<PAGE>
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

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

                                       OR

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

         FOR THE TRANSITION PERIOD FROM _____________ TO _______________


Commission file number 0-29946

                       QIAO XING UNIVERSAL TELEPHONE, INC.
          -------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                       QIAO XING UNIVERSAL TELEPHONE, INC.
           -----------------------------------------------------------
                 (Translation of Registrant's name into English)

                             BRITISH VIRGIN ISLANDS
             -------------------------------------------------------
                 (Jurisdiction of incorporation or organization)

                               QIAO XING BUILDING
                            QIAO XING INDUSTRIAL ZONE
                                  XIAO JIN KOU
                               HUIZHOU, GUANGDONG,
                           PEOPLE'S REPUBLIC OF CHINA
                    ----------------------------------------
                    (Address of principal executive offices)

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



     Title of each                            Name of each exchange
         class                                 on which registered
    ---------------                          ---------------------

         None                                          N/A




<PAGE>




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

                  $.001 Par Value Common Stock ("Common Stock")
                  ---------------------------------------------
                                (Title of Class)

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

                                      None
                               ------------------
                                (Title of Class)

         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of December 31, 2001:

                        14,282,400 Shares of Common Stock

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

         Yes  X     No
             ---       ---

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

Item 17         Item 18   X
         ---             ---

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)

         Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

         Not Applicable.




                                       -2-



<PAGE>




                           FORWARD-LOOKING STATEMENTS


         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 20-F and other materials filed or to be filed by us with
the Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by us) contains
statements that are forward-looking, such as statements relating to plans for
future expansion and other business development activities as well as other
capital spending, financing sources and the effects of competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on our behalf. These risks and uncertainties include, but are not
limited to, those relating to dependence upon key personnel, control by
principal shareholder, competition, material factors relating to the operations
of the business, PRC considerations, dependence on factories in China, and
general economic conditions.





                                       -3-



<PAGE>




                                     PART I


ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

         Not applicable.


ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

         Not applicable.


ITEM 3. KEY INFORMATION

A.       SELECTED FINANCIAL DATA.

         We prepare the consolidated financial statements in accordance with
United States Generally Accepted Accounting Principles ("US GAAP"). The
following summary consolidated statements of operations data for the years ended
December 31, 1999, 2000 and 2001 and the consolidated balance sheet data as of
December 31, 2000 and 2001 were derived from our audited financial statements
included elsewhere in this Annual Report and should be read in conjunction with
such financial statements. The following summary consolidated statements of
operations data for the years ended December 31, 1997 and 1998 and the
consolidated balance sheet data as of December 31, 1997, 1998 and 1999 were
derived from our audited financial statements not included elsewhere in this
Annual Report and have been prepared in accordance with US GAAP and have been
derived from audited financial statements. The following summary financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included elsewhere in this Annual Report.

<Table>
<Caption>

                                                                   Years ended December 31
                                  1997             1998             1999             2000                     2001
                               -----------      -----------      -----------      -----------      ----------------------------
                                 Rmb'000          Rmb'000          Rmb'000          Rmb'000          Rmb'000        US$'000 (3)

<S>                            <C>              <C>              <C>              <C>              <C>               <C>
Net sales                          383,934          351,184          383,633          392,529          249,271           30,118
Cost of goods sold                (300,910)        (251,935)        (259,658)        (271,606)        (212,229)         (25,642)
                               -----------      -----------      -----------      -----------      -----------      -----------

    Gross profit                    83,024           99,249          123,975          120,923           37,042            4,476
Selling expenses                   (12,183)         (11,173)         (15,695)         (15,325)          (6,172)            (746)
General and administrative
    expenses                       (14,952)         (21,548)         (28,562)         (40,605)         (44,114)          (5,330)
</Table>




                                       -4-



<PAGE>


<Table>

<S>                            <C>             <C>             <C>             <C>             <C>             <C>
Impairment loss on

   - Land Use Rights                     --              --              --              --          (5,004)           (605)

   - Property, machinery
     and equipment                       --              --              --              --          (8,722)         (1,054)
                               ------------    ------------    ------------    ------------    ------------    ------------
Income (loss) from operation         55,889          66,528          79,718          64,993         (26,970)         (3,259)

Interest expense                     (3,390)         (5,101)         (5,577)        (23,550)        (23,107)         (2,792)
Interest income                          54             287           1,981           2,061           2,000             242

Exchange gain(loss), net                 --              10              (8)          2,363            (104)            (13)

Other (expenses) income, net           (115)           (971)            252            (197)            908             110
                               ------------    ------------    ------------    ------------    ------------    ------------

  Income (loss) before
    income tax                       52,438          60,753          76,366          45,670         (47,273)         (5,712)
(Provision for) Write-back of
    income tax                       (6,565)         (7,900)        (20,298)        (16,599)         25,687           3,104
                               ------------    ------------    ------------    ------------    ------------    ------------

     Income (loss) before
        minority interests           45,873          52,853          56,068          29,071         (21,586)         (2,608)

  Minority interests(1)              (4,664)         (5,590)         (6,365)         (5,600)            164              20
                               ------------    ------------    ------------    ------------    ------------    ------------

     Net income (loss)               41,209          47,263          49,703          23,471         (21,422)         (2,588)
                               ============    ============    ============    ============    ============    ============

Earnings (loss) per common
  share

   - Basic(2)                       Rmb5.43         Rmb5.96         Rmb5.33         Rmb2.03       Rmb(1.67)        US$(0.20)
                               ============    ============    ============    ============    ============    ============

   - Diluted(2)                     Rmb5.43         Rmb5.96         Rmb5.32         Rmb1.98       Rmb(1.67)        US$(0.20)
                               ============    ============    ============    ============    ============    ============


Weighted average number of
    outstanding shares

    - Basic(2)                    7,595,000       7,936,000       9,333,000      11,572,000      12,838,000      12,838,000
                               ============    ============    ============    ============    ============    ============

    - Diluted(2)                  7,595,000       7,936,000       9,344,000      11,878,000      12,838,000      12,838,000
                               ============    ============    ============    ============    ============    ============
</Table>


                                       -5-



<PAGE>


<Table>
<Caption>

                                                                                     As of December 31,
                                                             -------------------------------------------------------------------
                                                              1997        1998        1999        2000              2001
                                                             -------    --------    --------    --------    --------------------
                                                             Rmb'000     Rmb'000     Rmb'000     Rmb'000     Rmb'000     US$'000

<S>                                                          <C>        <C>         <C>         <C>         <C>          <C>
BALANCE SHEET DATA
Cash and bank deposits                                         6,461       6,566       2,870      33,490       7,616         920
Working capital                                              101,463     128,162      56,917     136,616     147,505      17,821
Property, machinery and equipment, net                        36,181      33,449      48,473     182,140     183,600      22,183
Construction in progress                                          --      26,272     106,937      17,869         579          70
Land use rights                                                5,164       5,364     112,301     226,463     221,359      26,745
Debt issuance cost, net                                           --          --          --       8,234          --          --
Total assets                                                 287,478     379,236     576,847     939,267     911,238     110,097
Short-term-debts                                              27,513      47,886     103,270     170,443     189,990      22,955
Long-term-debts                                               18,151      17,966       8,169      44,869       8,163         986
Total liabilities                                            162,821     203,955     281,794     411,173     360,689      43,579
Minority interest (1)                                         13,711      11,301      17,666      23,266      23,102       2,791
Shareholders' equity                                         110,946     163,980     277,387     504,828     527,447      63,727

Cash flows data
Cash flows from operating activities                          (4,473)     14,711     110,628      (7,568)     26,489       3,200
Cash flows from investing activities                         (23,680)    (28,965)   (214,669)   (243,200)    (76,637)     (9,258)
Cash flows from financing activities                          27,727      14,349     100,353     281,315      24,344       2,942
</Table>

(1)      Mr. Rui Lin Wu and Mr. Zhi Yang Wu own minority equity interests in a
         subsidiary of our company.

(2)      Earnings per share is computed by dividing net income for 1997 by
         7,595,000 shares, for 1998 by 7,936,000 shares, for 1999 by 9,333,000
         shares, for 2000 by 11,572,000 shares and for 2001 by 12,838,000
         shares. The weighted average number of shares of common stock
         outstanding during the year, on the basis that the share split and the
         issue of 4,500,000 shares of common stock for the acquisition of a 90%
         interest in QXIT in July 1997 had been consummated prior to the years
         presented. Diluted earnings per common share is computed by using the
         weighted average number of common share outstanding adjusted to include
         the potentially dilutive effect of outstanding stock options, warrants
         and convertible debentures, to the extent such instruments were
         dilutive during the period.

(3)      Translation of amounts from Renminbi ("Rmb") into United States dollars
         ("US$") is for the convenience of readers and has been made at the noon
         buying rate in New York City for cable transfers in foreign currencies
         as certified for customs purposes by the Federal Reserve Bank of New
         York on December 31, 2001 of US$1.00 = Rmb 8.2766. No representation is
         made that the Renminbi amounts could have been, or could be, converted
         into United States dollars at that rate or at any other rate.





                                       -6-



<PAGE>




EXCHANGE RATE INFORMATION

         We have prepared our consolidated financial statements in accordance
with United States Generally Accepted Accounting Principles consistently applied
and publish such statements in Renminbi, the functional currency of our
subsidiaries and the legal tender currency of China. All references to
"Renminbi" or "Rmb" are to Renminbi. All references to "U.S. Dollars,"
"dollars," "US$" or "$" are to United States dollars.

         The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:

<Table>
<Caption>

                                                      NOON BUYING RATE(1)
                                                      -------------------

             CALENDAR YEAR                              AVERAGE (2)
             -------------                              -----------
                                                       (RMB PER US$)
<S>                                                   <C>

                  1997                                    8.3193
                  1998                                    8.2991
                  1999                                    8.2785
                  2000                                    8.2784
                  2001                                    8.2772
</Table>

-------

(1)      The noon buying rate in New York for cable transfers payable in foreign
         currencies as certified for customs purposes by the Federal Reserve
         Bank of New York. Since April 1994, the noon buying rate has been based
         on the PBOC Rate. As a result, since April 1994, the noon buying rate
         and the PBOC Rate have been substantially similar.

(2)      Determined by averaging the rates on the last business day of each
         month during the relevant period.





                                       -7-



<PAGE>




<Table>
<Caption>

          CALENDAR MONTH                      HIGH                     LOW
          --------------                      ----                     ---
<S>                                           <C>                     <C>

      December 2001                          8.2773                   8.2676
      January 2002                           8.2800                   8.2765
      February 2002                          8.2770                   8.2765
      March 2002                             8.2800                   8.2766
      April 2002                             8.2780                   8.2769
      May 2002                               8.2775                   8.2765
      June 2002                              8.2700                   8.2775
</Table>

As of June 28, 2002, being the latest practicable date, the exchange rate was
US$1.00 = Rmb 8.2771.


B.       CAPITALIZATION AND INDEBTEDNESS.

         Not applicable.


C.       REASONS FOR THE OFFER AND USE OF PROCEEDS.

         Not applicable.


D.       RISK FACTORS.






                                       -8-



<PAGE>




TECHNOLOGY RISK

         The new advanced products that we are developing incorporate complex
and evolving technologies that require substantial expenditures and resources.
However, these new products may fail to be accepted at the rates or levels we
anticipate and we may fail to realize the expected benefits from its investments
in these new technologies.

         We may experience greater variability in our 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 communications industry are expected to increase
competition and change the competitive landscape and may adversely affect our
operating results.

OPERATING RISK

         We conduct our manufacturing and sales operations through joint
ventures established between us and Mainland Chinese parties. Any deterioration
of these strategic relationships may have an adverse effect on our operations.

CONCENTRATION OF CREDIT RISK

         We perform ongoing credit evaluations of each customer's financial
condition. We maintain reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections. As of December 31,
2000 and 2001, our five largest accounts receivable accounted for approximately
27% and 31%, respectively, of our total accounts receivable.

THE ECONOMY OF CHINA DIFFERS FROM THE ECONOMIES OF MOST COUNTRIES.

         Although the majority of productive assets in China are still owned by
the government, economic reform policies since 1978 have emphasized
decentralization and the utilization of market mechanisms in the development of
the Chinese economy. We have significantly benefited from such reforms, as the
Ministry of Post and Telecommunications since 1994 has opened the
telecommunications equipment market of China to all kinds of manufacturers. Our
management believes that the basic principles underlying the reforms will
continue to provide an acceptable framework of the PRC's political and economic
systems. In addition, we currently see no evidence that this refinement and
readjustment process may adversely affect, directly or indirectly, the Company's
operation in the future.

         As substantially all of our operations are conducted in Mainland China,
we are 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. Our results may be adversely
affected by changes in the political and social conditions in Mainland China,
and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.

         In addition, substantially all of our revenue is denominated in
Renminbi ("Rmb") which must be converted into other currencies before remittance
outside Mainland China. Both the conversion of Renminbi into foreign currencies
and the remittance of foreign currencies abroad require approvals of the
Mainland Chinese government.

                                       -9-



<PAGE>


OUR CURRENCY IS NOT FREELY CONVERTIBLE.

         The State Administration for Exchange Control ("SAEC"), under the
authority of the People's Bank of China (the "PBOC"), controls the conversion of
Renminbi into foreign currency. The value of the Renminbi is subject to changes
in central government policies and to international economic and political
developments affecting supply and demand in the China Foreign Exchange Trading
System ("CFETS") market. Since substantially all of our raw materials are
provided by local suppliers using Renminbi and the majority of our expenses are
denominated in Renminbi, restrictions on currency conversions did not materially
affect our operations. Also, since we do not expect to require any raw material
that are not permitted or are limited to purchase using foreign currencies, our
management believes that such restriction will not materially affect our
operations in the future. However, our ability to pay dividends and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and our other holdings and investments, and our operating
subsidiaries located in China may be subject to restrictions on the conversion
of Renminbi to U.S. dollars and, as a result, may be restricted to make
distributions to us.

WE DEPEND ON CHINESE FACTORIES.

         We have no direct business operation, other than our ownership of our
subsidiaries located in China, and our results of operations and financial
condition are currently solely dependent on our subsidiaries' factories in
China. We currently maintain fire, casualty and theft insurance aggregating
approximately $9.6 million covering various of our stock in trade, goods and
merchandise, furniture and equipment, and factory buildings in China. The
proceeds of this insurance may not sufficiently cover material damage to, or the
loss of, any of our factories due to fire, severe weather, flooding or other
cause, and such damage or loss would have a material adverse effect on our
financial condition, business and prospects. However, we have not materially
suffered from such damage or loss to date.

TAXATION

         Our Company and its subsidiaries are subject to income taxes on an
entity basis on income arising in or derived from the tax jurisdictions in which
they operate. Our Company and Qiao Xing Holdings Limited were incorporated under
the International Business Companies Act of the British Virgin Islands and,
accordingly, are exempted from payment of the British Virgin Islands income
taxes. Our Company also registered in Hong Kong as a branch office and is
subject to Hong Kong income taxes at a rate of 16%. At present, substantially
all of the Group's income was generated in China by Qiao Xing Telecommunication
Industry Company Limited ("QXTI"), a joint venture enterprise established in the
Coastal Economic Open Zone in China and subject to Chinese income taxes at a
rate of 27% (24% state income tax and 3% local income tax). It was exempted from
state income tax and local income tax for three years starting from January 1,
1994, and then was subject to a 50% reduction in state income tax and full
exemption in local



                                      -10-



<PAGE>




income tax for the following two years. The tax holiday of state income tax has
expired on January 1, 1999. The tax holiday of local income tax continued for
the years ended December 31, 1999, 2000 and 2001.

         Pursuant to the Notice No. [1999] 52 issued by the Government of
Guangdong Province, China (the "Notice [1999] 52"), High and New Technology
Enterprise of Guangdong Province is entitled to tax holiday granted by the
relevant tax bureau, under which the company is subject to state income tax at a
rate of 15% for three years, effective from January 1, 1999. Furthermore, for a
foreign owned enterprise in Guangdong Province which is certified by Guangdong
Provincial Foreign Trade and Economic Cooperation Office ("GPFTECO") as an
Advanced Technology Enterprise, the company is entitled to additional tax
benefit granted by the relevant tax bureau under which the state income tax rate
can be further reduced to 10% for three years. QXTI is a High and New Technology
Enterprise since 1999 and it is also an Advanced Technology Enterprise of
Guangdong Province since 2000 pursuant to certificates issued by Guangdong
Science and Technology Commission and GPFTECO, respectively.

         Prior to obtaining confirmation from relevant tax bureau on the
entitlement of tax holiday as stated above, QXTI provided for enterprise income
tax using 24% for the years ended December 31, 1999 and 2000. Subsequent to
December 31, 2001, QXTI obtained a confirmation from the National Tax Bureau to
confirm that QXTI was able to enjoy the aforementioned tax benefit pursuant to
the Notice [1999] 52 and QXTI would be subject to state income tax rate at 15%
for the year ended December 31, 1999 and 10% for each of the years ended
December 31, 2000 and 2001.

         If the tax holiday of QXTI as mentioned above had not existed, the
Group's income tax expenses (net of minority interests) would have been
increased by approximately Rmb 2,632,000 and Rmb 2,351,000, respectively, for
the years ended December 31, 1999 and 2000, representing the tax effect on 3%
local tax exemption. In addition, income tax expenses (net of minority interest)
for the year ended December 31, 2001 would have been increased by Rmb
18,868,000, representing the effect of no written back on state income tax for
1999 and 2000. The tax holiday had no impact on operating results before tax
generated in 2001 as QXTI was in a tax loss position. Basic earnings (loss) per
common share would have been approximately Rmb 5.04, Rmb 1.83 and Rmb (2.99)
(US$(0.36)), respectively, for the years ended December 31, 1999, 2000 and 2001,
and diluted earnings (loss) per common share would have been approximately Rmb
5.04, Rmb 1.78 and Rmb (2.99) (US$(0.36)), respectively, for the years ended
December 31, 1999, 2000 and 2001.

OUR MANAGEMENT'S EXPECTATION OF FUTURE REVENUE AND EXPENSES MAY NOT BE ACHIEVED

         Our management intends to increase the production and sales volume of
new model telephones and special function telephones such as digital cordless
phones, cordless phones, smart card telephones, coin operated telephones and
caller ID displayed telephones, since the average gross profit margin of these
telephones is higher than that of the other telephones we



                                      -11-



<PAGE>




manufacture. At the same time, we expect to increase the export of digital
cordless phones and CT-0 cordless phones. In addition, the sales and production
volume of the lower profit margin products is expected to decrease in the coming
years. General and administrative expenses are forecasted to increase in next
year, since (i) we intend to employ more professionals; and (ii) research and
development expense is expected to increase continuously.

WE DEPEND UPON CERTAIN KEY PERSONNEL TO MANAGE OUR COMPANY.

         Our ability to successfully carry out our business plans continues to
be largely dependent upon the efforts of our senior management and executive
officers, particularly our chairman, Rui Lin Wu. We have not entered into any
employment agreement with Mr. Wu and the loss of his services would have a
material adverse effect on our ability to achieve our business objectives. We
have obtained key-person life insurance in the amount of US$2,000,000 on his
life, with the proceeds payable to us.

WE ARE CONTROLLED BY ONE OF OUR SHAREHOLDERS, WHOSE INTERESTS MAY DIFFER FROM
OTHER SHAREHOLDERS.

         Rui Lin Wu, our chief executive officer and chairman, and members of
his family beneficially own or control approximately 47.7% of our outstanding
shares as of June 21, 2002. Accordingly, he has controlling influence in
determining the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets, election of directors and other
significant corporate actions. He also has the power to prevent or cause a
change in control. In addition, without his consent, we could be prevented from
entering into transactions that could be beneficial to us. The interests of this
shareholder may differ from the interests of the other shareholders.

OUR HOLDING COMPANY STRUCTURE CREATES RESTRICTIONS ON THE PAYMENT OF DIVIDENDS.

         We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of paying dividends, should we
decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. If future dividends are paid in Renminbi, fluctuations
in the exchange rate for the conversion of Renminbi into U.S. dollars may
adversely affect the amount received by U.S. shareholders upon conversion of the
dividend payment into U.S. dollars.




                                      -12-



<PAGE>




IT MAY BE DIFFICULT TO SERVE US WITH LEGAL PROCESS OR ENFORCE JUDGMENTS AGAINST
US OR OUR MANAGEMENT.

         We are a British Virgin Islands holding company, and all or a
substantial portion of our assets are located in China. In addition, all of our
directors and officers are non-residents of the United States, and all or a
substantial portion of the assets of such non-residents are located outside the
United States. As a result, it may not be possible to effect service of process
within the United States upon them. Moreover, there is doubt as to whether the
courts of the British Virgin Islands or China would enforce:

         o    judgments of United States courts against us, our directors or our
              officers based on the civil liability provisions of the securities
              laws of the United States or any state; or

         o    in original actions brought in the British Virgin Islands or
              China, liabilities against us or non-residents based upon the
              securities laws of the United States or any state.

INFORMATION ABOUT US MAY BE UNAVAILABLE DUE TO EXEMPTIONS UNDER THE EXCHANGE ACT
FOR A FOREIGN PRIVATE ISSUER.

         We are a foreign private issuer within the meaning of the rules under
the Exchange Act. As such, we are exempt from certain provisions applicable to
United States public companies, including:

         o    the rules under the Exchange Act requiring the filing with the
              Securities and Exchange Commission of quarterly reports on Form
              10-Q or current reports on Form 8-K;

         o    the sections of the Exchange Act regulating the solicitation of
              proxies, consents or authorizations in respect of a security
              registered under the Exchange Act; and

         o    the sections of the Exchange Act requiring insiders to file public
              reports of their stock ownership and trading activities and
              establishing insider liability for profits realized from any
              "short-swing" trading transaction.

Because of these exemptions, investors are not provided the same information
which is generally available about public companies organized in the United
States.

RECENT ACQUISITION MAY AFFECT OUR LIQUIDITY.

         In 2002, we entered into agreements for acquisitions of 65% equity
interest in CEC Telecom Ltd for Rmb 312,750,000 ("the Acquisitions"). CEC
Telecom Ltd is a limited liability company established in China and is
principally engaged in production and sales of mobile phones and accessories in
China.




                                      -13-



<PAGE>




         We have paid Rmb 61,000,000 of the consideration, primarily financed by
a new one- year bank loan of Rmb 60,000,000. The remaining consideration will be
payable as to (i) Rmb 119,000,000 within 10 days after the completion of share
transfer at the relevant government bureau of China ("date of shares transfer"),
(ii) Rmb 85,000,000 within 3 months after the date of shares transfers and (iii)
Rmb 47,750,000 within 6 months after the date of shares transfers. We are in the
process of applying for the shares transfers as of June 28, 2002. The unsettled
considerations will be secured by, among others, Qiao Xing Mobile Communication
Co. Ltd's equity interest in CEC Telecom Ltd (after completion of shares
transfers) and certain land use right of the Group with net book value of Rmb
102,085,000 as at December 31, 2001. Qiao Xing Mobile Communication Co. Ltd.
("QXMCL") is a wholly owned subsidiary of ours.

         As of June 28, 2002, the Acquisitions have not been completed because
certain precedent conditions as set out in the agreements have not been
fulfilled. Such precedent conditions include, among others, (i) approval from
Mainland Chinese government on the shares transfers and (ii) completion of
collateral arrangements on QXMCL's equity interest in CECT and certain land use
right of the Group as described in the preceding paragraph. Any non-fulfillment
of these precedent conditions may lead to termination of the Acquisitions.

         The Acquisitions may affect our liquidity position. We are exploring
different means of financing from the banks, the existing shareholders, the
public or other investors.


ITEM 4. INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY.

         Qiao Xing Universal Telephone, Inc. ("Qiao Xing" or "we") is
principally engaged in the manufacturing and sales of telecommunication
terminals and equipment, including corded and cordless telephone sets, in China.
Our annual production capacity of telephone sets has increased from 300,000 to
an estimated 5 million within the last eight years. Our actual sales in 2001
were 4.06 million sets.

         Our history dates back to April 1992 when Mr. Rui Lin Wu, our founder
and chief executive officer, established Qiao Xing Telecommunication Industry
Co. Ltd. in Huizhou, People's Republic of China ("PRC" or "China"). We initially
were engaged in the original design manufacturing of corded telephones, whereby
products are designed and manufactured to the customer's requirements and
instructions and are marketed under the customer's designated brand name or
without designated brand name. When we commenced our operations in August 1992,
we consisted of only 100 employees and two production lines producing
telephones.

         In October 1992, we began to develop our own brand name products and by
the end of 1992, five different models of telephones had been successfully
developed. With only one year's



                                      -14-



<PAGE>




experience of operation, we had manufactured 300,000 telephones with net sales
of Rmb 6 million. In 1993, we further enhanced our production capacity by
expanding the factory area from 400 square meters to 3,800 square meters and by
increasing the number of employees from 100 to 400. In 1993, we had manufactured
1,000,000 telephones with net sales of Rmb 50.1 million and generated a profit
exceeding Rmb 4.4 million. We continued to expand our production capacity as our
business grew. In 1994, we enlarged our factory area to 15,000 square meters
with 20 production lines and 1,000 employees. Since then, we have successfully
introduced our Model HA8188 series of 20 different styles of telephones which we
developed. In 1994, we produced 1,300,000 telephones with net sales of Rmb 122.5
million, and generated a net profit of Rmb 20.0 million.

         In August 1995, we were awarded the ISO9001 certificate, which reflects
our reputation as a high quality telephone manufacturer. In addition, by the end
of 1995, we increased both our production to include over 30 different types of
telephones and the number of production lines to 28, generating an annual output
of 3,000,000 telephones with net sales of Rmb 277.7 million. Our net profit
exceeded Rmb 34.1 million for the fiscal year ended December 31, 1995.

         In view of an increased market demand, in 1996, we successfully
introduced a line of cordless telephone sets (one-channel and ten-channel
products) to the market. By the end of 1996, five cordless products had been
introduced, and 150,000 sets were sold. For the fiscal year ended December 31,
1996, 3,241,000 telephone sets, including cordless phones, were produced, with
net sales of Rmb 351.9 million. Our net profit was Rmb 34.5 million. In October
1997, we successfully introduced the special function corded telephone sets. For
the fiscal year ended December 31,1997, we produced 2,946,000 telephone sets
with sales of Rmb 383.9 million. Our net profit was Rmb 41.2 million.

         In the first quarter of 1998, we developed and introduced caller ID
display telephones and coined telephones. During the fiscal year ended December
31,1998, we produced 2,824,000 telephone sets with net sales of Rmb 351.2
million (US$42.4 million). Our net profit was Rmb 47.3 million (US$5.7 million).

         In 1999, our alteration of our sales mix towards the caller ID display
telephone which carried a higher profit margin successfully maintained our
growth in gross profit and net income. The caller ID display telephones
represented 13% of net sales in 1999 as compared to 3% of net sales in 1998. For
the fiscal year ended December 31, 1999, we generated an annual output of
4,159,032 telephones with net sales of Rmb 383.6 million. Our net income for the
fiscal year ended December 31, 1999 was Rmb 49.7 million. For the fiscal years
ended December 31, 2000 and 2001, we generated an annual output of 4.8 million
and 4.0 million telephones with net sales of Rmb 392.5 million and Rmb 249.3
million, respectively. Our net income for the fiscal year ended December 31,
2000 was Rmb 23.5 million and our net loss for the fiscal year ended December
31, 2001 was Rmb 21.4 million.




