment, net
    
    
    (6,460
    )
    
    
    (4,680
    )
    
    
    (709
    )- Assets held by the Company
    
    
    12,517
    
    
    
    6,647
    
    
    
    1,007- Deferred income taxes recognized on consolidation
    
    
    506
    
    
    
    
    
    
    
    Total assets
    
    
    4,136,593
    
    
    
    3,233,437
    
    
    
    489,914
 13
    
    Income taxes
 The Company and its subsidiaries are subject to income tax on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate.
 The Company was incorporated under the International Business Companies Act of the BVI and,
accordingly, is exempt from BVI income taxes.
  F-24




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 
 CECT, including its Huizhou branch and its PRC subsidiaries, is subject to enterprise income
tax at a rate of 25%. The deferred tax assets and liabilities of CECT and its PRC
subsidiaries are measured using the enacted tax rate of 25% that applies in the years in which
those temporary differences are expected to be recovered or settled.
 The current tax law in the PRC also imposes a 10% withholding income tax for dividends
distributed by a foreign invested enterprise to its immediate holding company outside of China
for distribution of earnings generated after January 1, 2008. Under the current tax law, the
distribution of earnings generated prior to January 1, 2008 is exempt from the withholding
tax. In addition, as CECT will not be distributing its earnings for the year ended December
31, 2009 and 2010 to the Company, no deferred tax liability has been recognized for the
undistributed earnings of CECT through December 31, 2010.
 Income tax expense consists of the following:
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Current expense
    
    
    162,267
    
    
    
    22,415
    
    
    
    
    
    
    
    Deferred (benefit) expense
    
    
    (6,550
    )
    
    
    (10,783
    )
    
    
    17,456
    
    
    
    2,645Total income tax expense
    
    
    155,717
    
    
    
    11,632
    
    
    
    17,456
    
    
    
    2,645
 A reconciliation of the expected income tax expense (based on the PRC statutory income tax
rate) to the actual income tax expense is as follows:
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Expected expense (benefit) based on
PRC statutory income tax rate at 25%
    
    
    148,855
    
    
    
    (59,589
    )
    
    
    (88,442
    )
    
    
    (13,400
    )Tax rate differential of the Company
    
    
    (5,972
    )
    
    
    53,870
    
    
    
    (2,370
    )
    
    
    (359
    )Non-deductible expenses:- Share-based compensation
expenses
    
    
    3,667
    
    
    
    8,730
    
    
    
    5,473
    
    
    
    829- Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    28,203
    
    
    
    4,273- Other
    
    
    9,257
    
    
    
    7,604
    
    
    
    8,463
    
    
    
    1,282Non-taxable income
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    Valuation allowance
    
    
    
    
    
    
    1,017
    
    
    
    66,129
    
    
    
    10,020Actual income tax expense
    
    
    155,717
    
    
    
    11,632
    
    
    
    17,456
    
    
    
    2,645
 Deferred income tax assets and liabilities reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of those amounts shown on
the consolidated balance sheets are as follows:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Deferred tax assets:Tax losses carried forward
    
    
    1,017
    
    
    
    44,820
    
    
    
    6,791Allowance for doubtful accounts
    
    
    3,233
    
    
    
    7,056
    
    
    
    1,069Inventory write-off
    
    
    9,841
    
    
    
    13,717
    
    
    
    2,078Accrued product warranties
    
    
    481
    
    
    
    384
    
    
    
    58Assets held for sale
    
    
    2,694
    
    
    
    
    
    
    
    Property, machinery and equipment, net
    
    
    1,614
    
    
    
    1,169
    
    
    
    177Impairment of investment at cost
    
    
    701
    
    
    
    
    
    
    
    Total deferred tax assets
    
    
    19,581
    
    
    
    67,146
    
    
    
    10,173Valuation allowance
    
    
    (1,017
    )
    
    
    (67,146
    )
    
    
    (10,173
    )Total deferred tax assets net of valuation allowance
    
    
    18,564
    
    
    
    
    
    
    
    Deferred tax liability:Other intangible assets, net
    
    
    (1,108
    )
    
    
    
    
    
    
    Net deferred tax assets
    
    
    17,456
    
    
    
    
    
    
    
    
   F-25




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 In assessing the realizability of deferred income tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment.
 Due to continued uncertainties in the business operating environment, the Group does not
believe that sufficient positive evidence exists to conclude that the recoverability of its
deferred tax assets is more likely than not to be realized. Consequently, the Group has
provided full valuation allowances on its deferred tax assets during the year ended December
31, 2010.
 As of December 31, 2009 and 2010, the Group has no material unrecognized tax benefit which
would favorably affect the effective income tax rate in future periods and does not believe
that there will be any significant increases or decreases of unrecognized tax benefits within
the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Group during the year ended December 31, 2008, 2009 and 2010, and no provision
for interest and penalties is deemed necessary as of December 31, 2009 and 2010.
 According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the taxpayer
or its withholding agent. The statute of limitations extends to five years under special
circumstances, which are not clearly defined. In the case of a related party transaction, the
statute of limitation is ten years. There is no statute of limitation in the case of tax
evasion.
 14
    