                                      -15-



<PAGE>




         For 1999, our total capital expenditure was about Rmb 192.0 million,
which primarily included: 1) Rmb 93.1 million for the construction of the Qiao
Xing Industry Zone; 2) Rmb 85.5 million for the purchase of a parcel of land
within the Boluo city in China; and 3) Rmb 13.1 million for the purchase of
digitally enhanced cordless telephones ("DECT") software.

         For 2000, our total capital expenditure was about Rmb194.3 million,
which primarily included: 1) Rmb 165.7 million for the construction of various
buildings in the Qiao Xing Industry Zone; 2) Rmb 10.5 million for the payment of
land use right for another parcel of land; and 3) Rmb 9.1 million and Rmb 7.5
million for SMT equipment and vehicle, respectively. The construction work of
Qiao Xing Industry Zone was substantially completed in 2000 and commenced
production.

         For 2001, our total capital expenditure was about Rmb 19 million which
primarily included: 1) Rmb 8.0 million for the construction of the Qiao Xing
Industry Zone; 2) Rmb 4.9 million for payment of land use right; and 3) Rmb 6.2
million for acquisition of property, machinery and equipment.

         Our company, formerly known as Pastiche Investments Limited, was
incorporated as an international business company under the International
Business Companies Act of the British Virgin Islands on December 6, 1994. We own
the entire issued share capital in Qiao Xing Holdings Limited ("QXHL"), an
international business company incorporated in the British Virgin Islands on
July 23, 1997. QXHL owns 90% of the issued share capital in Qiao Xing
Telecommunication Industry Co. Limited ("QXTI"), a PRC joint venture.
Substantially all of our income is contributed by QXTI. The remaining 10% of
QXTI is owned by Qiao Xing International Trading Ltd. ("QXIT"), a PRC company
owned by Rui Lin Wu (40%) and his elder son Zhi Yang Wu (60%). Messrs. Wu and Wu
are two of our executive officers and directors. On May 25, 1999, QXIT
transferred all of its 10% equity interest in QXTI to Qiao Xing Group Limited
("QXGL"), a privately owned company established in Mainland China. The change in
equity interest in QXTI and the supplementary joint venture agreement have been
approved by the relevant Mainland Chinese authorities. Mr. Rui Lin Wu and Mr.
Zhi Yang Wu, as the shareholders of QXGL, have agreed to vote their minority
position in QXTI in a manner consistent with QXHL.

         Our principal place of business and our executive office is the Qiao
Xing Building, Qiao Xing Industrial Zone, Xiao Jin Kou, Huizhou, Guangdong,
People's Republic of China, telephone: (011) 86-752-2820-268. We have designated
CT Corporation, 111 Eighth Avenue, New York, New York 10011 as our agent for
service of process in the United States.


B.       BUSINESS OVERVIEW.

         Since 1990, the telecommunications industry has grown rapidly in China,
a country with a population of 1.2 billion whose economy is undergoing
tremendous growth, with an accompanying rise in the population's standard of
living. This rise in affluence has proven



                                      -16-



<PAGE>




beneficial for us since the Chinese are more willing to purchase phones and to
upgrade from the corded to the cordless variety. Land-line telephone subscribers
numbered 70.3 million in 1997, 8.3 times the number of subscribers in 1991. The
national telephone penetration rate for land-line phones grew from 6.33% in 1996
to 8.07% in 1997, and this growth increased to 215 million or 20.1% of the
population in 2000.

         In March 2000, we received approval from the Guangdong Province
government to manufacture code division multiple access (CDMA) cellular
telephones. This provincial government approval is an important first step for
us. Additional steps are needed before production and distribution can occur,
including adopting the new technology and establishing production and
distribution agreements. In addition, approval at other governmental levels is
needed before sales can be made in China. In August 2000, the Ministry of
Information Industry approved our tender for CDMA network station core
technology research and development project (CDMA IS-95A to CDMA 2000-1X core
technology, including chipset and software).

         In June 2000, we entered into an agreement with Hyundai Electronics
Industries Co., Ltd. to form a joint venture company to manufacture and sell
CDMA phones and ground network stations, and to provide after-sale services in
relation to installation, operation and maintenance of the sold products.
Hyundai in Korea is one of the largest CDMA system equipment manufacturers in
the world. Qiao Xing-Hyundai is the joint-venture company formed between us and
Hyundai Electronics Industries Co., Ltd. As of June 28, 2002, the joint venture
company formed between Hyundai and us is still inactive and has not commenced
operation. It is our understanding that both we and Hyundai do not intend to
inject further capital into the joint venture company due to our unsuccessful
application in obtaining the approval certificates from the Chinese government
for selling and distributing CDMA phones in China. The above CDMA projects were
subsequently suspended.

         In August 2000, we expanded our popular line of corded and cordless
telephones to include a new special-functions corded model developed by us. The
special functions offered in the new phones include an auto-pay system, usage
security, interference and noise reduction, and volume boost for the
hearing-impaired or for use in noisy locations.

         In December 2000, our majority-owned operating subsidiary, Qiao Xing
Telecommunication Industry Co. Ltd., entered into an agreement with Tsinghua
University State Key Lab on Microwave and Digital Telecommunications to
establish the Qiao Xing-Tsinghua CDMA Mobile Telecommunication Research and
Development Center. Tsinghua University State Key Lab is a state-level
laboratory at Tsinghua University in China and is engaged in research and
development of wireless, digital telecommunications and third-generation CDMA
technologies.

         In April 2001, we announced a new model telephone offering an enhanced
vibration feature to assist users with hearing deficiencies. In addition to the
normal sound-emitting



                                      -17-



<PAGE>




speaker in the hand set, a special vibrating unit in the speaker also transmits
the same sounds through vibration.

         In April 2002, we announced a new product in our line of GSM mobile
phones. Our Q200-Dual represents the world's first folding dual-displayed mobile
phone with an FM radio. Shipments of the Q200-Dual began in the second quarter
of 2002. With dimensions of 86 x 45 x 26.5 mm, the Q200-Dual mobile phone adopts
the increasingly popular folding shell with two displays. In addition to common
functions such as dual-bands, an alarm clock and IP dialing, it also possesses
an advanced inner-fixed FM radio.

         In April and May 2002, for the purpose of expanding our business to
mobile phone manufacturing and distribution of CDMA and GSM phones, we entered
into sale and purchase agreements for acquisitions of an aggregate equity
interest of 65% in CEC Telecom Ltd. ("CECT") for an aggregate consideration of
Rmb 312,750,000. CECT is a limited liability company established in China and is
principally engaged in production and sales of mobile phones and accessories in
China. The acquisition process is in progress. CECT has obtained several
approval licenses from the Chinese government in producing and selling CDMA and
GSM phones under its own brand name. We believe that the acquisitions can enable
us to successfully penetrate into the mobile phone market in China.

BUSINESS OPERATIONS AND PRODUCT RANGE

         We are principally engaged in the design, manufacture and sale of
telecommunication terminals and equipment in the PRC, including primarily in
house corded and cordless telephone sets under the trademark of "Qiao Xing".
According to the National Statistic Bureau of the China Technology Progress
Information Centre, we were the largest in house telephone manufacturer by
number of sales units in the PRC in 1999. In 2000 and 2001, we ranked as the
second largest in house telephone manufacturer by number of sales units.

         We have produced corded telephones since our formation in 1992. In
1996, we successfully developed the manufacture of one-channel and ten-channel
cordless telephones. However, since one-channel cordless phones can be easily
interfered and create a lot of noises, we stopped producing it in June 1997 and
now concentrate on ten-channel cordless phone manufacturing.

         In October 1997, we introduced the smart card telephones, which is the
first of many special function corded telephones that we expect to develop and
introduce to the market. In the first quarter of 1998, we developed and
introduced caller ID display telephones and coin operated telephones. We
developed the digital cordless phone in 1999 and introduced digitally enhanced
cordless telephones ("DECT") in 2000. In 2002, we commenced production of GSM
phones.




                                      -18-



<PAGE>




         Presently, we are producing and selling 170 corded models and 23
cordless models, and have an extensive nationwide sales network that comprises
1,350 retail outlets in China.


TELEPHONE SALES BY UNITS

<Table>
<Caption>

                                            YEAR ENDED DECEMBER 31
                       1997            1998            1999            2000            2001
                       SETS            SETS            SETS            SETS            SETS
<S>                 <C>             <C>             <C>             <C>             <C>
corded              2,602,003       2,339,999       3,154,412       3,063,825       1,416,143
cordless              326,993         240,168         210,578         236,740         172,508
smart card             16,995         152,574         240,633         189,646         151,043
caller ID                  --          72,691         538,560       1,332,633       2,324,454
coin operated              --          18,943          14,849           2,034               0
Total               2,945,991       2,824,375       4,159,032       4,824,878       4,064,148
</Table>

AVERAGE WHOLESALES PRICES PER SET

<Table>
<Caption>

                                         YEAR ENDED DECEMBER 31
                        1997           1998         1999            2000          2001
                        RMB            RMB           RMB             RMB           RMB
<S>                 <C>              <C>           <C>            <C>            <C>
corded                 93.25          78.64          60.32          52.76          39.96
cordless              400.38         317.31         278.74         280.77         223.97
smart card            610.00         485.67         298.13         252.40         136.97
caller ID                 --         149.77         101.15          87.15          57.37
coin operated             --         315.16         568.39         202.56            n/a
</Table>

TELEPHONE SALES BY RMB

<Table>
<Caption>

                                            YEAR ENDED DECEMBER 31
                      1997            1998          1999           2000            2001
                     RMB'000        RMB'000        RMB'000        RMB'000         RMB'000
<S>                  <C>            <C>            <C>            <C>             <C>
corded               242,646        184,020        190,282        161,647         56,585
cordless             130,921         76,207         58,696         66,470         38,637
smart card            10,367         74,100         71,739         47,866         20,689
caller ID                 --         10,887         54,476        116,134        133,360
coin operated             --          5,970          8,440            412              0
Total                383,934        351,184        383,633        392,529        249,271
</Table>

         Cordless telephones and the special function corded telephones require
more sophisticated and more hi-tech manufacturing techniques and we charge a
higher wholesale price and make a greater margin for special function corded
telephones than for the ordinary one. The wholesale prices for our cordless
telephones range from US$18-60 (Rmb 160-500). For corded telephones, two
categories have been classified, with the simpler version selling for US$2-15
(Rmb 17-120), and the models with more sophisticated features selling for
US$15-27 (Rmb



                                      -19-



<PAGE>




120-220) per telephone. Caller ID telephones have selling prices of
approximately US$7.00 (Rmb 58) per telephone set.

         Cordless telephones on average have a gross profit margin of 8 percent,
corded telephones have an approximately 13% gross profit margin, and special
function corded telephones can have a gross profit margin of up to 31 percent.

         Caller ID is a function that displays the number of each incoming call.
Though it is a common function with mobile phones, it has not been available on
leased line telephones until 1999. Due to the convenience provided by the caller
ID function, caller ID telephones are becoming increasingly popular with
consumers. Indeed, many ordinary telephones with LCD display have been upgraded
with this function and are sold as caller ID telephones. Caller ID telephones
have a gross profit margin of 17%.


TELEPHONE GROSS PROFIT MARGIN

<Table>
<Caption>

                                             YEAR ENDED DECEMBER 31
                                     1999            2000             2001

<S>                                  <C>             <C>             <C>
corded                                26%             28%             11%
cordless                              22%             24%              8%
smart card                            65%             57%             31%
caller ID                             25%             28%             16%
coin operated                         21%            (8)%            N/A
digitally enhanced cordless          N/A              26%             13%
</Table>

The substantial decrease in sales amounts and gross profits were due to fierce
competition in the telephone industry in China. Demand for telephones has
shifted from corded and cordless phones to mobile phones.

         The top three popular products that we are selling are all caller ID
display telephones:

<Table>

<S>                                <C>                                <C>
                                   CAD8188(1)                         269,329 sets sold in 2001
                                   HCD1                               172,871 sets sold in 2001
                                   HCD56                              140,815 sets sold in 2001
</Table>

         CAD8188(1) is a special caller ID device that is used together with old
telephones without caller ID function. It is a separate device that can upgrade
all brands and models of old telephones with caller ID function and has been
widely welcomed by consumers using old models of telephones. HCD1 is a model
with a unique computer-like appearance and was especially welcomed in the mid
east area of China last year. HCD56 is a new model introduced in last August.
Its special design with a keypad cover makes a landline telephone possess
outlook features like some foldable mobile phones and is receiving increasingly
positive market reactions.

         In addition to our caller ID display products, we have also produced a
small quantity of digital recording telephones and telephone exchanges.





                                      -20-



<PAGE>




PRODUCTION FACILITIES

         Our current maximum production capacity of telephones is approximately
5,000,000 units per year. We produced 4,064,148 units in 2001, consisting of
1,416,143 units of corded telephones, 172,508 units of cordless telephones and
2,475,497 units of special function corded telephones.

MANUFACTURING PROCESS

         Our manufacturing process is subject to stringent quality control. This
process begins with our incoming quality control process, whereby all externally
supplied parts are inspected in accordance with our standards. Our finished
products are delivered to a holding area where the quality assurance workers
randomly select samples of product from each shipment which are checked in
accordance with an accepted quality level previously drawn up and agreed with
the particular customer to ensure that the samples comply with the required
specifications. The finished products are then ready for delivery.

         The following principal steps are involved in the manufacturing process
after the initial inspection process:

             o Plastic Injection Molding - Plastic resins are loaded into an
       injection machine, where they are melted and injected into a ready-made
       mold. When the plastic piece cools down, it becomes a solid piece of
       inelastic plastic part.

             o Painting and Silk Screen Printing - Some individual pieces or
       components need hand- spraying, using a variety of techniques including
       free-hand spraying, mask or template spraying, free hand brush painting
       and silk screen printing.

             o Assembly - When all components have been molded and painted, they
       are transferred to an assembly line. Each assembly line is operated by a
       team of workers, each having a specific task in the assembly of a
       product.

         The following steps are usually involved in producing electronic
components after the incoming quality control process. We use two methods of
assembly, namely automatic wave soldering and surface mount technique.

             o Automatic Wave Soldering - Components are soldered on to the
       printed circuit boards by using automatic wave soldering machines which
       pre-heat, flux and solder the circuit boards, before cutting off excess
       lengths of the legs of components. Finally, the circuit boards are dipped
       into a solder bath to ensure that reliable joints are formed in a single
       automated process. The automatic wave-soldering machine is subject to
       hourly



                                      -21-



<PAGE>




       checks to ensure that all soldering machines are at the correct
       temperature in order to achieve consistency.

             o Surface Mount Technique - Miniaturized components are placed onto
       the surface of a circuit board by a pick and place device. The components
       are attached to the circuit board using epoxy resin and the circuit board
       is then passed through an oven which bakes the resin to hold the
       components in place. The circuit board is subsequently placed onto a wave
       soldering machine where solder flows around the components to ensure that
       they achieve a correct electrical connection.

         Thereafter, electronic circuit boards are transferred to sub-assembly
lines where supplementary components such as switches, which cannot be processed
through the automatic wave soldering machines or the surface mount placement
machines, are assembled onto the circuit boards. All the circuit boards are then
subject to computerized in-circuit testing to ensure that the "circuit" is
continuous and does not contain damaged components or poorly soldered joints.
The circuit boards are then subject to a full function testing by inserting them
into specially designed test fixtures which simulate the performance of the
circuit boards as if they were already installed into their final plastic
cabinet.

         The electronic circuit boards are assembled into their cabinets, which
are then once again subject to a full-function testing through a wider variety
of performance-related and specification-related tests. The products are then
packed together with operation manuals and other related accessories into
shipping cartons ready for export to our customers.

         Each of the different product categories is subject to different
product design requirements and testing procedures, under their respective
industry standards. The similarities in certain stages of the production
procedure of these different products allow us a degree of flexibility in
organizing our production capacity to cope with any changes in product mix
effectively.

QUALITY ASSURANCE SYSTEM

         We place significant emphasis on preventive measures in the quality
control process and employ quality control procedures at every critical
manufacturing stage, with the aim of identifying, analyzing and solving problems
at the earliest possible stage of the production process. We are equipped with
the necessary testing facilities to handle the quality control tests and provide
in-house training for our quality control staff.

         Quality control tests on the production process include:

         o        sampling test method is used to inspect all incoming materials
                  on a sample basis;



                                      -22-



<PAGE>




         o        at each stage of production process, quality control
                  inspectors monitor the production flow and check the quality
                  of the products; and

         o        finished products are checked by quality control staff on a
                  sample basis.

         We obtained the ISO 9001 Quality System Certificate in respect of our
quality assurance system in August 1995, reflecting our reputation as a quality
telecommunication equipment manufacturer.

         We have not received any material claims for defective products from
customers for the three years ended December 31, 2001.

SALES AND MARKETING

         Substantially all of our products are sold in the PRC market and
accounted for approximately 98.1% and 98% of our total revenues for the years
ended December 31, 2000 and 2001, respectively. The remaining balance of
products is exported to Canada, Korea and Taiwan.

         We currently have 40 independent regional distributors and after-sales
service centers, including six wholesale agencies, serving our major customers
in different provinces in the PRC. There is at least one representative assigned
to each regional distributor to make frequent visits in order to understand the
business operation and assist management. These regional distributors distribute
our telecommunication products to a network of over 1,350 retail outlets,
including 350 consignments in big department stores. The purchase orders for
telephones from these retail outlets are collected by the 40 regional
distributors, who would then place consolidated purchase orders with us on their
own accounts. The regional distributors are each responsible for the credit risk
and settlement of their own customers. We give a settlement period of 30 days to
270 days to the distributors. The long credit period granted is comparable to
the common business practice in household telephones. For the years ended
December 31, 1999, 2000 and 2001, our top five customers accounted for
approximately 35%, 26.8% and 25% of our total sales. No single customer
accounted for over 13%, 7% and 7% of our total sales for the years ended
December 31, 1999, 2000 and 2001.

         The second way that our products are marketed is through direct
mailing. By following the telephone directory, the regional distributors will
send out product catalogues to selected households. If customers are interested,
they can contact the distributor and place an order.

         Our sales and marketing strategy focuses on satisfying customers with
high quality product, consistent timely delivery, competitive product pricing
and efficient after-sales service. Our staff communicates regularly with the
regional distributors and their customers to obtain market information and to
ascertain their needs. We also conduct regular reviews to analyze customers'
potential demands and to plan for new products.




                                      -23-



<PAGE>




         Our management believes that the provision of efficient after-sale
service is an important factor in influencing consumers' choices. We offer a
one-year warranty on our telephones. During the warranty period, all repair and
maintenance services are provided free of charge. After the warranty period,
customers assume the cost of repair and the components used. After-sale services
for our products are provided by the 350 regional distributors. We experience no
significant warranty expenses due to low labor costs in China.

         We advertise through various media, including national and regional
television networks, radio, newspapers, magazines, posters, billboards and
advertising pamphlets. In addition, the "Qiao Xing" brand name is also promoted
through sponsorship of sports events.

         We spent approximately Rmb 5.7 million (US$0.7 million) in 2001 for
advertising and promotion.

MATERIALS AND COMPONENTS

         More than 3,000 different parts and components are required for the
manufacture of our current models of corded and cordless telephone sets. The
primary components are integrated circuits, printed circuit boards, liquid
crystal displays, resistors, transistors and diodes. Except for some special
integrated circuit items and central processing units, which are sourced from
Hong Kong, we obtain our major components and raw materials from the leading
suppliers in the Pearl River Delta in the PRC. In order to secure the supply of
raw materials, we will select at least two suppliers for each component. We
believe that there is no seasonality factor which might affect the supply of raw
materials. For the years ended December 31, 1999, 2000 and 2001, our top five
suppliers accounted for approximately 30%, 28% and 29% of our total purchases of
materials and components. No single supplier accounted for over 12%, 13% and 8%
of our total purchases of materials and components for the years ended December
31, 1999, 2000 and 2001.

         We have formal distributorship agreements with the suppliers of the
parts and components. However, these contracts only confirm the selected
components and the price that we have agreed to pay; there is no firm agreement
on the quantity to be purchased. We believe that we have established a very
stable and friendly relationship with our suppliers, since more than 70 percent
of these suppliers have remained as our major suppliers since 1993. Payment for
materials and components are made in Rmb with a credit term ranging from 30 days
to 270 days.

RESEARCH AND DEVELOPMENT

         Our research and development ("R&D") and engineering functions are
performed in the PRC through our own R&D division and through appointed external
technology development experts. As of December 31, 2001, we employed 43 staff in
our R&D and engineering divisions, who work closely with our sales and marketing
executives to gauge the market demand in



                                      -24-



<PAGE>




developing new products and new models of existing products. The R&D division is
currently monitoring 26 particular models of corded telephones, 12 particular
models of cordless telephones, four models of GSM cellular telephones and two
models of code division multiple access (CDMA) cellular telephones.

         In 2001, we spent Rmb 3,516,000 (US$425,000) on the R&D division. We
anticipate increasing the research and development funding and the budget to
purchase new technologies up to US$2.0 million in 2002. The significant increase
is due to the proposed GSM and CDMA phones developing plan.

COMPETITION

         The market for telecommunication equipment generally and corded and
cordless telephones, as well as facsimile machines, in particular in the PRC is
intensely competitive. We believe that the principal competitive factors are:

         o        brand name recognition;

         o        distribution capability;

         o        after-sale service;

         o        short lead time in product development;

         o        product quality; and

         o        capability of mass production.

Only those telecommunication products that have been granted the permits issued
by the Ministry of Posts and Telecommunications are allowed to be connected to
the telephone network in the PRC.

         We consider that our products do not compete directly with imported
products with similar features, which are sold in the higher price range. We
currently compete directly with domestic manufacturers in the PRC, namely TCL
and BUBUGAO in Guangdong, which are currently the first and third seller of
telephones in the PRC, according to the statistical report released by the Trade
and Foreign Economy Statistics Division of National Statistic Bureau. According
to our market research, in 2001, TCL and BUBUGAO owned a market share of
approximately 13.54 percent and 12.61 percent, respectively, and we accounted
for approximately 13.11 percent in terms of number of sales units. However, TCL
and BUBUGAO are now diversifying into home electric appliance manufacture,
including DVD sets and Hi-Fi systems, which will likely divert some of their
resources from the telephone manufacturing business.






                                      -25-



<PAGE>




RECENT DEVELOPMENTS

         In April 2002, we announced a new product in our line of GSM mobile
phones. Our Q200-Dual represents the world's first folding dual-displayed mobile
phone with an FM radio. Shipments of the Q200-Dual began in the second quarter
of 2002. With dimensions of 86 x 45 x 26.5 mm, the Q200-Dual mobile phone adopts
the increasingly popular folding shell with two displays. In addition to common
functions such as dual-bands, an alarm clock and IP dialing, it also possesses
an advanced inner-fixed FM radio.

         In April and May 2002, we entered into sale and purchase agreements for
acquisitions of an aggregate equity interest of 65% in CEC Telecom Ltd. for an
aggregate consideration of Rmb 312,750,000. CECT is a limited liability company
established in China and is principally engaged in production and sales of
mobile phones and accessories in China.

         Our R&D division is currently monitoring 26 particular models of corded
telephones, 12 particular models of cordless telephones, four models of GSM
cellular telephones and two models of code division multiple access (CDMA)
cellular telephones.

THE COMMON STOCK PURCHASE AGREEMENT

         Effective September 14, 2001, we entered into a common stock purchase
agreement with Brooke Bond International Inc., a British Virgin Islands
corporation, for the future issuance and purchase of shares of our common stock.
This common stock purchase agreement establishes what is sometimes termed an
equity line of credit or an equity draw down facility.

         In general, the draw down facility operates like this: the investor,
Brooke Bond International Inc., has committed to purchase from us up to two
million shares of our common stock as we request it over a 24 month period.
During this period, provided 15 trading days have elapsed since the last draw
down pricing period and at our sole election, we may exercise a draw down which
is priced over a draw down period consisting of 15 trading days. We, in our sole
discretion, will determine the draw down amount and the threshold price and
include items in the draw down notice. The amount we can draw at each request
must be at least $100,000. The maximum amount we can actually draw for each
request is determined by a formula set forth in the common stock purchase
agreement. We are under no obligation to issue any shares to Brooke Bond or to
request a draw down during any period. The aggregate total of all draw downs
under the equity draw down facility cannot exceed two million shares. We are
entitled to receive the funds upon delivery of the shares on or prior to the 2nd
trading day following the end of the pricing period.

         We may request a draw down by faxing to Brooke Bond a draw down notice,
stating the amount of the draw down that we wish to exercise and the minimum
threshold price at which we are willing to sell the shares.



                                      -26-



<PAGE>




         No draw down can be less than $100,000. Except as described below, the
maximum draw down amount of a draw down under our equity line facility will be
equal to the lesser of $7,500,000 or 12% of the weighted average price for our
common stock for the 20 trading day period immediately prior to the date that we
deliver notice to Brooke Bond of our intention to exercise a draw down. We then
multiply the weighted average price by the total trading volume in respect of
our common stock for that period.

         Additionally, if any of the following events occur during a pricing
period, the investment amount for that pricing period will be reduced by 1/15th
and the volume weighted average price of any trading day during a pricing period
on which the event occurred will have no effect on the pricing of the shares
purchased during that pricing period:

         o        the volume weighted average price is less than the minimum
                  threshold price we designate;

         o        trading in our common stock is suspended for more than three
                  hours, in the aggregate, on any trading day or if any trading
                  day is shortened because of a public holiday; or

         o        if sales of previously drawn down shares pursuant to the
                  registration statement are suspended by us because of certain
                  potentially material events for more than three hours, in the
                  aggregate.

         The common stock purchase agreement does not permit us to draw funds if
the issuance of shares of common stock to Brooke Bond pursuant to the draw down
would cause Brooke Bond to beneficially own more than 9.9% of our issued and
outstanding common stock at the time of issuance. In such cases, we will not be
permitted to issue the shares otherwise issuable pursuant to the draw down and
Brooke Bond will not be obligated to purchase those shares. Of course, any of
Brooke Bond's resales of shares would reduce the number of shares it
beneficially owns, and would enable us to issue additional shares to Brooke Bond
without violating this 9.9% condition.

         The number of shares that we issue to Brooke Bond on each settlement
date will be equal to the sum of the quotients (for each trading day within the
applicable pricing period) of the draw down amount allocated to a trading day
within the applicable pricing period and the discounted volume weighted average
price on such trading day.

         To determine the number of shares of common stock that we can issue in
connection with a draw down, take 1/15th of the draw down amount and for each
trading day in the pricing period, divide it by 93% of the volume weighted
average daily trading price of our common stock for that day. The 7% accounts
for Brooke Bond's 7% discount. The sum of these daily calculations produces the
number of common shares that we can issue, unless, as described above, the
volume weighted average daily price for any given trading day is below the
threshold



                                      -27-



<PAGE>




amount, trading is suspended for any given trading day or sales made pursuant to
the registration statement is suspended, in which case those days are ignored in
the calculation.

         The following conditions must be satisfied before Brooke Bond is
obligated to purchase any common shares that we may request from time to time:

         o        a registration statement for the shares must be declared
                  effective by the Securities and Exchange Commission and must
                  remain effective and available as of the draw down settlement
                  date for making resales of the common shares purchased by
                  Brooke Bond;

         o        trading in our common shares must not have been suspended by
                  the Securities and Exchange Commission or The Nasdaq National
                  Market, nor shall minimum prices have been established on
                  securities whose trades are reported on The Nasdaq National
                  Market;

         o        we must not have merged or consolidated with or into another
                  company or transferred all or substantially all of our assets
                  to another company, unless the acquiring company has agreed to
                  honor the common stock purchase agreement;

         o        no statute, rule, regulation, executive order, decree, ruling
                  or injunction may be in effect which prohibits consummation of
                  the transactions contemplated by the common stock purchase
                  agreement; and

         o        no material adverse event shall have occurred with respect to
                  our affairs.

         The common stock purchase agreement limits our ability to raise capital
by selling securities for cash to third parties at a discount to the market
price of our common stock during the term of the common stock purchase
agreement. We may, however, sell securities at a discount in the following
situations:

         o        under any presently existing or future employee benefit plan,
                  which plan has been or may be approved by our stockholders;

         o        under any compensatory plan for a full-time employee or key
                  consultant;

         o        in an underwritten registered public offering;

         o        in connection with a strategic partnership or other business
                  transaction, the principal purpose of which is not to raise
                  money;

         o        in connection with a private placement of securities if the
                  purchasers do not have registration rights; or



                                      -28-



<PAGE>




         o        a transaction to which Brooke Bond gives its prior written
                  approval.

         The equity draw down facility established by the common stock purchase
agreement will terminate 24 months from the effective date of the registration
statement covering the shares underlying the equity line of credit. The facility
shall also terminate if we file for protection from creditors, or if our common
stock is delisted from The Nasdaq National Market, and not promptly relisted on
the Nasdaq SmallCap Market, the American Stock Exchange or the New York Stock
Exchange.

         We have no obligation to sell our shares under the equity draw down
facility. However, we may sell and issue to the investor the shares at our sole
discretion, and the investor shall be obligated to purchase the said shares from
us.

ACQUISITION OF EQUITY INTEREST IN CEC TELECOM LTD.

         Subsequent to December 31, 2001, we entered into two sale and purchase
agreements for acquisitions of an aggregate equity interest of 65% in CEC
Telecom Ltd. ("CECT") for an aggregate consideration of Rmb 312,750,000. CECT is
a limited liability company established in China and is principally engaged in
production and sales of mobile phones and accessories in China (the
"Acquisitions").

         Pursuant to an agreement dated April 4, 2002 and a supplementary
agreement dated May 23, 2002, Qiao Xing Mobile Communication Co. Limited
("QXMCL"), a wholly-owned subsidiary of Qiao Xing Universal Telephone, Inc.
formed subsequently to December 31, 2001, will acquire a 25% equity interest in
CECT from Tianjin Taida Company Limited ("TTCL") for cash consideration of Rmb
108,750,000. Pursuant to an agreement dated May 8, 2002 and a supplementary
agreement dated June 23, 2002, QXMCL will acquire a 40% equity interest in CECT
from China Electronics Corporation ("CEC") and other group companies of CEC for
cash consideration of Rmb 204,000,000. All agreements are governed by, and
construed in accordance with, Chinese law.

         As of June 28, 2002, we made prepayments of Rmb 61,000,000 to the
sellers according to the payment terms prescribed in the agreements. The
remaining consideration will be payable as to (i) Rmb 119,000,000 within 10 days
after the completion of shares transfers at the relevant government bureau of
the PRC ("date of shares transfers"); (ii) Rmb 85,000,000 within 3 months after
the date of shares transfers; and (iii) Rmb 47,750,000 within 6 months after the
date of shares transfers. The Group is in the process of applying for the shares
transfers as of June 28, 2002. The unsettled considerations will be secured by,
among others, QXMCL's equity interest in CECT (after completion of shares
transfers) and certain land use rights of the Group with net book value of Rmb
102,085,000 as at December 31, 2001.




                                      -29-



<PAGE>




         As of June 28, 2002, the Acquisitions have not been completed because
certain precedent conditions as set out in the agreements have not been
fulfilled. Such precedent conditions include, among others, (i) approval from
the Chinese government on the shares transfers and (ii) completion of collateral
arrangements on QXMCL's equity interest in CECT and certain land use rights of
the Group as described in the preceding paragraph. Any non-fulfillment of these
precedent conditions may lead to termination of the Acquisitions.




                                      -30-



<PAGE>




C.       ORGANIZATIONAL STRUCTURE AS OF JUNE 28, 2002.

<Table>
<S>                                                    <C>

                                                       Sino Foundations
                  Zhi Jian                               Holdings Ltd.
                    Wu Li                                (a Hong Kong
                                                        Listed Company)

                    100%                                     100%


                                                               Sino
                  Qiao Xing Trust                          Communications
                                                               Ltd.

                      71.16%                                  28.84%


                  Wu Holdings Ltd.                           Public
                                                           Shareholders

                      47.7%                                   52.3%
</Table>


<Table>
<Caption>


                                    QIAO XING UNIVERSAL                                 Rui Lin Wu and
                                      TELEPHONE, INC.                                   Zhi Yang Wu and
                                                                                        Zhi Zhong Wu
<S>                                 <C>                                                 <C>

              100%                               100%                                        100%


      Qiao Xing Mobile                      Qiao Xing Holdings                          Qiao Xing
      Communication Co., Ltd.                 Limited                                   Group Limited

                                                 90%                                         10%
</Table>


                                       Qiao Xing
                                    Telecommunication
                                    Industry Co. Ltd.





                                      -31-



<PAGE>




D.       PROPERTY, PLANTS AND EQUIPMENT.

         Our principal executive offices are located at Qiao Xing Industrial
Zone, Xiao Jin Kou, Huizhou, Guangdong, PRC. Our production facilities are
located in a two-storied industrial building in Qiao Xing Industrial Zone,
Huizhou City, Guangdong, PRC, with a total gross floor area of approximately
14,400 square meters. In view of our production capacity and our current
production plan, we have no significant expansion plan at present.


ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

         The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Consolidated Financial Statements and notes thereto and Item 3.A. Selected
Financial Data. The amounts reflected in the following discussion are in
Renminbi ("Rmb"). Translation of amounts for 2001 from Renminbi into United
States dollars ("US$") is for the convenience of readers and has been made at
the noon buying rate in New York City for cable transfers in foreign currencies
as certified for customs purposes by the Federal Reserve Bank of New York of
US$1.00 = Rmb 8.2766 on December 31, 2001.


A.       OPERATING RESULTS.

FISCAL 2001 COMPARED TO FISCAL 2000

Net sales

         Analysis of our sales revenue by product category for fiscal year 2001
and 2000 is as follows:





                                      -32-



<PAGE>




<Table>
<Caption>

                                                  Year ended December 31

                                               2001                        2000

                                      Rmb'000          %           Rmb'000           %
<S>                                <C>            <C>            <C>            <C>
corded telephones                      56,585           22.7        161,647           41.2
cordless telephones                    34,361           13.8         31,847            8.1
smart card telephones                  20,689            8.3         47,866           12.2
caller ID display telephones          133,360           53.5        116,134           29.6
Digitally enhanced cordless             4,276            1.7         34,623            8.8
telephones
coin operated telephones                    0              0            412            0.1
                                   ----------     ----------     ----------     ----------
Total                                 249,271            100        392,529            100
                                   ==========     ==========     ==========     ==========
</Table>

         Net sales revenue decreased by Rmb 143,258,000 from Rmb 392,529,000 for
fiscal year 2000 to Rmb 249,271,000 (US$30,118,000) for fiscal year 2001,
representing a decrease of 36.5%. It was mainly attributed to intense
competition in the corded phones industry as well as an increase in the general
living standard of Chinese people who are more willing to upgrade their phones
from corded phones or cordless phones to mobile phones. This led to a
significant decrease in sales value of our corded and cordless phone products.
The decrease can be further analyzed as follows:

         a)       a decrease of 800,000 sets of phones sold from 4.8 million
                  sets in 2000 to 4.0 million sets in 2001, including a decrease
                  of 120,000 sets of digitally enhanced cordless telephones
                  ("DECT").

         b)       average sales price of our phones decreased by 24.6%, mainly
                  due from corded telephones and DECT.

Gross Profit

         Analysis of our gross profit by product category for fiscal years 2001
and 2000 is as follows:

<Table>
<Caption>
                                                      Year ended December 31
                                                     2001                2000
                                              -----------------   -----------------
                                              Rmb' 000      %     Rmb' 000      %
<S>                                           <C>         <C>     <C>         <C>
corded telephones                                6,356     17.2     45,201     37.4
cordless telephones                              3,091      8.3      6,951      5.7
smart card telephones                            5,968     16.1     27,284     22.6
caller ID display telephones                    21,071     56.9     32,518     26.9
Digitally enhanced cordless telephones             556      1.5      9,002      7.4
coin operated telephones                             0      0.0        (33)     0.0
                                                ------    -----    -------    -----
                                                37,042    100.0    120,923    100.0
</Table>

         Gross profit for fiscal year 2001 was Rmb 37,042,000 (US$4,476,000),
representing a decrease of Rmb 83,881,000 from Rmb 120,923,000 in fiscal year
2000. This represents a decrease in percentage from 30.8% in 2000 to 14.9% in
2001. The decrease was mainly due to intense competition in the telephone market
in China which led us to reduce our sales price by an average of 24.6% to
maintain the sales level, while the cost of goods sold was reduced by only 7.2%
on average from 2000 to 2001 per set of phone.

Selling, General and Administrative Expenses

         Selling expenses decreased by Rmb 9,153,000 from Rmb 15,325,000 for
fiscal year 2000 to Rmb 6,172,000 (US$746,000) for fiscal year 2001. The
decrease was predominantly attributable to reduction of budget spent on
promotion and marketing activities. The



                                      -33-



<PAGE>




transportation expenses incurred also decreased as a result of the decrease in
sales revenue of 36.5% from fiscal year 2000 to fiscal year 2001.

         We expect that selling expenses in fiscal year 2002 will increase
because of new GSM and CDMA mobile phone products launched to the market where
more marketing and promotion expenses are expected to be incurred in 2002.

         General and administrative expenses increased by Rmb 3,509,000 from Rmb
40,605,000 in fiscal year 2000 to Rmb 44,114,000 (US$5,330,000) in fiscal year
2001. This increase was mainly attributable to an increase in research and
development expenses of Rmb 3,000,000 for new products including GSM mobile
phone and ordinary telephones.

         The other general and administrative expenses are generally comparable
between fiscal year 2000 and 2001. We also expect that general and
administrative expenses in 2002 will also increase following the completion of
our acquisition of CEC Telecom Ltd.

Impairment loss on land use rights and property, machinery and equipment

         Impairment loss on land use rights and property, machinery and
equipment of Rmb 5,004,000 (US$605,000) and Rmb 8,722,000 (US$1,054,000),
respectively, has been recorded in fiscal year 2001.

         Impairment loss on land use rights represented provisions made by us on
payment of land use rights for a parcel of land for which we have not been able
to obtain the land use right certificate from the government. This parcel of
land has been left vacant for a few years and is no longer under our development
plan. We are of the view that this parcel of land has no continuing value in use
to us. Sales of this parcel of land is limited as we have not obtained the land
use right. As a result, we determine to record an impairment loss of Rmb
5,004,000 for the land use rights for this parcel of land.

         Capitalized software represents acquisition costs to obtain proprietary
software provided by a third party, which is recorded under machinery, equipment
and software. We evaluated the recoverability of the capitalized software cost
and determined to make a full provision of Rmb 8,722,000 of the carrying value
of capitalized software cost in 2001 by reference to reduction of DECT sales of
Rmb 30,347,000 from Rmb 34,623,000 in 2000 to Rmb 4,276,000 in 2001, an 88%
decrease, and the low sales projection of DECT mobile phones.

Interest expenses

         Interest expenses for bank borrowings and shareholders' loan increased
from Rmb 6,300,000 in 2000 to Rmb 8,404,000 (US$1,015,000) in 2001 due to an
increase in the amount of short-term bank borrowings from 2000 to 2001.



                                      -34-



<PAGE>




         Interest expense for convertible debentures decreased from Rmb
17,250,000 to Rmb 14,703,000 in 2001 due to higher portion of debentures being
converted in 2000, resulting in higher portion of unamortized debt issuance cost
and discount of convertible debentures being recognized as interest expense in
2000. The interest expenses for convertible debentures were non-cash expense.

         The convertible debentures were fully converted in 2001. No further
interest expense for the debentures will be incurred in 2002.

Other Income/Expenses

         Other income (expense) increased by Rmb 1,105,000 from other expense,
net of Rmb 197,000 in 2000 to other income, net of Rmb 908,000 (US$110,000) in
2001. This was mainly attributed by a non-operating income of Rmb 1 million in
2001 for subcontracting services rendered.

Provision for (Write-back of) income tax

Provision for (Write-back of) income tax consists of:


<Table>
<Caption>

                                    2000                      2001
                                -----------      ----------------------------
                                  Rmb'000          Rmb'000          US$'000
<S>                             <C>              <C>              <C>

Mainland Chinese income tax

- current                            18,809          (18,868)          (2,280)

- deferred                           (2,210)          (6,819)            (824)
                                -----------      -----------      -----------

                                     16,599          (25,687)          (3,104)
                                ===========      ===========      ===========
</Table>

         Pursuant to the Notice No. [1999] 52 issued by the Government of
Guangdong Province, Mainland China ("the Notice [1999] 52"), High and New
Technology Enterprise of Guangdong Province is entitled to a tax holiday granted
by the relevant tax bureau, under which the company is subject to state income
tax at a rate of 15% for three years, effective from January 1, 1999.
Furthermore, for a wholly foreign owned enterprise in Guangdong Province which
is certified by Guangdong Provincial Foreign Trade and Economic Cooperation
Office ("GPFTECO") as an Advanced Technology Enterprise, the company is entitled
to additional tax benefits granted by the relevant tax bureau under which the
state income tax rate can be further reduced to 10% for three years. Qiao Xing
Telecommunication Industry Co. Ltd. ("QXTI"), our PRC subsidiary, is a High and
New Technology Enterprise since 1999 and it is also an Advanced Technology
Enterprise of Guangdong Province since 2000 pursuant to certificates issued by
Guangdong Science and Technology Commission and GPFTECO respectively.




                                      -35-



<PAGE>




         Prior to obtaining confirmation from the relevant tax bureau on the
entitlement to a tax holiday as stated above, QXTI provided for enterprise
income tax using 24% for the years ended December 31, 1999 and 2000. Subsequent
to December 31, 2001, QXTI obtained a confirmation from the National Tax Bureau
to confirm that QXTI was able to enjoy the aforementioned tax benefit pursuant
to the Notice [1999] 52 and QXTI would be subject to state income tax rate at
15% for the year ended December 31, 1999 and 10% for each of the years ended
December 31, 2000 and 2001. Accordingly, the excess provision of Mainland
Chinese enterprise income tax in prior years was written back in 2001.

         The increase in write-back of deferred Mainland Chinese income tax from
Rmb 2,210,000 to Rmb 6,819,000 (US$824,000) was due to increase in temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes such as
provision for doubtful debt and loss carryforwards.

Net Income & Earning Per Share

         Net loss of Rmb 21,422,000 (US$2,588,000) was recorded for fiscal year
2001, while net income of Rmb 23,471,000 was recorded for fiscal year 2000. The
loss was mainly attributable by the following:

         i)       decrease in gross profit of Rmb 83,881,000 (US$10,134,000);

         ii)      increase in impairment loss on land use rights and property,
                  machinery and equipment of Rmb 13,726,000 (US$1,658,000); and

         iii)     write-back of provision for income tax of Rmb 25,687,000
                  (US$3,104,000) in 2001 while provision for income tax of Rmb
                  16,599,000 was recorded in 2000 (i.e. variation of Rmb
                  42,286,000).

         Based on a weighted average of 12.8 million shares outstanding in 2001,
the Group reported a loss per share of Rmb 1.66 (US$0.20), compared to earnings
per share of Rmb 2.03 on 11.57 million weighted-average shares outstanding in
2000. The higher number of outstanding shares is the result of additional shares
issued for conversion of all the outstanding convertible debentures during 2001.


FISCAL 2000 COMPARED TO FISCAL 1999

Net sales

          Net sales revenue increased to Rmb 392,529,000 from Rmb 383,633,000
for 1999. The increase was due to a growing number of telephone subscribers.




                                      -36-



<PAGE>




         The following table presents our sales revenues by category, and the
approximate percentage of total sales revenues for fiscal 2000 and 1999:


<Table>
<Caption>

                                                        Year ended December 31
                                                 2000                             1999

                                       Rmb'000            %              Rmb'000            %
<S>                                <C>              <C>              <C>              <C>
corded telephones                       161,647             41.2          190,282             49.6
cordless telephones                      66,470             16.9           58,696             15.3
smart card telephones                    47,866             12.2           71,739             18.7
caller ID display telephones            116,134             29.6           54,476             14.2
coin operated telephones                    412              0.1            8,440              2.2
                                   ------------     ------------     ------------     ------------
Total                                   392,529              100          383,633              100
                                   ============     ============     ============     ============
</Table>

Gross Profit

         Analysis of our gross profit by product category for fiscal years 2000
and 1999 is as follows:

<Table>
<Caption>
                                                      Year ended December 31
                                                     2000                1999

                                              Rmb' 000      %     Rmb' 000      %
<S>                                           <C>         <C>     <C>         <C>
corded telephones                               45,201     37.4     48,571     39.2
cordless telephones                              6,951      5.7     12,826     10.3
smart card telephones                           27,284     22.6     47,232     38.2
caller ID display telephones                    32,518     26.9     13,574     10.9
Digitally enhanced cordless telephones           9,002      7.4         --       --
coin operated telephones                           (33)     0.0      1,772      1.4
                                               -------    -----    -------    -----
                                               120,923    100.0    123,975    100.0
                                               =======    =====    =======    =====
</Table>

         Gross profit in 2000 was Rmb 120,923,000 compared with Rmb 123,975,000
in 1999. The gross profit margins were stable mainly due to a change in product
mix. The gross profit of smart card telephone, with an average gross profit
margin of 57%, declined to Rmb 27,284,000 for 2000 compared to Rmb 47,232,000
for 1999. However, the gross profit of caller ID display telephones increased
substantially from Rmb 13,574,000 in 1999 to Rmb 32,518,000 in 2000. In
addition, DECT products were rolled out in 2000 with contribution of gross
profit of Rmb 9,002,000.

Selling, General and Administrative Expenses

         Selling expenses decreased slightly by Rmb 370,000, from Rmb 15,695,000
for 1999 to Rmb 15,325,000 for 2000. The decrease was predominantly attributable
to the change of promotion strategy. We tended to use more printing media, such
as billboards and posters, instead of TV advertising. As a result, advertising
expenses decreased by Rmb 9,351,000 from Rmb 13,260,000 for 1999 to Rmb
3,909,000 for 2000.

         General and administrative expenses increased by Rmb 12,043,000, from
Rmb 28,562,000 for 1999 to Rmb 40,605,000 for 2000. This was mainly due to an
increase of approximately Rmb 11,963,000 for bad debt provisions and increased
expense for additional personnel to support the production of digitally-enhanced
cordless telephones.

Interest expense

         Interest expense for 2000 was Rmb 23,550,000 compared with Rmb
5,577,000 for 1999, representing an increase of Rmb 17,973,000. This is mainly
due to amortization of costs of issuing the debentures as well as amortization
on discount of convertible debentures. In June, 2000, we issued Rmb 82,745,000
convertible debentures, and accordingly, approximately Rmb 17,250,000 of
non-cash interest expense was recognized. The amount consists of Rmb



                                      -37-



<PAGE>




9,637,000 amortization costs of issuing the debentures and Rmb 7,613,000
amortization related to the discounted issuance of the convertible debentures.

Provision for income tax

         Provision for income tax decreased from Rmb 20,298,000 in 1999 to
Rmb16,599,000 in 2000. The effective tax rate in 1999 and 2000 was 26.6% and
36.3%, respectively. The increase in effective tax rate of 24% from 1999 to 2000
was mainly attributed by non-deductible US GAAP accounting entry on amortization
of debt issuance costs and discount of convertible debentures in 2000 which
constituted an increase in tax rate of 14.1%.

Net Income & Earning Per Share

         Net income decreased by Rmb 26,232,000 to Rmb 23,471,000 in 2000 from
Rmb 49,703,000 in 1999, which was mainly because of an increase in Rmb
17,250,000 and Rmb 12,043,000, respectively, in amortization of debt issuance
cost and discount of convertible debentures and general and administrative
expenses.

         Based on a weighted average of 11.57 million shares outstanding during
the year ended December 31, 2000, we reported earnings per share of Rmb 2.03,
compared to Rmb 5.33 per share on 9.33 million weighted average shares
outstanding during the year ended December 31, 1999. The increase in number of
outstanding shares in 2000 is due to additional shares issued in 2000.


B.       LIQUIDITY AND CAPITAL RESOURCES.

         We are principally engaged in the manufacturing and sales of
telecommunication terminals and equipment, including corded and cordless
telephone sets, in Mainland China. We did not declare or pay dividends in fiscal
year 2001.

         Our primary sources of funding are (i) cash flows from operating
activities and (ii) new borrowings under credit agreements with various banks.
Bills payable are a form of bank borrowings with payment terms of 180 days and
are non-interest bearing unless they become trust receipts loans which bear
interest at the prevailing interest rate of bank loans.

         Furthermore, during the years ended December 31, 2000 and 2001, we
issued certain bills to related companies. These related companies discounted
the bills with certain banks and remitted the cash to us immediately. We
recorded this type of financing as other bank borrowings - discounted bills,
which was repayable in 180 days and bore weighted average interest at 3.58% per
annum and 3.47% per annum, respectively, as of December 31, 2000 and 2001. As of
December 31, 2000 and 2001, the bills payables and other bank borrowings -



                                      -38-



<PAGE>




discounted bills are secured by pledged bank deposits of approximately Rmb
46,462,000 and Rmb 28,062,000 (US$3,391,000) respectively.

         For the years ended December 31, 1999, 2000 and 2001, approximately Rmb
110,628,000, Rmb (7,568,000) and Rmb 26,489,000 (US$3,200,000), respectively,
was generated from (used by) operating activities, approximately Rmb
100,353,000, Rmb 281,315,000 and Rmb 24,344,000 (US$2,942,000) respectively was
provided by financing activities and approximately Rmb 214,669,000,
approximately Rmb 243,200,000 and Rmb 76,637,000 (US$9,258,000) was used in
investing activities. Consequently, cash and bank deposits decreased by Rmb
3,696,000 during the year ended December 31, 1999, increased by Rmb 30,620,000
during the year ended December 31, 2000 and decreased by Rmb 25,874,000
(US$3,126,000) during the year ended December 31, 2001.

Cash flows from operating activities

         Cash flows from operating activities increased by Rmb 110,628,000
during the year ended December 31, 1999. This was mainly attributable by net
income of Rmb 49,703,000, decrease in certain operating assets from 1998 to 1999
of Rmb 8,124,000 and increase in operating liabilities from 1998 to 1999 of Rmb
31,531,000.

         In 2000, there was a cash outflow of Rmb 7,568,000 despite net income
of Rmb 23,471,000. This was mainly due to (i) non-cash items such as
depreciation of property, machinery and equipment, amortization of land use
rights, amortization of debt issuance costs and discount of convertible
debentures of a total of Rmb 30,048,000 (ii) increase in operating assets of Rmb
97,747,000 mainly due to increase in accounts receivable and inventories, and
(iii) increase in operating liabilities of Rmb 25,999,000 mainly due to increase
in taxation payable.

         In 2001, there was an operating cash inflow of Rmb 26,489,000 despite a
net loss of Rmb 21,422,000. This was mainly due to (i) non-cash items such as
depreciation of property, machinery and equipment, amortization of land use
rights, amortization of debt issuance costs and discount of convertible
debentures of a total of Rmb 36,623,000 (ii) decrease in operating assets of Rmb
31,766,000 mainly due to decrease in accounts receivable and prepaid expenses,
and (iii) decrease in operating liabilities of Rmb 34,623,000 mainly due to
decrease in taxation payable.

Cash flows from financing activities

         For the years ended December 31, 1999, 2000 and 2001, approximately Rmb
100,353,000, Rmb 281,315,000 and Rmb 24,344,000 (US$2,940,000) respectively was
provided by financing activities.

         During the year ended December 31, 1999, there was Rmb 100,353,000 cash
provided by financing activities which was mainly due to new short-term
borrowings of Rmb



                                      -39-



<PAGE>




59,264,000 and our shares were listed in NASDAQ with net proceeds of Rmb
54,045,000 obtained through issue of common stock.

         During the year ended December 31, 2000, there was Rmb 281,315,000 cash
provided by financing activities which was mainly due to (i) increase in
short-term bank borrowings of Rmb 67,173,000, (ii) net proceeds from issue of
common stocks, convertible debentures and exercise of options and warrants of an
aggregate amount of Rmb 214,635,000.

         During the year ended December 31, 2001, there was Rmb 24,344,000 cash
provided by financing activities which was due to increase in short-term bank
borrowings of Rmb 20 million.

Cash flows from investing activities

         For the years ended December 31, 1999, 2000 and 2001, approximately Rmb
214,669,000, Rmb 243,200,000 and Rmb 76,637,000 (US$9,258,000) was used in
investing activities.

         During the year ended December 31, 1999, we incurred capital
expenditures on acquisition of property, machinery and equipment amounting to
Rmb 25,547,000 for expansion of our production facilities. Furthermore, we
incurred Rmb 80,665,000 to develop our own Qiao Xing Industrial Zone. We further
paid Rmb 85,531,000 for land use rights for investment purpose. We also used Rmb
31,978,000 as pledged deposits for security of our banking facilities.

         During the year ended December 31, 2000, we incurred capital
expenditures on acquisition of property, machinery and equipment amounting to
Rmb 12,373,000 for expansion of our production facilities. Furthermore, we
incurred a further Rmb 75,937,000 to develop our own Qiao Xing Industrial Zone.
In 2000, we also paid an amount of Rmb 104,982,000 for land use rights for
investment purpose. We also increased our pledged deposits of Rmb 42,006,000 for
security of our banking facilities.

         During the year ended December 31, 2001, our cash used in investing
activities decreased significantly to Rmb 76,637,000. The amount was mainly
attributed by an advance of Rmb 56,300,000 to Qiao Xing Group Limited, a related
company, as short-term funding. Subsequent to December 31, 2001, we received Rmb
50,000,000 from Qiao Xing Group Limited. We also spent approximately Rmb 19
million in 2001 in acquisition of property, machinery and equipment, newly
constructed plant and payment of land use rights.

          As of December 31, 2001, our consolidated working capital was Rmb
147,505,000 (US$17,821,000) as compared to Rmb 136,616,000 as of December 31,
2000.

         Historically, we have financed our operations and capital expenditures
principally through cash generated from operating activities and bank
borrowings. Outstanding bank



                                      -40-



<PAGE>




borrowings accounted for 18.1% and 20.8% of our total assets as of December 31,
2000 and December 31, 2001, respectively. Seasonal working capital needs have
been met through short- term borrowings under revolving lines of credit.

          As of December 31, 2001, the Group had banking facilities of
approximately Rmb 198,330,000 (US$23,963,000) for loans and trade financing.
Approximately Rmb 189,990,000 (US$22,955,000) of the Group's banking facilities
were used as of December 31, 2001.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

         The Group had capital commitments for contribution of Huizhou Qiao
Xing-Hyundai System Communication Equipment Co., Ltd. and Qiao Xing Mobile
Telecommunication Co., Ltd. of Rmb 118,438,000 (US$14,310,000) as of December
31, 2001.