    Distribution of income
 For the years ended December 31, 2008, 2009 and 2010, substantially all of the Groups income
(loss) was attributable to CECT. Income of CECT, as determined under generally accepted
accounting principles in the PRC (the PRC GAAP), is distributable after transfer to
dedicated statutory reserve funds, namely, the general reserve, the enterprise expansion fund,
and the staff welfare and bonus fund, pursuant to the laws applicable to Foreign Investment
Enterprises in the PRC and the Companys articles of association. These reserve funds can
only be used for specific purposes and are not distributable as cash dividends. Under the
relevant regulations, CECT is required to transfer at least 10% of its annual PRC GAAP income
to the general reserve until such reserve reaches 50% of its registered capital.
 Transfers to the enterprise expansion fund and the staff welfare and bonus fund are at the
discretion of the board of directors of CECT. For the years ended December 31, 2008, 2009 and
2010, CECT made transfers to the general reserve of approximately RMB46,429, RMB513 and nil,
respectively. The board of directors of CECT did not recommend any transfers to the
enterprise expansion fund and the staff welfare and bonus fund for the years ended December
31, 2008, 2009 and 2010. The accumulated balances of the statutory reserve funds maintained
at CECT as of December 31, 2009 and 2010 were both RMB184,068 (US$27,889).
 15
    
    Earnings (loss) per share
 The following represents a reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share:
 Year ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net income (loss) attributable to holders of
ordinary shares
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (362,842
    )
    
    
    (54,976
    )Amount allocated to participating convertible notes
    
    
    (53,889
    )
    
    
    
    
    
    
    
    
    
    
    Basic net income (loss) available to holders of
ordinary shares
    
    
    369,915
    
    
    
    (250,369
    )
    
    
    (362,842
    )
    
    
    (54,976
    )Net income allocated to participating convertible
notes
    
    
    53,889
    
    
    
    
    
    
    
    
    
    
    
    Interest on convertible notes
    
    
    92,944
    
    
    
    
    
    
    
    
    
    
    
    Exchange loss on revaluation of convertible notes
    
    
    11,471
    
    
    
    
    
    
    
    
    
    
    
    Loss on extinguishment of convertible notes
    
    
    10,634
    
    
    
    
    
    
    
    
    
    
    
    Gain on remeasurement of derivatives embedded in
convertible notes
    
    
    (144,939
    )
    
    
    
    
    
    
    
    
    
    
    Fully diluted net income (loss)
    
    
    393,914
    
    
    
    (250,369
    )
    
    
    (362,842
    )
    
    
    (54,976
    )Weighted average ordinary shares:Basic
    
    
    49,216,000
    
    
    
    48,034,000
    
    
    
    52,935,000
    
    
    
    52,935,000Effect of dilutive ordinary share equivalents
    
    
    7,170,000
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    56,386,000
    
    
    
    48,034,000
    
    
    
    52,935,000
    
    
    
    52,935,000Earnings (loss) per ordinary share:Basic
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )Diluted
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (6.85
    )
    
    
    (1.04
    )
  F-26




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 Except for the convertible notes issued in May 2008, all other ordinary share equivalents
outstanding during the year ended December 31, 2008, including share options and warrants,
were anti-dilutive and accordingly, were excluded from the calculation of diluted earnings per
share for the year ended December 31, 2008. For the years ended December 31, 2009 and 2010,
all ordinary share equivalents outstanding, including share options, restricted shares,
convertible notes and warrants, were anti-dilutive.
 16
    
    Ordinary shares
 On January 7, 2008, the Company issued 565,000 new ordinary shares at US$7.50 per share upon
the exercise of share options granted to a director and certain of the Companys employees.
 On May 15, 2008, the Company repurchased 6,966,666 of its issued ordinary shares at US$6.94
per share from two existing shareholders of the Company through the issuance of the Notes
discussed in note 12 to the consolidated financial statements. All ordinary shares
repurchased were subsequently cancelled.
 On August 19, 2008, the holders of the Notes exercised the option to convert US$8,251 of the
principal amount of the Notes and accrued interest thereon of US$46 into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49 per share. The stock price of the
Companys ordinary shares was US$5.31 at the date of exercise of the option to convert.
 On December 4, 2009, the Company issued 960,884 ordinary shares to a director and various
employees of the Group upon the vesting of restricted shares granted under the QXMC 2007 Stock
Plan (Note 17(a)).
 On November 23, 2009, a holder of the Notes exercised the option to convert US$8,187 of the
principal amount of the Notes and accrued interest thereon of US$293 into 2,093,996 ordinary shares of the Company at a conversion price of US$4.05 per share. The stock price of the
Companys ordinary shares was US$4.66 at the date of exercise of the option to convert.
 On December 9, 2009, a holder of the Notes exercised the option to convert US$7,886 of the
principal amount of the Notes and accrued interest thereon of US$296 into 2,020,290 ordinary shares of the Company at a conversion price of US$4.05 per share. The stock price of the
Companys ordinary shares was US$4.35 at the date of exercise of the option to convert.
 On April 1, 2010, the Company issued 331,391 ordinary shares to a director and various
employees of the Group upon the vesting of restricted shares granted under the QXMC 2007 Stock
Plan (Note 17(a)).
 17
    