         The Group has an operating lease agreement for an office premise, which
extends through September 2002. Future minimum rental payments as of December
31, 2001, under an agreement classified as operating lease with non-cancelable
terms within one year amount to Rmb304,000 (US$37,000).

         Under the agreement for the payment of land use rights for a parcel of
land in Mainland China, the Group has committed to pay pre-determined annual
fees to the respective third-party landlord for the period of 20 years up to
December 2017. As of December 31, 2001, future fees payable under these
agreements were Rmb 16,388,000 (US$1,980,000).

         The Group had other commitments for research and development of Rmb
3,479,000 (US$420,000) as of December 31, 2001.

RELATED PARTY TRANSACTIONS

         From time to time, we may enter into transactions with parties that
have relationships with our officers or directors or entities in which we have
an ownership interest. Such transactions are reviewed by the Board of Directors
and are subject to the approval of members of the Board of Directors who do not
have a personal interest in the applicable transaction. We disclose all material
transactions that, in our judgment, constitute related party transactions.
Related parties include our subsidiaries, investments accounted for under the
equity method, members of our management and owners of a significant percentage
of our common stock and their family members, and any other party that we
significantly influence.

CRITICAL ACCOUNTING POLICIES: ACCOUNTING ESTIMATES

         In preparing our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, we
must make a variety of estimates that affect the reported amounts and related
disclosures. The following accounting policies are currently considered most
critical to the preparation of our financial statements.




                                      -41-



<PAGE>




         Revenue Recognition. The Securities and Exchange Commission's Staff
Accounting Bulletin ("SAB") No. 101: "Revenue Recognition". SAB No. 101 requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Based on the above criteria our revenue is recognized at
the time when the merchandise is shipped and title to the merchandise has passed
to customers. Title to the merchandise may transfer to the customer when shipped
or when received by the customer based on the specific agreement. We grant
discounts or allowances on merchandise and account for these discounts and
allowances as a deduction from sales. We evaluate our provisions for estimated
discounts and allowances periodically based on historical trends. To date, we
have not experienced any significant discounts and allowances. Any material
increase in the level of returns could have a material and adverse effect on our
financial statements.

         Allowance for doubtful accounts. Certain of our accounts receivable are
subject to credit losses. We have attempted to reserve for expected credit
losses based on our past experience with similar accounts receivable and believe
our reserves to be adequate. It is possible, however, that the accuracy of our
estimation process could be materially impacted as the composition of this pool
of accounts receivable changes over time. We continually review and refine the
estimation process to make it as reactive to these changes as possible; however,
we cannot guarantee that we will be able to accurately estimate credit losses on
these accounts receivable.

         Inventory Valuation. We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional write-downs may be
required.

         Valuation of Long-lived Assets. We assess the carrying value of
long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:

         (1)      significant under-performance relative to expected historical
                  or projected future operating results;

         (2)      significant changes in the manner of our use of the asset;

         (3)      significant negative industry or economic trends; and

         (4)      our market capitalization relative to net book value.

         Upon the existence of one or more of the above indicators of
impairment, we test such assets for a potential impairment. The carrying value
of a long-lived asset is considered impaired when the anticipated cash flows are
less than the asset's carrying value. In that event, a loss is



                                      -42-



<PAGE>




recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk
involved.

         Deferred taxes. As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes and tax bases
of assets and liabilities in each of the jurisdictions in which we operate. This
process involves us estimating our current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income, and, to the extent we believe that recovery is more unlikely
than likely, we must establish a valuation allowance. To the extent we establish
a valuation allowance or increase this allowance in a period, we must include an
expense with the tax provision in the statement of operations.

         Income tax. We account for income tax under the provision of SFAS No.
109 "Accounting for Income Taxes". Income tax liabilities are assessed based on
the relevant tax rate applicable at the time we prepare financial statements for
each financial period. On this basis, our subsidiary, QXTI, provided for
enterprise income tax in Mainland China using 24% state income tax rate for 1999
and 2000 as the tax holiday it was entitled to had not been confirmed by the
relevant tax bureau in Mainland China. In 2002, QXTI obtained a confirmation
from the relevant tax bureau on its entitlement of tax holiday under which the
state income tax rates are 15% for 1999 and 10% for 2000 and 2001. We then
applied these adjusted tax rates to assess the income tax position for 1999 and
2000, as a result, the excess tax provision for 1999 and 2000 of Rmb 18,868,000
in total has been written back in 2001.

         Convertible debenture. We account for convertible debentures issued
during the year ended December 31, 2000 in accordance with Accounting Principles
Board Opinions No. 14: "Accounting for Convertible Debt and Debt issued with
Stock Purchase Warrants," Emerging Issues Task Force Issue ("EITF") Issue No.
98-5: "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios" and EITF Issue No. 00-27:
"Application of EITF Issue No. 98-5 to Certain Convertible Debentures."

         The proceeds obtained from the issuance of convertible debentures are
allocated between the convertible debentures and the attached detachable
warrants based on the relative fair values of the two securities, at the time of
issuance, with the portion applicable to the warrants being debited as a
discount to convertible debenture and credited to the additional paid-in
capital. The embedded beneficial conversion feature of the convertible debenture
is recognized and measured by allocating a portion of the proceeds equal to the
intrinsic value of that feature as a discount to convertible debentures and as a
credit to additional paid-in capital.




                                      -43-



<PAGE>




         Discounts of convertible debentures and debt issuance cost were
amortized over the term of the convertible debentures using the effective
interest rate method and the amount amortized were recognized as interest
expense. Any unamortized discounts remaining at the date of conversion of
convertible debentures were recognized as interest expense in the period the
conversion took place.

         In connection with the conversion which took place during the years
ended December 31, 2000 and 2001, the relevant portion of unamortized debt
issuance cost amounted to approximately Rmb 8,053,000 and Rmb 7,124,000
(equivalent to US$973,000) respectively and unamortized discounts of convertible
debentures amounted to approximately Rmb 6,335,000 and Rmb 5,580,000 (equivalent
to US$674,000), respectively were recognized as interest expenses.

CRITICAL ACCOUNTING POLICIES: ADOPTION OF NEW ACCOUNTING POLICIES

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141: "Business combinations" and SFAS No. 142: "Goodwill and Other
Intangible Assets". These pronouncements significantly change the accounting for
business combinations, goodwill and intangible assets. SFAS No. 141 establishes
that all business combinations will be accounted for using the purchase method
and the use of the pooling-of-interests method is no longer allowed. The
statement further clarifies the criteria to recognise intangible assets
separately from goodwill. The provision of SFAS No. 141 are effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and, generally, adopts a non-amortisation and periodic
impairment-analysis approach to goodwill and indefinitely-lived intangibles.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 or
for business combinations initiated after June 30, 2001. The adoptions of SFAS
No. 141 & 142 are not expected to have a material impact on the Group's
financial statements.

         In August 2001, the FASB issued SFAS No. 143: "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of SFAS No. 143
shall be effective for fiscal years beginning after June 15, 2002. The adoption
of SFAS No. 143 is not expected to have a material impact on the Group's
financial statements.

         In October 2001, the FASB issued SFAS No. 144: "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 amends accounting and
reporting standards for the disposal of segments of a business and addresses
various issues related to the accounting for impairments or disposals of
long-lived assets. The provisions of SFAS No. 144 shall be effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS No. 144 is not
expected to have a material impact on the Group's financial statements.




                                      -44-



<PAGE>




         In April 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 145: "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections". This statement
made revisions to the accounting for gains and losses from the extinguishment of
debt, rescinded Statement No. 44, and required certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions. The Company is required to and
will adopt SFAS No. 145 on January 1, 2002. The adoption of SFAS No. 145 is not
expected to have a material impact on the Group's financial statements.


C.       RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

         During each of the last three fiscal years, we spent the following
amounts on company-sponsored research and development activities:

<Table>

<S>                                                                      <C>
                  Year ending December 31, 2001                          Rmb 3,516,000
                  Year ending December 31, 2000                            Rmb 497,000
                  Year ending December 31, 1999                            Rmb 562,000
</Table>






                                      -45-



<PAGE>




D.       TREND INFORMATION.

Sales

         In light of the recent market condition and the continuous improvement
of the living standard of the people in China, we are of the view that the
corded and cordless telephones products will be less attractive to the public.
Our focus in fiscal year 2002 is the promotion of caller ID displayed
telephones. We are confident that these relatively high-end phone products can
continue to achieve a double digit growth in fiscal year 2002. In addition, we
started production of GSM and CDMA mobile phones since the beginning of fiscal
year 2002 and we expect that sales revenue of at least Rmb 65 million will be
generated from sale of mobile phone products. Therefore, we believe that we will
be able to achieve a remarkable growth in sales revenue for fiscal year 2002 as
compared to 2001.

Gross Profit

         Our gross profit margin percentage in fiscal year 2001 was
approximately 15%. We also achieved a gross profit margin of approximately 15%
for our sale of mobile phone products so far in 2002. On this basis, we
anticipate that with the increase in sales revenue because of the introduction
of GSM and CDMA mobile phones and multi-function indoor phones, our total gross
profit in fiscal year 2002 will increase.

Production

         Our total production for the first half of 2002 is expected to be 2.1
million sets, compared to 1.5 million sets for the same period of 2001. The
increase of 0.6 million sets is mainly due to the commencement of production of
GSM and CDMA mobile phones in 2002.

Price

         In 2002, we further reduced our price by approximately 10% for certain
of our products. Due to the keen competition in the telephone market, our new
GSM and CDMA mobile phones are to be priced at a gross profit margin of not more
than 15% so as to be competitive in the market.

Inventory

         We forecast that our inventory value as of June 30, 2002 is
approximately Rmb 91 million which was higher than Rmb 80 million as of December
31, 2001. This is due to the purchases of high-value raw material and components
for the production of GSM and CDMA mobile phones.




                                      -46-



<PAGE>




Acquisition of CEC Telecom Ltd.

         The acquisition of CEC Telecom Ltd by Qiao Xing Mobile Communication
Co. Ltd, a wholly owned subsidiary of Qiao Xing Universal Telephone Inc.,
requires Rmb 312,750,000 (US$37,787,000) of additional funding during fiscal
2002. Rmb 61,000,000 (US$7,370,000) has already been paid for the planned
acquisition. We continued to use our existing loan facilities and extended our
existing short term bank loans to finance our daily operations. Events such as
non-renewal of credit facilities or requirements to repay short-term debt could
affect our ability to fund the acquisition and working capital. We may require
significant additional funding in connection with the planned acquisition and to
expand in the future. Such additional funding may be raised through additional
public or private equity or debt financings or other sources and may, if
obtained by way of subsequent equity financing, result in dilution to the
holders of the Common Shares. We believe that our existing cash balances and
funds expected to be generated from operations and available credit facilities
should be sufficient to fund our anticipated level of operations and our current
expansion and acquisition plans for the foreseeable future. There can be no
assurance that our operations, expansion plans or capital requirements will not
change in a manner that would consume available resources more rapidly than
anticipated, or that substantial additional funding will not be required before
we can achieve and maintain profitable operations. Further, additional funding
may not be available on terms satisfactory to us, if at all. If adequate funds
are not available, we may be required to cut back or abandon our expansion plans
and curtail operations significantly, which would have a material adverse effect
on our business, financial condition and results of operations.






                                      -47-



<PAGE>




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       DIRECTORS AND SENIOR MANAGEMENT.

         Our senior management and directors are as follows:


<Table>
<Caption>

  NAME                                          AGE           POSITION
  ----                                          ---           --------
<S>                                             <C>         <C>

Rui Lin Wu                                       50         Chairman and Chief Executive
                                                            Officer
Zhi Yang Wu                                      29         Vice Chairman and Secretary
Zhi Fang Zhang                                   48         Executive Director
Zhong Ai Li                                      31         Executive Director
Murry Xiao                                       35         Chief Financial Officer
Liu Rong Yang                                    29         Non-Executive Director
Zi Shu Huang                                     48         Non-Executive Director
Guo Liang Zhang                                  60         Non-Executive Director
</Table>

         None of our directors and officers was selected pursuant to any
agreement or understanding with any other person. There is no family
relationship between any director or executive officer and any other director or
executive officer, except Rui Lin Wu and his son Zhi Yang Wu.

         MR. RUI LIN WU is our chairman and chief executive officer. He is our
founder and has over 14 years of experience in the telecommunication industry.
He is responsible for our overall strategic planning, policy making and finance.
Prior to his career in the telecommunications industry, he was a general manager
of a fashion and garment factory from 1980 to 1986. Currently, Mr. Wu is a
member of the China National Association of Industry and Commerce, senior
analyst of the China National Condition and Development Research Center, and a
member of the Poverty Fund of China.

         MR. ZHI YANG WU is our vice chairman and the elder son of Mr. Rui Lin
Wu. Mr. Wu also serves as our secretary. Mr. Wu received a Diploma in Business
Management from Huizhou University of the PRC. He joined us in 1992 and is
responsible for our overall strategic planning, policy making and the overseas
market development.

         MR. ZHI FANG ZHANG serves as an executive director. He is the chairman
of HomeWay Information Technology Co., Ltd. HomeWay is a famous internet company
in China. Mr. Zhang received his bachelor degree of law from Peking University
and achieved the master of law from Fletcher School of Law and Diplomacy in the
U.S.




                                      -48-



<PAGE>




         MR. ZHONG AI LI is deputy general manager of Qiao Xing
Telecommunication Industry Co., Ltd. ( "QXTI ") and has served as one of our
directors since September 1997. From August 1992 to July 1994, he served as
deputy manager of QXTI's marketing department. From August 1994 to February
1997, Mr. Li served as manager of Shenzhen Baoan Chang He Electronic Co., Ltd.
From February 1997 to September 1997, he served as manager of QXTI's marketing
department. Mr. Li has served as deputy general manager of QXTI since September
1997.

         MR. MURRY XIAO has served as our chief financial officer and controller
of finance since June 15, 2002. Mr. Xiao received a degree in economics from
Jiang Xi University of Finance and Economics in 1988. From July 1988 to March
1995, he served as an audit senior and an audit department manager with Jiang Xi
Certified Public Accountants, PRC. From April 1995 to March 1996, he served as
assistant chief financial officer for Shenzhen Fortune (Group) Ltd. From April
1996 to September 1996, Mr. Xiao served as senior accountant for China Pacific
Steel Co. Ltd. (H.K.). From September 1996 through June 1999, he served as an
audit manager with Ho and Ho & Company, C.P.A. (H.K.). From July 1999 to June
15, 2002, Mr. Xiao served as our finance manager. Mr. Xiao is a registered
member of the China Institute of Certified Public Accountants since April 1994.

         MS. LIU RONG YANG serves as a non-executive director. Ms. Yang has
worked for Huizhou Lian Zhuang Wire and Cable Limited as deputy managing
director since January 1998. From 1996 to 1998, she served as the deputy
managing director for Huizhou Zhong Qiao Electronics Limited.

         MR. ZI SHU HUANG serves as a non-executive director. He has served as
the general manager of Huizhou City Xiaojinkou Economic Development Company
since September 1997. This company specializes in the manufacturing of
electronic parts and business trading.

         MR. GUO LIANG ZHANG is assistant to the chairman of QXTI and served as
one of our directors from September 1997 to July 1998 and has served as one of
our non-executive directors since August 1999. From March 1992 to May 1994, Mr.
Zhang served as vice general manager of Jiling Telecommunication Industry Co.,
Ltd. This company is principally engaged in the manufacturing and sales of
telecommunications terminals and equipment. Mr. Zhang received a degree of
Bachelor of Arts in Chinese from Jilin Province Huadian Normal College.


B.       COMPENSATION.

         The aggregate compensation which we paid to all of our directors and
executive officers as a group with respect to our fiscal year ended December 31,
2001 on an accrual basis, for services in all capacities, was Rmb 2,570,000
(US$311,000). During the fiscal year ended December 31, 2001, we contributed an
aggregate amount of Rmb 739,917 (US$108,279) toward the pension plans of our
directors and executive officers.



                                      -49-



<PAGE>




         We have not entered into an employment agreement with Mr. Rui Lin Wu.
Currently, Mr. Wu serves as our chief executive officer at an annual salary of
Rmb 1,266,840 (US$153,000). Mr. Wu's remuneration package includes benefits with
respect to a motor car.

         During the fiscal year ended December 31, 2000, Mr. Wu received stock
options exercisable to acquire 300,000 shares of common stock at $15.00 per
share at any time until April 14, 2005. In January 2002, the exercise price of
the options was reduced to $5.50 per share.

         Besides Mr. Wu, during the fiscal year ended December 31, 2000, our
vice president, Zhi Yang Wu, our vice general manager, Yong Tai Wu, and the
chairman assistant, Min Zhu, respectively, received stock options exercisable to
acquire 250,000, 245,000 and 200,000 shares of common stock at $15.00 per share
at any time until April 14, 2005. In January 2002, the exercise price of the
options was reduced to $5.50 per share.


C.       BOARD PRACTICES.

         Each of our seven current directors was elected at our last annual
meeting of shareholders held December 7, 2001 to serve a one-year term or until
their successor is elected and qualified.

         There are no directors' service contracts with us or any of our
subsidiaries providing for benefits upon termination of employment.

         Our board of directors has established an audit committee, which
consists of Rui Lin Wu, Liu Rong Yang and Zi Shu Huang. Its functions are:

         o        to recommend annually to the Board of Directors the
                  appointment of our independent public accountants;

         o        discuss and review the scope and the fees of the prospective
                  annual audit and review the results thereof with the
                  independent public accountants;

         o        review and approve non-audit services of the independent
                  public accountants;

         o        review compliance with our existing accounting and financial
                  policies;

         o        review the adequacy of our financial organization; and

         o        review management's procedures and policies relative to the
                  adequacy of our internal accounting controls and compliance
                  with federal and state laws relating to financial reporting.






                                      -50-



<PAGE>




D.       EMPLOYEES.

         As of December 31, 2001, we had a total of 1,873 full time employees,
of which 25 are key management staff, five are engaged in sales and marketing,
three are engaged in finance and administration, and eight are engaged in
production. None of our employees is represented by a labor union and we believe
that our employees' relations are good.

E.       SHARE OWNERSHIP.

         The following table sets forth certain information regarding the
beneficial ownership of our shares of common stock as of June 21, 2002 by:

         o        each person who is known by us to own beneficially more than
                  5% of our outstanding common stock;

         o        by each of our executive officers and directors; and

         o        by all directors and executive officers as a group.

As of June 21, 2002, we had 14,282,400 shares of our common stock issued and
outstanding.

         This information gives effect to securities deemed outstanding pursuant
to Rule 13d-3(d)(l) under the Securities Exchange Act of 1934, as amended.


<Table>
<Caption>
                                                                             NUMBER           PERCENT
                                                                           ----------       ----------
NAME OF BENEFICIAL HOLDER                                                   SHARES BENEFICIALLY OWNED
-------------------------                                                  ---------------------------
<S>                                                                        <C>              <C>


Wu Holdings Limited                                                        6,819,000(1)                47.7
Rui Lin Wu                                                                 7,119,000(1)(2)             48.8
Zhi Yang Wu                                                                  250,000(3)                 1.7
Zhang Zhi Fang                                                                     0                      0
Zhong Ai Li                                                                        0                      0
Murry Xiao                                                                         0                      0
Liu Rong Yang                                                                      0                      0
Zi Shu Huang                                                                       0                      0
Guo Liang Zhang                                                                    0                      0
All directors and executive officers as a group(8)                         7,369,000(2)(3)             49.7
</Table>



-----------

(1)      Wu Holdings Limited is a British Virgin Islands corporation which is
         71.16% owned by the Qiao Xing Trust and the remaining 28.84% is owned
         by Sino Communications Ltd., a wholly owned subsidiary of a
         nonaffiliated corporation listed on The Stock Exchange of Hong Kong
         Limited. The Qiao Xing Trust is a Cook Islands trust which was formed
         for the primary benefit of Zhi Jian Wu Li, the youngest son of Rui Lin
         Wu, our chairman.



                                      -51-



<PAGE>




         The 6,819,000 shares of common stock owned of record and beneficially
         by Wu Holdings Limited may be deemed to also be beneficially owned by
         Rui Lin Wu (within the meaning of Rule 13d-3 under the Securities
         Exchange Act of 1934, as amended) since he may be deemed to have and/or
         share the power to direct the voting and disposition of such shares.

(2)      Includes options currently exercisable to acquire 300,000 shares of
         common stock at $5.50 per share at any time until April 14, 2005.

(3)      Includes options currently exercisable to acquire 250,000 shares of
         common stock at $5.50 per share at any time until April 14, 2005.


THE 1999 STOCK COMPENSATION PLAN

         Effective June 16, 1999, we adopted and approved the 1999 Stock
Compensation Plan. The purpose of the plan is to:

         o        encourage ownership of our common stock by our officers,
                  directors, employees and advisors;

         o        provide additional incentive for them to promote our success
                  and our business; and

         o        encourage them to remain in our employ by providing them an
                  opportunity to benefit from any appreciation of our common
                  stock through the issuance of stock options.

         Options constitute either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended, or
options which constitute nonqualified options at the time of issuance of such
options. The plan provides that incentive stock options and/or nonqualified
stock options may be granted to our officers, directors, employees and advisors
selected by the compensation committee. A total of 2,000,000 shares of common
stock are authorized and reserved for issuance during the term of the plan which
expires in June 2009. The compensation committee has the sole authority to
interpret the plan and make all determinations necessary or advisable for
administering the plan. The exercise price for any incentive option must be at
least equal to the fair market value of the shares as of the date of grant. Upon
the exercise of the option, the exercise price must be paid in full either in
cash, shares of our stock or a combination. If any option is not exercised for
any reason, such shares shall again become available for the purposes of the
plan.

         As of June 21, 2002, 1,005,000 options had been exercised and the
following options to purchase shares of our common stock under the Plan remained
outstanding:

         o        stock options to purchase 995,000 shares at $5.50 per share
                  through April 14, 2005, all of which are held by our directors
                  and officers as a group.



                                      -52-



<PAGE>




OTHER OPTIONS AND WARRANTS OUTSTANDING

         As of June 21, 2002, the following additional options and warrants to
purchase shares of our common stock were outstanding:

         o    stock purchase warrants to purchase 8,000 shares of common stock
              at $7.975 per share through February 16, 2004 which we sold to our
              IPO underwriter and/or persons related to the underwriter in
              February 1999

         o    warrants to purchase 20,000 shares of common stock at $5.50 per
              share at any time until November 1, 2004 which we granted to a
              former public relations consultant in October 1999

         o    warrants to purchase an aggregate of 660,000 shares of common
              stock at $20.7625 per share at any time until December 31, 2004
              which we granted to two accredited investors and the placement
              agents in January 2000 in connection with a common stock and
              warrants purchase agreement

         o    warrants to purchase an aggregate of 660,000 shares of common
              stock at $8.49 per share at any time until May 26, 2005 which we
              granted to two accredited investors and the placement agents in
              June 2000 in connection with a convertible debenture and warrants
              purchase agreement

         o    warrants to purchase an aggregate of 300,000 shares of common
              stock at $6.60 per share at any time until September 15, 2004
              which we granted to an accredited investor and the placement agent
              in September 2001 in connection with an equity line of credit
              facility


ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       MAJOR SHAREHOLDERS.

         Please see Item 6.E. for share ownership information regarding our
major shareholders. Our major shareholders do not have different voting rights.

         We do not have available information as to the portion of our common
stock held in the host country and the number of record holders in the host
country.

         To the extent known to us, we are not directly or indirectly owned or
controlled by another corporation, by any foreign government or by any other
natural or legal persons severally or jointly.



                                      -53-



<PAGE>




         To our knowledge, there are no arrangements the operation of which may
at a subsequent date result in a change in control of our company.


B.       RELATED PARTY TRANSACTIONS.

Name and relationship of related parties:


<Table>
<Caption>

                 Name of related parties                       Existing relationship with the Company
                -------------------------                      ---------------------------------------
<S>                                                            <C>

Mr. Zhi Jian Wu Li                                             The major shareholder
Mr. Rui Lin Wu                                                 Director and father of Mr. Zhi Jian Wu Li
Mr. Zhi Yang Wu                                                Director and brother of Mr. Zhi Jian Wu Li
Ms. Mei Lian Li                                                Wife of Mr. Zhi Yang Wu
Mr. Zhi Zhong Wu                                               Brother of Mr. Zhi Jian Wu Li
Ms. Qing Li                                                    Wife of Mr. Rui Lin Wu
Ms. Hong Ling Deng                                             Friend of Mr. Rui Lin Wu
Ms. Zhen Yin Su                                                Friend of Mr. Rui Lin Wu
Mr. Zhong Ai Li                                                Director
Mr. Guo Liang Zhang                                            Director
Ms. Lin Rong Yang                                              Director
Mr. Zhi Fang Zhang                                             Director
Mr. Zi Shu Huang                                               Director
Wu Holdings Limited                                            Intermediate holding company
Exquisite Jewel Limited                                        Minority shareholder
Metrolink Holdings Limited                                     Minority shareholder
Specialist Consultants Limited                                 Minority shareholder
Jia Xing Electronic Supplies Company Limited                   Common director
Qiao Xing Electronic Holdings Company Limited                  Common director
Qiao Xing Group Limited                                        Common director
Qiao Xing International Company                                Common director
Qiao Xing Investment Limited                                   Common director
Qiao Xing Properties Limited                                   Common director
Rui Xing Electronic Development Company Limited                Common director
</Table>


Summary of related party transactions is as follows:

<Table>
<Caption>
                                                       1999           2000                    2001
                                                    ---------       ---------       -------------------------
                                                     Rmb'000        Rmb'000          Rmb'000         US$'000
<S>                                                 <C>             <C>             <C>           <C>


Recovery of general and administrative expenses (at
  cost) in respect of factory and office premises
  subleased to

  - Jia Xing Electronic Supplies Company
       Limited                                            182             238             139              17
  - Qiao Xing Properties Limited                        2,088           2,285           1,776             215
  - Rui Xing Electronic Development Company
       Limited                                            357             404             915             111

Interest paid to
  - Rui Xing Electronic Development Company
       Limited                                            201              --              --              --
</Table>



                                      -54-



<PAGE>

<Table>


<S>                                                       <C>       <C>        <C>        <C>
  - Ms. Mei Lian Li                                          51         --         --        --
  - Ms. Hong Ling Deng                                       --         40         --        --
  - Ms. Zhen Yin Su                                          --          8         --        --

Purchases from
  - Jia Xing Electronic Supplies Company
       Limited                                           31,301     35,704     13,436     1,623
  - Qiao Xing International Company                          12         --         --        --
  - Qiao Xing Properties Limited                         25,666     22,268     20,471     2,473
  - Rui Xing Electronic Development Company
       Limited                                            6,693      6,289      8,033       971
                                                         ======     ======     ======     =====
</Table>


Summary of related party balances is as follows:

<Table>
<Caption>

                                                                2000                     2001
                                                            ------------     -----------------------------
                                                              Rmb'000          Rmb'000          US$'000
<S>                                                         <C>              <C>              <C>
Advance to Qiao Xing Group Limited                                    --           56,300            6,802

Due from
   - Mr. Rui Lin Wu                                                9,749              281               34
   - Mr. Zhong Ai Li                                                 123               --               --
   - Ms. Mei Lian Li                                                 123              508               61
   - Qiao Xing Group Limited                                          --            3,133              380
   - Qiao Xing Investment Limited                                    189              189               23
   - Qiao Xing Electronic Holdings Company
      Limited                                                      5,667               --               --
   - Wu Holdings Limited                                             200              209               25
                                                            ------------     ------------     ------------

                                                                  16,051           60,620            7,325
                                                            ============     ============     ============

Due to
   - Mr. Zhi Zhong Wu                                                570              664               80
   - Ms. Qing Li                                                     705            1,793              217
   - Mr. Zhi Jian Wu Li                                               97              543               66
   - Mr. Zhi Yang Wu                                                 383              882              107
   - Mr. Guo Liang Zhang                                               5               94               11
   - Ms. Liu Rong Yang                                                 3                7                1
   - Ms. Zhi Fang Zhang                                                3                7                1
   - Mr. Zi Shu Huang                                                  3                7                1
   - Mr. Zhong Ai Li                                                  --              136               16
   - Qiao Xing Group Limited                                       1,073                7                1
                                                            ------------     ------------     ------------

                                                                   2,842            4,140              501
                                                            ============     ============     ============
</Table>



Except for the advance to Qiao Xing Group Limited and the balances with the
shareholders, all other balances with directors and related parties were
unsecured, non-interest bearing and without pre-determined repayment terms.

During the year ended December 31, 2001, the Group advanced to Qiao Xing Group
Limited approximately Rmb 56,300,000. The advance was unsecured and non-interest
bearing. Rmb 50,000,000 of the advance has been settled subsequent to December
31, 2001.




                                      -55-



<PAGE>




Loan from shareholders were unsecured loan from Mr. Rui Lin Wu (held on trust
for Mr. Zhi Jian Wu Li), Exquisitive Jewel Limited, Metrolink Holdings Limited
and Specialist Consultants Limited, the Company's shareholders, and were
non-interest bearing. The lenders have agreed not to demand the Group for
repayment before January 1, 2003.

The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, our
director, and Qiao Xing Group Limited on behalf of Qiao Xing Telecommunication
Industry Company Limited.

As of December 31, 2001, the Group had banking facilities of Rmb 198,330,000 for
loans and trade financing, of which Rmb 189,990,000 were used. These facilities
are, among other things, secured by personal guarantees provided by Mr. Rui Lin
Wu, our director, and Qiao Xing Group Limited.


C.       INTERESTS OF EXPERTS AND COUNSEL.

         Not applicable.


ITEM 8. FINANCIAL INFORMATION

A.       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

         The Consolidated Financial Statements are filed in this Annual Report
as Item 18.


B.       SIGNIFICANT CHANGES.

         We do not believe that any significant change has occurred since the
date of the annual financial statements included in this Annual Report.








                                      -56-



<PAGE>




ITEM 9. THE OFFER AND LISTING

A.       OFFER AND LISTING DETAILS.

         Our common stock is listed and quoted for trading on The Nasdaq
National Market under the symbol "XING." The following table sets forth, during
the periods indicated, the high and low last sale prices for the common stock
since its listing on The Nasdaq National Market on February 16, 1999 as reported
by Nasdaq:


<Table>
<Caption>

PERIOD                                                    HIGH            LOW
------                                                 ----------     ----------
<S>                                                    <C>            <C>
Year ended December 31, 1999                           $    51.00     $     2.75
Year ended December 31, 2000                           $   52.313     $    3.375
Year ended December 31, 2001                           $    6.625     $     1.79

Quarter ended March 31, 2000                           $   52.313     $   27.688
Quarter ended June 30, 2000                            $   32.875     $   14.313
Quarter ended September 30, 2000                       $    20.50     $   11.063
Quarter ended December 31, 2000                        $    12.75     $    3.375
Quarter ended March 31, 2001                           $    6.625     $    3.844
Quarter ended June 30, 2001                            $     4.72     $     2.81
Quarter ended September 30, 2001                       $     3.78     $     1.97
Quarter ended December 31, 2001                        $     6.10     $     1.79
Quarter ended March 31, 2002                           $     5.58     $    3.719

Month ended December 31, 2001                          $     6.10     $     2.41
Month ended January 31, 2002                           $     5.58     $     4.17
Month ended February 28, 2002                          $     4.91     $    3.719
Month ended March 31, 2002                             $     4.85     $     3.82
Month ended April 30, 2002                             $    4.849     $     3.89
Month ended May 31, 2002                               $     4.54     $     3.73
</Table>


B.       PLAN OF DISTRIBUTION.

         Not applicable.


C.       MARKETS.

         Our common stock is listed and quoted for trading on The Nasdaq
National Market System since February 16, 1999.



                                      -57-



<PAGE>




D.       SELLING SHAREHOLDERS.

         Not applicable.


E.       DILUTION.

         Not applicable.


F.       EXPENSES OF THE ISSUE.

         Not applicable.


ITEM 10. ADDITIONAL INFORMATION

A.       SHARE CAPITAL.

         Not applicable.


B.       MEMORANDUM AND ARTICLES OF ASSOCIATION.

         This information is incorporated by reference to the subsection
entitled "Description of Securities" contained on pages 45-46 of our
Registration Statement on Form F-1, File No. 333-9274, declared effective on
February 16, 1999.

C.       MATERIAL CONTRACTS.

         None.

D.       EXCHANGE CONTROLS.

         There are no exchange control restrictions in China on the repatriation
of dividends by our subsidiaries. In addition, there are no material British
Virgin Islands laws that impose foreign exchange controls on us or that affect
the payment of dividends, interest or other payments to nonresident holders of
our capital stock. British Virgin Islands law and our Memorandum of Association
and Articles of Association impose no limitations on the right of nonresident or
foreign owners to hold or vote our common stock.



                                      -58-



<PAGE>




E.       TAXATION.

         The following is a summary of certain anticipated material U.S. federal
income and British Virgin Islands tax consequences of an investment in our
common stock. The summary does not deal with all possible tax consequences
relating to an investment in our common stock and does not purport to deal with
the tax consequences applicable to all categories of investors, some of which
(such as dealers in securities, insurance companies and tax-exempt entities) may
be subject to special rules. In particular, the discussion does not address the
tax consequences under state, local and other national (e.g., non-U.S. and
non-British Virgin Islands) tax laws. Accordingly, each prospective investor
should consult its own tax advisor regarding the particular tax consequences to
it of an investment in our common stock. The following discussion is based upon
laws and relevant interpretations thereof in effect as of the date of this
Annual Report, all of which are subject to change.

UNITED STATES FEDERAL INCOME TAXATION

         The following discussion addresses only the material U.S. federal
income tax consequences to a U.S. person (i.e., a U.S. citizen or resident, a
U.S. corporation, or an estate or trust subject to U.S. federal income tax on
all of its income regardless of source) making an investment in the common stock
(a "U.S. Investor"). For taxable years beginning after December 31, 1996, a
trust will be a U.S. person only if (i) a court within the United States is able
to exercise primary supervision over its administration and (ii) one or more
United States persons have the authority to control all of its substantial
decisions. In addition, the following discussion does not address the tax
consequences to a person who holds (or will hold), directly or indirectly, 10%
or more of the common stock (a "10% Shareholder"). Non-U.S. persons and 10%
Shareholders are advised to consult their own tax advisors regarding the tax
considerations incident to an investment in the common stock.

         A U.S. Investor receiving a distribution with respect to the common
stock will be required to include such distribution in gross income as a taxable
dividend, to the extent of our current or accumulated earnings and profits as
determined under U.S. federal income tax principles. Any distributions in excess
of our earnings and profits will first be treated, for U.S. federal income tax
purposes, as a nontaxable return of capital, to the extent of the U.S.
Investor's adjusted tax basis in the common stock, and then as gain from the
sale or exchange of a capital asset, provided that the common stock constitutes
a capital asset in the hands of the U.S. Investor. U.S. corporate shareholders
will not be entitled to any deduction for distributions received as dividends on
the common stock.

         Gain or loss on the sale or exchange of the common stock will be
treated as capital gain or loss if the common stock is held as a capital asset
by the U.S. Investor. Such capital gain or loss will be long-term capital gain
or loss if the U.S. Investor has held the common stock for more than one year at
the time of the sale or exchange, and will be taxed at the lowest rates



                                      -59-



<PAGE>




applicable to capital gains if the U.S. Investor has held the common stock for
more than eighteen months at such time.

         A holder of common stock may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such common stock if such
dividends are paid by a paying agent, broker or other intermediary in the United
States or by a U.S. broker or certain United States-related brokers to such
holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of common stock may be subject to backup withholding, if
such proceeds are paid by a paying agent, broker or other intermediary in the
United States.

         Backup withholding may be avoided by the holder of common stock if such
holder (i) is a corporation or comes within certain other exempt categories or
(ii) provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules. In addition, holders of common stock who are not U.S.
persons ("non-U.S. holders") are generally exempt from backup withholding,
although such holders may be required to comply with certification and
identification procedures in order to prove their exemption.

         Any amounts withheld under the backup withholding rules from a payment
to a holder will be refunded (or credited against the holder's U.S. federal
income tax liability, if any) provided that amount withheld is claimed as
federal taxes withheld on the holder's U.S. federal income tax return relating
to the year in which the backup withholding occurred. A holder who is not
otherwise required to file a U.S. income tax return must generally file a claim
for refund (or, in the case of non-U.S. holders, an income tax return) in order
to claim refunds of withheld amounts.

BRITISH VIRGIN ISLANDS TAXATION

         Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common stock who is not a resident
of the BVI is exempt from BVI income tax on dividends paid with respect to the
common stock and all holders of common stock are not liable to BVI income tax on
gains realized during that year on sale or disposal of such shares; the BVI does
not impose a withholding tax on dividends paid by a company incorporated under
the International Business Companies Act.

         There are no capital gains, gift or inheritance taxes levied by the BVI
on companies incorporated under the International Business Companies Act. In
addition, the common stock is not subject to transfer taxes, stamp duties or
similar charges.

         There is no income tax treaty or convention currently in effect between
the United States and the BVI.




                                      -60-



<PAGE>




F.       DIVIDENDS AND PAYING AGENTS.

         Not applicable.


G.       STATEMENT BY EXPERTS.

         Not applicable.


H.       DOCUMENTS ON DISPLAY.

         The documents concerning our company which are referred to in this
Annual Report may be inspected at our principal executive offices at Qiao Xing
Building, Qiao Xing Industrial Zone, Xiao Jin Kou, Huizhou, Guangdong, People's
Republic of China.


I.       SUBSIDIARY INFORMATION.

         Not applicable.


ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Our primary risk exposures arise from changes in interest rates and
foreign currency exchange rates.

         As of December 31, 2001, our aggregate bank borrowings, at various
fixed interest rates, amounted to Rmb 189,990,000 (US$22,955,000). Due to the
stable interest rate in the PRC, we do not believe that material risk on
interest rates exists. Impact of 10% swings in interest rate as of December 31,
2001 would result in swings in interest expense of Rmb 840,000 (US$102,000) for
the year ended December 31, 2001.

         As of December 31, 2001, about 98% of our products were sold in
Mainland China and the great majority of our sales income are denominated in
Rmb. Our major expenses are also denominated in Rmb. Accordingly, we believe
that we are not exposed to material risk from changing foreign currency exchange
rates.

         Although we cannot accurately determine the precise effect of inflation
on our operations, due to the stable economy of China, we do not believe
inflation has had a material effect on our sales or results of operations.



                                      -61-



<PAGE>




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.



                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         Not applicable.


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

         Not applicable.



                                    PART III


ITEM 17. FINANCIAL STATEMENTS

         Not applicable.


ITEM 18. FINANCIAL STATEMENTS



                                      -62-



<PAGE>





                       QIAO XING UNIVERSAL TELEPHONE, INC.



                        CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2000 AND 2001
            AND FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                         TOGETHER WITH AUDITORS' REPORT













Approved by the Board of Directors on June 28, 2002, and signed on behalf of the
Board of Directors by:





Directors:
            -----------------------------------        -------------------------
                       RUI LIN WU                              ZHI YANG WU



<PAGE>







REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders and Board of Directors of Qiao Xing Universal Telephone,
Inc.:


We have audited the accompanying consolidated balance sheets of Qiao Xing
Universal Telephone, Inc. (a company incorporated in the British Virgin Islands;
"the Company") and its subsidiaries ("the Group") as of December 31, 2000 and
2001, and the related consolidated statements of operations and comprehensive
income (loss), cash flows and changes in shareholders' equity for the years
ended December 31, 1999, 2000 and 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Qiao Xing Universal
Telephone, Inc. and its subsidiaries as of December 31, 2000 and 2001, and the
results of their operations, and cash flows for the years ended December 31,
1999, 2000 and 2001, in conformity with generally accepted accounting principles
in the United States of America.




                                                      ARTHUR ANDERSEN & CO
                                                  Certified Public Accountants
                                                           Hong Kong
Hong Kong,
June 28, 2002




                                      -64-
<PAGE>




              QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2000 AND 2001


<Table>
<Caption>

                                                          Note              2000                       2001
                                                      -------------     ------------     -----------------------------
                                                                          Rmb'000           Rmb'000           US$'000
                                                                                                             (Note 4)

<S>                                                   <C>               <C>              <C>              <C>
ASSETS

Current assets:
   Cash and bank deposits                                                     33,490            7,616              920
   Pledged bank deposits                                         26           75,433           76,925            9,294
   Accounts receivable, net                                       5          282,627          254,816           30,787
   Inventories                                                    6           80,100           79,862            9,649
   Prepaid expenses                                               7            8,951              938              113
   Other current assets                                           8            3,300            9,467            1,144
    Deferred income tax assets                                   20            2,968            9,787            1,182
   Due from related parties                                      27           16,051           60,620            7,325
                                                                        ------------     ------------     ------------

       Total current assets                                                  502,920          500,031           60,414

Deposits for purchase of property,
   machinery and equipment                                                     1,641            5,672              685
Property, machinery and equipment,
   net                                                            9          182,140          183,600           22,183
Construction-in-progress                                         10           17,869              576               70
Land use rights                                                  11          226,463          221,359           26,745
Debt issuance costs, net                                         12            8,234               --               --
                                                                        ------------     ------------     ------------

       Total assets                                                          939,267          911,238          110,097
                                                                        ============     ============     ============

LIABILITIES, MINORITY INTERESTS
   AND SHAREHOLDERS' EQUITY

Current liabilities:
   Short-term borrowings                                         13          170,443          189,990           22,955
   Accounts payable                                                           36,690           32,752            3,957
   Other payables                                                14           16,098            6,550              791
   Accrued liabilities                                           15           12,292           13,627            1,646
   Due to related parties                                        27            2,842            4,140              501
   Taxation payable                                              20          127,939          105,467           12,743
                                                                        ------------     ------------     ------------

       Total current liabilities                                             366,304          352,526           42,593

Convertible debentures, net                                      16           36,706               --               --
Shareholders' loans                                              17            8,163            8,163              986
                                                                        ------------     ------------     ------------

       Total liabilities                                                     411,173          360,689           43,579
                                                                        ------------     ------------     ------------

Minority interests                                                            23,266           23,102            2,791
                                                                        ------------     ------------     ------------

Shareholders' equity:
   Common stock, par value Rmb0.008
     (equivalent of US$0.001); authorized -
     50,000,000 shares; outstanding and
     fully paid - 12,138,199 shares as of
     December 31, 2000 and 14,282,400
     shares as of December 31, 2001                              18              100              118               14
   Additional paid-in capital                                                280,126          324,219           39,174
   Dedicated reserves                                            21           10,541           10,541            1,273
   Retained earnings                                                         213,980          192,558           23,265
   Cumulative translation adjustments                                             81               11                1
                                                                        ------------     ------------     ------------

       Total shareholders' equity                                            504,828          527,447           63,727
                                                                        ------------     ------------     ------------

       Total liabilities, minority
         interests and shareholders'
         equity                                                              939,267          911,238          110,097
                                                                        ============     ============     ============
</Table>



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



                                      -65-
<PAGE>




              QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                         AND COMPREHENSIVE INCOME (LOSS)

              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

<Table>
<Caption>

                                               Note             1999             2000                     2001
                                             -----------     -----------      -----------      ----------------------------
                                                               Rmb'000          Rmb'000          Rmb'000         US$'000
                                                                                                                 (Note 4)
<S>                                          <C>             <C>              <C>              <C>              <C>

Net sales                                                        383,633          392,529          249,271           30,118
Cost of goods sold                                    27        (259,658)        (271,606)        (212,229)         (25,642)
                                                             -----------      -----------      -----------      -----------


     Gross profit                                                123,975          120,923           37,042            4,476

Selling expenses                                                 (15,695)         (15,325)          (6,172)            (746)
General and administrative
   expenses                                           27         (28,562)         (40,605)         (44,114)          (5,330)
Impairment loss on
   - Land use rights                                                  --               --           (5,004)            (605)
   - Property, machinery
       and equipment                                   9              --               --           (8,722)          (1,054)
                                                             -----------      -----------      -----------      -----------
Income (Loss) from
   operations                                                     79,718           64,993          (26,970)          (3,259)

Interest income                                                    1,981            2,061            2,000              242
Exchange (loss) gain, net                                             (8)           2,363             (104)             (13)
Interest expense:
   - Amortization of debt
       issuance costs                                                 --           (9,637)          (8,234)            (995)
   - Amortization of
       discount of
       convertible
       debentures                                                     --           (7,613)          (6,469)            (782)
   - Others                                                       (5,577)          (6,300)          (8,404)          (1,015)
Other income (expenses), net                                         252             (197)             908              110
                                                             -----------      -----------      -----------      -----------

     Income (Loss) before
       income tax                                                 76,366           45,670          (47,273)          (5,712)

(Provision for) Write-back
   of income tax                                      20         (20,298)         (16,599)          25,687            3,104
                                                             -----------      -----------      -----------      -----------

     Income (Loss) before
       minority interests                                         56,068           29,071          (21,586)          (2,608)

Minority interests                                                (6,365)          (5,600)             164               20
                                                             -----------      -----------      -----------      -----------

     Net income (loss)                                            49,703           23,471          (21,422)          (2,588)
                                                             ===========      ===========      ===========      ===========

Other comprehensive (loss)
   income - translation
   adjustments                                                        (8)              79               70                8
                                                             -----------      -----------      -----------      -----------

     Comprehensive income
       (loss)                                                     49,695           23,550          (21,352)          (2,580)
                                                             ===========      ===========      ===========      ===========

Earnings (Loss) per common
   share
     - Basic                                          22        Rmb 5.33         Rmb 2.03       Rmb (1.67)       US$ (0.20)
                                                             ===========      ===========      ===========      ===========

     - Diluted                                        22        Rmb 5.32         Rmb 1.98       Rmb (1.67)       US$ (0.20)
                                                             ===========      ===========      ===========      ===========

Weighted average number of
   shares outstanding
     - Basic                                          22       9,333,000       11,572,000       12,838,000       12,838,000
                                                             ===========      ===========      ===========      ===========

     - Diluted                                        22       9,344,000       11,878,000       12,838,000       12,838,000
                                                             ===========      ===========      ===========      ===========
</Table>

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



                                      -66-
<PAGE>
              QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001


<Table>
<Caption>

                                               1999             2000                   2001
                                            ------------    ------------    ----------------------------
                                              Rmb'000          Rmb'000           Rmb'000          US$'000
                                                                                                  (Note 4)
<S>                                         <C>             <C>             <C>                <C>
Cash flows from operating activities:

Net income (loss)                                 49,703          23,471         (21,422)         (2,588)
Adjustments to reconcile net income
   (loss) to net cash provided by
   (used in) operating activities -
   Depreciation of property, machinery
     and equipment                                 8,137           9,856          16,942           2,046
   Amortization of land use rights                 1,657           2,942           4,978             601
   Impairment loss on
     - Land use rights                                --              --           5,004             605
     - Property, machinery and equipment              --              --           8,722           1,054
   Net (gain) loss on disposal of
     property, machinery and equipment               (92)            119             105              13
   Amortization of debt issuance costs                --           9,637           8,234             995
   Amortization of discount of
     convertible debentures                           --           7,613           6,469             782
   Compensation cost for stock options
     and warrants issued to external
     consultants                                   4,628           4,464              --              --
   Interest expense on shareholders'
     loans                                           575             478             478              58
   Minority interests                              6,365           5,600            (164)            (20)
Decrease (Increase) in operating
   assets -
   Accounts receivable                             9,790         (69,598)         27,811           3,359
   Inventories                                    (4,167)        (12,813)            238              29
   Prepaid expenses                                 (780)         (7,123)          8,471           1,023
   Other current assets                            4,039           2,158          (6,167)           (745)
   Deferred income tax assets                       (758)         (2,210)         (6,819)           (824)
   Due from related parties                           --          (8,161)          8,232             995
(Decrease) Increase in operating
   liabilities -
   Accounts payable                               (6,347)           (902)         (3,938)           (476)
   Other payables                                 12,685             661          (9,548)         (1,153)
   Accrued liabilities                             1,285             991           1,335             161
   Taxation payable                               23,908          25,249         (22,472)         (2,715)
                                            ------------    ------------    ------------    ------------
                                                 110,628          (7,568)         26,489           3,200
                                            ------------    ------------    ------------    ------------
Cash flows from investing activities:

Acquisitions of property, machinery
   and equipment                                 (25,547)        (12,373)         (2,145)           (259)
Additions of construction-in-progress            (80,665)        (75,937)         (7,981)           (964)
Payment of land use rights                       (85,531)       (104,982)         (4,878)           (589)
Proceeds from disposal of property,
   machinery and equipment                           821             207             190              23
Increase in pledged bank deposits                (31,978)        (42,066)         (1,492)           (180)
Decrease (Increase) in due from
   related parties                                 8,491          (7,066)        (56,300)         (6,802)
Increase in deposits for purchase of
   property, machinery and equipment                (260)           (983)         (4,031)           (487)
                                            ------------    ------------    ------------    ------------

                                                (214,669)       (243,200)        (76,637)         (9,258)
                                            ------------    ------------    ------------    ------------
Cash flows from financing activities:
New short-term borrowings                         59,264         108,478         218,260          26,370
Repayment of short-term borrowings                (3,880)        (41,305)       (198,713)        (24,010)
Repayment of long-term bank loan                  (9,800)             --              --              --
New advances from related parties                  1,680              --           4,797             580
Repayment of advances from related
   parties                                          (959)           (493)             --              --
New shareholders' loans                                3              --              --              --
Net proceeds from issue of common stock           54,045          75,576              --              --
Net proceeds from issue of convertible
   debentures                                         --          75,958              --              --
Net proceeds from exercise of options
   and warrants                                       --          63,101              --              --
                                            ------------    ------------    ------------    ------------
                                                 100,353         281,315          24,344           2,940
                                            ------------    ------------    ------------    ------------
Effect of translation adjustments                     (8)             73             (70)             (8)
                                            ------------    ------------    ------------    ------------
Net (decrease) increase in cash and
   bank deposits                                  (3,696)         30,620         (25,874)         (3,126)

Cash and bank deposits, beginning of year          6,566           2,870          33,490           4,046
                                            ------------    ------------    ------------    ------------
Cash and bank deposits, end of year                2,870          33,490           7,616             920
                                            ============    ============    ============    ============
</Table>


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




                                      -67-
<PAGE>




              QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001


<Table>
<Caption>

                                                                                                                    Accumulated
                                                                                                                       other
                                                                                                                   comprehensive
                                                                                                                       income
                                               Common Stock                                                            (loss) -
                                       ---------------------------    Additional                                     cumulative
                                          Number                       paid-in        Dedicated      Retained       translation
                                Note     of shares       Amount        capital         reserves      earnings       adjustments
                              -------  ------------   ------------   ------------    ------------   ------------   --------------
                                           `000          Rmb'000       Rmb'000          Rmb'000        Rmb'000         Rmb'000
<S>                           <C>      <C>            <C>            <C>             <C>            <C>            <C>
Balance as of December 31, 1998               8,000             64         12,559           6,295        145,052              10
   Issue of common stock for
     cash                         18          1,600             15         72,849              --             --              --
   Stock issuance costs                          --             --         (9,727)             --             --              --
   Net income                                    --             --             --              --         49,703              --
   Shareholders' contribution     17             --             --            575              --             --              --
   Transfer to dedicated
     reserves                                    --             --             --           2,314         (2,314)             --
   Translation adjustments                       --             --             --              --             --              (8)
                                       ------------   ------------   ------------    ------------   ------------    ------------

Balance as of December 31, 1999               9,600             79         76,256           8,609        192,441               2
   Issue of common stock          18            833              7         82,738              --             --              --
   Exercise of stock options      19          1,005              8         52,528              --             --              --
   Exercise of stock warrants     19            172              2         10,563              --             --              --
   Issue of shares to
     external consultants         18             25             --          7,501              --             --              --
   Stock issuance costs                          --             --        (13,155)             --             --              --
   Issuance of convertible
     debentures                   18             --             --         14,082              --             --              --
   Issue of stock purchase
     warrants to external
     consultants               19.c.iv           --             --          9,569              --             --              --
   Conversion of convertible
     debentures                   16            503              4         39,566              --             --              --
   Net income                                    --             --             --              --         23,471              --
   Shareholders' contribution     17             --             --            478              --             --              --
   Transfer to dedicated
     reserves                                    --             --             --           1,932         (1,932)             --
   Translation adjustments                       --             --             --              --             --              79
                                       ------------   ------------   ------------    ------------   ------------    ------------

Balance as of December 31, 2000              12,138            100        280,126          10,541        213,980              81
   Issue of stock purchase
     warrants to investors
     and external
     consultants                19.c.v.          --             --            458              --             --              --
   Conversion of convertible
     debentures                   16          2,144             18         43,157              --             --              --
   Net loss                                      --             --             --              --        (21,422)             --
   Shareholders' contribution     17             --             --            478              --             --              --
   Translation adjustments                       --             --             --              --             --             (70)
                                       ------------   ------------   ------------    ------------   ------------    ------------
Balance as of December 31, 2001              14,282            118        324,219          10,541        192,558              11
                                       ============   ============   ============    ============   ============    ============
</Table>



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



                                      -68-
<PAGE>




              QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION AND NATURE OF OPERATIONS

Qiao Xing Universal Telephone, Inc. ("the Company") was incorporated in the
British Virgin Islands on December 6, 1994. Its shares have become listed on the
Nasdaq National Market since February 1999.

The Company and its subsidiaries ("the Group") are principally engaged in the
manufacturing and sales of telecommunication terminals and equipment, including
cord and cordless telephone sets, in Mainland China.

For the year ended December 31, 2001, the Group recorded net loss attributable
to shareholders of approximately Rmb21,422,000 and had short-term bank
borrowings of approximately Rmb189,990,000 as of December 31, 2001. Subsequent
to December 31, 2001, the Group entered into agreements for acquisition of an
aggregate equity interest of 65% in CEC Telecom Ltd. ("CECT") for an aggregate
cash consideration of Rmb312,750,000 ("the Acquisitions"). Details of the
Acquisitions have been disclosed in Note 30 to the financial statements. The
Group's ability to continue as a going concern depends on the success of its
future operations, its ability to renew or replace the short-term bank
borrowings as they fall due and its ability to obtain additional financing from,
among others, the banks, the existing shareholders, the public or the private
institutional investors to finance the Acquisitions.

The Company's Directors are confident that the Group's future operations will be
successful. Also, the Directors are confident that the Group will be able to
rollover majority of its short-term bank borrowings upon maturity in the second
half of 2002. Further, the Directors have explored different means of financing
including, inter alia, a new bank loan of Rmb60,000,000 in May 2002 to finance
the Acquisitions. The financial statements have been prepared on the assumption
that the Group is a going concern and will continue in operation for the
foreseeable future.