    Stock plan and warrants
 (a)
    
    QXMC 2007 Stock Plan
 Pursuant to a shareholders resolution passed on March 19, 2007, the Company adopted an equity
incentive plan (the QXMC 2007 Stock Plan) under which the Company may grant incentive share
options, nonstatutory share options, restricted shares, share appreciation rights, restricted
share units, performance units, performance shares and other stock based awards to certain
qualifying directors, employees and consultants of the Group in accordance with the provisions
of the QXMC 2007 Stock Plan.
 On March 19, 2007, the Company granted share options to a director and various employees of
the Group to purchase 2,716,520 shares of the Companys ordinary shares at an exercise price
of US$7.50 per share. The options granted have terms ranging from 2 to 6 years from the date
of grant and vest on various dates commencing from November 1, 2007. In addition, on March
19, 2007, in consideration of services rendered in connection with the Companys IPO, the
Company also granted an option to a consultant to purchase up to 1,200,000 shares of the
Companys common stock at an exercise price of US$18 per share with a term of four years
commencing from the grant date. The option vested on April 1, 2007 and will expire on March
18, 2011.
 The Company did not grant any share options during the years ended December 31, 2008, 2009 and
2010.
 In December 2009, the Company granted 1,955,057 restricted shares to a director and various
employees and concurrently cancelled 1,744,800 of employee share options that were outstanding
under the QXMC 2007 Stock Plan. Of the 1,955,057 restricted shares that were granted, 960,884
shares vested immediately while the balance of 994,173 shares vest on various dates ending
April 1, 2012. The grant of restricted shares and cancellation of outstanding share options
resulted in a modification charge of approximately US$6,360,
which is being recognized over the vesting periods of the restricted shares. The modification
charge recognized in 2009 and 2010 amounted to US$3,348 (RMB22,851) and US$1,337 (RMB9,046),
respectively. As of December 31, 2010, the total unrecognized modification charge amounted to
US$1,652, which is expected to be recognized over a remaining weighted average vesting period
of 1.25 year.
  F-27




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 
 Stock option activity of the Company during the year ended December 31, 2010 was as follows:
 Weighted
    
    
    Weightedaverage
    
    
    averageexercise
    
    
    remaining
    
    
    AggregateNumber of
    
    
    price
    
    
    contractual
    
    
    intrinsicoptions
    
    
    per share
    
    
    term
    
    
    valueUS$
    
    
    
    
    
    
    US$Balance as of January 1, 2010
    
    
    1,200,000
    
    
    
    18.00Balance as of December 31, 2010
    
    
    1,200,000
    
    
    
    18.00
    
    
    0.2 years
    
    
    Exercisable as of December 31, 2010
    
    
    1,200,000
    
    
    
    18.00
    
    
    0.2 years
    
    
    
 The following table summarizes the activities for the Companys unvested restricted shares for
the year ended December 31, 2010:
 WeightedaverageNumber of
    
    
    grant dateshares
    
    
    fair valueUS$Balance as of January 1, 2010
    
    
    994,173
    
    
    
    4.60Vested
    
    
    (331,391
    )
    
    
    4.60Canceled
    
    
    (7,776
    )
    
    
    4.60Balance as of December 31, 2010
    
    
    655,006
    
    
    
    4.60Expected to vest after December 31, 2010
    
    
    655,006
    
    
    
    4.60
 The Company recognizes compensation cost based on the grant date fair value over the period
that the employees are required to provide services in exchange for the award. The total
amount of share-based compensation expenses recognized during the years ended December 31,
2008, 2009 and 2010, was approximately US$2,111 (RMB14,668) and US$5,115 (RMB34,922) and
US$3,236 (RMB21,892), respectively. As of December 31, 2010, there was US$4,171 of
unrecognized compensation cost related to unvested restricted shares. This amount is expected
to be recognized over a remaining weighted average vesting period of 1.25 year.(b)
    
    Warrants
 Warrants outstanding during the years ended December 31, 2008, 2009 and 2010 relate to the
Warrants issued in connection with the issuance of the Notes detailed in note 11 to the
consolidated financial statements. Information about the Warrants outstanding as of December
31, 2010 is as follows:
 Weighted
    