The Group is subjected to, among others, the following operating risks:

Country risk

As substantially all of the Group's operations are conducted in Mainland China,
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 Mainland China, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other things.



                                      -69-
<PAGE>





1.       ORGANIZATION AND NATURE OF OPERATIONS (Cont'd)

Country risk (Cont'd)

In addition, substantially all of the Company's revenue is denominated in
Renminbi ("Rmb") which must be converted into other currencies before remittance
outside Mainland China. Both the conversion of Renminbi into foreign currencies
and the remittance of foreign currencies abroad require approvals of the
Mainland Chinese government.

Technology risk

The new advanced products that the Group is developing incorporate complex and
evolving technologies that require substantial expenditures and resources.
However, 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.

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.

Operating risk

The Group conducts its manufacturing and sales operations through joint ventures
established between the Group and Mainland Chinese parties. Any deterioration of
these strategic relationships may have an adverse effect on the operations of
the Group.

Concentration of credit risk

The Group performs ongoing credit evaluations of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections. As of December 31,
2000 and 2001, the Group's five largest accounts receivable accounted for
approximately 27% and 31%, respectively, of the Group's total accounts
receivable.




                                      -70-
<PAGE>





2.       SUBSIDIARIES

Details of the Company's subsidiaries as of December 31, 2000 and 2001 were as
follows:

<Table>
<Caption>

                                                                  Percentage of
                                                                 equity interest
                                               Place of         attributable to
           Name                              incorporation          the Group        Principal activities
           ----                              -------------      ----------------     --------------------
<S>                                          <C>                <C>                  <C>

Qiao Xing Holdings Limited                    The British              100%          Investment holding
                                             Virgin Islands

Qiao Xing Telecommunication Industry         Mainland China        90% - Note i      Manufacturing and
   Company Limited                                                                     sales of
                                                                                       telecommunication
                                                                                       equipment

Huizhou Qiao Xing-Hyundai System             Mainland China       60% - Note ii      Manufacturing and
   Communication Equipment Co., Ltd.                                                   sales of Code
                                                                                       Division Multiple
                                                                                       Access ("CDMA")
                                                                                       system equipment

Qiao Xing Mobile Telecommunication           Mainland China       60% - Note iii     Manufacturing and
   Co., Ltd.                                                                           sales of CDMA mobile
                                                                                       phones
</Table>

Notes -

i.       Qiao Xing Telecommunication Industry Company Limited ("QXTI") is an
         equity joint venture established in Mainland China in April 1992 to be
         operated for a term of 30 years until April 2022. Full capital
         contribution has been made by the Group and the joint venture partner.

ii.      Huizhou Qiao Xing-Hyundai System Communication Equipment Co., Ltd. is
         an equity joint venture established in Mainland China in August 2000
         for a term of 20 years until August 2020. According to the joint
         venture agreement, the Group and the joint venture partner have to make
         capital contribution of US$7,152,000 (equivalent to approximately
         Rmb59,219,000 based on exchange rate of US$1 = Rmb8.28) and
         US$4,768,000 (equivalent to approximately Rmb39,479,000 based on
         exchange rate of US$1 = Rmb8.28), respectively. As of December 31,
         2001, no capital contribution has been made by the Group and the joint
         venture partner, and Huizhou Qiao Xing-Hyundai System Communication
         Equipment Co., Ltd. has not begun commercial operations.

iii.     Qiao Xing Mobile Telecommunication Co., Ltd. is an equity joint venture
         established in Mainland China in August 2000 for a term of 20 years
         until August 2020. According to the joint venture agreement, the Group
         and the joint venture partner have to make capital contribution of
         US$7,152,000 (equivalent to approximately Rmb59,219,000 based on
         exchange rate of US$1 = Rmb8.28) and US$4,768,000 (equivalent to
         approximately Rmb39,479,000 based on exchange rate of US$1 = Rmb8.28),
         respectively. As of December 31, 2001, no contribution has been made by
         the Group and the joint venture partner, and Qiao Xing Mobile
         Telecommunication Co., Ltd. has not begun commercial operations.




                                      -71-
<PAGE>

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.       Basis of consolidation

         The consolidated financial statements include the accounts of the
         Company and its majority-owned subsidiaries, including the equity joint
         ventures. All material intra-group balances and transactions have been
         eliminated on consolidation.

b.       Subsidiaries

         A subsidiary is a company in which the Company holds, directly or
         indirectly, more than 50% of its issued voting share capital as
         long-term investment and over which it can exercise control, as defined
         under generally accepted accounting principles.

c.       Inventories

         Inventories are stated at the lower of cost, on a weighted average
         basis, and net realizable value. Costs of work-in-process and finished
         goods are composed of direct materials, direct labor and an
         attributable portion of manufacturing overhead. Net realizable value is
         the estimated selling price in the ordinary course of business less the
         estimated cost of completion and the estimated costs necessary to make
         the sale.

         When inventories are sold, their carrying amount is charged to expense
         in the year in which the revenue is recognized. Writedowns for declines
         in net realizable value or for losses of inventories are recognized as
         an expense in the year the impairment or loss occurs.

d.       Property, machinery and equipment and construction-in-progress

         Property, machinery and equipment are stated at cost less accumulated
         depreciation and accumulated impairment losses. Gains or losses on
         disposals are reflected in current operations. Major expenditure for
         betterments and renewals are capitalized. All ordinary repair and
         maintenance costs are expensed as incurred. Depreciation for financial
         reporting purposes is provided using the straight-line method over the
         estimated useful lives of the assets after taking into account the
         estimated residual value. The estimated useful lives are as follows:
         buildings - 8 to 30 years, machinery and equipment - 6 to 12 years,
         furniture and office equipment - 5 years, and motor vehicles - 5 years.

         Capitalized software represents acquisition cost to obtain proprietary
         software provided by a third party, which is recorded under property,
         machinery and equipment. The Group has adopted Statement of Position
         ("SOP") 98-1: "Accounting for the costs of Computer Software Developed
         or Obtained for Internal use," which requires the Group to capitalize
         certain internal use software purchased from third parties. Software
         costs are capitalized when they relate to products under development
         and which have reached technological feasibility. Capitalization ceases
         as the production of the products associated with the software has
         started and thereafter, the capitalized software is amortized on a
         straight-line basis over an estimated useful life of six years.
         Management reviews and evaluates the recoverability of the capitalized
         software periodically by reference to certain external factors,
         including, but not limited to, anticipated future revenue of the
         product and changes in technology.




                                      -72-
<PAGE>





3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

d.       Property, machinery and equipment and construction-in-progress (Cont'd)

         Construction-in-progress represents land costs as well as factory and
         office buildings under construction. The Group capitalizes interest
         during the construction phase of qualifying assets in accordance with
         Statement of Financial Accounting Standards ("SFAS") No. 34:
         "Capitalization of Interest Cost."

         The Group accounts for property, machinery and equipment and
         construction-in-progress in accordance with SFAS No. 121: "Accounting
         for the Impairment of Long-lived Assets and for Long-lived Assets to be
         Disposed of" which requires impairment loss to be recognized on the
         long-lived assets when the sum of expected future cash flows
         (undiscounted and without interest charges) resulted from the use of
         the asset and its eventual disposition is less than the carrying amount
         of the assets. Otherwise, an impairment loss is not recognized.
         Measurement of the impairment loss for long-lived assets is based on
         the fair value of the assets.

e.       Land use rights

         Land use rights are stated at the amount of the prepayment less
         accumulated amortization. Land use rights expense is recognized ratably
         over the lease term of 50 years.

f.       Convertible debentures

         The Company accounts for convertible debentures issued during the year
         ended December 31, 2000 in accordance with Accounting Principles Board
         Opinions No. 14: "Accounting for Convertible Debt and Debt issued with
         Stock Purchase Warrants," Emerging Issues Task Force Issue ("EITF")
         Issue No. 98-5: "Accounting for Convertible Securities with Beneficial
         Conversion Features or Contingently Adjustable Conversion Ratios" and
         EITF Issue No. 00-27: "Application of EITF Issue No. 98-5 to Certain
         Convertible Debentures."

         The proceeds obtained from the issuance of convertible debentures are
         allocated between the convertible debentures and the attached
         detachable warrants based on the relative fair values of the two
         securities, at the time of issuance, with the portion applicable to the
         warrants being debited as a discount to convertible debentures and
         credited to the additional paid-in capital. The embedded beneficial
         conversion feature of the convertible debenture is recognized and
         measured by allocating a portion of the proceeds equal to the intrinsic
         value of that feature as a discount to convertible debentures and as a
         credit to additional paid-in capital.

         Discounts of convertible debentures were amortized over the term of the
         convertible debentures using the effective interest rate method and the
         amount amortized were recognized as interest expense. Any unamortized
         discounts remaining at the date of conversion of convertible debentures
         were recognized as interest expense in the period the conversion took
         place.




                                      -73-
<PAGE>





3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

f.       Convertible debentures (Cont'd)

         The Company capitalizes direct costs incurred for the issuance of
         convertible debentures as debt issuance costs. Debt issuance costs are
         amortized over the term of the convertible debentures using the
         effective interest rate method and the amounts amortized were
         recognized as debt issuance expense. Any unamortized debt issuance
         costs remaining at the date of conversion of convertible debentures
         were recognized as debt issuance expense in the period the conversion
         took place.

g.       Sales recognition

         The Group recognizes sales in accordance with SEC Staff Accounting
         Bulletin No. 101 "Revenue Recognition in Financial Statements".

         Sales represent (i) the invoiced value of goods, net of value-added tax
         ("VAT"), supplied to customers, and (ii) machinery rental. Sales are
         recognized upon delivery of goods and passage of title to customers and
         machinery rental is recognized as it accrues.

         All of the Group's sales made in Mainland China are subject to Mainland
         Chinese value-added tax at a rate of 17% ("output VAT"). Such output
         VAT is payable after offsetting VAT paid by the Group on purchases
         ("input VAT").

h.       Advertising costs

         Costs incurred for producing and communicating advertising are
         generally expensed when incurred.

i.       Debt issuance costs and borrowing costs

         Costs related to the issuance of debt are capitalized and amortized to
         interest expense using the effective interest method over the lives of
         the related debt. All other borrowing costs are recognized as an
         expense in the period in which they are incurred.

j.       Research and development expenditures

         Research and development expenses are charged to expenses as incurred.

k.       Income taxes

         The Group accounts for income tax under the provisions of SFAS No. 109:
         "Accounting for Income Taxes," which requires recognition of deferred
         tax assets and liabilities for the expected future tax consequences of
         events that have been included in the financial statements or tax
         returns. Deferred income tax is provided using the liability method and
         is recognized for all significant temporary differences between the tax
         and financial statement bases of assets and liabilities. A valuation
         allowance is provided for deferred tax assets if it is more likely than
         not these items will either expire before the Company is able to
         realise their benefits or that future deductibility is uncertain.



                                      -74-
<PAGE>





3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

l.       Operating leases

         Operating leases represent those leases under which substantially all
         the risks and rewards of ownership of the leased assets remain with the
         lessors. Rental payments under operating leases are charged to expenses
         on a straight-line basis over the period of the relevant leases.

m.       Segment information

         The Group adopted SFAS No. 131 "Disclosures about Segments of an
         Enterprise and Related Information". SFAS No. 131 requires companies to
         report financial and descriptive information about their reportable
         operating segments, including segment profit or loss, certain specific
         revenue and expense items, and segment assets, as well as information
         about the revenues derived from the Group's products and services, the
         countries in which the Group earns revenues and holds assets, and major
         customers. This Statement requires companies that have a single
         reportable segment to disclose information about products and services,
         information about geographic areas, and information about major
         customers. This statement requires the use of the management approach
         to determine the information to be reported. The management approach is
         based on the way management organizes the enterprise to assess
         performance and make operating decisions regarding the allocation of
         resources. It is management's opinion that, at this time, the Group has
         several operating segments, however only one reportable segment.

n.       Foreign currency translation

         The Company's functional currency is in United States dollars (US$) as
         a majority of its financing and cash is denominated in US$. All other
         companies within the Group consider Renminbi ("Rmb") to be their
         functional currency as most of their business activities are based in
         Renminbi. Aggregate (loss) gain from foreign currency transactions
         (that is, non-US$ translation of the Company and non-Rmb translation of
         other companies in the Group) are included in the statements of
         operations and amounted to approximately Rmb(8,000), Rmb2,363,000 and
         Rmb(104,000) for the years ended December 31, 1999, 2000 and 2001.

         The translation of the Company's financial statements into Renminbi is
         performed for balance sheet accounts using the closing exchange rate in
         effect at each of the balance sheet dates and for revenue and expense
         accounts using the average exchange rate during each reporting period.
         Gains and losses resulting from translation are included in
         shareholders' equity separately as cumulative translation adjustments.

o.       Comprehensive income

         The Group has adopted SFAS No. 130: "Reporting Comprehensive Income"
         which requires the Group to report all changes in equity during a
         period, except for those resulting from investment by owners and
         distribution to owners, in financial statements as comprehensive income
         for the period in which they are recognized. The Group has presented
         comprehensive income, which encompasses net income and currency
         translation adjustments, in the statements of operations and
         comprehensive income.



                                      -75-
<PAGE>





3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

p.       Earnings (Loss) per common share

         Earnings (Loss) per common share is computed in accordance with SFAS
         No. 128: "Earnings Per Share" by dividing the net income by the
         weighted average number of shares of common stock outstanding during
         the period. Diluted earnings (loss) per common share is computed by
         using the weighted average number of common shares outstanding adjusted
         to include the potentially dilutive effect of outstanding stock
         options, warrants and convertible debentures to the extent such
         instruments were dilutive during the period.

q.       Stock-based compensation

         The Company accounts for employee stock options in accordance with
         Accounting Principles Board Opinion No. 25: "Accounting for Stock
         Issued to Employees." Compensation expense related to employee stock
         options is recorded only if the fair value of the underlying stock
         exceeds the exercise price on the date of grant. Pro forma disclosures
         were made assuming hypothetical fair value method application as
         prescribed by Statement of Financial Accounting Standards No. 123:
         "Accounting for Stock-Based Compensation."

         The Company accounts for stock options and warrants issued to external
         consultants in accordance with the recognition provisions of SFAS
         No. 123 and EITF 96-18: "Accounting for Equity Instruments That Are
         Issued to Other Than Employees for Acquiring, or in Conjunction with
         Selling, Goods or Services." The Company values stock options and
         warrants issued based on Black-Scholes option-pricing model and
         recognizes this value over the period in which the options vest.

r.       Financial instruments

         The Group accounts for financial instruments under the provisions of
         SFAS No. 133: "Accounting for Derivative Instruments and Hedging
         Activities", which requires that all derivative financial instruments
         be recognized in the financial statements and maintained at fair value
         regardless of the purpose or intent for holding them. Changes in fair
         value of derivative financial instruments are either recognized
         periodically in income or stockholders' equity (as a component of
         comprehensive income), depending on whether the derivative is being
         used to hedge changes in fair value or cash flows. The adoption of SFAS
         133 in 2001 did not have a material impact on the Group's financial
         position or its results of operations because the Group does not
         purchase or sell any derivative financial instruments, and does not
         have any contracts with embedded derivative.

         The carrying amounts for cash and bank deposits, pledged bank deposits,
         accounts receivable, short-term borrowings, accounts payable, other
         payables and accrued liabilities approximate their fair values because
         of the short maturity of those instruments. The carrying amounts for
         convertible debentures approximate their fair values as of December 31,
         2000 and 2001 since the fair values are estimated based on the quoted
         market prices for the same or similar issues.



                                      -76-
<PAGE>





3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

r.       Financial instruments (Cont'd)

         The carrying amounts and fair values of the Group's financial
         instruments at December 31, 2000 and 2001 are as follows:

<Table>
<Caption>

                                                  Carrying amount                              Fair value
                                       --------------------------------------    --------------------------------------
                                          2000                 2001                2000                   2001
                                       ----------    ------------------------    ----------     -----------------------
                                        Rmb'000         Rmb'000      US$'000      Rmb'000         Rmb'000      US$'000
<S>                                    <C>           <C>            <C>          <C>            <C>            <C>

Cash and bank deposits                     33,490         7,616           920        33,490         7,616           920
Pledged bank deposits                      75,433        76,925         9,294        75,433        76,925         9,294
Accounts receivable                       282,627       254,816        30,787       282,627       254,816        30,787
Short-term borrowings                     170,443       189,990        22,955       170,443       189,990        22,955
Accounts payable                           36,690        32,752         3,957        36,690        32,752         3,957
Other payables                             16,098         6,550           791        16,098         6,550           791
Accrued liabilities                        12,292        13,627         1,646        12,292        13,627         1,646
Convertible debentures                     36,706            --            --        36,706            --            --
</Table>

s.       Cash and cash equivalents

         Cash and cash equivalents include cash on hand, amount on deposits with
         banks and all highly liquid investments with maturity of three months
         or less at the time of acquisition.

t.       Use of estimates and assumptions

         The preparation of financial statements in conformity with generally
         accepted accounting principles in the United States of America requires
         management to make estimates and assumptions that affect certain
         reported amounts and disclosures. Accordingly, actual results could
         differ from those estimates.

u.       New accounting standards

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 141: "Business combinations" and SFAS No. 142: "Goodwill and
         Other Intangible Assets". These pronouncements significantly change the
         accounting for business combinations, goodwill and intangible assets.
         SFAS No. 141 establishes that all business combinations will be
         accounted for using the purchase method and the use of the
         pooling-of-interests method is no longer allowed. The statement further
         clarifies the criteria to recognise intangible assets separately from
         goodwill. The provisions of SFAS No. 141 are effective for all business
         combinations initiated after June 30, 2001. SFAS No. 142 addresses
         financial accounting and reporting for acquired goodwill and other
         intangible assets and, generally, adopts a non-amortisation and
         periodic impairment-analysis approach to goodwill and
         indefinitely-lived intangibles. SFAS No. 142 is effective for fiscal
         years beginning after December 15, 2001 or for business combinations
         initiated after June 30, 2001. The adoptions of SFAS No. 141 and 142
         are not expected to have a material impact on the Group's financial
         statements.

         In August 2001, the FASB issued SFAS No. 143: "Accounting for Asset
         Retirement Obligations". SFAS No. 143 addresses financial accounting
         and reporting obligations associated with the retirement of tangible
         long-lived assets and the associated asset retirement costs. The
         provisions of SFAS No. 143 shall be effective for fiscal years
         beginning after June 15, 2002. The adoption of SFAS No. 143 is not
         expected to have a material impact on the Group's financial statements.



                                      -77-
<PAGE>





3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

u.       New accounting standards (Cont'd)

         In October 2001, the FASB issued SFAS No. 144: "Accounting for the
         Impairment of Disposal of Long-Lived Assets". SFAS No. 144 amends
         accounting and reporting standards for the disposal of segments of a
         business and addresses various issues related to the accounting for
         impairments or disposals of long-lived assets. The provisions of SFAS
         No. 144 shall be effective for fiscal years beginning after December
         15, 2001. The adoption of SFAS No. 144 is not expected to have a
         material impact on the Group's financial statements.

         In April 2002, the FASB issued Statement of Financial Accounting
         Standards ("SFAS") No. 145: "Rescission of FASB Statements No. 4, 44
         and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
         This statement made revisions to the accounting for gains and losses
         from the extinguishment of debt, rescinded Statement No. 44, and
         required certain lease modifications that have economic effects similar
         to sale-leaseback transactions be accounted for in the same manner as
         sale-leaseback transactions. The Company is required to and will adopt
         SFAS No. 145 on January 1, 2002. The adoption of SFAS No. 145 is not
         expected to have a material impact on the Group's financial statements.

4.       CONVENIENCE TRANSLATION

Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for custom
purposes by the Federal Reserve Bank of New York on December 31, 2001 of US$1.00
= Rmb8.2766. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.

5.       ACCOUNTS RECEIVABLE

Accounts receivable consists of:

<Table>
<Caption>


                                                           2000                      2001
                                                      ------------     -----------------------------
                                                        Rmb'000          Rmb'000           US$'000
<S>                                                   <C>              <C>               <C>
Trade receivables                                          304,753          285,900           34,543

Less: Allowance for doubtful accounts                      (22,126)         (31,084)          (3,756)
                                                      ------------     ------------     ------------

Accounts receivable, net                                   282,627          254,816           30,787
                                                      ============     ============     ============
</Table>



                                      -78-
<PAGE>





5.       ACCOUNTS RECEIVABLE (Cont'd)

Movements of allowance for doubtful accounts were as follows:

<Table>
<Caption>

                                                     1999            2000                      2001
                                                 ------------    ------------    ----------------------------
                                                    Rmb'000         Rmb'000         Rmb'000          US$'000

<S>                                              <C>             <C>             <C>             <C>
Beginning of year                                       6,330          10,163          22,126           2,673
Increase in allowance for
    doubtful accounts                                   3,833          11,963           8,958           1,083
                                                 ------------    ------------    ------------    ------------

End of year                                            10,163          22,126          31,084           3,756
                                                 ============    ============    ============    ============
</Table>

6.       INVENTORIES

Inventories consists of:

<Table>
<Caption>

                                                     2000                      2001
                                                 ------------    ----------------------------
                                                    Rmb'000         Rmb'000         US$'000

<S>                                              <C>             <C>              <C>
Raw materials                                          24,863          16,706           2,018
Work-in-process                                         8,281           9,377           1,133
Finished goods                                         46,956          53,779           6,498
                                                 ------------    ------------    ------------

                                                       80,100          79,862           9,649
                                                 ============    ============    ============
</Table>

7.       PREPAID EXPENSES

Prepaid expenses consists of:


<Table>
<Caption>

                                                    2000                    2001
                                                 ------------    ----------------------------
                                                   Rmb'000         Rmb'000         US$'000

<S>                                              <C>             <C>             <C>
Prepaid advertising costs                               8,562             150              18
Prepaid stock issuance costs (Note 19.c.v)                 --             458              55
Prepaid insurance                                         178             183              22
Others                                                    211             147              18
                                                 ------------    ------------    ------------

                                                        8,951             938             113
                                                 ============    ============    ============
</Table>





                                      -79-
<PAGE>


8.       OTHER CURRENT ASSETS

Other current assets consists of:

<Table>
<Caption>


                                                    2000                    2001
                                                 ------------    ----------------------------
                                                    Rmb'000         Rmb'000        US$'000
<S>                                              <C>             <C>             <C>
Deposits for purchase of raw materials                  2,077               1              --
Utility deposits                                          225             187              23
Advances to sales agents                                  365             456              55
Other advances                                            633           8,724           1,054
Interest receivable                                        --              99              12
                                                 ------------    ------------    ------------

                                                        3,300           9,467           1,144
                                                 ============    ============    ============
</Table>

Including in other advances of Rmb8,724,000 as of December 31, 2001 was an
advance to an independent third party amounting to Rmb8,000,000. The independent
third party applied the advance of Rmb8,000,000 from the Group as pledged bank
deposits for certain of the Group's short-term borrowings (see Notes 13 and 26).
The entire amount was settled by the independent third party subsequent to
December 31, 2001 upon the Group's repayment of the short-term borrowings to the
bank.

9.       PROPERTY, MACHINERY AND EQUIPMENT

Property, machinery and equipment consists of:

<Table>
<Caption>


                                                     2000                      2001
                                                 ------------     -----------------------------
                                                    Rmb'000         Rmb'000          US$'000

<S>                                              <C>              <C>               <C>
Buildings                                             126,679          151,952           18,359
Machinery, equipment and software                      71,389           72,735            8,788
Furniture and office equipment                         14,597           15,020            1,815
Motor vehicles                                         14,415           14,172            1,712
                                                 ------------     ------------     ------------

                                                      227,080          253,879           30,674

Less: Accumulated depreciation and impairment
         losses                                       (44,940)         (70,279)          (8,491)
                                                 ------------     ------------     ------------

Property, machinery and equipment, net                182,140          183,600           22,183
                                                 ============     ============     ============
</Table>




                                      -80-
<PAGE>




9.       PROPERTY, MACHINERY AND EQUIPMENT (Cont'd)

Capitalized software represents acquisition cost to obtain proprietary software
provided by a third party, which is recorded under machinery, equipment and
software. The Directors evaluated the recoverability of the capitalized software
cost and determined to make full provision of Rmb8,722,000 of the carrying value
of capitalized software cost as of December 31, 2001.

Certain property, machinery and equipment of the Group with net book value of
approximately Rmb41,313,000 and Rmb115,172,000 as of December 31, 2000 and 2001,
respectively, were pledged as collateral for certain of the Group's short-term
borrowings (see Notes 13 and 26).

10.      CONSTRUCTION-IN-PROGRESS

Construction-in-progress represents construction costs incurred for construction
of certain factory facilities.

11.      LAND USE RIGHTS

Land use rights consist of:

<Table>
<Caption>

                                                    2000                      2001
                                                 ------------     -----------------------------
                                                    Rmb'000         Rmb'000          US$'000


<S>                                              <C>              <C>               <C>
Land use rights                                       232,062          236,940           28,628

Less: Accumulated amortization and
            impairment losses                          (5,599)         (15,581)          (1,883)
                                                 ------------     ------------     ------------

Land use rights, net                                  226,463          221,359           26,745
                                                 ============     ============     ============
</Table>

Private ownership of land is not allowed in Mainland China. Rather, entities
acquire the right to use land for a designated term. As of December 31, 2000 and
2001, the land use rights consisted of four parcels of land located in Mainland
China with net book value of approximately Rmb177,850,000 and Rmb167,211,000,
respectively, held under land use rights of 44 to 49 years expiring in June
2042, July 2048, August 2049 and March 2050, respectively.

In addition, as of December 31, 2000 and 2001, the Group also recorded prepaid
land use rights with net book value of approximately Rmb48,613,000 and
Rmb54,148,000, respectively, in respect of two parcels of land (out of the four
parcels of land) which the Group has not yet obtained the land use right
certificates for certain portion of land. The Group has obtained legal opinion
from its Mainland Chinese lawyer that it is virtually assured of success in
obtaining the land use right certificates for the remaining portion of land with
no land use right certificates.

Land use rights with carrying amount of approximately Rmb84,730,000 and
Rmb103,668,000 as of December 31, 2000 and 2001, respectively, were pledged as
collateral for certain of the Group's short-term borrowings (see Notes 13 and
26).





                                      -81-
<PAGE>

12.      DEBT ISSUANCE COSTS

Debt issuance costs consist of:

<Table>
<Caption>


                                                        2000                      2001
                                                     ------------     -----------------------------
                                                       Rmb'000           Rmb'000         US$'000

<S>                                                  <C>              <C>              <C>
Costs incurred in connection with the issuance of
    convertible debentures
    - Legal and other direct costs                          6,787            6,787              820
    - Bonus shares issued to external consultants
          (Note 18)                                         1,515            1,515              183
    - Warrants issued to external consultants
          (Note 19.c.iv)                                    9,569            9,569            1,156
                                                     ------------     ------------     ------------

                                                           17,871           17,871            2,159

Less: Accumulated amortization (Note 16.c)                 (9,637)         (17,871)          (2,159)
                                                     ------------     ------------     ------------

Debt issuance costs, net                                    8,234               --               --
                                                     ============     ============     ============
</Table>

13.      SHORT-TERM BORROWINGS

Short-term borrowings consists of:

<Table>
<Caption>


                                                     2000                   2001
                                                 ------------    ----------------------------
                                                    Rmb'000         Rmb'000        US$'000

<S>                                              <C>             <C>              <C>
Bills payable                                          47,543          29,180           3,526
Bank loans                                             85,900         127,300          15,381
Other bank borrowings - discounted bills               37,000          33,510           4,048
                                                 ------------    ------------    ------------

                                                      170,443         189,990          22,955
                                                 ============    ============    ============
</Table>

Bills payable are a form of bank borrowings with payment terms of 180 days and
are non-interest bearing unless they become trust receipts loans which bear
interest at the prevailing interest rate of bank loans.

Furthermore, during the years ended December 31, 2000 and 2001, the Group issued
certain bills to related companies. These related companies discounted the bills
with certain banks and remitted the cash to the Group immediately. The Group
recorded this type of financing as other bank borrowings - discounted bills,
which was repayable in 180 days and bore weighted average interest at 3.58% per
annum and 3.47% per annum, respectively, as of December 31, 2000 and 2001. As of
December 31, 2000 and 2001, the bills payables and other bank borrowings -
discounted bills are secured by pledged bank deposits of approximately
Rmb46,462,000 and Rmb28,062,000 respectively.



                                      -82-
<PAGE>





13.      SHORT-TERM BORROWINGS (Cont'd)

The weighted average interest rate on bank loans was 6.31% per annum and 6.22%
per annum, respectively, as of December 31, 2000 and 2001. As of December 31,
2000 and 2001, the bank loans are secured by pledged bank deposits of
approximately Rmb28,971,000 and Rmb48,863,000 respectively, property, machinery
and equipment of approximately Rmb41,313,000 and Rmb115,172,000 respectively
(see Note 9), a parcel of land recorded under land use rights with a net book
value of approximately Rmb84,730,000 and Rmb103,668,000 (see Note 11)
respectively, advance of Nil and Rmb8,000,000 to an independent third party
respectively (see Note 8), a personal guarantee provided by Mr. Rui Lin Wu, and
a corporate guarantee provided by a related company (see Note 26).

14.      OTHER PAYABLES

Other payables consists of:

<Table>
<Caption>


                                                       2000                     2001
                                                    ------------    ----------------------------
                                                      Rmb'000         Rmb'000          US$'000

<S>                                                 <C>             <C>             <C>
Payable for land use rights                                  200           1,000             121
Payable for construction work of factories                10,921           4,357             526
Payable for purchase of machinery, equipment and
    software                                               4,666             731              88
Payable for advertising expenses                              --             455              55
Others                                                       311               7               1
                                                    ------------    ------------    ------------

                                                          16,098           6,550             791
                                                    ============    ============    ============
</Table>



                                      -83-
<PAGE>


15.      ACCRUED LIABILITIES

Accrued liabilities consists of:

<Table>
<Caption>


                                                     2000                    2001
                                                 ------------    ----------------------------
                                                    Rmb'000         Rmb'000        US$'000
<S>                                              <C>             <C>             <C>
Accruals for operating expenses
    - Salaries                                          3,916           2,949             356
    - Advertising expenses                                504           2,806             339
    - Others                                              949           1,199             145
Provision for staff benefit*                            3,280           3,030             366
Provision for staff welfare fund**                      3,643           3,643             440
                                                 ------------    ------------    ------------

                                                       12,292          13,627           1,646
                                                 ============    ============    ============
</Table>

*        Provision for staff benefit is provided at 17.5% of total salary
         expenses of QXTI. The provision for staff benefit is used for
         employees' welfare, employees' education and workers' association.

**       Staff welfare fund is a discretionary fund provided at 1% of the
         statutory after-tax profit of QXTI and is used for employees' welfare.

16.      CONVERTIBLE DEBENTURES

On June 2, 2000, the Company issued convertible debentures with aggregated face
value of US$10,000,000, together with 360,000 detachable warrants, for
US$10,000,000 (equivalent to Rmb 82,745,000 based on exchange rate of US$1 =
Rmb8.2745).

The 360,000 detachable warrants are exercisable during a period from June 2,
2000 to May 25, 2005. Each warrant is entitled to subscribe for one common stock
of the Company at an exercise price of US$24.38 per share before November 29,
2000 and thereafter at an exercise price of US$8.49 per share, representing 110%
of the average of the closing bid prices of the Company's common stock over five
trading days prior to November 29, 2000.

The convertible debentures bears zero interest rate and are due for repayment on
December 31, 2004. They are convertible into common stocks of the Company
according to the following basis:

i)       During the period from June 2, 2000 to July 12, 2000, the entire face
         value of the debentures, US$10,000,000, were convertible at a
         conversion price of US$25 per share;

ii)      During the period from July 13, 2000 to October 9, 2000, one-third of
         the face principal of the debentures, US$3,333,333, were convertible at
         a conversion price of the lower of US$25 or 87% of the average of the
         two lowest closing bid prices of the common stock over 15 trading days
         prior to the conversion date, subject to a floor price of US$5;

iii)     During the period from October 10, 2000 to January 7, 2001, two-third
         of the face principals of the debentures, US$6,666,667, were
         convertible at a conversion price of the lower of US$25 or 87% of the
         average of the two lowest closing bid prices of the common stock over
         15 trading days prior to the conversion date, subject to a floor price
         of US$5 up to November 19, 2000;



                                      -84-
<PAGE>

16.      CONVERTIBLE DEBENTURES (Cont'd)

iv)      During the period from January 8, 2001 to December 31, 2004, the
         remaining unconverted face principal of the debentures are convertible
         at a conversion price at the lower of US$25 or 87% of the average of
         the two lowest closing bid prices of the common stock over 15 trading
         days prior to the conversion date, without minimum price.

v)       Upon maturity of the convertible debentures on December 31, 2004, any
         outstanding face principals has to be redeemed in the form of common
         stock of the Company at the conversion price of the lower of US$25 or
         87% of the average of the two lowest closing bid prices of the common
         stock over 15 trading days prior to December 31, 2004 without minimum
         price.

vi)      At all time during June 2, 2000 to December 31, 2004, the maximum
         number of common stocks held by the debentures holders, including the
         common stocks from redemption of the convertible debentures, cannot
         exceed 9.9% of the Company's outstanding common stocks.

During the years ended December 31, 2000 and 2001, convertible debentures with a
face value of Rmb39,570,000 and Rmb43,175,000 (equivalent to US$5,218,000) were
converted into 503,198 and 2,144,201 shares of common stock of the Company at an
average conversion price of US$9.51 and US$2.43 per share, respectively (see
Note 18). As of December 31, 2001, the entire convertible debentures were
converted into common stocks of the Company.

The movement of the balance of the debentures is as follows:

<Table>
<Caption>


                                                    2000                      2001
                                                 ------------     -----------------------------
                                                    Rmb'000         Rmb'000          US$'000
<S>                                              <C>              <C>              <C>

Face Value

Beginning of year                                          --           43,175            5,218
Issued during the year                                 82,745               --               --
Converted to common stock (Note c)                    (39,570)         (43,175)          (5,218)
                                                 ------------     ------------     ------------

End of year                                            43,175               --               --
                                                 ------------     ------------     ------------

Less: Discounts

Beginning of year                                          --            6,469              782
Discounts arising from recording the fair
    value of the detachable warrants during
    the year (Note a)                                  11,250               --               --
Discounts arising from recording the
    intrinsic value of the beneficial
    conversion feature of the debentures
    during the year (Note b)                            2,832               --               --
Less:
Amortization during the year (Note c)                  (7,613)          (6,469)            (782)
                                                 ------------     ------------     ------------

End of year                                             6,469               --               --
                                                 ------------     ------------     ------------

                                                       36,706               --               --
                                                 ============     ============     ============
</Table>




                                      -85-
<PAGE>

16.      CONVERTIBLE DEBENTURES (Cont'd)

a.       The proceeds obtained from the issuance of the convertible debentures
         and the detachable warrants are allocated between the two securities
         based on their respective fair values as computed using the Binomial
         option-pricing model and Black-Scholes option-pricing model,
         respectively, on the issue date of the debentures. In this connection,
         the share of face value of convertible debentures allocated to the
         warrants, of approximately Rmb11,250,000 (equivalent to US$1,358,000)
         has been recorded as a discount to the face value of the debentures and
         credited to additional paid-in capital.

b.       This represents the intrinsic value of the beneficial conversion
         feature embedded into the debentures measured using the intrinsic value
         model in accordance with EITF Issue No 98-5 and 00-27. This intrinsic
         value has been recorded as a discount to the issue value of the
         debentures and has been credited to additional paid-in capital.

c.       In connection with the conversion which took place during the years
         ended December 31, 2000 and 2001, the relevant portion of unamortized
         debt issuance cost amounted to approximately Rmb8,053,000 and
         Rmb7,124,000 (equivalent to US$973,000) respectively and unamortized
         discounts of convertible debentures amounted to approximately
         Rmb6,335,000 and Rmb5,580,000 (equivalent to US$674,000), respectively
         were recognized as expenses.

17.      SHAREHOLDERS' LOANS

These represent unsecured loans from Mr. Rui Lin Wu (held on trust for Mr. Zhi
Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist
Consultants Limited, the Company's shareholders. The loans are denominated in
United States dollars and are non-interest bearing. The shareholders have agreed
not to demand the Group for repayment before January 1, 2003. For financial
reporting, interest expense of approximately Rmb575,000, Rmb478,000 and
Rmb478,000 for the years ended December 31, 1999, 2000 and 2001, respectively,
were imputed according to cost of borrowings in Mainland China, and were
recorded as interest expense and shareholders' contribution.




                                      -86-
<PAGE>





18.      COMMON STOCK

In February 1999, the Company issued 1,600,000 shares of common stock, par value
US$0.001 each, for cash consideration of US$5.50 per share through a public
offering, and raised US$8,800,000 (equivalent to Rmb72,864,000 based on exchange
rate of US$1 = RMB8.28).

In January 2000, the Company issued 833,334 shares of common stock, par value
US$0.001 each, for cash consideration of US$12 per share through a placing
arrangement with certain private institutional investors and raised
US$10,000,000 (equivalent to Rmb82,745,000 based on exchange rate of US$1 =
Rmb8.2745).

During the year ended December 31, 2000, an aggregate of US$4,784,000
(equivalent to Rmb39,570,000 based on exchange rate of US$1 = Rmb8.2718) of the
face value of the convertible debentures were converted into 503,198 shares of
common stock of the Company at an average conversion price of US$9.51 per share
(Note 16).

During the year ended December 31, 2000, 16,667 and 8,000 shares of common stock
were issued to certain external consultants in connection with the share
placement and issuance of convertible debentures, respectively. The fair value
of the 16,667 shares of approximately Rmb5,986,000 issued in connection with the
share placement was recorded as a reduction to additional paid-in capital. The
fair value of the 8,000 shares of approximately Rmb1,515,000 issued in
connection with the issuance of convertible debentures was recorded as debt
issuance costs.

During the year ended December 31, 2001, an aggregate of US$5,216,000
(equivalent to Rmb43,175,000 based on exchange rate of US$1 = Rmb8.2774) of the
face value of the convertible debentures were converted into 2,144,201 shares of
common stock of the Company at an average conversion price of US$2.43 per share
(Note 16).

In September 2001, the Company entered into a common stock purchase agreement
("the Share Purchase Agreement") with an institutional investor ("the Investor")
under which the Company may sell and issue to the Investor and the Investor
shall be obligated to purchase from the Company an aggregate of 2,000,000 shares
of common stock of the Company during the 24-month period from the date of
approval of the registration of such shares with the Securities and Exchange
Commission ("the SEC"). According to the terms of the Share Purchase Agreement,
the common stock purchase price is being set at 93% of the daily volume weighted
average price of the common stock over the preceding 15 trading days. As of the
date of this report, the Company has not filed any registration statement with
the SEC and no shares of common stock have been issued under the Share Purchase
Agreement as of December 31, 2001.



19.      STOCK OPTIONS AND WARRANTS

a.       Stock Purchase Options

         The 1999 Stock Compensation Plan of the Company ("the Plan") allows for
         the issuance of either incentive stock options to employees, or
         non-qualified options to employees, directors and external consultants.
         A total of 2,000,000 common shares have been authorized and reserved
         for issuance under the Plan.



                                      -87-
<PAGE>
19.      STOCK OPTIONS AND WARRANTS (Cont'd)

b.       i)       Stock options to employees

                  For the year ended December 31, 1999, 680,000 incentive stock
                  options were issued to certain employees at an exercise price
                  of US$6.32 per share, exercisable during a five-year period
                  commencing on November 2, 1999. During the year ended December
                  31, 2000, all of these incentive stock options were exercised
                  at an exercise price of US$6.32 per share and the
                  corresponding stock issuance costs were vested immediately as
                  of the stock options grant date.

                  During the year ended December 31, 2000, 995,000 incentive
                  stock options were issued to certain employees at an exercise
                  price of US$15 per share, exercisable during a five-year
                  period commencing on April 14, 2000. The Company has not
                  granted any options to employees during the year ended
                  December 31, 2001. Subsequent to December 31, 2001, the
                  exercise price of these outstanding stock options was
                  re-priced to US$5.5 per share in January 2002.

                  The Company has elected to follow APB No. 25 to account for
                  the incentive stock options granted to employees, under which
                  the Company recognized no compensation expense as no employee
                  options were granted at prices below the market price on the
                  grant dates. Had compensation expenses for the incentive stock
                  options been recognized based on fair value on the grant dates
                  in accordance with SFAS No. 123, the Group's pro forma net
                  income and earnings (loss) per common share would have been as
                  follows:

<Table>
<Caption>

                                      1999           2000                     2001
                                  ------------    ------------    ----------------------------
                                     Rmb'000         Rmb'000        Rmb'000          US$'000
<S>                               <C>             <C>             <C>             <C>

Net income (loss)                       49,703          23,471         (21,422)]        (2,588)
Earnings (loss)
   per share
   - Basic                            Rmb 5.33        Rmb 2.03       Rmb (1.66)      US$ (0.20)
   - Diluted                          Rmb 5.32        Rmb 1.98       Rmb (1.66)      US$ (0.20)

Pro forma net
   income (loss)                        32,842         (40,625)        (21,422)]        (2,588)
Pro forma earnings
   (loss) per share
   - Basic                            Rmb 3.52       Rmb (3.51)      Rmb (1.66)      US$ (0.20)
   - Diluted                          Rmb 3.51       Rmb (3.51)      Rmb (1.66)      US$ (0.20)
                                  ============    ============    ============    ============
</Table>

ii)      Non-qualified stock options to external consultants

         During the year ended December 31, 1999, 325,000 non-qualified stock
         options were issued to external consultants. The Company has adopted
         SFAS No. 123 to account for these non-qualified stock options. The fair
         value of these stock options amounted to approximately Rmb8,059,000
         (equivalent to US$973,000), as computed using the Black-Scholes
         option-pricing model on the grant date, which were recognized as
         consultant expenses over the service period of the external consultants
         and in this connection, approximately Rmb3,595,000 and Rmb4,464,000
         were recognized as expenses for the years ended December 31, 1999 and
         2000, respectively.




                                      -88-
<PAGE>




19.      STOCK OPTIONS AND WARRANTS (Cont'd)

c.       Stock Purchase Warrants

         i)       In connection with the public offering of the Company's shares
                  in February 1999, the Company granted common stock purchase
                  warrants ("the Underwriter Warrants") to the underwriter to
                  purchase up to 160,000 shares of the Company at an exercise
                  price of $7.98 per share, exercisable during a five-year
                  period commencing on February 19, 1999. During the year ended
                  December 31, 2000, 152,000 of the Underwriter Warrants were
                  exercised at an exercise price of US$7.98 each.

         ii)      On October 31, 1999, the Company issued 40,000 common stock
                  purchase warrants to certain external consultants, at
                  exercisable prices ranging from US$3.25 to US$5.50 per share,
                  exercisable during a five-year period commencing on October
                  31, 1999. During the year ended December 31, 2000, 20,000
                  common stock purchase warrants were exercised at an exercise
                  price of US$3.25 each.

                  The Company has adopted SFAS No. 123 to account for the stock
                  purchase warrants granted to external consultants. The fair
                  value of these warrants amounted to approximately Rmb1,033,000
                  (equivalent to US$125,000), as computed using the
                  Black-Scholes option-pricing model on the grant date, which
                  were recognized as consultant expense over the service period
                  of the external consultants and in this connection,
                  approximately Rmb1,033,000 and nil were recognized as expenses
                  for the years ended December 31, 1999 and 2000 respectively.

         iii)     In connection with the share placement of the Company in
                  January 2000, the Company granted 360,000 warrants to the
                  private institutional investors ("the Subscription Warrants
                  I") and 300,000 warrants to external consultants ("the
                  Consultant Warrants I"). Each warrant can subscribe for one
                  common stock in the Company at an exercise price of US$46.96
                  per share, and is exercisable for the period from January 7,
                  2000 to December 31, 2004. In accordance with the warrant
                  agreement, the exercise price was reset to US$20.76
                  representing 110% of the average of the closing bid prices of
                  the common stock over 5 trading days prior to July 10, 2000.




                                      -89-
<PAGE>





19.      STOCK OPTIONS AND WARRANTS (Cont'd)

c.       Stock Purchase Warrants (Cont'd)

         iv)      In connection with the issuance of convertible debentures of
                  the Company in June 2000, the Company granted 360,000 warrants
                  to the debenture holders ("the Detachable Warrants") and
                  300,000 warrants to external consultants ("the Consultant
                  Warrants II"). Each warrant can subscribe one common stock in
                  the Company at an exercise price of US$24.38 per share, and is
                  exercisable for the period from June 2, 2000 to May 25, 2005.
                  In accordance with the warrant agreement, the exercise price
                  was reset to US$8.49, representing 110% of the average of the
                  closing bid prices of the common stock over 5 trading days
                  prior to November 29, 2000.

                  The fair value of the 360,000 Detachable Warrants amounted to
                  approximately Rmb9,272,000 (equivalent to US$1,120,000) as
                  computed using Black-Scholes option-pricing model on the grant
                  date, which had been applied for allocating the face value of
                  the convertible debenture into the value of the Detachable
                  Warrants and the value of the debenture. In this connection,
                  approximately Rmb11,250,000 (equivalent to US$1,358,000) of
                  the face value of convertible debentures was allocated to
                  value of the Detachable Warrants, which was recorded as a
                  discount to the face value of the debentures and credited to
                  additional paid-in capital.

                  The fair value of 300,000 common stock Consultant Warrants II
                  granted to financial consultants amounted to approximately
                  Rmb9,569,000 (equivalent to US$1,155,000), as computed using
                  the Black-Scholes option-pricing model on the grant date,
                  which has been recognized as debt issuance costs and credited
                  to additional paid-in capital, respectively.

         v)       In connection with the Share Purchase Agreement entered into
                  in September 2001, the Company granted 150,000 warrants to the
                  private institutional investors ("the Subscription Warrants
                  II") and 150,000 warrants to external consultants ("the
                  Consultant Warrants III"). Each warrant can subscribe for one
                  common stock of the Company at an exercise price of US$6.6 per
                  share, and is exercisable for the period from September 14,
                  2001 to September 14, 2004.

                  During the year ended December 31, 2001, the fair value of the
                  150,000 Subscription Warrants II and 150,000 Consultant
                  Warrants III amounted to approximately Rmb458,000 (equivalent
                  to US$55,350) as computed using Black-Scholes option-pricing
                  model on the grant date, which were recognised as prepaid
                  stock issuance cost.



                                      -90-
<PAGE>





19.      STOCK OPTIONS AND WARRANTS (Cont'd)

Changes in outstanding stock options and warrants during the year ended December
31, 2000 and 2001 were as follows:

<Table>
<Caption>

                                                 No. of stock          Weighted
                                                   options/            average
                                                   warrants         exercise price
                                                 ------------       --------------
                                                                          US$
<S>                                              <C>                <C>
Outstanding, as of December 31, 1998                       --                --
Granted in 1999                                     1,865,000             20.80
                                                 ------------

Outstanding, as of December 31, 1999                1,865,000             20.80
Granted in 2000                                     1,655,000             12.40
Exercised in 2000                                  (1,177,000)             6.48
                                                 ------------

Outstanding, as of December 31, 2000                2,343,000             14.68
Granted in 2001                                       300,000              6.60
                                                 ------------

Outstanding, as of December 31, 2001                2,643,000             13.77
                                                 ============

Exercisable, as of December 31, 2001                2,643,000             13.77
                                                 ============

Exercisable, as of December 31, 2000                2,343,000             14.68
                                                 ============

Exercisable as of December 31, 1999                 1,205,000*             6.48
                                                 ============
</Table>


*        The 660,000 warrants granted in connection with the placement of shares
         in the Company were only exercisable upon the successful share
         placement of the Company in January 2000 (see Note 19.c.iii).

The following table summarizes information about stock options and warrants
described above that are outstanding and exercisable at December 31, 2001:

<Table>
<Caption>

                               Options and warrants outstanding and exercisable
        ------------------------------------------------------------------------------------------------------
                                                                                          Weighted-average
                                              Weighted-average exercise             remaining contractual life
        Options/warrants                       price per option/warrant                       (years)
        ----------------                      -------------------------             --------------------------
<S>                                           <C>                                   <C>
               995,000                                     15.00                                  3.28
                 8,000                                      7.98                                  2.13
                20,000                                      5.50                                  2.84
               660,000                                     20.76                                  3.00
               660,000                                      8.49                                  3.41
               300,000                                      6.60                                  2.79
         -------------                             -------------                           -----------
             2,643,000                                     13.77                                  3.18
         -------------                             =============                           ===========
</Table>




                                      -91-
<PAGE>





19.      STOCK OPTIONS AND WARRANTS (Cont'd)

The weighted average fair value of the common stock purchase options and
warrants on the grant dates were as follows:

<Table>
<Caption>

                                                     1999            2000            2001
                                                 ------------    ------------    ------------
                                                      US$             US$             US$
<S>                                              <C>             <C>             <C>

Stock options granted under the Plan                     2.99            7.78              --
The Underwriter Warrants                                 5.99              --              --
Stock warrants granted to external
    consultants on October 31, 1999                      3.12              --              --
Subscription Warrants I                                    --            9.81              --
Subscription Warrants II                                   --              --            0.18
Detachable Warrants                                        --            3.85              --
Consultant Warrants I                                      --            9.81              --
Consultant Warrants II                                     --            3.85              --
Consultant Warrants III                                    --              --            0.18
                                                 ============    ============    ============
</Table>

The fair values were computed based on the following weighted average
assumptions:

<Table>
<Caption>

                                                    1999              2000             2001
                                                 ------------     ------------     ------------

<S>                                              <C>              <C>              <C>
Risk-free interest rate                                  5.81%            5.53%            3.17%
Expected dividend yield                                  0.00%            0.00%            0.00%
Expected option/warrant life                       5.00 years       4.99 years          3 years
Expected stock price volatility                        291.27%           21.14%           57.21%
                                                 ============     ============     ============
</Table>

The weighted average fair value of common stock purchase options and warrants
granted using the Black-Scholes option-pricing model for the years ended
December 31, 1999, 2000 and 2001 respectively are as follows:

<Table>
<Caption>

                                                    1999            2000            2001
                                                 ------------    ------------    ------------
                                                     US$             US$              US$
<S>                                              <C>             <C>             <C>
Weighted average fair value of options
    and warrants                                         3.39            7.24            0.18
                                                 ============    ============    ============
</Table>






                                      -92-
<PAGE>





20.      INCOME TAXES

The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdictions in which they
operate. The Company and Qiao Xing Holdings Limited were incorporated under the
International Business Companies Act of the British Virgin Islands and,
accordingly, are exempted from payment of the British Virgin Islands income
taxes. The Company also registered in Hong Kong as a branch office and is
subject to Hong Kong income taxes at a rate of 16%.

At present, substantially all of the Group's income was generated in Mainland
China by QXTI, a joint venture enterprise established in the Coastal Economic
Open Zone in Mainland China and is subject to Mainland Chinese income taxes at a
rate of 27% (24% state income tax and 3% local income tax). It was exempted from
state income tax and local income tax for three years starting from January 1,
1994, and then was subject to a 50% reduction in state income tax and full
exemption in local income tax for the following two years. The tax holiday of
state income tax was expired on January 1, 1999. The tax holiday of local income
tax continued for the years ended December 31, 1999, 2000 and 2001.

Pursuant to the Notice No. [1999] 52 issued by the Government of Guangdong
Province, Mainland China ("the Notice [1999] 52"), High and New Technology
Enterprise of Guangdong Province is entitled to a tax holiday granted by the
relevant tax bureau, under which the company is subject to state income tax at a
rate of 15% for three years, effective from January 1, 1999. Furthermore, for a
foreign owned enterprise in Guangdong Province which is certified by Guangdong
Provincial Foreign Trade and Economic Cooperation Office ("GPFTECO") as an
Advanced Technology Enterprise, the company is entitled to additional tax
benefit granted by the relevant tax bureau under which the state income tax rate
can be further reduce to 10% for three years. QXTI is a High and New Technology
Enterprise since 1999 and it is also an Advanced Technology Enterprise of
Guangdong Province since 2000 pursuant to certificates issued by Guangdong
Science and Technology Commission and GPFTECO, respectively.

Prior to obtaining confirmation from relevant tax bureau on the entitlement of
tax holiday as stated above, QXTI provided for enterprise income tax using 24%
for the years ended December 31, 1999 and 2000. Subsequent to December 31, 2001,
QXTI obtained a confirmation from the National Tax Bureau to confirm that QXTI
was able to enjoy the aforementioned tax benefit pursuant to the Notice [1999]
52 and QXTI's would be subject to state income tax rate at 15% for the year
ended December 31, 1999 and 10% for each of the year ended December 31, 2000 and
2001. Accordingly, the excess provision of Mainland Chinese enterprise income
tax in prior years was written back in 2001.

If the tax holiday of QXTI described above had not existed, the Group's income
tax expenses (net of minority interests) would have been increased by
approximately Rmb2,632,000 and Rmb2,351,000, respectively for the years ended
December 31, 1999 and 2000 representing the effect of 3% local income tax
exemption . In addition, income tax expenses (net of minority interests) for the
year ended December 31, 2001 would have been increased by Rmb18,868,000,
representing the effect of no written back on state income tax for 1999 and
2000. The tax holiday had no impact on operating results before tax generated in
2001 as QXTI was in a tax loss position. Basic earnings (loss) per common share
would have been approximately Rmb5.04, Rmb1.83 and Rmb(2.99)(US$(0.36)),
respectively, for the years ended December 31, 1999, 2000 and 2001, and diluted
earnings (loss) per common share would have been approximately Rmb5.04, Rmb1.78,
and Rmb(2.99)(US $(0.36)), respectively, for the years ended December 31, 1999,
2000 and 2001.