    
    Weightedaverage
    
    
    averageexercise
    
    
    remainingNumber of
    
    
    price
    
    
    contractualwarrants
    
    
    per share
    
    
    TermUS$Investor Warrants
    
    
    1,648,721
    
    
    
    8.91
    
    
    2.4 yearsAgent Warrants
    
    
    942,127
    
    
    
    8.91
    
    
    2.4 yearsTotal
    
    
    2,590,848
    
    
    
    8.91
    
    
    2.4 yearsExercisable as of December 31, 2010
    
    
    2,590,848
    
    
    
    8.91
    
    
    2.4 years
  F-28




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 18
    
    Fair value of financial instruments
 The carrying amounts for cash, restricted cash, accounts receivable, prepayments to suppliers,
prepaid expenses and other current assets, short-term borrowings, accounts payable,
prepayments from customers, accrued liabilities, amounts due from related parties, and other
payables and current liabilities, approximate their fair values because of the short maturity
of these instruments.
 The carrying amount and the estimated fair value of the Groups convertible notes at December
31, 2010 were RMB112,162 (US$16,994) (2009: RMB112,162) and RMB113,449 (US$17,189) (2009:
RMB106,281), respectively. The liability-classified embedded derivatives relating to the
convertible notes and the Warrants are measured at fair value at the end of each reporting
period (see note 11).
 19
    
    Commitments and contingencies
 The Group has operating lease agreements for office and factory premises which extend through
October 2013. As of December 31, 2010, the Groups future minimum lease payments required
under non-cancellable operating leases are as follows:
 RMBYear ending December 31,- 2011
    
    
    2,376- 2012
    
    
    1,751- 2013
    
    
    1,051Total
    
    
    5,178
 Lease expenses of the Group for the years ended December 31, 2008, 2009 and 2010 were
approximately RMB4,998, RMB6,090 and RMB6,363 (US$964), respectively.
 20
    
    Related party transactions
 (a)
    
    Name and relationship of related parties
 Name of related party
    
    Existing relationship with the CompanyQiao Xing Universal Resources, Inc. (Xing)
    
    Parent companyHuizhou Qiao Xing Communication Industry 
Ltd. (QXCI)
    
    Subsidiary of Xing until November 30, 2009Qiao Xing Group Limited (QXGL)
    
    A company controlled by certain directors of the
Company
 (b)
    
    Summary of related party transactions
 (i)
    
    During the years ended December 31, 2008 and 2009, the Group received processing
fee income from QXCI for handset processing services rendered, amounting to RMB6,573 and
RMB1,371, respectively.(ii)
    
    During the year ended December 31, 2009, the Company redeemed US$30,706 (equivalent
to RMB150,000) of the principal amount of the Notes, which were owned by Xing. In
addition, the Company paid to Xing US$1,073 (equivalent to RMB7,331) for interest that
was accrued on the Notes as of the date of redemption.
 The Group also participates in a cash management arrangement at the direction and discretion
of Xing as further described below. Other transactions with related parties are set out in
other Notes to the consolidated financial statements.
 (c)
    
    Summary of related party balances
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Amount due to Xing
    
    
    (5,568
    )
    
    
    (8,136
    )
    
    
    (1,233
    )
  F-29




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
 The amount represents non-interest bearing net advances to and from Xing which are unsecured
and have no fixed repayment terms. The amount resulted principally from the Groups
participation in a cash management arrangement at the direction and discretion of Xing (Note
2(c)) and represents the netting of the following advances to and from the related parties of
Xing:
 December 31,2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Amounts due to related parties before
execution of netting arrangement:- Xing
    
    
    (3,923
    )
    
    
    (4,373
    )
    
    
    (663
    )- QXGL
    
    
    (1,498
    )
    
    
    (3,615
    )
    
    
    (548
    )- Director: Wu Zhi Yang
    
    
    (147
    )
    
    
    (148
    )
    
    
    (22
    )Net advances from Xing
    
    
    (5,568
    )
    
    
    (8,136
    )
    
    
    (1,233
    )
 21
    
    Subsequent events
 Subsequent to the end of the financial year ended December 31, 2010,
 (a)
    
    the Company issued 327,503 ordinary shares to a director and various employees of
the Group upon the vesting of restricted shares that were granted in 2009 under the QXMC
2007 Stock Plan.(b)
    
    US$16,975 of the principal amount of the Notes plus accrued interest thereon of
US$1,450 was converted into 4,549,453 ordinary shares at a conversion price of US$4.05
per share.(c)
    
    CECT disposed of its 100% equity interest in Beijing Yilian Xuntong Technology Co.,
Ltd. to an independent third-party for a total consideration of RMB10,000.
  F-30