                                      -93-
<PAGE>





20.      INCOME TAXES (Cont'd)

Provision for (Write-back of) income tax consists of:

<Table>
<Caption>

                                                     1999             2000                     2001
                                                 ------------     ------------     -----------------------------
                                                    Rmb'000         Rmb'000          Rmb'000          US$'000

<S>                                              <C>              <C>              <C>              <C>
Mainland Chinese income tax
    - current                                          21,056           18,809          (18,868)          (2,280)
    - deferred                                           (758)          (2,210)          (6,819)            (824)
                                                 ------------     ------------     ------------     ------------

                                                       20,298           16,599          (25,687)          (3,104)
                                                 ============     ============     ============     ============
</Table>

The reconciliation of Mainland Chinese statutory income tax rate to the
effective income tax rate based on income before income tax stated in the
consolidated statements of operations is as follows:

<Table>
<Caption>

                                                        1999             2000             2001
                                                  ------------      ------------      ------------

<S>                                               <C>               <C>               <C>
Mainland Chinese statutory income tax rate                27.0%             27.0%             27.0%
Effect of tax holiday                                     (3.3%)            (6.6%)              --
Non-deductible activities
     - Amortization of debt issuance costs and
         discount of convertible debentures                 --              14.1%             (8.4%)
Reversal of over-provision of Mainland Chinese
    income tax                                              --                --              39.9%
Others                                                     2.9%              1.8%             (4.2%)
                                                  ------------      ------------      ------------

Effective income tax rate                                 26.6%             36.3%             54.3%
                                                  ============      ============      ============
</Table>

Deferred income tax assets reflected the net tax effects 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 balance sheet as of December 31, 2000
and 2001 were as follows:

<Table>
<Caption>

                                                     2000                     2001
                                                 ------------     -----------------------------
                                                    Rmb'000         Rmb'000           US$'000
<S>                                              <C>              <C>                <C>
Write-off of obsolete and slow-moving
    inventories                                         2,303            6,209              750
Allowance for doubtful accounts                           665            2,815              340
Loss carryforwards                                        670            1,818              220
                                                 ------------     ------------     ------------

                                                        3,638           10,842            1,310

Valuation allowance                                      (670)          (1,055)            (128)
                                                 ------------     ------------     ------------

Deferred income tax assets                              2,968            9,787            1,182
                                                 ============     ============     ============
</Table>




                                      -94-
<PAGE>





20.      INCOME TAXES (Cont'd)

Movements of valuation allowance were as follows:

<Table>
<Caption>

                                                     1999           2000                    2001
                                                 ------------    ------------    ----------------------------
                                                    Rmb'000        Rmb'000         Rmb'000          US$'000
<S>                                              <C>             <C>            <C>              <C>
Beginning of year                                          --              89             670              81
Increase in valuation allowance                            89             581             385              47
                                                 ------------    ------------    ------------    ------------

End of year                                                89             670           1,055             128
                                                 ============    ============    ============    ============
</Table>

Valuation allowance of approximately Rmb670,000 and Rmb1,055,000 were
established as of December 31, 2000 and 2001, respectively, for the deferred
income tax assets related to loss carryforwards indefinitely of the Company. The
Company's management did not believe it was more likely than not that it would
generate a sufficient level of taxable income in the foreseeable future to
utilize all the loss carryforwards of the Company.

Management believes that it will obtain the full benefit of other deferred
income tax assets on the basis of its evaluation of the Group's anticipated
profitability over the period of years that the temporary differences are
expected to become tax deductions. It believes that sufficient book and taxable
income will be generated to realize the benefit of these tax assets.

Taxation payable comprised:

<Table>
<Caption>

                                                    2000                     2001
                                                 ------------    ----------------------------
                                                   Rmb'000         Rmb'000         US$'000

<S>                                              <C>             <C>              <C>
Mainland Chinese value-added tax                       73,608          70,004           8,458
Mainland Chinese income tax                            54,331          35,463           4,285
                                                 ------------    ------------    ------------

                                                      127,939         105,467          12,743
                                                 ============    ============    ============
</Table>

21.      DISTRIBUTION OF INCOME

Substantially all of the Group's income is contributed by QXTI, an equity joint
venture enterprise established in Mainland China. Income of QXTI as determined
under generally accepted accounting principles in Mainland China ("Mainland
Chinese GAAP") is distributable to its joint venture partners after transfer to
dedicated reserves and staff welfare fund as required under Mainland Chinese
Company Law and QXTI's articles of association, at rates determined by QXTI's
board of directors.



                                      -95-
<PAGE>


21.      DISTRIBUTION OF INCOME (Cont'd)

Dedicated reserves include statutory surplus reserve and discretionary surplus
reserve. Pursuant to the Notice [1995] 31 issued by Ministry of Finance on
August 24, 1995 ("the Notice") and QXTI's articles of association, provision of
these reserves are recommended by QXTI's board of directors. For the years ended
December 31, 1999 and 2000, QXTI appropriated 2% of its statutory after-tax
profit to each of the statutory surplus reserve and the discretionary surplus
reserve. As QXTI recorded a net loss for the year ended December 31, 2001, no
appropriation to statutory surplus reserve and the discretionary surplus reserve
was made. The statutory surplus reserve can only be utilized to offset prior
years' losses or for capitalization as paid-in capital, whereas the
discretionary surplus reserve can be utilized for QXTI's future development or
capitalization as paid-in capital. As of December 31, 2001, no utilization of
statutory surplus reserve was proposed by the QXTI's management.

Pursuant to the Notice and QXTI's articles of association, QXTI appropriated 1%
of its statutory after-tax profit for the years ended December 31, 1999 and 2000
to the staff welfare fund which shall be utilized for collective staff benefits
such as building of staff quarters or housing. As QXTI recorded a net loss for
the year ended December 31, 2001, no appropriation to the staff welfare fund was
made. No distribution shall be made other than on liquidation of QXTI. Amounts
appropriated to staff welfare fund were charged against income and the related
provisions were reflected as accrued liabilities in the consolidated balance
sheets.

Unappropriated profit is to be carried forward as retained earnings for future
distribution. The amount of profit available for distribution to the
shareholders will be determined based on the lower of the unappropriated profit
as reported under Mainland Chinese GAAP and under US GAAP.

The Group keeps its books and records under Mainland Chinese GAAP. Adjustments
between Mainland Chinese GAAP and US GAAP consists of  transfer to staff welfare
fund as required under Mainland Chinese GAAP as well as (i) recognition of
deferred tax assets, (ii) recognition of stock-based compensation cost, (iii)
amortization of debt issuance costs and (iv) amortization of discount of
convertible debentures as required under US GAAP.





                                      -96-
<PAGE>
22.      EARNINGS (LOSS) PER COMMON SHARE

The following represents a reconciliation from basic earnings (loss) per common
share to diluted earnings (loss) per common share:

<Table>
<Caption>

                                                     1999            2000                    2001
                                                 ------------    ------------    ----------------------------
                                                   Rmb'000         Rmb'000         Rmb'000           US$'000

<S>                                              <C>             <C>             <C>             <C>
Net income (loss)                                      49,703          23,471         (21,422)         (2,588)
                                                 ============    ============    ============    ============

                                                     `000            `000            `000            `000
Weighted average common
    shares - basic                                      9,333          11,572          12,838          12,838
Effect of dilutive stock
    options and warrants                                   11             306*             --*             --*
                                                 ------------    ------------    ------------    ------------

Weighted average common
    shares - diluted                                    9,344          11,878          12,838          12,838
                                                 ============    ============    ============    ============

Earnings (loss) per common
    share
    - Basic                                          Rmb 5.33        Rmb 2.03       Rmb (1.67)      US$ (0.20)
                                                 ============    ============    ============    ============

    - Diluted                                        Rmb 5.32        Rmb 1.98       Rmb (1.67)      US$ (0.20)
                                                 ============    ============    ============    ============
</Table>

*  The figures exclude convertible debentures that were anti-dilutive during the
   years ended December 31, 2000 and 2001.

The diluted loss per common share for the year ended December 31, 2001 is the
same as the basic loss per share as all potential ordinary shares are
anti-dilutive.

23.      RETIREMENT PLAN

Since December 1, 2000, the Group has arranged for its Hong Kong employees to
join the Mandatory Provident Fund Scheme ("the MPF Scheme"), a defined
contribution scheme managed by an independent trustee. Under the MPF Scheme,
each of the Group (employer) and its employees make monthly contribution to the
scheme at 5% of the employees' earnings as defined under the Mandatory Provident
Fund legislation, subject to a maximum cap of HK$1,000 (equivalent to Rmb1,070)
per month and thereafter additional contributions are voluntary.

The Group's employees in Mainland China are all employed by QXTI. As stipulated
by Mainland Chinese regulations, QXTI maintains a defined contribution
retirement plan for all of its employees who are residents of Mainland China.
All retired employees of QXTI are entitled to an annual pension equal to their
basic annual salary upon retirement. QXTI contributed to a state sponsored
retirement plan with amounts stipulated by the local government of Mainland
China and has no further obligations for the actual pension payments or
post-retirement benefits beyond the annual contributions. The state sponsored
retirement plan is responsible for the entire pension obligations payable to all
employees.



                                      -97-
<PAGE>

23.      RETIREMENT PLAN (Cont'd)

The aggregate employer's contributions made by the Group amounted to
approximately Rmb69,000, Rmb897,000 and Rmb795,000 for the years ended December
31, 1999, 2000 and 2001, respectively.

24.      COMMITMENTS

a.       Capital commitments

         Capital commitments not provided for in the financial statements were
         analyzed as follows:

<Table>
<Caption>

                                                    2000                     2001
                                                 ------------    ---------------------------
                                                   Rmb'000         Rmb'000         US$'000
<S>                                              <C>             <C>            <C>
Authorized and contracted for
   - property, machinery and equipment                  8,962              --              --
   - capital contribution of Huizhou
       Qiao Xing-Hyundai System
       Communication Equipment Co., Ltd.
       and Qiao Xing Mobile
       Telecommunication Co., Ltd.                    118,438         118,438          14,310
                                                 ------------    ------------    ------------

                                                      127,400         118,438          14,310
                                                 ============    ============    ============
</Table>

b.       Operating lease commitments

         The Group has operating lease agreements for a land use right and an
         office premise, which extend through December 2017. Rental expenses for
         the years ended December 31, 1999, 2000 and 2001 were approximately
         Rmb4,233,000, Rmb2,072,000 and Rmb1,304,000 respectively. Future
         minimum rental payments as of December 31, 2001 under agreements
         classified as operating leases with non-cancelable terms amounted to
         approximately Rmb1,304,000 (equivalent to approximately US$158,000)
         within one year, approximately Rmb4,000,000 (equivalent to
         approximately US$483,000) within two to five years and approximately
         Rmb11,388,000 (equivalent to approximately US$1,376,000) more than five
         years.

c.       Other commitments

         Other commitments not provided for in the financial statements were
         analyzed as follows:

<Table>
<Caption>

                                                     2000                   2001
                                                 ------------    ----------------------------
                                                   Rmb'000         Rmb'000         US$'000
<S>                                              <C>             <C>             <C>
Authorized and contracted for
   - Research and development                              --           3,479             420
                                                 ============    ============    ============
</Table>




                                      -98-
<PAGE>


25.      SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

d.       Non-cash transactions

         For the years ended December 31, 1999, 2000 and 2001, imputed interest
         on shareholders' loans of approximately Rmb575,000, Rmb478,000 and
         Rmb478,000, respectively, were recorded as shareholders' contribution
         and credited to additional paid-in capital.

         For the year ended December 31, 1999, the fair value of Underwriter
         Warrants amounted to approximately Rmb7,937,000 and has been recognized
         as stock issuance costs, and the fair value of stock options and
         warrants granted to external consultants amounted to approximately
         Rmb4,628,000 and Rmb4,464,000, respectively, and has been recognized as
         operating expense and deferred compensation cost.

         For the year ended December 31, 2000, the share of face value of
         convertible debentures allocated to the Detachable Warrants and the
         fair value of the intrinsic value of beneficial conversion feature of
         the convertible debentures amounted to approximately Rmb22,648,000, and
         has been recognized as a discount of the carrying amount of the
         convertible debentures with a respective amount credited to additional
         paid-in capital.

         For the year ended December 31, 2000, the aggregate fair value of
         Consultants Warrants II and 8,000 bonus shares of common stock issued
         in connection with the issuance of convertible debentures in June 2000
         amounted to approximately Rmb15,334,000, and has been recognized as
         debt issuance costs with the respective amount credited to additional
         paid-in capital.

         For the year ended December 31, 2000, a total of US$4,784,000
         convertible debentures have been converted into common stock and in
         this connection, a total of 503,198 shares of common stock has been
         issued to debenture holders.

         For the year ended December 31, 2001, a total of US$5,218,000
         convertible debentures have been converted into common stock and in
         this connection, a total of 2,144,201 shares of common stock has been
         issued to debenture holders.

e.       Cash (paid) received for interest is as follows

<Table>
<Caption>

                                                    1999             2000                      2001
                                                 ------------     ------------     -----------------------------
                                                   Rmb'000           Rmb'000         Rmb'000          US$'000
<S>                                              <C>              <C>              <C>              <C>
Interest paid                                          (5,002)          (5,822)          (7,926)            (957)
Interest received                                       1,981            2,061            2,000              242
                                                 ============     ============     ============     ============
</Table>

26.      BANKING FACILITIES

As of December 31, 2001, the Group had banking facilities of approximately
Rmb198,330,000 for loans and trade financing. Approximately Rmb189,990,000 of
the Group's banking facilities were used as of December 31, 2001. These banking
facilities were secured by:

a.       the Group's pledged bank deposits of approximately Rmb76,925,000;

b.       the Group's buildings, machinery and equipment and land use rights with
         carrying amounts of approximately Rmb115,172,000 and Rmb103,668,000,
         respectively;

c.       an advance to an independent third party of approximately Rmb8,000,000

d.       a personal guarantee provided by Mr. Rui Lin Wu; and

e.       corporate guarantees provided by a related company.



                                      -99-
<PAGE>





27.      RELATED PARTY TRANSACTIONS

Name and relationship of related parties:

<Table>
<Caption>


                 Name of related parties                           Existing relationship with the Company
----------------------------------------------------------    -------------------------------------------------
<S>                                                           <C>

Mr. Zhi Jian Wu Li                                            The major shareholder
Mr. Rui Lin Wu                                                Director and father of Mr. Zhi Jian Wu Li
Mr. Zhi Yang Wu                                               Director and brother of Mr. Zhi Jian Wu Li
Ms. Mei Lian Li                                               Wife of Mr. Zhi Yang Wu
Mr. Zhi Zhong Wu                                              Brother of Mr. Zhi Jian Wu Li
Ms. Qing Li                                                   Wife of Mr. Rui Lin Wu
Ms. Hong Ling Deng                                            Friend of Mr. Rui Lin Wu
Ms. Zhen Yin Su                                               Friend of Mr. Rui Lin Wu
Mr. Zhong Ai Li                                               Director
Mr. Guo Liang Zhang                                           Director
Ms. Liu Rong Yang                                             Director
Mr. Zhi Fang Zhang                                            Director
Mr. Zi Shu Huang                                              Director
Wu Holdings Limited                                           Intermediate holding company
Exquisite Jewel Limited                                       Minority shareholder
Metrolink Holdings Limited                                    Minority shareholder
Specialist Consultants Limited                                Minority shareholder
Jia Xing Electronic Supplies Company Limited                  Common director
Qiao Xing Electronic Holdings Company Limited                 Common director
Qiao Xing Group Limited                                       Common director
Qiao Xing International Company                               Common director
Qiao Xing Investment Limited                                  Common director
Qiao Xing Properties Limited                                  Common director
Rui Xing Electronic Development Company Limited               Common director
</Table>

Summary of related party transactions is as follows:

<Table>
<Caption>
                                                          1999             2000                  2001
                                                       ------------    ------------    ----------------------------
                                                         Rmb'000         Rmb'000         Rmb'000         US$'000

<S>                                                    <C>             <C>             <C>              <C>
Recovery of general and administrative expenses (at
   cost) in respect of factory and office premises
   subleased to
   - Jia Xing Electronic Supplies Company
       Limited                                                  182             238             139              17
   - Qiao Xing Properties Limited                             2,088           2,285           1,776             215
   - Rui Xing Electronic Development
       Company Limited                                          357             404             915             111

Interest paid to
   - Rui Xing Electronic Development
       Company Limited                                          201              --              --              --
   - Ms. Mei Lian Li                                             51              --              --              --
   - Ms. Hong Ling Deng                                          --              40              --              --
   - Ms. Zhen Yin Su                                             --               8              --              --

Purchases from
   - Jia Xing Electronic Supplies Company
       Limited                                               31,301          35,704          13,436           1,623
   - Qiao Xing International Company                             12              --              --              --
   - Qiao Xing Properties Limited                            25,666          22,268          20,471           2,473
   - Rui Xing Electronic Development
       Company Limited                                        6,693           6,289           8,033             971
                                                       ============    ============    ============    ============
</Table>




                                     -100-
<PAGE>





27.      RELATED PARTY TRANSACTIONS (Cont'd)

Summary of related party balances is as follows:

<Table>
<Caption>


                                                     2000                   2001
                                                 ------------    ----------------------------
                                                    Rmb'000         Rmb'000          US$'000

<S>                                              <C>               <C>              <C>
Advance to Qiao Xing Group Limited                         --          56,300           6,802

Due from
   - Mr. Rui Lin Wu                                     9,749             281              34
   - Mr. Zhong Ai Li                                      123              --              --
   - Ms. Mei Lian Li                                      123             508              61
   - Qiao Xing Group Limited                               --           3,133             380
   - Qiao Xing Investment Limited                         189             189              23
   - Qiao Xing Electronic Holdings Company
     Limited                                            5,667              --              --
   - Wu Holdings Limited                                  200             209              25
                                                 ------------    ------------    ------------

                                                       16,051          60,620           7,325
                                                 ============    ============    ============

Due to
   - Mr. Zhi Zhong Wu                                     570             664              80
   - Ms. Qing Li                                          705           1,793             217
   - Mr. Zhi Jian Wu Li                                    97             543              66
   - Mr. Zhi Yang Wu                                      383             882             107
   - Mr. Guo Liang Zhang                                    5              94              11
   - Ms. Liu Rong Yang                                      3               7               1
   - Ms. Zhi Fang Zhang                                     3               7               1
   - Mr. Zi Shu Huang                                       3               7               1
   - Mr. Zhong Ai Li                                       --             136              16
   - Qiao Xing Group Limited                            1,073               7               1
                                                 ------------    ------------    ------------

                                                        2,842           4,140             501
                                                 ============    ============    ============
</Table>

Except for the amount advanced to Qiao Xing Group Limited and the balances with
the shareholders, all other balances with directors and related parties were
unsecured, non-interest bearing and without pre-determined repayment terms.

During the year ended December 31, 2001, the Group advanced to Qiao Xing Group
Limited of approximately RMB56,300,000. The amount was unsecured, non-interest
bearing and without pre-determined repayment terms. Rmb50,000,000 of the advance
has been settled subsequent to December 31, 2001.

Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held on trust
for Mr. Zhi Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings Limited and
Specialist Consultants Limited, the Company's shareholders, and were
non-interest bearing. The lenders have agreed not to demand the Group for
repayment before January 1, 2003.

The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, a
director, and Qiao Xing Group Limited on behalf of Qiao Xing Telecommunication
Industry Company Limited.




                                     -101-

<PAGE>
28.      SEGMENT ANALYSIS

The Group operates as a single reportable segment as the telecommunication
products wholesaler in Mainland China with net sales of approximately
Rmb383,633,000, Rmb392,529,000 and Rmb249,271,000 (equivalent to US$30,118,000)
for the years ended December 31, 1999, 2000 and 2001, respectively - including
operations outside Mainland China, which were immaterial. The Group sells its
products through national distribution networks to more than 350 customers, who
in turn sells directly to end-users.

a.       Major customers

         Details of individual customer accounting for more than 10% of the
         Group's sales are as follows:

<Table>
<Caption>
                                                       1999             2000              2001
                                                       ----             ----              ----
<S>                                                   <C>               <C>               <C>
        Chengfeng Electronic Appliance Trading
            Company of Yiwu City                        13%               7%                7%
                                                       ===              ===               ===
</Table>

b.       Major suppliers

         Details of individual supplier accounting for more than 10% of the
         Group's purchases are as follows:

<Table>
<Caption>
                                                       1999             2000              2001
                                                       ----             ----              ----
<S>                                                   <C>               <C>               <C>
        Jia Xing Electronic Supplies Company
            Limited                                     12%              13%                8%
                                                       ===              ===               ===
</Table>


                                     -102-
<PAGE>

29.      OTHER ADDITIONAL INFORMATION

The following items were included in the consolidated statements of operations
and comprehensive income (loss):

<Table>
<Caption>
                                                  1999             2000                        2001
                                                --------        ---------          ---------------------------
                                                 Rmb'000          Rmb'000           Rmb'000            US$'000
<S>                                             <C>              <C>               <C>              <C>
Depreciation of property, machinery
    and equipment                                 8,137            9,856            16,942             2,046

Amortization of land use rights                   1,657            2,942             4,978               601

Interest expense for
    - Amortization of debt issuance
         costs                                       --            9,637             8,234               995
    - Amortization of discount of
         convertible debentures                      --            7,613             6,469               782
    - bank loans                                  4,585            5,025             6,683               807
    - other bank borrowings -
         discounted bills                            --              749             1,243               150
    - loan from a related party                     252               --                --                --
    - other loans                                   165               48                --                --
    - shareholders' loans (imputed
         interest)                                  575              478               478                58
                                                -------          -------           -------            ------

Total interest expense                            5,577           23,550            23,107             2,792

Advertising expenses                             13,260            3,909             5,653               683

Research and development expenditures               562              497             3,516               425
                                                =======          =======           =======            ======
</Table>


                                     -103-
<PAGE>

30.      SUBSEQUENT EVENT

Subsequent to December 31, 2001, the Group entered into the following sale and
purchase agreements for acquisitions of an aggregate equity interest of 65% in
CEC Telecom Ltd. ("CECT") for an aggregate consideration of Rmb312,750,000. CECT
is a limited liability company established in Mainland China and is principally
engaged in production and sales of mobile phones and accessories in Mainland
China ("the Acquisitions").

Pursuant to an agreement dated April 4, 2002 and a supplementary agreement
dated May 23, 2002, Qiao Xing Mobile Communication Limited ("QXMCL"), a
wholly-owned subsidiary of the Company formed subsequently to December 31, 2001,
will acquire 25% equity interest in CECT from Tianjin Taida Company Limited
("TTCL") for cash consideration of Rmb108,750,000. Pursuant to an agreement
dated May 8, 2002 and a supplementary agreement dated June 23, 2002, QXMCL will
acquire 40% equity interest in CECT from China Electronics Corporations ("CEC")
and other group companies of CEC for cash consideration of Rmb204,000,000. All
agreements are governed by, and construed in accordance with, the Mainland
Chinese law.

As of June 28, 2002, the Group made prepayments of Rmb61,000,000 to the sellers
according to the payment term prescribed in the agreements. The remaining
consideration will be payable as to (i) Rmb 119,000,000 within 10 days after the
completion of shares transfers at the relevant government bureau of Mainland
China ("date of shares transfers"), (ii) Rmb85,000,000 within 3 months after the
date of shares transfers and (iii) Rmb47,750,000 within 6 months after the date
of shares transfers. The Group is in the process of applying for the shares
transfers as of June 28, 2002. The unsettled considerations will be secured by,
among others, QXMCL's equity interest in CECT (after completion of shares
transfers) and certain land use right of the Group with net book value of
Rmb102,085,000 as at December 31, 2001.

As of June 28, 2002, the Acquisitions have not been completed because certain
precedent conditions as set out in the agreements have not been fulfilled. Such
precedent conditions include, among others, (i) approval from Mainland Chinese
government on the shares transfers and (ii) completion of collateral
arrangements on QXMCL's equity interest in CECT and certain land use right of
the Group as described in the preceding paragraph. Any non-fulfillment of these
precedent conditions may lead to termination of the Acquisitions.


                                     -104-
<PAGE>

ITEM 19.       EXHIBITS

         (a) The following financial statements are being filed as part of this
Annual Report on Form 20-F:

         Report of Independent Certified Public Accountants

         Consolidated statements of operations for the years ended December 31,
1999, 2000 and 2001

         Consolidated balance sheets at December 31, 2000 and 2001

         Consolidated statements of changes in shareholders' equity for the
years ended December 31, 1999, 2000 and 2001

         Consolidated statements of cash flows for the years ended December 31,
1999, 2000 and 2001

         Notes to and forming part of the financial statements

         (b) The following exhibits are being filed as part of this Annual
Report on Form 20-F:

Exhibit 1.1    Memorandum of Association of the Company - incorporated by
               reference to the Exhibits to our Registration Statement on Form
               F-1, SEC File No. 333-9274, declared effective on February 16,
               1999.

Exhibit 1.2    Articles of Association of the Company - incorporated by
               reference to the Exhibits to our Registration Statement on Form
               F-1, SEC File No. 333-9274, declared effective on February 16,
               1999.

Exhibit 2.1    Common Stock and Warrants Purchase Agreement dated as of December
               30, 1999 - incorporated by reference to the Proxy Statement filed
               June 16, 2000.

Exhibit 2.2    Convertible Debenture and Warrants Purchase Agreement dated as of
               May 24, 2000 - incorporated by reference to the Proxy Statement
               filed June 16, 2000.

Exhibit 2.3    Common Stock Purchase Agreement, dated as of September 14, 2001,
               between the Company and Brooke Bond International Inc.

Exhibit 2.4    Registration Rights Agreement, dated as of September 14, 2001,
               between the Company and Brooke Bond International Inc.

Exhibit 2.5    Warrant Agreement, dated as of September 14, 2001, between the
               Company and Brooke Bond International Inc.


                                      -105-
<PAGE>

Exhibit 8.1    List of Subsidiaries of the Company - incorporated by reference
               to the Exhibits to our Registration Statement on Form F-1, SEC
               File No. 333-9274, declared effective on February 16, 1999.

Exhibit 99.1   Company Letter to the Commission re Arthur Andersen quality
               control system.


                                      -106-
<PAGE>



                                   SIGNATURES

         The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

                                        QIAO XING UNIVERSAL TELEPHONE, INC.
                                        (Registrant)



Date:         June 28, 2002             By:      /s/ RUI LIN WU
       ---------------------------           ------------------------------


                                               Rui Lin Wu
                                               Chairman


<PAGE>

                               INDEX TO EXHIBITS

<Table>
<Caption>
EXHIBIT
NUMBER                              DESCRIPTION
-------                             -----------
<S>                     <C>
Exhibit 1.1    Memorandum of Association of the Company - incorporated by
               reference to the Exhibits to our Registration Statement on Form
               F-1, SEC File No. 333-9274, declared effective on February 16,
               1999.

Exhibit 1.2    Articles of Association of the Company - incorporated by
               reference to the Exhibits to our Registration Statement on Form
               F-1, SEC File No. 333-9274, declared effective on February 16,
               1999.

Exhibit 2.1    Common Stock and Warrants Purchase Agreement dated as of December
               30, 1999 - incorporated by reference to the Proxy Statement filed
               June 16, 2000.

Exhibit 2.2    Convertible Debenture and Warrants Purchase Agreement dated as of
               May 24, 2000 - incorporated by reference to the Proxy Statement
               filed June 16, 2000.

Exhibit 2.3    Common Stock Purchase Agreement, dated as of September 14, 2001,
               between the Company and Brooke Bond International Inc.

Exhibit 2.4    Registration Rights Agreement, dated as of September 14, 2001,
               between the Company and Brooke Bond International Inc.

Exhibit 2.5    Warrant Agreement, dated as of September 14, 2001, between the
               Company and Brooke Bond International Inc.
</Table>

<PAGE>

<Table>
<S>            <C>
Exhibit 8.1    List of Subsidiaries of the Company - incorporated by reference
               to the Exhibits to our Registration Statement on Form F-1, SEC
               File No. 333-9274, declared effective on February 16, 1999.

Exhibit 99.1   Company Letter to the Commission re Arthur Andersen quality
               control system.
</Table>